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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________to
___________
Commission file number 1-11983
FPIC Insurance Group, Inc.
(Exact name of registrant as specified in its charter)
Florida 59-3359111
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
225 Water Street, Suite 1400, Jacksonville, Florida 32202
(Address of principal executive offices) (Zip Code)
(904) 354-2482
(Registrant's telephone number, including area code)
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
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 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 24, 2000 was
approximately $176,579,291.
As of March 17, 2000, there were 9,515,936 shares of the Registrant's Common
Stock, $.10 Par Value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 2000 Annual Shareholders'
Meeting are incorporated by reference into Part II, items 10, 11, 12, and 13 of
this Report. Such Proxy Statement, except for the parts therein that have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this Report on Form 10-K.
FPIC Insurance Group, Inc.
1999 Annual Report on Form 10-K
Table of Contents
Description Page
- ----------- ----
Part I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk 27
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 29
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management 30
Item 13. Certain Relationships and Related Transactions 30
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 30
2
Part I
Item 1. Business
Forward-Looking Statements
- --------------------------
This Annual Report on Form 10-K contains forward-looking statements under many
different captions. These forward-looking statements are subject to certain
risks, uncertainties or assumptions. Except for historical information, all
information provided under "Quantitative and Qualitative Disclosures About
Market Risk" and "Year 2000" should be considered forward-looking statements.
Should one or more of these risks, uncertainties or other factors materialize or
should any underlying assumptions prove incorrect, actual results, performance
or achievements of the Company may vary materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements.
The assumptions underlying certain forward-looking statements are that the
Company will continue to: (i) profitably price its insurance products; (ii)
maintain its underwriting standards; (iii) market its insurance products
competitively; (iv) maintain its successful handling of claims; (v) retain
existing agents and key management personnel; and (vi) reserve adequately for
losses and loss adjustment expenses ("LAE"). Additionally, the primary risk in
maintaining adequate reserves is unexpected changes in the frequency or severity
of reported claims, particularly adverse development which may occur during the
last three report years. Other important considerations include: (i) the
Company's reinsurers remaining solvent and (ii) competitors not further reducing
rates for medical professional liability ("MPL") insurance products.
Many of the forward-looking statements are also premised upon the Company
successfully continuing its growth strategy. Although the Company has
experienced significant growth in the past through acquisitions, there can be no
assurance that the Company will be able to continue to identify suitable
acquisition candidates, be able to negotiate acquisitions on acceptable terms,
and be able to integrate successfully all acquired businesses. The Company's
diversification of its product portfolio and geographic expansion present
additional risks and uncertainties. These risks and uncertainties include
whether the Company can demonstrate the necessary underwriting and marketing
expertise required by these new products and locations. Many of the
forward-looking statements, as well as many of the Company's strategies, are
dependent upon the market price of the Company's common stock. The Company's
common stock can be affected not only by the Company's financial performance but
also by general economic and market conditions that are not within the Company's
control. The liquidity of the Company's common stock is small compared to the
liquidity of many other stocks. As a result, the Company's common stock may be
more volatile. The Company's common stock price experienced a significant
decline during 1999. This and any further adverse developments with the
Company's common stock price could greatly hinder, among other things, the
Company's growth strategy.
Assumptions relating to the foregoing are difficult or impossible to predict
accurately and many are beyond the control of the Company. 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.
Overview
- --------
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
3
Company's common stock for each of their shares of FPIC's common stock. As of
December 31, 1999, the Company's principal direct and indirect subsidiaries
include: Florida Physicians Insurance Company, Inc. ("FPIC"), FPIC Publishing,
Inc., Anesthesiologists' Professional Assurance Company, FPIC Insurance Agency,
Inc., Administrators For The Professions, Inc. and its two subsidiaries: Group
Data Corporation and FPIC Intermediaries, Inc., The Tenere Group, Inc.
("Tenere") and its two subsidiaries: Intermed Insurance Company ("Intermed") and
Interlex Insurance Company ("Interlex"), McCreary Corporation and its subsidiary
Employers Mutual, Inc. and its two subsidiaries: FPIC Services, Inc., and Sy.Med
Development, Inc. For developments during 1999, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Company, through FPIC, APAC, Intermed, and Interlex, is a provider of MPL
and other professional liability insurance principally in Florida and Missouri,
and certain other states. MPL insurance protects 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").
MPL premium in Florida and Missouri accounts for approximately 91% of the
Company's total premiums written. As of December 31, 1999, the Company was also
licensed in Alabama, Arkansas, Georgia, Kansas, Kentucky, Illinois, Indiana,
Maryland, Michigan, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas,
Virginia and West Virginia. The Company has begun or will begin marketing in
each of these states when it determines that an opportunity exists to write
profitable business.
The Company's three significant industry segments are insurance, third party
administration services and reciprocal management. For financial information
relating to the Company's operations and significant industry segments, see Item
7, Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the notes to the consolidated financial statements.
Insurance
- ---------
The Company has developed a variety of insurance products for participants in
the healthcare industry. These products include: MPL insurance for medical
professionals, legal professional liability ("LPL"), managed care liability
insurance, professional and comprehensive general liability insurance for
healthcare facilities, investigation defense coverage, provider stop loss
insurance, workers' compensation, and group accident and health ("A&H")
coverage. The following table (in thousands) summarizes by product the direct
premium written and assumed for the year-ended December 31, 1999, 1998 and 1997.
1999 1998 1997
-------- -------- --------
Medical professional liability for physicians $118,044 94,769 71,056
Medical professional liability for dentists 4,529 4,238 3,726
Legal professional liability for attorneys 1,197 -- --
Group accident and health 19,190 14,959 989
Professional and comprehensive general liability 1,509 1,226 814
Provider stop loss 1,611 13 --
Workers' compensation 802 552 --
Managed care -- 141 130
Investigation defense coverage 1,334 1,091 1,056
-------- -------- --------
Totals $148,216 116,989 77,771
======== ======== ========
4
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.
The Company's MPL policies are issued substantially 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
$5.0 million per incident and $7.0 million in annual aggregate for physicians
and $2.0 million per incident and $5.0 million in annual aggregate for dentists.
At December 31, 1999, the Company had 7,905 physician insureds and 2,174 dentist
insureds. For the year ended December 31, 1999, the Company's $122.6 million in
direct and assumed premium from MPL insurance represents 82.7% of the Company's
total premium.
Legal Professional Liability. Legal professional liability insurance provides
coverage for a wrongful act committed by an insured while providing professional
services as a lawyer, notary public, arbitrator, or mediator. Coverage is
written on a claims-made basis with a single policy limit shared by all members
of the insured firm. Defense costs are included within the policy limit. Limits
up to $1.0 million per incident and $3.0 million in annual aggregate are
available. Higher limits are placed through semi-facultative reinsurance
agreements. For the year ended, December 31, 1999, the Company had 1,205 LPL
insureds.
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 for E&O policies are $1.0
million per incident and $1.0 million in annual aggregate. For D&O policies, the
typical limits are $3.0 million per incident and $3.0 million in annual
aggregate.
Professional and Comprehensive General Liability. The Company also offers
professional and comprehensive general liability insurance to hospitals and
healthcare facilities, such as ambulatory surgery centers and walk-in medical
care clinics. The policies issued to healthcare facilities provide both
comprehensive general liability and protection for professional liability
related to the operation of a healthcare facility and its various staff
committees. 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, 1999 were on a claims-made basis. The maximum limits of coverage
for these policies available to non-hospital healthcare facilities are $1.0
million per incident and $3.0 million in annual aggregate. The maximum limits of
coverage for policies available to hospitals are $11.0 million per incident and
$13.0 million in annual aggregate. Higher liability limits are placed through
facultative reinsurance arrangements. As of December 31, 1999, the Company had
34 facility insureds.
Investigation Defense Coverage. The Company also offers investigation defense
coverage to physicians and dentists for costs associated with investigations
initiated by state licensing agencies as well as the Occupational Safety and
Health Administration ("OSHA") and Equal Employment Opportunity Commission
("EEOC"). This coverage is offered to the Company's insureds for investigations
that are not related to an
5
MPL claim; investigations related to an MPL claim are provided to the Company's
insureds as part of their MPL policy coverage. This 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, 1999, the Company had $1.3 million in direct premium
written from investigation defense coverage.
Workers' Compensation. The Company began writing workers' compensation insurance
in 1998. Workers' compensation insurance covers the liability of an employer for
work-related injuries to employees, in accordance with the requirements of law.
The Company's workers' compensation insurance is primarily offered to physicians
and dentists, as well as to other professional occupations such as accountants,
architects, engineers, attorneys and insurance agents. The initial focus has
been to write in the state of Florida with a guaranteed cost product. As the
Company expands into other states with MPL insurance, the intent is to offer
workers' compensation coverage to the existing or potential customer base. The
Company uses its subsidiary, McCreary, for claims handling, policy
administration, and underwriting of its workers' compensation insurance.
Group Accident and Health. The Company began writing and assuming A&H premium in
1997. Through its relationships with the FMA and the FDA, the Company began
underwriting small employer, accident and health programs for physicians and
dentists. A&H insurance provides comprehensive coverage for preventive care and
medically necessary expenses at various deductible, co-insurance and stop loss
limits. For the year ended December 31, 1999, the Company had $19.2 million in
direct and assumed premium from group accident and health, representing 12.9% of
the Company's total premium.
During February 2000, the Company announced its intention to withdraw from its
group accident and health programs. See Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations for additional
information.
Assumed Reinsurance. In addition to its direct business, the Company reinsures
risks underwritten by other insurers. As an assuming reinsurer, the Company
essentially acts as an insurer of the direct writer for a portion of their
insurance risks, as specified under the terms of the reinsurance agreement. The
Company's assumed reinsurance consists primarily of MPL, LPL, and a group
accident and health business written on an excess of loss and a quota share
basis. Under excess of loss contracts, the Company assumes risks over a certain
limit on a per loss basis. Under the Company's quota share agreements, it
assumes a pro-rata portion of each underlying risk, up to and including 100% in
some cases. The Company's assumed reinsurance contracts are treaty agreements
whereby, terms are set in advance and the underlying individual contracts of the
ceding company are automatically assumed as they are written.
For the years ended December 31, 1999, 1998 an 1997, the Company's direct
premium written and assumed included assumed reinsurance of $34.2 million, $22.1
million and $1.7 million, respectively; or 23%, 19%, and 2% of the totals.
Rates
- -----
The Company establishes, through its own actuary and staff and independent
actuaries, rates and rating classifications for its MPL and LPL insureds based
on loss and LAE experience developed over the past 20 years, taking into account
rates charged by its competitors. The Company uses risk factors based among
other things, on geographic location, medical specialty, and policy limits to
determine rates. 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
6
for liability insurance are subject to review by the relevant insurance
regulatory authority. As part of its pricing strategy, the Company targets
medical and legal professionals with low levels of previous claims.
Marketing and Policyholder Services
- -----------------------------------
The Company markets its MPL policies in Florida and Missouri primarily through
independent agencies. As of December 31, 1999, the Company's MPL products were
sold through 198 independent agencies. During 1999, approximately 68% of the
Company's MPL direct premium written was produced by independent agents, 10 of
which accounted for approximately 53% of such premiums or 25% of the Company's
total premiums. Through the Agency, the Company also sells insurance products
directly. The insurance products that are sold directly by the Agency are a
result of direct requests from physicians.
The Company markets its LPL policies in Missouri primarily through a direct
sales force. In October of 1999, the Company signed an agreement with Charlton
Manley, Inc. to serve as the State Administrator for all marketing and
underwriting functions in the state of Kansas. During 1999, the direct sales
force produced approximately 91% of LPL premiums written.
An integral part of the Company's marketing strategy is targeting sectors of the
MPL industry that it believes generate above average underwriting profits. The
Company has identified certain medical specialties and "claims-free" physicians
as sectors 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 60% of the increase in direct premium written in 1999
was received from physicians in the targeted specialties.
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, as a service to its
insureds, designed to heighten their awareness of situations giving rise to
potential loss exposures, to educate them on ways to improve their medical
practice procedures and to assist them in implementing risk modification
measures. In addition, the Company conducts surveys for hospitals and large
medical groups to review their practice procedures. Complete reports that
specify areas of the insured's medical practice that may need attention are
provided to the policyholder. The Company also 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
- ------------
Eight underwriters, averaging 14 years of experience underwriting MPL and LPL
insurance, perform the underwriting of the Company's insurance internally. The
Company has given its internal underwriting department complete authority for
all initial underwriting decisions. The Company's MPL agents have no binding
authority.
7
As part of the MPL underwriting process, the Company utilizes the data collected
by the states of Florida and Missouri, which includes a record of all MPL
claims-paid information that insurers are required to report. 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 comments received from personal references.
Annually, the Company's underwriting department also reexamines each insured
before coverage is renewed, including verifying that the insured's license is
current and that any reported claims for the insured were within acceptable
limits.
In underwriting LPL insurance, the Company's underwriters use an underwriting
committee composed of lawyers. The committee is geographically broad-based, and
in most instances, has personal knowledge of applicants and renewals. This
structure has enabled the Company to maintain high underwriting standards.
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.
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 26 employees, including 8
supervisors and 7 field investigators who are located in Orlando, Tampa,
Sarasota, Miami, and Jacksonville, Florida and Springfield, Missouri. Employees
in the claims department with settlement authority have an average of 17 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 and
Missouri who have significant experience in the defense of MPL / LPL claims and
who are able to defend in an aggressive, cost-efficient manner the claims
against the Company's insureds.
Reinsurance
- -----------
The Company follows the customary industry practice of reinsuring its business.
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 Company from its primary liability for the full amount of the policies
reinsured, it does make the reinsurer liable to the Company to the extent of
risk ceded.
For MPL, LPL, and professional and comprehensive general liability insurance
written during 1999 and prior years, the Company has reinsured risks in excess
of $500,000 per loss, except on the Company's anesthesiology program in which
the Company has reinsured risks in excess of $750,000. 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
8
policy limit offered. Effective January 1, 2000, the Company lowered its
retention to $250,000, and thus, reinsures risks in excess of $250,000 per loss
on business written in 2000. For group accident and health insurance, the
Company has entered into a separate excess of loss reinsurance treaty. Under
this treaty, the reinsurers bear losses in excess of $100,000 per person. For
workers' compensation insurance, the Company has entered into a separate excess
of loss reinsurance treaty. Under this treaty, the reinsurers bear losses in
excess of $100,000 per loss.
Reinsurance is placed under reinsurance treaties and agreements with a number of
individual companies and syndicates to mitigate concentration of credit risk.
General Reinsurance Corporation has been one of the Company's largest reinsurers
of MPL insurance, with 25% of the ceded risks for professional and comprehensive
general liability insurance written in 1999 and prior years. 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 and Missouri to post an evergreen
letter of credit to secure their reinsurance recoverables.
Under Florida and Missouri laws, 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
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. The Company's primary reinsurance contracts include coverage for
policies with limits equal to or greater than $1 million for which the claim
exceeds policy limits or extra contractual damage. In the past five years, the
Company has not paid a claim, including bad faith claims, in excess of $3.0
million. Effective January 1, 2000, the Company has obtained reinsurance
covering such claims.
Liability for Loss and LAE
- --------------------------
The determination of the total liability for loss and LAE is based upon 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 by the Company due to differing or 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. 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 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 one or more
times each year and prepare a report that includes a recommended level of
reserves. The Company considers this recommendation as well as other factors,
such as 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
9
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 current period.
The following table sets forth the development of loss and LAE reserves of the
Company, net of reinsurance recovered or recoverable, for the 10-year period
ended December 31, 1999:
Year Ended December 31 1999 1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Balance Sheet Reserves (2) 214,691 200,763 173,971 161,124 155,318 143,415 132,190
Reestimated Liability As Of: (2)
- --------------------------------
One year later 182,208 159,639 146,009 140,322 129,472 121,543
Two years later 142,369 127,529 116,151 114,193 105,704
Three years later 112,770 106,937 90,666 91,929
Four years later 104,684 86,154 72,854
Five years later 87,807 73,753
Six years later 75,032
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Paid As Of: (2)
- --------------------------
One year later 76,292 49,697 33,103 35,562 28,701 24,794
Two years later 90,165 62,612 60,464 52,832 45,162
Three years later 88,649 78,291 63,738 57,597
Four years later 94,882 73,296 62,630
Five years later 82,840 68,052
Six years later 72,509
Seven years later
Eight years later
Nine years later
Ten years later
Redundancy (1) 18,555 31,602 48,354 50,634 55,608 57,158
% Redundancy 9.24% 18.17% 30.01% 32.60% 38.77% 43.24%
1992 1991 1990 1989
---- ---- ---- ----
Balance Sheet Reserves (2) 126,651 118,995 119,031 97,302
Reestimated Liability As Of: (2)
- --------------------------------
One year later 98,706 101,844 103,533 108,496
Two years later 89,301 80,932 86,249 89,478
Three years later 76,247 71,653 64,456 72,321
Four years later 68,445 66,891 56,578 57,068
Five years later 69,396 63,884 55,459 53,499
Six years later 70,596 63,133 55,068 53,486
Seven years later 71,547 63,980 53,875 53,184
Eight years later 64,714 54,345 52,237
Nine years later 54,832 52,453
Ten years later 52,646
Cumulative Paid As Of: (2)
- --------------------------
One year later 25,924 26,482 17,500 22,656
Two years later 42,520 44,758 37,399 34,707
Three years later 55,677 52,675 47,689 43,911
Four years later 60,448 57,248 50,106 49,671
Five years later 63,458 59,309 52,600 49,716
Six years later 66,468 59,637 52,746 51,179
Seven years later 69,975 61,258 52,849 51,265
Eight years later 63,468 53,653 51,314
Nine years later 54,710 51,761
Ten years later 52,524
Redundancy (1) 55,104 54,281 64,199 44,656
% Redundancy 43.51% 45.62% 53.93% 45.89%
(1) There may be a difference of 1 (,000) in the redundancies due to rounding.
(2) The Company has changed its presentation of the above data from a gross
basis to a net of reinsurance basis, which is consistent with prevalent
practice. Data presented for the years 1993 through 1998 have been
restated accordingly. Data presented for the years prior to 1993 have
previously been reported on a net basis and, therefore, no restatement is
necessary for these years.
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The following table (in thousands) sets forth an analysis of the Company's
reserves for losses and LAE and provides a reconciliation of beginning and
ending liability for loss and LAE, net of reinsurance for the periods presented:
Year Ended December 31,
1999 1998 1997
--------- --------- ---------
Net loss and LAE liability, at beginning of period $ 200,763 173,971 161,124
Loss and LAE of entity acquired 24,590 23,406 --
Provisions for losses and LAE occurring
in the current period 99,523 81,694 69,126
Decrease in estimated losses and
LAE for claims occurring in prior periods (18,555) (14,332) (15,115)
--------- --------- ---------
Total incurred during current period 80,968 67,362 54,011
--------- --------- ---------
Losses and LAE payments relating to:
Current period 15,338 14,279 8,061
Prior periods 76,292 49,697 33,103
--------- --------- ---------
Total paid during current period 91,630 63,976 41,164
--------- --------- ---------
Net liability, at end of period $ 214,691 200,763 173,971
========= ========= =========
Gross liability at end of period $ 273,092 242,377 188,086
Reinsurance recoverable at end of period 58,401 41,614 14,115
--------- --------- ---------
Net liability at end of period $ 214,691 200,763 173,971
========= ========= =========
The net reductions in incurred losses and LAE related to prior years (net of
reinsurance recoveries of $985,357, $7,115,000, and $5,834,000, in 1999, 1998,
and 1997, respectively) for each of the years ended December 31, 1999, 1998 and
1997, are the result of reevaluations of the adequacy of reserve estimates and
reflect overall favorable underwriting results and lower than anticipated losses
and LAE. Given recent competitive market conditions, which have lessened the
Company's ability to underwrite and price its business at such favorable terms,
management does not expect reserve reductions to continue at these levels in
2000. Furthermore, given the inherent uncertainties in the estimation of loss
and LAE reserves, there can be no assurance concerning future adjustments,
positive or negative, for prior years' claims.
Investment Portfolio
- --------------------
The Company's investment strategy for its bond portfolio is to maintain a
diversified investment-grade fixed income portfolio, provide liquidity, and
maximize after-tax yield. As of December 31, 1999, the Company's portfolio was
managed internally and the Company had $327.1 million of fixed income securities
valued at market value. All of the Company's fixed income and equity securities
are classified as available-for-sale.
The Company believes that its 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. All of the fixed maturity securities held in the
investment portfolio are publicly traded securities.
In addition to the fixed income portfolio, the Company invests in other
securities such as investment partnerships and certain strategic equity
investments. Aside from certain strategic investments, the Company's current
policy is to limit such investments to $10 million in aggregate.
11
The Company generally does not invest in off-balance sheet derivative financial
investments. However, the Company has invested in one interest rate swap
contract in connection with its revolving credit facility. The contract is an
off-balance sheet instrument and serves to fix the Company's interest expense on
the revolving credit facility.
Competition
- -----------
The MPL insurance markets in Florida and Missouri are highly competitive from
the perspective of pricing and the number of competitors writing business.
Several companies offer products at lower premium rates than the Company and
more companies may enter the Company's markets 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 and affect
both its Florida and Missouri based operations. 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 the Company's insurance subsidiaries ratings 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 maintain its number of insureds. Furthermore,
the Company has been successful at target marketing groups and specialties that
exhibit above average profitability and 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 affecting its
business in Florida 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 to 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 FPIC has the exclusive endorsement of
both the FMA and the FDA, and is also endorsed by various county and state
medical societies.
In both Missouri and Kansas, Intermed and Interlex compete with both regional
and national companies. In 1998, the last year for which statistics are
available from the Missouri Department of Insurance, there were 54 companies
writing medical malpractice insurance in the state. The top five writers have
57% of the market. The largest market share was 14.73%. Intermed, the seventh
largest writer in the state in 1998, had a market share of 7.67%.
Ten companies wrote LPL insurance in the state of Missouri in 1998 according to
the latest statistics available from the Missouri Department of Insurance. One
company, sponsored by the Missouri Bar Association, had a market share of
69.36%. Interlex, which commenced operations in October 1994, had a market share
of 10.8% and was the second largest writer.
A number of hospitals in Missouri have purchased the medical practices of
fee-for-service physicians and hired the physicians as employees of the hospital
or a corporate entity affiliated with the hospital. A number of such physicians
formerly purchased their own professional liability insurance through smaller
insurance companies such as Intermed. As a result of the consolidation, many of
the hospitals purchasing the practices of physicians have become self-insured or
sought professional liability insurance from professional liability carriers
with capital and surplus greater than that of Intermed and at premiums lower
than those currently offered by Intermed.
12
In general, local carriers who have been able to maintain strong customer
loyalty dominate the MPL market in other states. The same targeted specialty and
loss-free approach developed in Florida is being used in these other states. The
Company is recruiting and developing an agency force to expand its market,
provide service, and develop name recognition.
Insurance Ratings
- -----------------
FPIC, APAC, Intermed, and Interlex currently have 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 National Association of Insurance Commissioners
("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
- ----------
The Company and its insurance subsidiaries are subject to extensive state
regulatory oversight in Florida, Missouri and in the other jurisdictions in
which they conduct business.
Florida and Missouri insurance laws regulate insurance holding company
structures, including the Company and its subsidiaries. Each insurance company
in a holding company structure is required to register with its domiciliary
Department of Insurance (the "Department of 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, APAC, Intermed, and Interlex 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, APAC, Intermed, and Interlex. All transactions within the
holding company structure affecting the Company's insurance subsidiaries must be
fair and reasonable.
Florida insurance laws provide that no person may acquire directly or indirectly
five percent or more of the voting securities of a domiciled insurance company
unless such person has obtained the prior written approval of the Department of
Insurance for such acquisition. Any purchaser of five percent or more of the
Company's insurance subsidiaries' outstanding common stock will generally be
presumed to have acquired control of the insurance company. In lieu of obtaining
such prior approval, a purchaser owning less than 10% of the outstanding shares
of the Company or FPIC, APAC, Intermed, or Interlex may file a disclaimer of
affiliation and control with the Department of Insurance.
Missouri insurance laws provide generally no person may acquire directly or
indirectly ten percent or more of the voting securities of a domiciled insurance
company unless such person has obtained the prior written approval of the
Department of Insurance for such acquisition.
Since FPIC, APAC, Intermed, and Interlex are insurance companies, the
Departments of Insurance in Florida and Missouri are their principal supervisors
and regulators. However, these companies are also subject to supervision and
regulation in the states in which they transact business in relation to numerous
aspects of their
13
business and financial condition. The primary purpose of such supervision and
regulation is to insure the financial stability of the insurance companies 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.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles Project (the "Codification") as the NAIC supported basis of
accounting. The Codification was approved with a provision allowing for
discretion by each states' Department of Insurance in determining appropriate
statutory accounting for insurers. Accordingly, such discretion will continue to
allow prescribed or permitted accounting practices that may differ from state to
state. The Codification will not affect the Company's consolidated financial
statements, which are prepared in accordance with generally accepted accounting
principles ("GAAP"). The impact of the Codification on the Company's insurance
subsidiaries' statutory financial statements has not been determined. Because
the Codification represents a new basis of accounting for statutory financial
statements, adoption of the Codification may have a significant impact on the
insurance subsidiaries' statutory financial statements.
Although the NAIC has stated that the adoption date for the Codification is
January 1, 2001, the implementation date is dependent upon an insurer's state of
domicile. Accordingly, the Company's adoption date of the Codification is
dependent upon actions of the Insurance Departments of the State of Florida and
Missouri and the Florida and Missouri State Legislatures.
The insurance subsidiaries of the Company are subject to assessment by the
Financial Guaranty Associations in the states in which they conduct 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 written premiums in their particular states.
The Gramm-Leach-Bliley Act of 1999 (the "Act") establishes a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the federal Bank Holding Company Act framework to permit a bank holding company
system to engage in a full range of financial activities, including insurance,
through a new entity known as a "financial holding company." The Act may
significantly change the competitive, operational and regulatory environment in
which the Company and its subsidiaries conduct business. Generally, the Act (i)
repeals historical restrictions on, and eliminates many federal and state law
barriers to, affiliations among commercial banks, securities firms, insurance
companies, and other financial service providers; (ii) provides a uniform
framework for the functional regulation of commercial banks, insurance companies
and securities firms; (iii) broadens the activities that may be conducted by
national banks (and derivatively, state banks), banking subsidiaries of bank
holding companies, and their financial subsidiaries; and (iv) addresses a
variety of other legal and regulatory issues affecting both day-to-day
operations and long-term activities of insurance companies and other financial
institutions.
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
14
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 any such proposals would be
adopted, or the impact, if any, such adoption would have on the Company,
although such impact could be material.
Third Party Services
- --------------------
Through McCreary and its subsidiary, Employers Mutual, Inc. ("EMI"), the Company
offers third party administration services, which it operates as a separate
industry segment. McCreary specializes in the administration of self-insured
plans for large employers. The lines of insurance that McCreary primarily
administers are group accident and health, workers' compensation, general
liability, and property. The main product of EMI is administration of
self-insured plans for emerging managed care organizations.
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 and fully insured basis. For the year ended December 31, 1999,
McCreary contributed $13.6 million to the Company's total revenues.
Reciprocal Management
- ---------------------
Effective January 1, 1999, the Company purchased Administrators For The
Professions, Inc. ("AFP"). AFP is the manager and attorney-in-fact for
Physicians' Reciprocal Insurers ("PRI"), the second largest MPL insurer for
physicians in the state of New York. As such, AFP's primary business is the
management and administration of PRI on behalf of its physician members.
In this regard, AFP has an exclusive 10-year management agreement with PRI, the
current term of which runs through December 31, 2008, whereby it provides all
underwriting, administrative and investment functions for PRI in exchange for
compensation. Compensation under the agreement is based upon PRI's direct
written premium and statutory operating results. The management agreement also
provides that AFP is to be reimbursed by PRI for certain expenses paid by AFP on
PRI's behalf. The expenses reimbursed by PRI consist principally of salary,
related payroll, and overhead costs of AFP's claims, legal and risk management
course personnel who work on PRI's behalf. AFP's reciprocal management and
related operations have been consolidated with those of the Company. For the
year ended December 31, 1999, AFP and its subsidiaries contributed $20.6 million
to the Company's total revenues.
Employees
- ---------
At December 31, 1999, the Company employed 596 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 leases 8,926 square feet for its corporate headquarters and
administrative offices located in downtown Jacksonville, Florida. The Company
also owns an 8-story, 70,000 square foot office building in Jacksonville where
26,600 square feet of space is occupied by FPIC for its insurance operations and
12,000 square feet is occupied by EMI. The Company and its subsidiaries also
lease additional facilities for their operations in various locations throughout
the United States. Management believes the Company's owned and leased properties
are adequate for the Company's current needs.
15
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
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
- -------
The Company's common equity 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.
1999 First Quarter Second Quarter Third Quarter Fourth Quarter
---- ------------- -------------- ------------- --------------
High Bid $ 49.13 49.88 50.63 22.38
Low Bid 37.88 40.25 14.25 14.88
1998
----
High Bid $ 32.37 37.25 37.25 47.81
Low Bid 26.00 31.87 24.75 23.00
As of March 23, 2000, the Company estimated that there were approximately 5,500
beneficial owners of the Company's common stock.
The Company does not anticipate paying any cash dividends in the foreseeable
future.
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 the 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.
(in thousands, except per share amounts)
Income Statement Data: 1999 1998 1997 1996 1995
- --------------------- ---- ---- ---- ---- ----
Direct written premiums $148,216 116,989 77,771 64,292 56,641
Total revenues $170,823 120,321 93,216 76,982 69,531
Net income $ 21,869 20,693 16,557 13,324 11,686
Basic earnings per share $ 2.24 2.22 1.83 1.57 1.47
Diluted earnings per share $ 2.19 2.11 1.76 1.53 1.47
Cash dividend declared
per share $ -- -- -- .10 .10
16
(in thousands)
Balance Sheet Data: 1999 1998 1997 1996 1995
- ------------------ ---- ---- ---- ---- ----
Total investments $346,589 345,004 268,300 238,497 221,604
Total assets $582,223 479,378 352,849 303,553 276,699
Loss and LAE liabilities $273,092 242,377 188,086 172,738 164,506
Revolving credit facility $ 62,719 27,165 -- -- --
Total liabilities $415,844 328,448 232,785 207,141 195,143
Shareholders' equity $166,379 150,931 120,064 96,411 81,556
Item 7. Management's Discussion & Analysis of Financial Condition and Results
of Operations
- -------------
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes to the consolidated financial
statements appearing elsewhere in this report. The consolidated financial
statements include the results of all of the Company's wholly owned and majority
owned subsidiaries. The results of AFP and Tenere have been included from
January 1, 1999 and March 17, 1999, respectively. All amounts have been rounded
to the nearest $100,000.
General
- -------
FPIC Insurance Group, Inc. ("FIG" or the "Company") was formed in 1996 in
connection with a reorganization pursuant to which it became the parent company
of Florida Physicians Insurance Company, Inc. ("FPIC") and McCreary Corporation
("McCreary"), a third party administrator. The Company's primary source of
revenue is management fees and dividends from its subsidiaries. The primary
sources of revenues for these amounts are premiums earned and investment income
derived from the insurance operations of FPIC, APAC, Intermed, and Interlex, and
fee and commission income from McCreary, AFP and their respective subsidiaries.
The Company, through its insurance subsidiaries, specializes in professional
liability insurance products and services for the healthcare community, with MPL
insurance for physicians and dentists as its primary product. The Company's MPL
insurance is written substantially on a "claims-made" basis (as opposed to an
"occurrence" basis) providing protection to the insured only for those claims
that arise out of incidents occurring, and of which notice to the insurer is
given, while coverage is in effect. 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.
During 1997, (i) McCreary acquired Employers Mutual, Inc. ("EMI"), a third party
administrator; (ii) the Company acquired a 20% interest in APS Insurance
Services, Inc. ("APS"), a management company for a Texas MPL insurance
reciprocal; and (iii) FPIC acquired renewal rights with respect to Frontier
Insurance Company's Florida book of physician MPL business. On July 1, 1998, the
Company acquired Anesthesiologists' Professional Assurance Company ("APAC"), a
Florida-based MPL insurer. On January 6, 1999, the Company acquired
Administrators for the Professions, Inc. ("AFP"), the management company for
Physicians' Reciprocal Insurers ("PRI"), a New York MPL insurance reciprocal. On
March 17, 1999, FPIC acquired The Tenere Group, Inc. ("Tenere"), a Missouri
insurance holding company that owns Intermed Insurance Company ("Intermed"), a
Missouri MPL insurer, and Interlex Insurance Company ("Interlex"), a Missouri
LPL insurer.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpected high frequency or severity
of losses for the Company's insurance subsidiaries in any period, particularly
in the Company's prior three policy years, could have a material adverse effect
on the
17
Company. In addition, reevaluations of the liability for loss and LAE could
result in an increase or decrease in liabilities and a corresponding adjustment
to earnings. The Company's historical results of operations are not necessarily
indicative of future earnings.
Overview
- --------
Fiscal year 1999 was another year of growth for the Company. Net premiums earned
by the Company's insurance subsidiaries grew 31.9%, from $89.6 million in 1998
to $118.2 million in 1999. Total revenues increased 42.0%, from $120.3 million
in 1998 to $170.8 million in 1999. Net income increased 5.8%, from $20.7 million
in 1998 to $21.9 million in 1999. Fully diluted earnings per share increased
$.08 per share from $2.11 per share in 1998 to $2.19 per share in 1999. During
1999, the portion of the Company's revenues attributable to areas other than its
core physicians MPL market continued to increase. The 1999 net losses and loss
adjustment expenses for the Company's insurance subsidiaries rose 20.2%, from
$67.4 million in 1998 to $81.0 million in 1999.
The Company believes that the premiums and earnings growth rates in 2000 are not
likely to be comparable to those achieved in 1999, which were largely the
results of acquisitions.
Insurance Operations
- --------------------
With respect to the Company's core MPL business, total insureds increased 2,793
from 8,525 in 1998 to 11,318 in 1999. Of this increase, 2.9% is attributable to
growth at APAC and the acquisition of Intermed and Interlex, which accounted for
51.5% and 43.1% of the increase, respectively. FPIC accounted for the balance of
the increase. Physician insureds grew 23.8%, from 6,383 in 1998 to 7,905 in
1999. Dental insureds grew 18.0%, from 1,843 in 1998 to 2,174 in 1999. Net
premiums earned on the Company's MPL business grew 30.6%, from $74.8 million in
1998 to $97.7 million in 1999.
Growth was achieved during 1999 in other product areas such as legal defense for
healthcare provider licensure investigations, group accident and health
insurance coverage and errors & omissions and directors & officers liability
insurance for managed care organizations. Net premiums earned for these products
increased from $14.7 million in 1998 to $20.5 million in 1999, primarily as a
result of the increased health premium.
The Company experienced another solid year of underwriting results during 1999,
with the frequency of physician claims reported decreasing by 2.6% from 1998
levels. The decline in claims frequency over the past several years is a
positive sign for future claims development. The primary risk to future positive
development of the Company's claims expense is unanticipated increases in the
average claim payment, also known as severity. Loss experience on the 1996 and
prior report years is developing as expected and, in some instances, better than
expected. However, while report years 1997, 1998, and 1999 are not mature enough
to accurately project at this time, management believes it is unlikely that the
reserves carried for these years will develop to be as materially redundant as
has been the case in the past.
The Company's combined ratio for fiscal year 1999, calculated using generally
accepted accounting principles ("GAAP"), declined 1.7%, from 89.2% in 1998 to
87.7% in 1999. The combined ratio is defined as the sum of net losses and loss
adjustment expenses plus other underwriting expenses as a percentage of net
premiums earned. This positive trend was primarily due to favorable loss and LAE
experience on the Company's core MPL business, the addition of assumed
reinsurance, which carries a lower loss and combined ratio than the core MPL
business, offset to some extent by adverse results from the Company's group
accident and health business. As discussed in the preceding paragraph,
management expects that the
18
level of favorable development and corresponding reserve reductions will decline
in 2000; therefore, the Company's combined ratio can be expected to increase
accordingly.
During 1999, the Company requested a 40% rate increase on its FDA group accident
and health program from the Florida Department of Insurance for which it
received approval in February 2000. This rate increase will begin to take effect
for business written or renewed beginning April 1, 2000. However, based upon
management's expectation that adverse accident and health claim trends may
continue, the Company has subsequently announced its intention to withdraw from
all its group accident and health programs. The Company's group accident and
health programs combined contributed an after-tax operating loss of
approximately $3.9 million for the year ended December 31, 1999, as compared to
an after-tax operating gain of $.4 million for the year ended December 31, 1998.
Investments
- -----------
The Company invests primarily in a diversified portfolio of high grade, taxable
and tax-exempt, fixed-income securities, with a targeted duration of
approximately five years. The majority of these securities are held as invested
assets by the various insurance subsidiaries. At the close of 1999, 55% of the
fixed-income portfolio was invested in tax-exempt securities and 45% in taxable
securities.
On a consolidated basis, the Company's total investment portfolio grew $1.6
million from $345.0 million in 1998 to $346.6 million in 1999. APAC and Tenere
accounted for $4.3 million and $44.5 million, respectively, of the increase in
the Company's total investment portfolio while FPIC's portfolio declined $39.8
million due to sales of bonds in connection with the acquisition of Tenere,
dividends paid to the Company in connection with the acquisition of AFP and
unrealized losses on FPIC's portfolio. The growth in investments also consisted
of a net contribution from the reinvestment of net interest income, a decrease
in equity securities of $.6 million and an increase in other invested assets of
$.4 million. Net investment income earned increased 8.6%, from $17.5 million in
1998 to $19.0 million in 1999.
Outlook for Florida and Missouri MPL Markets
- --------------------------------------------
The Company's assessment of the current Florida and Missouri MPL markets
indicates that premium growth may be flat to slightly negative for 2000 due to
the continuation of intense competition from both the large numbers of carriers
already present and new carriers entering these states. This competition is
likely to keep downward pressure on rates during 2000.
Effective January 1, 2000, the insurance subsidiaries of the Company did not
institute any overall rate increases. However, certain regions in the various
states in which the Company does business as well as certain medical specialties
did receive rate increases. Within these specialties and regions, the Company
has continued to realize deteriorating loss experience with loss ratios reaching
levels that, over time, could negatively affect earnings. The Company's strategy
is to increase pricing on these negatively developing medical specialties and
regions to the level where contribution is being made toward covering related
fixed expenses.
1999 Acquisitions and 2000 Strategy
- -----------------------------------
Effective January 1, 1999, the Company acquired AFP, which is the manager and
attorney-in-fact for Physicians' Reciprocal Insurers ("PRI"), a New York MPL
insurance reciprocal. PRI, which is the second largest MPL carrier for
physicians in New York, insures over 8,000 physicians and has direct written
premiums of approximately $130 million and total assets of approximately $897
million. The purchase consideration paid by the Company for AFP consisted of $44
million in cash and 214,286 shares of the Company's common stock. AFP derives
its income from management fees paid by PRI. The acquisition of AFP had a
positive impact on the Company's 1999 operating results.
19
The Company continues to consider and analyze the possibility of sponsoring a
conversion of PRI to a stock insurer and acquiring it. Such a transaction,
although unlikely during the coming year, would be subject to the approval of
the Company's board of directors and shareholders, as well as PRI's Board of
Trustees and policyholders, and the Florida and New York Departments of
Insurance and other regulatory authorities. Such an acquisition would give the
Company direct ownership of a large northeastern MPL insurer and has the
potential to further improve the Company's operating results.
On March 17, 1999, FPIC acquired Tenere, which is the holding company for
Intermed, a Missouri MPL insurer with approximately 1,439 insureds, and
Interlex, a Missouri LPL insurer with approximately 1,205 insureds. The purchase
price for Tenere was approximately $19.6 million in cash. Included in the net
assets acquired was approximately $14 million in cash. Contrary to management's
initial expectations, Tenere contributed an after-tax net operating loss of
approximately $688,000 to the Company's consolidated operating results for 1999.
Tenere's 1999 loss was primarily the result of a reserve strengthening. The
acquisition of Tenere, Intermed, and Interlex provided the Company with
approximately $8.2 million of additional net premiums earned and increased the
Company's presence in the southern mid-west. The Company contemplates prudently
expanding the LPL business to the Company's other states of operation and to use
the Company's existing relationships with legal defense attorneys to help market
this business.
On August 6, 1999, the Company's subsidiary, EMI, purchased all of the assets of
Brokerage Services, Inc. ("BSI") and Group Brokerage, Inc. ("GBI"), related
corporations headquartered in Albuquerque, New Mexico. BSI and GBI provide third
party administration services for self-insured and fully insured health plans.
The consideration paid by EMI for such assets aggregated approximately
$1,000,000.
The Company continues to believe that the MPL industry is in a consolidation
phase and will ultimately be dominated by companies with a national or large
regional presence. During 2000, the Company will continue to work to implement
its strategy of growing nationally within the MPL industry by expanding writings
of its existing carriers geographically and through strategic acquisitions that
may become available. The Company views ideal acquisition candidates as
companies that are as strong or stronger than the Company on a relative basis
and seeks acquisitions that are expected to be immediately accretive to
earnings.
The acquisitions to date provide the Company with infrastructure to expand its
products and services to the southeast, northeast and southern midwest. The
Company's goal over the next few years is to acquire additional companies to
provide management support and operations in the rest of the country.
Accomplishing this goal will provide the Company with the resources to compete
nationally for physicians and healthcare facilities insurance business. The
Company views this expansion as the cornerstone of its strategy to meet the
growing needs of the consolidating healthcare marketplace.
A secondary acquisition strategy that the Company considers viable is the
acquisition and consolidation of operations of small to medium sized third party
administrators ("TPAs") for self-insured and fully insured health plans. The
Company currently owns two TPAs, McCreary and EMI, and has identified other TPAs
that are acquisition candidates.
A number of capital sources are available to finance acquisitions, including
internally generated funds, bank credit facilities and newly issued debt and/or
equity securities.
On June 29, 1999, the Company's Board of Directors approved the extension of a
stock repurchase plan pursuant to which the Company is authorized to repurchase,
at management's discretion, up to 500,000 of its shares on the open market over
a twelve-month period. As of December 31, 1999, the Company had
20
repurchased 460,500 shares pursuant to this plan at a cost of approximately
$10.1 million. On September 11, 1999, the Company's Board of Directors approved
an additional stock buyback program, pursuant to which the Company is authorized
to repurchase an additional 500,000 shares of its stock on the open market when
all available shares have been repurchased under the previously announced
program.
On January 25, 2000, the Company's Board approved a third stock buyback program
for an additional 500,000 shares, under which the Company can repurchase shares
upon completion of the first two programs. Subsequent to December 31, 1999, and
as of March 20, 2000, the Company has repurchased an additional 280,000 shares
for approximately $4.7 million, completing the first program plus 240,500 shares
authorized under the second program. This leaves 259,500 shares that are
authorized under the second program, and 500,000 shares under the third, for a
total of 759,500 shares available for repurchase.
Selected Balance Sheet Items - December 31, 1999 compared to December 31, 1998
As noted above, the Company completed two significant acquisitions, AFP and
Tenere, in the first quarter of 1999. These acquisitions were accounted for
using the purchase method and had an impact on certain balance sheet accounts.
The effects of these acquisitions as well as other changes are described below.
Premiums Receivable
- -------------------
Premiums receivable increased $5.5 million, from $40.3 million at December 31,
1998 to $45.8 million at December 31, 1999 primarily due to the acquisition of
Tenere, which added $1.9 million, additional health premium receivables of $.5
million and additional assumed premiums of $3.2 million.
Due From Reinsurers on Unpaid Losses and Advance Premiums
- ---------------------------------------------------------
Due from reinsurers on unpaid losses and advance premiums increased $18.3
million, from $42.1 million at December 31, 1998 to $60.4 million at December
31, 1999 primarily due to the acquisition of Tenere.
Deferred Income Taxes
- ---------------------
Deferred income taxes increased $11.9 million, from $9.3 million at December 31,
1998 to $21.2 million at December 31, 1999. Approximately $5.8 million of the
increase is due to the acquisition of Tenere. The remaining $6.1 million relates
to deferred tax changes due to fluctuations in unrealized gains and losses on
investments available for sale.
Goodwill
- --------
Goodwill increased $57.7 million, from $12.7 million at December 31, 1998 to
$70.4 million at December 31, 1999. The increase is primarily related to the
acquisitions of AFP and Tenere, of $55.0 million and $3.9 million, respectively.
Loss and Loss Adjustment Expenses
- ---------------------------------
The liability for loss and LAE increased $30.7 million, from $242.4 million at
December 31, 1998 to $273.1 million at December 31, 1999. The increase is
primarily due to the acquisition of Tenere and the inclusion of its reserves.
21
Unearned Premiums
- -----------------
Unearned premiums increased $11.5 million, from $44.3 million at December 31,
1998 to $55.8 million at December 31, 1999. Approximately $1.8 million of the
increase is due to the acquisition of Tenere. The remaining $9.7 million is
primarily due to an increase in premiums on assumed business during 1999.
Revolving Credit Facility
- -------------------------
The revolving credit facility increased $35.5 million, from $27.2 million at
December 31, 1998 to $62.7 million at December 31, 1999. The increase in the
credit facility is due to additional borrowings to complete the acquisition of
AFP and fund non-operating cash needs, such as the repurchase of the Company's
common stock.
Accrued Expenses and Other Liabilities
- --------------------------------------
Accrued expenses and other liabilities increased $10.0 million, from $8.8
million at December 31, 1998 to $18.8 million at December 31, 1999 primarily due
to the acquisitions of AFP and Tenere, which added $2.6 million and $5.5
million, respectively.
Additional Paid-In Capital
- --------------------------
Additional paid-in capital increased $7.6 million, from $34.3 million at
December 31, 1998 to $41.9 million at December 31, 1999. This increase is due to
shares issued in connection with the purchase of AFP offset by a decline in
additional paid-in capital due to repurchase of the Company's common stock.
Accumulated Other Comprehensive Income
- --------------------------------------
Accumulated other comprehensive income decreased $14.1 million from $5.6 million
at December 31, 1998 to $(8.5) million at December 31, 1999 due to unrealized
losses on securities available for sale.
Results of Operations - Year Ended December 31, 1999 Compared to Year Ended
December 31, 1998
Premiums
- --------
Direct premiums written and assumed increased $31.2 million, or 26.7%, from
$117.0 million in 1998 to $148.2 million in 1999. The increase in premiums
written and assumed is due to the acquisitions of APAC and Tenere, which added
$6.1 million and $6.2 million, respectively, and additional assumed premiums
written of $12.1 million. Net premiums earned increased $28.6 million, or 31.9%,
from $89.6 million for the year ended December 31, 1998 to $118.2 million for
the year ended December 31, 1999. The increase in net premiums earned is due to
the acquisition of Tenere, which added $6.3 million, a full year of premiums
earned at APAC of $4.2 million, additional assumed MPL premium of $13.4 million,
and additional health premium of $4.7 million.
Net Investment Income
- ---------------------
Net investment income increased $1.5 million, or 8.6%, from $17.5 million in
1998 to $19.0 million in 1999. The increase was primarily attributable to the
inclusion of Tenere, which added approximately $1.9 million of investment
income. The overall allocation to tax-free securities decreased from 58% in 1998
to 55% in 1999.
22
Claims Administration and Management Fees and Commission Income
- ---------------------------------------------------------------
Claims administration fees and commission income increased $19.4 million, or
167.2%, from $11.6 million in 1998 to $31.0 million in 1999. The increase is
primarily attributable to the acquisition of AFP, which added $20.6 million in
management fees and commission revenue during 1999.
Claims administration fees are revenues generated by McCreary's core business,
which is the administration of self-insured programs for large employers,
primarily in the health and workers' compensation areas. Neither McCreary nor
the Company assume insurance risks on these products; each employer assumes the
risk and McCreary places any desired excess coverage with various insurers and
reinsurers. McCreary generated commission income from the placement of this
excess coverage. Management fees are revenues generated by AFP for providing all
underwriting, administrative and investment functions for PRI.
Losses and LAE
- --------------
Losses and LAE increased $13.6 million, or 20.2%, from $67.4 million in 1998 to
$81.0 million in 1999, reflecting, in part, the increase in premiums earned. The
GAAP loss ratios were 68.5% in 1999 and 75.2% in 1998. The loss ratio is defined
as losses and loss adjustment expenses as a percentage of net premiums earned.
The positive trend in the Company's loss ratio was primarily due to favorable
loss and LAE experience on business written on the Company's core MPL business,
the addition of assumed reinsurance, which carries a lower loss ratio than the
core MPL business, offset to some extent by adverse results from the Company's
group accident and health business. The liability for losses and LAE represents
management's best estimate of the ultimate cost of all losses incurred but
unpaid and considers prior loss experience, loss trends, the Company's loss
retention levels and changes in frequency and severity of claims.
In connection with the Company's review of the liability for losses and LAE,
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 $18.6 million in 1999 and $14.3 million in 1998. Given recent competitive
market conditions, which have lessened the Company's ability to underwrite and
price its business at such favorable terms, management does not expect reserve
reductions to continue at these levels in 2000. Furthermore, given the inherent
uncertainties in the estimation of loss and LAE reserves, there can be no
assurance concerning future adjustments, positive or negative, for prior years'
claims.
Other Underwriting Expenses
- ---------------------------
Other underwriting expenses increased $10.2 million, or 81.6%, from $12.5
million in 1998 to $22.7 million in 1999. The increase is primarily attributable
to an increase in expenses related to assumed premiums of $1.4 million, and the
inclusion of APAC and Tenere, which combined, added $6.0 million. In addition,
general and administrative expenses increased $2.3 million, including a
non-recurring severance charge of $1.9 million. In addition, the Company's
health insurance products have a higher expense factor than the Company's core
MPL products.
Claims Administration and Management Expenses
- ---------------------------------------------
Claims administration and management expenses increased $16.9 million, or
170.7%, from $9.9 million in 1998 to $26.8 million in 1999. The increase is
primarily attributable to the purchase of AFP, which incurred $14.3 million in
management expenses during 1999 and $.7 in compensation expense related to stock
grants for AFP employees.
23
Interest Expense
- ----------------
Interest expense increased $3.2 million, from $.8 million in 1998 to $4.0
million in 1999. The increase is primarily due to additional draws on the credit
facility to fund non-operating activities and the acquisition of AFP.
Other Expenses
- --------------
Other expenses increased $4.4 million, from $.8 million in 1998 to $5.2 million
in 1999. The increase is primarily attributable to amortization expense on
goodwill recorded in connection with acquisitions accounted for under the
purchase method.
Income Tax
- ----------
Income taxes increased $1.1 million, or 13.4%, from $8.2 million in 1998 to $9.3
million in 1999. This increase was due to additional income before taxes.
Net Income
- ----------
Net income increased $1.2 million, or 5.8%, from $20.7 million in 1998 to $21.9
million in 1999. Diluted earnings increased $.08 per share from $2.11 per share
for the year ended December 31, 1998 to $2.19 per share (including the $.16 per
share nonrecurring severance charge) for the year ended December 31, 1999.
Excluding the nonrecurring severance charge of $.16 per share, operating
earnings per share for the year-ended December 31, 1999 would be $2.32 per
share.
Results of Operations - Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997
Premiums
- --------
Direct premiums written and assumed increased $39.2 million, or 50%, from $77.8
million in 1997 to $117.0 million in 1998. This increase was primarily
attributable to assumed premium of $22 million, of which $16 million was MPL
premium, the purchase of APAC, which added $2.8 million, and an average rate
increase of 5.5% on MPL premiums effective January 1, 1998. In addition, the
Company added direct premium written of $5.2 million in Texas and $8 million in
group accident and health coverage in 1998. Reinsurance premium ceded more than
doubled from $7.5 million in 1997 to $16 million in 1998 due to the increase in
premium written in Texas and the APAC premium. Net premiums earned increased
$24.1 million, or 37%, from $65.5 million in 1997 to $89.6 million in 1998 due
to the increase in direct premiums written and the assumed premium.
Net Investment Income
- ---------------------
Net investment income increased $1.5 million, or 9%, from $16.0 million in 1997
to $17.5 million in 1998. The increase was primarily attributable to a higher
level of invested assets and the inclusion of APAC, which added approximately
$0.9 million of investment income. The increase was achieved despite an increase
in the overall allocation to tax-free securities from 50% in 1997 to 58% in
1998.
Claims Administration and Management Fees and Commission Income
- ---------------------------------------------------------------
Claims administration fees are revenues generated by McCreary's core business,
which is the administration of self-insured programs for large employers,
primarily in the health and
24
workers' compensation areas. Neither McCreary nor the Company assumes insurance
risk on these products; each employer assumes the risk and McCreary places any
desired excess coverage with various insurers and reinsurers. McCreary generated
all the commission income from the placement of this excess coverage.
Claims administration fees and commission income increased $1.4 million, or 14%,
from $10.2 million in 1997 to $11.6 million in 1998. This increase is
attributable to the addition of new contracts.
Losses and LAE
- --------------
Losses and LAE increased $13.4 million, or 25%, from $54.0 million in 1997 to
$67.4 million in 1998 reflecting, in part, the increase in premiums earned. The
GAAP loss ratios were 75.2% in 1998 and 82.5% in 1997. The lower loss ratio in
1998 reflects a change in the mix of business, particularly the group accident
and health product, which during 1998 ran at a lower loss ratio than the
Company's MPL business. In connection with the Company's review of the liability
for losses and LAE, 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 $14.3 million in 1998 and $15.1 million in 1997.
The liability for losses and LAE represents management's best estimate of the
ultimate cost of all losses incurred but unpaid and considers prior loss
experience, loss trends, the Company's loss retention levels and changes in
frequency and severity of claims. Given the inherent uncertainties in the
estimation of loss and LAE reserves, there can be no assurance concerning future
adjustments, positive or negative, for prior years' claims.
Other Underwriting Expenses
- ---------------------------
Other underwriting expenses increased $5.4 million, or 76%, from $7.1 million in
1997 to $12.5 million in 1998. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written. In addition, the increase in assumed premium and the expansion into
other product lines, such as group accident and health, have higher acquisition
costs and added $3.8 million.
Claims Administration and Management Expenses
- ---------------------------------------------
Claims administration expenses increased $1.4 million, or 16%, from $8.5 million
in 1997 to $9.9 million in 1998. This increase was primarily attributed to the
addition of new contracts.
Other Expenses
- --------------
Other expenses increased $.5 million, or 166.7%, from $.3 million in 1997 to $.8
million in 1998. The increase is primarily attributable to the purchase of
Sy.Med in 1998.
Income Tax
- ----------
Income taxes increased $1.4 million, or 21%, from $6.8 million in 1997 to $8.2
million in 1998. This increase was due to additional income before taxes.
Net Income
- ----------
Net income increased $4.1 million, or 25%, from $16.6 million in 1997 to $20.7
million in 1998. Diluted earnings increased $.35 per share, or 19.9%, from $1.76
per share for the year-ended December 31, 1997 to $2.11 per share for the
year-ended December 31, 1998.
25
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 1999 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
management considers to be adequate reinsurance; (ii) conducts regular actuarial
reviews of loss reserves; and (iii) maintains adequate asset liquidity (by
managing its cash flow from operations coupled with the maturities from its
fixed income portfolio investments).
The Company maintains a $75,000,000 revolving credit facility with five banks to
meet certain non-operating cash needs as they may arise. As of December 31,
1999, $62,719,109 had been borrowed under this facility at an interest rate of
approximately 6.4% per annum. The credit facility bears interest at various
rates ranging from LIBOR plus 0.75% to Prime plus 0.50%. The credit facility
terminates on January 4, 2002. The Company anticipates that before such time, it
would either extend the financing or obtain alternative financing. The Company
is not required to maintain compensating balances in connection with this credit
facility but is charged a fee on the unused portion, which ranges from 20 to 30
basis points. Under the terms of the credit facility, the Company is required to
meet certain financial covenants. Significant covenants are as follows: a) the
Company's funded debt to total capital plus funded debt ratio cannot exceed
0.35:1 and b) net premiums written to statutory capital and surplus ratio cannot
exceed 2.0:1. At December 31, 1999, the Company's subsidiary, Intermed, was in
technical violation of one of the Company's loan covenants. The Company has
obtained a waiver for this technical violation bringing Intermed and the Company
into compliance. The credit facility is guaranteed by certain subsidiaries and
collateralized by the common stock of certain subsidiaries.
At December 31, 1999, the Company held approximately $14.3 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 $14,342,940 in 1999.
Shareholder dividends payable by the Company's insurance subsidiaries are
subject to certain limitations imposed by Florida and Missouri law. In 2000,
these subsidiaries are permitted, within insurance regulatory guidelines, to pay
dividends of approximately $19,700,000 without prior regulatory approval.
The NAIC has developed risk-based capital ("RBC") measurements for insurers,
which have been adopted by the Florida and Missouri Departments of Insurance.
RBC measurements provide state regulators with varying levels of authority based
on the adequacy of an insurer's adjusted surplus. At December 31, 1999, the
Company's insurance subsidiaries maintain adjusted surplus in excess of all
required RBC thresholds.
Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998, and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. As issued, SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," was issued in June 1999 and defers the effective
date of SFAS No. 133. SFAS No. 133
26
is now effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. Management believes that SFAS No. 133 will not have a significant
impact on the Company's consolidated financial position or results of
operations.
Guaranty Fund Assessments
The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. (FIGA) and the Missouri Property and Casualty Insurance
Guaranty Association (MPCIGA) as well as similar associations in other states
where it is licensed, for the provision of funds necessary for the settlement of
covered claims under certain policies of insolvent insurers. In addition to the
standard assessments, the Florida and Missouri Legislatures may levy special
assessments to settle claims caused by certain catastrophic losses. The Company
would be assessed on a basis of premium written. No provision for special
assessments was made in the 1999 financial statements. However, damages caused
by future catastrophes could subject the Company to additional assessments.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve various risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
Market risk is the risk of loss arising from adverse changes in market rates and
conditions, such as interest rates, spreads among various asset classes, foreign
currency exchange rates, and other relevant market rate or price changes. Market
risk is directly influenced by the volatility and liquidity in the markets in
which the related underlying assets are traded. The following is a discussion of
the Company's primary market risk exposures and how those exposures are
currently managed as of December 31, 1999. The Company's market risk sensitive
instruments are entered into for purposes other than trading.
The fair value of the Company's debt and equity investment portfolio as of
December 31, 1999 was $335,899,101. Approximately 97.4% of the portfolio was
invested in fixed maturity securities. The primary market risk to the investment
portfolio is interest rate risk associated with investments in fixed maturity
securities. The Company's exposure to equity risk is not material.
The Company does not believe it has any foreign currency exposure. The Company
does not conduct any operations outside of the United States nor does the
Company own any non-U.S. dollar denominated securities.
Generally, the Company does not invest in derivatives and does not currently use
any hedging strategies in its investment portfolio. However, the Company has
invested in one interest rate swap contract to fix the interest rate in
connection with its revolving credit facility. As of December 31, 1999, the
Company's investments in Collateral Mortgage Obligations and Asset Backed
Securities represented approximately one percent of its investment portfolio.
The Company's investment portfolio is predominately fixed-income with
approximately 43.4% allocated to the municipal sector. The balance is
diversified through investments in Treasuries, agencies, corporates and
mortgage-backed securities. The three market risks that can most directly affect
the investment portfolio are changes in US interest rates, credit risks and
legislative changes impacting the tax-exempt status of municipal securities.
Adverse impacts to the Company resulting from changes in interest rates is
primarily controlled through limiting the duration, or average maturity, of the
overall portfolio. The Company manages the duration of its portfolio relative to
the duration of the anticipated liabilities of the Company. Credit risks are
controlled
27
through investing in securities with above average credit ratings. Approximately
63.3% of the portfolio is AAA, 15.0% is AA, 5.7% is A and 15.9% is BBB rated.
From time to time discussion arises in the United States Congress relative to
changing or modifying the tax-exempt status of municipal securities. While the
Company is diligent in its efforts to stay current on legislative acts that
could adversely impact the tax exempt status of municipal securities, and while
it is uncertain as to whether these changes would ultimately affect valuation of
municipal securities currently held in the portfolio, at present there are no
hedging or other strategies being specifically used to minimize this risk. If
interest rates were to rise 100 basis points, the fair value of the Company's
fixed maturity securities would decrease approximately $17,600,000.
There have been no significant changes to the Company's exposure to financial
market risks during the year nor does the Company anticipate any significant
changes in future reporting periods.
The amounts reported as cash flows in the table below for fixed maturities
represent par values at maturity date. The fair values of fixed maturities as
disclosed in the table below are based upon quoted market prices or dealer
quotes for comparable securities. The fair value of the credit facility is based
on the amount of cash flows discounted over the applicable term at the Company's
borrowing rate at December 31, 1999.
Projected Cash Flows (in thousands)
--------------------------------------------------------------------------------------------------
December 31, 1999
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ---------------------
Assets
- ------
Fixed maturity securities:
Available for sale $ 14,300 15,028 5,800 17,047 14,007 273,337 339,518 327,076
Liabilities:
- ------------
Credit facility $ 62,719 56,559
Weighted Average Interest Rate:
- -------------------------------
Fixed maturity securities 5.52% 6.39% 6.54% 6.34% 6.96% 6.23% 6.26%
Credit facility 5.27%
Year 2000
In order to avoid potential Year 2000 ("Y2K") problems, the Company adopted a
Year 2000 Plan ("the Plan") covering all of the Company's operations. The aim of
the Plan was to take steps to prevent the Company's processes and systems, with
emphasis on mission-critical functions, from being impaired due to Y2K problems.
Y2K problems result from the use in computer hardware and software of two digits
rather than four digits to define the applicable year. The Plan considered the
readiness of software systems written internally and those provided by third
parties to process data and perform date calculations correctly using dates
beginning January 1, 2000 and beyond. Hardware, including network servers, PC
workstations, network routers, and communication equipment were reviewed to
determine that firmware and operating system software were Y2K compliant.
As of March 30, 2000, the Company has not experienced any significant Y2K
problems prior to or after January 1, 2000. The Company further believes that it
will not experience any material Y2K problems in its mission critical functions,
processes and systems.
The Company anticipated that total costs for Y2K awareness, inventory,
assessment, analysis, conversion, testing and contingency planning would be
approximately $150,000. As of March 30, 2000, approximately $140,000 in costs
had been incurred. The Company does not anticipate any material costs related to
Y2K.
28
The costs incurred to address Y2K problems did not have a material effect on the
Company's consolidated financial position or results of operations.
From a forward-looking perspective, Y2K problems may affect the Company for some
period of time after January 1, 2000. However, the extent and magnitude of the
Y2K problem is difficult to predict or quantify. If, despite the Company's
reasonable efforts under its Plan, there are mission critical Y2K related
failures that create substantial disruptions to the Company's business, the
adverse impact on the Company's business could be material.
Item 8. Financial Statements and Supplementary Data
- ------- -------------------------------------------
The consolidated financial statements and schedules listed in Item 14(a)(1) and
(2) are included in this Report beginning on Page 35.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------
None
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 2000 Annual Meeting of Shareholders, which
information is incorporated herein by reference. Information regarding the
Company's other executive officers is as follows:
Name of Executive Officers Age Capacity
Kim D. Thorpe 44 Executive Vice President and Chief
Financial Officer
Donald J. Sabia 41 Vice President-Finance
David L. Rader 53 President and Director
Kim D. Thorpe has served the Company as Executive Vice President and Chief
Financial Officer since November 1999. Mr. Thorpe is a certified public
accountant. Prior to joining the Company, Mr. Thorpe served as the chief
financial officer of a life insurance business unit of GE Financial Assurance, a
subsidiary of GE Capital Corporation and General Electric Company. Before
joining GE in March 1998, Mr. Thorpe was a partner with the accounting firm of
PricewaterhouseCoopers LLP, where he practiced public accounting for
approximately 12 years.
Donald J. Sabia has served as a Vice President of the Company since its
formation in 1996 and as an officer of FPIC since 1995 and has been employed by
the Company since 1993. From 1986 to 1993, Mr. Sabia was an auditor with the
accounting firm of Coopers & Lybrand. Mr. Sabia is a Certified Public
Accountant. Mr. Sabia has tendered his resignation and will be departing the
Company effective April 1, 2000.
David L. Rader has served as President, Chief Operating Officer and Director of
FPIC since September 1999. Mr. Rader previously served as President and Director
of FPIC from 1984 through 1990. He has been a senior officer or director of
Physicians Insurance Company of Ohio, Physicians Insurance Company of Michigan,
Physicians Insurance Company of Indiana and Kentucky Medical Insurance Company.
Immediately prior to joining FPIC in 1984, he was President of American
Physicians Life Insurance Company. From 1995 through 1997, he was President and
Chief Operating Officer of Plans' Liability
29
Insurance Company in Chicago, Illinois. He is a founding member of Physicians
Insurers Association of America (PIAA).
Item 11. Executive Compensation
The information required herein will appear under the heading "Executive
Compensation" in the Company's Proxy Statement for the 2000 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 2000 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
2000 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, 1999 and 1998
Consolidated Statements of Income for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December
31, 1999, 1998 and 1997
Notes to the Consolidated Financial Statements
2. Financial Statement Schedules:
------------------------------
(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
II Condensed Financial Information of Registrant
III Supplemental Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
30
3. Exhibits:
---------
Exhibit No.
-----------
3.1 Restated Articles of Incorporation of FPIC Insurance Group,
Inc., incorporated by reference to the Company's Form 10-Q
(Commission File No. 1-11983) filed on August 16, 1999.
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) Form of Employment Agreement dated December 30, 1992, amended
November 4, 1995, and amended February 28, 1996 and extended
on November 7, 1998, 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 and the Company's Form 10-Q, incorporated by
reference to the Company's definitive proxy statement
(Commission File No. 1-11983) filed on May 7, 1999.
10(b) Form of Severance Agreements 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(c) Form of Indemnity Agreement dated February 28, 1996 between
the Registrant and Drs. Acosta-Rua, Gause, Shapiro, Selander,
White, Bagby, Baratta, Murray, Bridges, Hagen, Van Eldik,
Yonge, Messrs. Russell, Rosenbloom, Sabia, 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(d) Omnibus Incentive Plan, as amended, incorporated by reference
to the Company's definitive proxy statement (Commission File
No. 1-11983) filed on May 7, 1999.
10(e) Director Stock Option Plan, as amended, incorporated by
reference to the Company's definitive proxy statement
(Commission File No. 1-11983) filed on May 7, 1999.
10(f) Supplemental Executive Retirement Plan, as amended,
incorporated by reference to the Company's Form 10-Q
(Commission File No. 1-11983) filed on May 17, 1999.
10(g) 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(h) 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(i) Agreement and Plan of Merger dated as of April 14, 1998 among
the Company, Anesthesiologists' Professional Assurance
Association, Inc., the APAA Liquidating Trust and
Anesthesiologists' Professional Assurance Company,
incorporated by reference to the Company's filing on Form 10-K
(Commission File No. 1-11983) filed on March 31, 1999.
31
10(l) Form of Severance Agreement dated January 1, 1999 between the
Registrant and John R. Byers incorporated by reference to the
Company's Form 10-Q (Commission File No. 1-11983) filed on May
17, 1999.
10(m) Form of Employment Agreement dated January 1, 1999 between the
Registrant and John R. Byers incorporated by reference to the
Company's Form 10-Q (Commission File No. 1-11983) filed on May
17, 1999.
10(n) Form of Employment Agreement dated November 22, 1999 between
the Registrant and Kim D. Thorpe.
10(o) Form of Severance Agreement dated November 22, 1999 between
the Registrant and Kim D. Thorpe.
10(p) Form of Indemnity Agreement dated January 1, 1999 between the
Registrant and Frank Moya, M.D. and John R. Byers.
10(q) Form of Indemnity Agreement dated May 8, 1999 between the
Registrant and Mss. Deyo, Parks and Ryan.
10(r) Form of Indemnity Agreement dated August 22, 1999 between the
Registrant and Steven Coniglio.
10(s) Form of Indemnity Agreement dated November 6, 1999 between the
Registrant and Messrs. Cetin and Thorpe.
21 Subsidiaries of the Registrant.
23 Consent of KPMG LLP
27 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
The Company did not file any reports on Form 8-K during the fourth quarter
of 1999.
32
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 27th day of
March, 2000.
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 27, 2000
------------------------ Officer and Director
William R. Russell (Principal Executive Officer)
/s/ Kim D. Thorpe Executive Vice President March 27, 2000
------------------------ and Chief Financial Officer
Kim D. Thorpe (Principal Financial Officer)
/s/ Donald J. Sabia Vice President - Finance March 27, 2000
------------------------ (Principal Accounting Officer)
Donald J. Sabia
/s/ Robert O. Baratta Chairman of the Board March 27, 2000
------------------------
Robert O. Baratta, M.D.
/s/ David M. Shapiro Vice Chairman March 27, 2000
------------------------
David M. Shapiro, M.D.
/s/ Gaston J. Acosta-Rua Director March 27, 2000
------------------------
Gaston J. Acosta-Rua, M.D.
/s/ Richard J. Bagby Director March 27, 2000
------------------------
Richard J. Bagby, M.D.
/s/ James W. Bridges Director March 27, 2000
------------------------
James W. Bridges, M.D.
/s/ Curtis E. Gause Director March 27, 2000
------------------------
Curtis E. Gause, D.D.S.
/s/ J. Stewart Hagen Director March 27, 2000
------------------------
J. Stewart Hagen, M.D.
33
/s/ Frank M. Moya Director March 27, 2000
---------------------
Frank M. Moya, M.D.
/s/ Louis C. Murray Director March 27, 2000
---------------------
Louis C. Murray, M.D.
/s/ Guy T. Selander Director March 27, 2000
---------------------
Guy T. Selander, M.D.
/s/ Dick L. Van Eldik Director March 27, 2000
--------------------------
Dick L. Van Eldik, M.D.
/s/ James G. White Director March 27, 2000
---------------------
James G. White, M.D.
/s/ Henry M. Yonge Director March 27, 2000
---------------------
Henry M. Yonge, M.D.
34
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1999 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 LLP
Jacksonville, Florida
March 8, 2000
35
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets
As of December 31, 1999 and 1998
1999 1998
------------- -------------
Assets
Cash and cash equivalents $ 6,829,802 7,062,695
Bonds and U.S. Government securities, available for sale 327,076,429 325,922,559
Equity securities, available for sale 8,822,672 9,427,990
Real estate 5,235,379 4,581,671
Other invested assets 5,454,775 5,071,771
------------- -------------
Total cash and investments 353,419,057 352,066,686
Premiums receivable, net of allowance for doubtful accounts
of $1,246,580 and $908,409 in 1999 and 1998, respectively 45,782,784 40,296,590
Accrued investment income 5,426,270 4,981,612
Reinsurance recoverable on paid losses 3,080,859 3,190,042
Due from reinsurers on unpaid losses and advance premiums 60,355,677 42,100,852
Property and equipment, net 3,773,502 2,614,686
Deferred policy acquisition costs 2,789,170 2,001,248
Deferred income taxes 21,243,776 9,348,494
Finance charge receivable 378,860 370,875
Prepaid expenses 1,126,167 644,336
Goodwill, net 70,441,159 12,699,714
Intangible assets, net 3,480,696 3,886,574
Federal income tax receivable 4,128,756 271,029
Other assets 6,796,269 4,905,730
------------- -------------
Total assets $ 582,223,002 479,378,468
============= =============
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 273,092,000 242,377,000
Unearned premiums 55,758,929 44,309,691
Paid in advance and unprocessed premiums 5,458,683 5,767,080
Revolving credit facility 62,719,109 27,165,000
Accrued expenses and other liabilities 18,815,339 8,829,169
------------- -------------
Total liabilities 415,844,060 328,447,940
------------- -------------
Commitments and contingencies (note 16)
Common stock, $.10 par value, 50,000,000 shares authorized; 9,621,298 and
9,518,679 shares issued and outstanding at
December 31, 1999 and 1998, respectively 962,130 951,868
Additional paid-in capital 41,856,912 34,297,994
Unearned compensation (230,669) (356,528)
Accumulated other comprehensive (loss) income (8,494,573) 5,621,533
Retained earnings 132,285,142 110,415,661
------------- -------------
Total shareholders' equity 166,378,942 150,930,528
------------- -------------
Total liabilities and shareholders' equity $ 582,223,002 479,378,468
============= =============
See accompanying notes to consolidated financial statements.
36
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Revenues
Net premiums earned $118,188,873 89,561,578 65,503,675
Net investment income 19,023,878 17,549,099 15,978,534
Net realized investment gains (losses) 350,596 (39,226) 32,065
Claims administration and management fees 26,805,357 9,861,210 8,758,651
Commission income 4,152,233 1,740,005 1,465,282
Finance charge and other income 2,301,863 1,648,144 1,477,824
------------ ------------ ------------
Total revenues 170,822,800 120,320,810 93,216,031
------------ ------------ ------------
Expenses
Net losses and loss adjustment expenses 80,967,650 67,361,507 54,010,515
Other underwriting expenses 22,695,107 12,513,065 7,079,238
Claims administration and management expenses 26,804,723 9,936,558 8,461,264
Interest expense 3,981,500 844,451 48,980
Other expenses 5,170,843 801,013 271,811
------------ ------------ ------------
Total expenses 139,619,823 91,456,594 69,871,808
------------ ------------ ------------
Income before income taxes 31,202,977 28,864,216 23,344,223
Income taxes 9,333,496 8,171,574 6,787,538
------------ ------------ ------------
Net income $ 21,869,481 20,692,642 16,556,685
============ ============ ============
Basic earnings per common share $ 2.24 2.22 1.83
============ ============ ============
Diluted earnings per common share $ 2.19 2.11 1.76
============ ============ ============
Basic weighted average common shares outstanding 9,748,190 9,332,206 9,044,984
============ ============ ============
Diluted weighted average common shares outstanding 10,006,614 9,808,664 9,407,093
============ ============ ============
See accompanying notes to consolidated financial statements.
37
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Net Income $ 21,869,481 20,692,642 16,556,685
------------ ------------ ------------
Other Comprehensive Income
Unrealized (losses) gains on securities
Unrealized holding (losses) gains arising during period (22,067,683) 3,096,509 5,352,980
Reclassification adjustment for gains (losses) included
in net income 350,596 (39,226) 32,065
Income tax benefit (expense) related to unrealized gains and
losses on securities 7,600,981 (1,070,049) (1,830,915)
------------ ------------ ------------
Other comprehensive (loss) income (14,116,106) 1,987,234 3,554,130
------------ ------------ ------------
Comprehensive income $ 7,753,375 22,679,876 20,110,815
============ ============ ============
See accompanying notes to consolidated financial statements.
38
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated
Other
Common Additional Comprehensive Retained Treasury
Stock Paid-in capital Income Earnings Stock
--------------- ---------------- --------------- ----------- ---------
December 31, 1996 $ 902,167 22,444,711 80,169 73,166,334 (181,991)
Net income -- -- -- 16,556,685 --
Retirement of treasury shares (1,957) (180,034) -- -- 181,991
Net unrealized gain on debt and equity securities -- -- 3,554,130 -- --
Issuance of shares, net 17,748 3,524,467 -- -- --
December 31, 1997 $ 917,958 25,789,144 3,634,299 89,723,019 --
Net income -- -- -- 20,692,642 --
Unearned compensation -- -- -- -- --
Net unrealized gain on debt and equity securities -- -- 1,987,234 -- --
Issuance of shares, net 33,910 8,508,850 -- -- --
December 31, 1998 $ 951,868 34,297,994 5,621,533 110,415,661 --
Net income -- -- -- 21,869,481 --
Earned compensation on option issue -- -- -- -- --
Net unrealized loss on debt and equity securities -- -- (14,116,106) -- --
Issuance of shares, net 10,262 7,558,918 -- -- --
------------ ------------ ------------ ------------ ------------
December 31, 1999 $ 962,130 41,856,912 (8,494,573) 132,285,142 --
============ ============ ============ ============ ============
Unearned
Compensation Total
------------ ------------
December 31, 1996 -- 96,411,390
Net income -- 16,556,685
Retirement of treasury shares -- --
Net unrealized gain on debt and equity securities -- 3,554,130
Issuance of shares, net -- 3,542,215
------------ ------------
December 31, 1997 -- 120,064,420
Net income -- 20,692,642
Unearned compensation (356,528) (356,528)
Net unrealized gain on debt and equity securities -- 1,987,234
Issuance of shares, net -- 8,542,760
------------ ------------
December 31, 1998 (356,528) 150,930,528
Net income -- 21,869,481
Earned compensation on option issue 125,859 125,859
Net unrealized loss on debt and equity securities -- (14,116,106)
Issuance of shares, net -- 7,569,180
------------ ------------
December 31, 1999 (230,669) 166,378,942
============ ============
See accompanying notes to consolidated financial statements.
39
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 21,869,481 20,692,642 16,556,685
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 5,908,262 2,256,019 2,108,350
Realized (gain) loss on investments (350,596) 39,226 (32,065)
Realized loss on sale of property and equipment 16,191 10,886 7,275
Noncash compensation 125,859 20,972 --
Net loss (earnings) from equity investments 339,036 (300,046) --
Deferred income taxes 1,096,986 (361,043) (1,939,499)
Writedown of goodwill to net realizable value 436,042 -- --
Bad debt expense 352,178 227,234 297,595
Changes in assets and liabilities:
Premiums receivable, net 965,314 (19,136,259) (5,670,261)
Accrued investment income, net (25,271) (831,355) (99,588)
Reinsurance recoverable 109,183 (2,207,575) (792,276)
Due from reinsurers on unpaid losses and advance premiums (5,650,686) (11,319,478) (2,094,761)
Deposits with reinsurers 662,496 18,606,551 (1,651,162)
Deferred policy acquisition costs (525,734) (589,828) (199,385)
Prepaid expenses and finance charge receivable (652,590) (310,666) (64,385)
Other assets 340,096 (1,620,628) (784,846)
Loss and loss adjustment expenses (6,790,115) 14,880,897 15,348,000
Unearned premiums 3,234,011 11,372,617 4,758,896
Paid in advance and unprocessed premiums (308,397) 348,712 (467,920)
Federal income tax receivable / payable (3,857,727) (3,006,556) 2,214,942
FIGA accrual -- -- (1,345,244)
Accrued expenses and other liabilities (2,951,079) 1,456,300 2,973,378
------------ ------------ ------------
Net cash provided by operating activities 14,342,940 30,228,622 29,123,729
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 69,470,532 44,017,742 81,416,058
Purchase of bonds and U.S. Government securities (61,577,622) (83,056,363) (102,081,907)
Proceeds from sale of equity securities 236,433 300,000 --
Purchase of equity securities -- (7,680,500) (2,331,950)
Proceeds from sale of real estate investments -- -- 281,060
Purchase of real estate investments (902,312) (376,833) (864,224)
Purchase of other invested assets (703,558) (2,171,771) (2,000,000)
Purchases of property and equipment, net (1,556,323) (1,215,618) (1,174,941)
Purchase of subsidiary's net other assets and stock (49,763) (2,433,623) (285,726)
Purchase of goodwill (50,986,139) (11,559,043) (5,407,588)
------------ ------------ ------------
Net cash used in investing activities (46,068,752) (64,176,009) (32,449,218)
------------ ------------ ------------
Cash flows from financing activities:
Receipt of revolving credit facility 39,054,109 25,165,000 2,000,000
Payment on revolving credit facility (3,500,000) -- --
Buyback of common stock outstanding (8,272,435) -- --
Issuance of common stock 4,211,245 8,165,260 3,542,215
------------ ------------ ------------
Net cash provided by financing activities 31,492,919 33,330,260 5,542,215
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (232,893) (617,127) 2,216,726
Cash and cash equivalents at beginning of period 7,062,695 7,679,822 5,463,096
------------ ------------ ------------
Cash and cash equivalents at end of period $ 6,829,802 7,062,695 7,679,822
============ ============ ============
See accompanying notes to consolidated financial statements.
Continued.
40
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ --------- ------------
Supplemental disclosure of noncash financing activities:
Interest paid $ 4,015,726 844,151 65,962
============ ========= ============
Federal income taxes paid $ 6,634,000 9,816,000 6,071,204
============ ========= ============
Retirement of treasury stock $ -- -- 181,991
============ ========= ============
Supplemental schedule of noncash investing and financing activities:
The Company purchased all of the capital stock of Administrators For The
Professions, Inc. for $53,830,370 and a 70% equity interest in a limited
liability company for $2,500,000. In conjunction with the acquisitions,
common stock was issued as follows:
Goodwill and other tangible assets acquired $ 56,330,370 -- --
Cash paid for the capital stock (44,700,000) -- --
------------ --------- ------------
Common stock issued and related additional paid-in capital $ 11,630,370 -- --
============ ========= ============
See accompanying notes to consolidated financial statements.
41
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
FPIC Insurance Group, Inc. ("the Company") is an insurance holding company.
The Company's principal direct and indirect subsidiaries are: Florida
Physicians Insurance Company, Inc. ("FPIC"), FPIC Publishing, Inc.
("Publishing"), Anesthesiologists' Professional Assurance Company, Inc.
("APAC"), FPIC Insurance Agency, Inc. ("the Agency"), Administrators For
The Professions, Inc. ("AFP") and its two subsidiaries: Group Data
Corporation and FPIC Intermediaries, Inc., The Tenere Group, Inc.
("Tenere") and its two subsidiaries: Intermed Insurance Company
("Intermed") and Interlex Insurance Company ("Interlex"), McCreary
Corporation ("MCC") and its subsidiary Employer's Mutual, Inc. ("EMI") and
its two subsidiaries: FPIC Services, Inc., and Sy.Med Development, Inc.
("Sy.Med").
FPIC is a licensed casualty insurance carrier and writes professional
liability insurance for physicians, dentists, hospitals, and other
healthcare providers. AFP is a manager and attorney-in-fact for the medical
professional liability insurer, Physicians Insurers' Reciprocal ("PRI") in
the state of New York. The subsidiaries of AFP provide various brokerage
services to the Company's insurance subsidiaries and PRI. APAC is a
licensed casualty insurance carrier and writes professional liability
insurance for anesthesiologists. Intermed and Interlex are licensed
casualty insurance carriers and write professional liability insurance for
physicians and attorneys, respectively. Publishing publishes the bimonthly
magazine, Women In Medicine. MCC and EMI are third-party administrators of
various lines of business in the insurance industry. The subsidiaries of
EMI provide various services and software programs to assist physicians in
the managed care environment. The Agency conducts various insurance agency
activities. The Company's subsidiaries are located primarily in the states
of Florida, Missouri, New Mexico, and New York.
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 the Company and all of its
wholly owned and majority-owned subsidiaries. Less than majority-owned
entities in which the company has at least a 20% interest are reported on
the equity basis. Intercompany transactions and balances have been
eliminated in consolidation.
Nature of Operations
The Company, through FPIC, APAC, Intermed, and Interlex, operates in the
property and casualty insurance industry and is a provider of medical
professional liability ("MPL") and legal professional liability ("LPL")
insurance in Florida, Kansas, and Missouri. The Company is licensed to
write insurance in Alabama, Arkansas, Florida, Georgia, Kansas, Kentucky,
Illinois, Indiana, Maryland, Mississippi, Missouri, Ohio, Pennsylvania,
Tennessee, Texas, Virginia, and West Virginia. In addition, the Company 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:
Legal/Regulatory Risk 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 or new legal theories may create costs for the insurer beyond those
currently recorded in the consolidated financial statements. This risk is
concentrated in Florida, where the Company writes approximately 85% of its
business, but may expand to other states 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 that owe the Company
money, will not pay. Financial instruments that potentially expose the
Company to concentrations of credit risk consist primarily of fixed
maturity investments, 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 or collateralized by irrevocable
letters of credit. The Company has not experienced significant losses
related to such deposits.
42
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Market Risk is the risk that a change in interest rates will 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
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
The estimates most susceptible to change are those used in determining the
liability for losses and loss adjustment expenses ("LAE"). Although
considerable variability is inherent in these estimates, management
believes that these liabilities are adequate. These amounts are continually
reviewed and adjusted as necessary in current operations.
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.
Investments
The Company accounts for its investments under Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." Under the provisions of SFAS No. 115, the
Company is required to classify investments in debt and equity securities
into one of three categories: held-to-maturity, available-for-sale, or
trading. All of the Company's investments in debt and equity securities are
classified as available-for-sale on the consolidated balance sheet, with
the change in fair value during the period excluded from earnings and
recorded net of tax as a component of other comprehensive income.
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.
Other invested assets include investments in three limited partnerships and
a joint venture. Two of the partnerships invest in stocks and other
financial securities of both public and non-publicly traded companies,
primarily in the insurance and financial services industries. The third
partnership is a diversified real estate fund. The Company accounts for
these investments based on the cost method.
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 are
determined on the basis of specific identification. 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.
Real estate investments consist of a building, various rental units and
vacant lots. These investments are carried at cost less accumulated
depreciation. 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 are included in net
investment income.
Reinsurance
The Company records its reinsurance contracts under the provisions of SFAS
No. 113, "Accounting and Reporting for Reinsurance on Short-Duration and
Long-Duration Contracts." 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, except on the Company's
anesthesiology program in
43
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which the maximum loss is $750,000 per occurrence. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. Reinsurance contracts do not relieve
the Company from its primary obligations to policyholders. Failure of
reinsurers to honor their obligations could result in losses to the
Company. The Company evaluates the financial condition of reinsurers and
monitors concentrations of credit risk arising from similar geographic
regions, activities or economic characteristics of the reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies.
The Company holds collateral in the form of letters of credit for amounts
recoverable from reinsurers that are not designated as authorized
reinsurers by the domiciliary Departments of Insurance.
The Company uses the deposit method of accounting for short-duration and
multiple-year contracts that do not transfer both underwriting and timing
risk or for which risk transfer is undeterminable.
Property and Equipment
The cost of property and equipment is depreciated over the estimated useful
lives of the related assets ranging from five to fifteen years.
Depreciation is computed on the straight-line basis.
Deferred Policy Acquisition Costs
Costs related to acquiring insurance contracts, principally commissions,
are capitalized when incurred and amortized over the term of the insurance
contracts.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." 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 carry forwards. 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.
Goodwill
Goodwill represents the aggregate cost of companies acquired over the fair
value of net assets at the date of acquisition and is being amortized into
income using the straight-line method over periods not exceeding
twenty-five years. Management regularly reviews the carrying value of
goodwill by determining whether the amortization of the goodwill can be
recovered through undiscounted future operating cash flows of the acquired
operation.
Intangible Assets
Intangible assets represent broker fees, trade secrets and non-compete
agreements acquired in connection with business combinations. These assets
are being amortized into income over periods not exceeding ten years using
the straight-line method. Management regularly reviews the carrying value
of intangible assets by determining whether the amortization of the
intangible assets can be recovered through undiscounted future operating
cash flows of the acquired operation.
Recognition of Revenues
Premiums are recognized as revenues on a monthly pro rata basis over the
terms of the policies. Policy terms generally do not exceed one year.
Unearned premiums represent the portion of written premiums which relate to
future periods net of deductions for reinsurance placed with reinsurers.
Premiums received in advance of the policy year are recorded as premiums
collected in advance on the consolidated balance sheet. Claims
administration and management fee income is recognized when earned over the
life of the contracts. Commission income is recognized at the time a policy
is signed.
Loss and Loss Adjustment Expenses
As more fully described in Note 11, the Company estimates its liability for
loss and LAE based on actuarial projections of the best estimate of
ultimate losses and LAE. The estimated liability for losses is based upon
case base estimates for losses reported, adjusted through formula
calculations for ultimate loss expectations; estimates of incurred but not
reported losses based on past experience; deduction of amounts for
reinsurance placed with
44
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reinsurers; and estimates received related to assumed reinsurance. Amounts
attributable to ceded reinsurance derived in estimating the liability for
loss and LAE are reclassified as assets in the consolidated balance sheets
are required by SFAS No. 113. The liability for LAE is provided by
estimating future expenses to be incurred in settlement of claims provided
for in the liability for losses.
The liabilities for losses and LAE and the related estimation methods are
continually reviewed and revised to reflect current conditions and trends.
The resulting adjustments are reflected in operating results of the year
the revisions are made. While management believes the liabilities for
losses and LAE are adequate to cover the ultimate liability, the actual
ultimate loss costs may vary from the amounts presently provided.
Per Share Data
Basic and diluted earnings per common share are based upon the weighted
average number of common and common and common equivalent shares,
respectively, outstanding during each year.
Accounting for Stock-based Compensation
SFAS No. 123, "Accounting for Stock-based Compensation" requires the fair
value of stock options and other stock-based compensation issued to
employees to either be 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 consolidated financial
statements. The Company elected to adopt SFAS No.123 on a disclosure basis
only and will continue to measure stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," using intrinsic values with appropriate disclosures
under the fair value based method as required by SFAS 123. Accordingly,
SFAS No. 123 does not have an effect on the Company's consolidated
financial position and results of operations.
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.
Interest Rate Swap
The Company uses a derivative financial instrument, specifically an
interest rate swap, to manage market risks related to changes in interest
rates. The instrument is off-balance-sheet and therefore has no carrying
value. The differential to be paid or received as interest rates change is
accrued and recognized as an adjustment on interest expense related to the
debt. The related amount payable to or receivable from the counterparty is
included as an adjustment to accrued interest.
The Company does not currently hold or issue any other derivative financial
instruments for trading purposes or otherwise.
Reclassification
Certain amounts for 1998 and 1997 have been reclassified to conform to the
1999 presentation.
2. Business Acquisitions
On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a
Florida third party administrator, for $2,000,000 plus certain additional
payments based on earnings. On January 17, 1997, MCC acquired all of the
outstanding common stock of EMI, a Florida third party administrator, for
$1,250,000 plus certain additional payments based upon earnings. The
acquisition agreements specified additional payments, based upon earnings,
to be made to the sellers from the acquisition date through 2001. The
remaining contingent payments and the year of payment for these two
acquisitions are as follows:
MCC EMI
-------------- ------------
2000 $ 600,000 $ 250,000
2001 -- 250,000
45
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These payments are subject to adjustment in accordance with the agreements
based on attainment of projected annual earnings from the date of
acquisition through 2001. The Company made a $700,000 and a $250,000
payment in 1999 to MCC and EMI, respectively, in accordance with the
acquisition agreements.
Subsequent to December 31, 1999, the Company entered into agreements ("the
new agreements") with the sellers to fix the remaining payments and thereby
effectively eliminate the contingent terms under the previous agreements.
Under the new agreements, the Company will pay the sellers of McCreary
$1,668,362 on July 31, 2000, and the sellers of EMI $226,918 and $537,613
on March 27, 2000 and March 1, 2001, respectively. These payments will
increase the original purchase price and the recorded goodwill,
accordingly.
1999 business acquisitions
Effective January 1, 1999, the Company purchased all of the outstanding
common stock of AFP and a 70% interest in Professional Medical
Administrators, LLC. ("PMA") for aggregate consideration equal to
$56,330,000, paid in cash of $44,700,000 and Company common stock. AFP is
the manager and attorney-in-fact for Physicians Reciprocal Insurers, the
second largest medical professional liability insurer for physicians in the
state of New York. The earnings of PMA are not material to the consolidated
results of the Company.
The purchase had the following impact for the year ended December 31, 1999,
which is included in the consolidated financial statements. Had AFP been
included in the consolidated results of operations for the Company for the
year ended December 31, 1998 the following increases and decreases would
have resulted:
Actual Proforma
1999 1998
----------- -----------
Revenues $20,649,910 16,210,469
Expenses 18,551,632 17,943,619
Net income loss 1,010,965 (94,613)
Earnings (loss) per share .10 (.01)
On March 17, 1999, the Company's subsidiary, FPIC, purchased all of the
outstanding common stock of Tenere for $19,608,000 in cash. Included in the
net assets acquired was approximately $14,000,000 in cash. Tenere,
headquartered in Springfield, Missouri, is a stock holding company, with
two primary insurance subsidiaries, Intermed and Interlex. Intermed and
Interlex provide MPL and LPL insurance. The purchase had the following
impact for the nine and a half month period ended December 31, 1999, which
is included in the consolidated financial statements:
Revenues $ 8,217,401
Expenses 9,302,876
Net loss (688,710)
Loss per share (.07)
Had Tenere been included in the consolidated results of operations for the
Company for the years ended December 31, 1999 and 1998, the following
increases and decreases would have resulted:
1999 1998
------------ ------------
Revenues $ 9,565,187 9,586,374
Expenses 13,920,485 14,087,589
Net loss (2,484,171) (2,990,678)
Loss per share (.25) (.30)
On August 6, 1999, the Company's subsidiary, EMI, purchased all of the
assets of Brokerage Services, Inc. ("BSI") and Group Brokerage, Inc.
("GBI"), related corporations headquartered in Albuquerque, New Mexico.
46
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BSI and GBI provide third party administration services for self-insured
and fully insured health plans. The consideration paid by EMI for such
assets aggregated approximately $1,000,000. The purchase had the following
impact for the five-month period ended December 31, 1999, which is included
in the consolidated financial statements:
Revenues $ 1,364,188
Expenses 1,705,333
Net loss (221,744)
Loss per share (.02)
Had BSI and GBI been included in the consolidated results of operations for
the Company for the years ended December 31, 1999 and 1998, the following
increases and decreases would have resulted:
1999 1998
----------- -----------
Revenues $ 3,824,999 5,471,618
Expenses 4,661,003 4,977,872
Net loss / income (543,403) 297,235
Loss / earnings per share (.05) .03
1998 business acquisitions
On July 1, 1998, the Company purchased all of the outstanding common stock
of APAC, a medical malpractice insurance company, for $18,000,000.
Additionally, $3,500,000 was paid in non-compete agreements and other fees
to certain key employees. These amounts are recorded as intangible assets
on the consolidated balance sheet. APAC insures over 800 anesthesiologists
in over 20 states.
Concurrent with the purchase of APAC on July 1, 1998, the Company purchased
a 9.9% interest in American Professional Assurance Ltd. ("APAL"), a Cayman
Islands captive reinsurer, for $5,500,000. The Company's investment in APAL
is being accounted for under the cost method.
On July 1, 1998, EMI purchased all of the outstanding stock of Sy.Med, a
software development and consulting company located in Nashville,
Tennessee, for a cost of $400,000, plus certain additional payments based
upon future earnings. The purchase agreement sets the initial future earn
out amounts at $175,000 for the six month period ended December 31, 1998
and $400,000, $500,000 and $600,000 for the fiscal years ending December
31, 1999 through 2001 and $325,000 for the six month period January 1, 2002
through June 30, 2002. These amounts are subject to adjustment depending on
the actual results attained. The December 31, 1998 and 1999 earnings
amounts were not achieved and therefore no payments were made. During 1999,
goodwill of $436,042 related to the acquisition of Sy.Med was written off
because it was considered to have no continuing value.
On November 6, 1998, the Company's subsidiary, FPIC Services, Inc.
("Services"), a Florida corporation, formed a Texas corporation with one
other Texas corporation and a Texas self insurance trust association.
Services cost for its one-third ownership was $900,000. The new corporation
offers credential verification and other related services and markets
software programs related to those services.
1997 business acquisitions
On July 1, 1997, the Company purchased 20% of the common stock of APS
Insurance Services, Inc. (APS), a Texas insurance service corporation, for
$2,000,000. This investment is accounted for under the equity method. The
market value of APS approximates the book value at December 31, 1999.
On September 22, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. ("Frontier") pursuant to which, beginning December 1,
1997, FPIC began underwriting Frontier's Florida book of business. The cost
of the transaction was $3,200,000, payable in the Company's common stock,
with a cash adjustment based on actual results. The excess of the purchase
price over tangible assets is included in goodwill and will be
47
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amortized over the expected life of this book of business, considering the
Company's historical policy renewal rate. Based on the actual results
achieved, the Company received a cash refund of approximately $1,500,000
from Frontier during 1999. The effect is to reduce the original cost of the
transaction and goodwill by the same amount.
3. Fair Value of Financial Instruments
Fair value estimates are made as of a specific point in time based on the
characteristics of the financial instruments and the relevant market
information. Where available, quoted market prices are used. In other
cases, fair values are based on estimates using other valuation techniques,
such as discounting estimated future cash flows using a rate commensurate
with the risks involved or other acceptable methods. These techniques
involve uncertainties and are significantly affected by the assumptions
used and the judgments made regarding risk characteristics of various
financial instruments, prepayments, discount rates, estimates of future
cash flows, future anticipated loss experience and other factors. Changes
in assumptions could significantly affect these estimates. Independent
market data may not be available to validate those fair value estimates
that are based on internal valuation techniques. Moreover, such fair value
estimates may not be indicative of the amounts that could be realized in an
immediate sale of the instrument. Also, because of differences in
methodologies and assumptions used to estimate fair value, the Company's
fair values should not be compared to those of other companies.
Fair value estimates are based on existing financial instruments without
attempting to estimate the value of anticipated future business and the
value of assets and liabilities that are not considered financial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. For certain assets and
liabilities, the information required is supplemented with additional
information relevant to an understanding of the fair value.
The Company has an interest rate swap agreement to fix interest rates on
variable rate debt and reduce certain exposures to market fluctuations. The
interest rate swap has a notional principal amount of $60,000,000 with a
fixed interest rate of 5.27% at December 31, 1999. The agreement terminates
on January 2, 2004. However, the counter parties have the option to call
the interest rate swap as of December 31, 2001. The Company is required to
make payments at the variable LIBOR rate, plus or minus differences between
that rate and the fixed rate as specified in the agreement. The Company is
exposed to credit loss in the event the nonperformance by the counter
parties to the swap agreement. However, the Company does not anticipate
nonperformance by the counter parties.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents - The carrying value approximates the fair value
because of the short maturity of these instruments.
Bonds and equity securities - The fair value was estimated based on bid
prices published in financial newspapers, bid quotations received from
securities dealers, or by using discounted cash flow methods.
Other invested assets - The fair value was estimated based on audited
financial amounts of the limited partnerships and a joint venture.
Revolving Credit Facility - The fair value was estimated based on the
amount of cash flows discounted over the applicable term at the Company's
borrowing rate at December 31, 1999.
Interest Rate Swap - The fair value is estimated using quotes from brokers
and represents the cash requirement if the existing agreement had been
settled at year end.
48
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the carrying values and estimated fair values
of the Company's financial instruments at December 31, 1999 and 1998.
December 31, 1999
---------------------------
Carrying Estimated
Value Fair Value
------------ ------------
Financial assets
Cash and cash equivalents $ 6,829,802 6,829,802
Bonds 327,076,429 327,076,429
Equity securities 8,822,672 8,822,672
Other invested assets 5,454,775 6,127,524
------------ ------------
Total financial assets $348,183,678 348,856,427
============ ============
Financial liabilities
Revolving credit facility $ 62,719,109 56,559,000
------------ ------------
Total financial liabilities $ 62,719,109 56,559,000
============ ============
Off Balance Sheet Instruments:
Interest Rate Swap $ -- 1,560,554
============ ============
December 31, 1998
---------------------------
Carrying Estimated
Value Fair Value
------------ ------------
Financial assets
Cash and cash equivalents $ 7,062,695 7,062,695
Bonds 325,922,559 325,922,559
Equity securities 9,427,990 9,427,990
Other invested assets 5,071,771 5,319,789
------------ ------------
Total financial assets $347,485,015 347,733,033
============ ============
Financial liabilities
Revolving credit facility $ 27,165,000 21,590,000
------------ ------------
Total financial liabilities $ 27,165,000 21,590,000
============ ============
Off Balance Sheet Instruments:
Interest Rate Swap $ -- 262,919
============ ============
49
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Investments
The amortized cost and estimated fair value of investments in debt and
equity securities as of December 31, 1999 and 1998 were as follows:
Gross Gross
Amortized unrealized unrealized Fair
1999 Cost gains losses value
---- ------------ ------------ ------------ ------------
Bonds:
United States Government
agencies and authorities $ 70,498,384 65,110 2,489,620 68,073,874
States, municipalities and
political subdivisions 151,792,331 448,330 6,386,647 145,854,014
Corporate securities 65,407,976 45,127 3,304,207 62,148,896
Mortgage-backed securities 52,211,055 326,452 1,537,862 50,999,645
------------ ------------ ------------ ------------
Total bonds $339,909,746 885,019 13,718,336 327,076,429
------------ ------------ ------------ ------------
Equity securities:
Common stocks $ 8,057,869 69,156 4,353 8,122,672
Preferred stocks 1,000,000 -- 300,000 700,000
------------ ------------ ------------ ------------
Total equity securities $ 9,057,869 69,156 304,353 8,822,672
------------ ------------ ------------ ------------
Total securities available-for-sale $348,967,615 954,175 14,022,689 335,899,101
============ ============ ============ ============
Gross Gross
Amortized unrealized unrealized Fair
1998 Cost gains losses value
---- ------------ ------------ ------------ ------------
Bonds:
United States Government
agencies and authorities $ 56,259,581 2,033,736 10,277 58,283,040
States, municipalities and
political subdivisions 148,544,449 4,559,260 34,325 153,069,384
Corporate securities 46,072,483 702,508 684,079 46,090,912
Mortgage-backed securities 66,532,029 2,258,563 311,369 68,479,223
------------ ------------ ------------ ------------
Total bonds $317,408,542 9,554,067 1,040,050 325,922,559
------------ ------------ ------------ ------------
Equity securities:
Common stocks $ 8,293,495 134,495 -- 8,427,990
------------ ------------ ------------ ------------
Preferred stocks 1,000,000 -- -- 1,000,000
------------ ------------ ------------ ------------
Total equity securities $ 9,293,495 134,495 -- 9,427,990
------------ ------------ ------------ ------------
Total securities available-for-sale $ 326,702,037 9,688,562 1,040,050 335,350,549
============ ============ ============ ============
The Company's other invested assets include investments in limited
partnerships and a joint venture. These assets are recorded at a cost of
$5,454,775 and $5,071,771 at December 31, 1999 and 1998, respectively. The
market value of these assets at December 31, 1999 and 1998 was $6,127,524
and $5,319,789, respectively.
50
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of debt securities at December
31, 1999, 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 Fair
Cost Value
------------ ------------
Due in one year or less $ 14,268,212 14,268,803
Due after one year through five years 46,076,443 45,307,351
Due after five years through ten years 97,101,816 93,689,017
Due after ten years 182,463,275 173,811,258
------------ ------------
$339,909,746 327,076,429
============ ============
Treasury notes, a political sub-division bond and a cash deposit with a
carrying value of $7,918,458 and a market value of $7,746,332 were on
deposit with the Insurance Departments in various states as of December 31,
1999 as required by law.
Net investment income earned for the years ended December 31, 1999, 1998,
and 1997 was as follows:
1999 1998 1997
------------ ------------ ------------
Bonds $ 19,339,900 18,131,630 16,628,612
Equity securities 72,192 51,112 53,667
Real estate 596,408 452,099 368,270
Short-term investments 266,010 113,050 132,721
Other invested assets 205,489 551,965 123,210
Cash on hand and on deposit 296,728 83,206 13,846
------------ ------------ ------------
20,776,727 19,383,062 17,320,326
Less investment expenses (1,752,849) (1,833,963) (1,341,792)
------------ ------------ ------------
Net investment income $ 19,023,878 17,549,099 15,978,534
============ ============ ============
Proceeds from sales and maturities of bonds were $69,470,532, $44,017,742,
and $81,416,058 for the years ended December 31, 1999, 1998, and 1997
respectively. Proceeds from sales of equity securities were $236,433, and
$300,000 for the years ended December 31, 1999, and 1998, respectively.
Gross gains of $354,068, $10,384, and $42,643 and gross losses of $3,472,
$49,610, and $89,057 were realized on sales of debt and equity securities
for the years ended December 31, 1999, 1998, and 1997, respectively.
Gross gains of $78,479 were realized on the sale of real estate investments
for the year ended December 31, 1997.
5. Real Estate Investments
At December 31, 1999 and 1998, real estate investments consisted of the
following:
1999 1998
----------- -----------
Land and building $ 4,670,310 4,670,310
Rental units 1,363,512 461,200
Other 37,670 37,670
----------- -----------
6,071,492 5,169,180
Accumulated depreciation (836,113) (587,509)
----------- -----------
Net real estate investments $ 5,235,379 4,581,671
=========== ===========
Total depreciation expense on real estate investments was $248,604,
$338,837, and $138,598, in 1999, 1998, and 1997, respectively.
51
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Property and Equipment
At December 31, 1999 and 1998, property and equipment consisted of the
following:
1999 1998
----------- -----------
Furniture, fixtures and equipment $ 3,243,792 2,258,917
Data processing equipment, including software 3,814,625 1,835,510
Leasehold improvements 1,057,588 795,933
Automobiles 211,031 282,577
----------- -----------
8,327,036 5,172,937
Accumulated depreciation (4,553,534) (2,558,251)
----------- -----------
Net property and equipment $ 3,773,502 2,614,686
=========== ===========
Total depreciation expense on property and equipment was $1,174,317,
$699,646, and $605,516, in 1999, 1998, and 1997, respectively.
7. Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs for the years ended December
31, 1999, 1998, and 1997, were as follows:
1999 1998 1997
----------- ----------- -----------
Beginning balance $ 2,001,248 1,411,420 1,212,035
Additions 7,515,452 5,450,153 4,194,981
Amortization expense (6,727,530) (4,860,325) (3,995,596)
----------- ----------- -----------
Ending balance $ 2,789,170 2,001,248 1,411,420
=========== =========== ===========
8. Goodwill
Goodwill represents the aggregate cost of companies acquired over the fair
value of net assets at the date of acquisition and is being amortized into
income using the straight-line method over periods not exceeding
twenty-five years.
December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Beginning balance $ 12,699,714 7,173,841 1,989,113
Additions at cost 61,341,767 7,524,041 5,407,588
Reductions at cost (note 2) (436,042) (1,500,000) --
Amortization expense (3,164,280) (498,168) (222,860)
------------ ------------ ------------
Ending balance $ 70,441,159 12,699,714 7,173,841
============ ============ ============
9. Intangible Assets
Intangible assets represent broker fees, trade secrets and non-compete
agreements acquired in connection with business combinations. These assets
are being amortized into income over periods not exceeding ten years using
the straight-line method
December 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Beginning balance $ 3,886,547 -- --
Additions at cost -- 4,035,491 --
Amortization expense (405,851) (148,944) --
----------- ----------- -----------
Ending balance $ 3,480,696 3,886,547 --
=========== =========== ===========
52
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Borrowing Arrangements
The Company maintains a $75,000,000 revolving credit facility with five
banks to meet certain non-operating cash needs as they may arise. As of
December 31, 1999 and 1998, $62,719,109 and $27,165,000, respectively, had
been borrowed under this credit facility at a per annum rate of
approximately 6.4% and 5.9%, respectively. The new credit facility
terminates on January 4, 2002 and bears interest at various rates. The
interest rates range from LIBOR plus 0.75% to Prime plus 0.50%. As of
December 31, 1999, the interest rate was 7.08%. The Company is not
required to maintain compensating balances in connection with this credit
facility. Under the terms of the credit facility, the Company is required
to meet certain financial covenants. Significant covenants are as follows:
a) the Company's funded debt to total capital plus funded debt ratio
cannot exceed 0.35:1 and b) net premiums written to statutory capital and
surplus ratio cannot exceed 2.0:1. Effective January 1, 2001, the funded
debt to total capital plus funded debt ratio cannot exceed .30:1. At
December 31, 1999, the Company's subsidiary, Intermed, was in technical
violation of one of the Company's Loan Covenants. The Company has obtained
a waiver for this technical violation bringing Intermed and the Company
into compliance. The credit facility is guaranteed by certain subsidiaries
and collateralized by the common stock of certain subsidiaries.
11. Liability for Loss and Loss Adjustment Expenses
The liability for loss and LAE is 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 internal and external consulting actuaries on an
undiscounted basis. The assumptions used in making such estimates and for
establishing the resulting liabilities are continually reviewed and updated
based upon current circumstances, and any adjustments resulting therefrom
are reflected in current income.
Activity in the liability for loss and LAE for the years ended December 31,
1999, 1998, and 1997 was as follows:
1999 1998 1997
------------- ------------- -------------
Gross balance, January 1 $ 242,377,000 188,086,000 172,738,000
Less reinsurance recoverables 41,614,000 14,115,000 11,614,000
------------- ------------- -------------
Net balance, January 1 200,763,000 173,971,000 161,124,000
Reserves of entities acquired 24,590,000 23,406,000 --
Incurred related to:
Current year 99,523,000 81,694,000 69,126,000
Prior year (18,555,000) (14,332,000) (15,115,000)
------------- ------------- -------------
Total incurred 80,968,000 67,362,000 54,011,000
------------- ------------- -------------
Paid related to:
Current year 15,338,000 14,279,000 8,061,000
Prior year 76,292,000 49,697,000 33,103,000
------------- ------------- -------------
Total paid 91,630,000 63,976,000 41,164,000
------------- ------------- -------------
Net balance, December 31 214,691,000 200,763,000 173,971,000
Plus reinsurance recoverables 58,401,000 41,614,000 14,115,000
------------- ------------- -------------
Gross balance, December 31 $ 273,092,000 242,377,000 188,086,000
============= ============= =============
The net reductions in incurred losses and LAE related to prior years (net
of reinsurance recoveries of $985,357, $7,115,000, and $5,834,000, in 1999,
1998, and 1997, respectively) for each of the years ended December 31,
1999, 1998 and 1997, are the result of reevaluations of the adequacy of
reserve estimates; and reflect overall favorable underwriting results and
lower than anticipated losses and LAE. Given recent competitive market
conditions, which have lessened the Company's ability to underwrite and
price its business at such favorable terms, management does not expect
reserve reductions to continue at these levels in 2000. Furthermore, given
the inherent uncertainties in the estimation of loss and LAE reserves,
there can be no assurance concerning future adjustments, positive or
negative, for prior years' claims.
53
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Reinsurance
The Company presently has excess of loss reinsurance contracts that serve
to limit the Company's maximum loss to $500,000 per occurrence, except on
the Company's anesthesiology program in which the maximum loss is limited
to $750,000 per occurrence. To the extent that any reinsurer might be
unable to meet its obligations, the Company would be liable for such
defaulted amounts. At December 31, 1999 and 1998, amounts due from a single
reinsurer, APAL, an affiliated company, on unpaid losses had a carrying
value of $12,817,000 and $11,035,000, respectively, of which $2,515,000 and
$900,000 was secured by letter of credit. Of the total amount due from
reinsurers on unpaid losses at December 31, 1999 and 1998, $31,189,000 and
$21,685,000, respectively, was due from three reinsurers, of which
$27,508,000 and $20,300,000 was secured by letters of credit or other
offsets.
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1999, 1998, and 1997 was as follows:
1999 1998 1997
------------------------------ ------------------------------ ------------------------------
Written Earned Written Earned Written Earned
------------- ------------- ------------- ------------- ------------- -------------
Direct and assumed $ 148,215,714 144,530,033 116,989,450 105,616,840 77,770,733 73,011,835
Ceded (26,089,417) (26,341,160) (15,512,281) (16,055,262) (7,485,436) (7,508,160)
------------------------------ ------------------------------ ------------------------------
Net premiums $ 122,126,297 118,188,873 101,477,169 89,561,578 70,285,297 65,503,675
============================== ============================== ==============================
13. Shareholders' Equity
The Company has a stock option plan for officers and key employees (the
employee plan) and a plan for non-employee directors (the director plan).
Both plans became effective in 1996. Under the director plan, only
nonqualified stock options may be issued. Under the employee plan, both
incentive stock options and nonqualified stock options 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, and on a discretionary basis at future
dates as approved by the Board, at a price not less than 100% of the fair
market value on the grant date. In 1999, the Company began a stock purchase
incentive program ("the incentive plan") designed to encourage non-employee
directors and employees of the Company and its subsidiaries to increase
their beneficial ownership of Company stock. As Company stock is purchased,
an equivalent number of options are granted to the participant.
During 1999, 130,000 nonqualified stock options were issued under the
director plan, 416,283 nonqualified stock options and 86,217 incentive
stock options were issued under the employee plan, and 25,900 nonqualified
stock options were issued under the incentive plan. In addition, 110,000
nonqualified stock options and 15,000 incentive stock options were
forfeited under the employee plan and 25,000 restricted options, which were
not part of any plan, were forfeited.
During 1998, 116,688 nonqualified stock options and 3,312 incentive stock
options were issued under the employee plan. An additional 70,000
restricted options, which were not part of either plan, were issued in
connection with acquisitions during the year. During 1997, 120,000
nonqualified stock options were granted under the director plan, and
265,000 nonqualified stock options were issued under the employee plan.
During 1996, 320,000 incentive stock options and 335,000 nonqualified stock
options were issued under both plans. Of the 1998 nonqualified stock
options issued, 50,000 were issued to an employee with an exercise price
lower than the fair market value on the date of the grant. This difference
in price of $7.55 per option is considered noncash compensation and is
being amortized over the period in which the options vest and of which
$125,859 has been recognized as an expense in 1999. 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.
54
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's stock option plans as of December
31, 1999 is presented below:
Weighted Average
Fixed Options Shares Exercise Price
------------- --------- ----------------
Outstanding at beginning of year 1,094,668 $ 17.80
Granted 658,400 30.08
Exercised (201,823) 10.41
Forfeited (150,000) 39.24
---------
Outstanding at end of year 1,401,245
=========
Options exercisable at year-end 886,170 $ 20.64
=========
At December 31, 1999, 539,500 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:
1999 1999 1999
1999 stock options Nonqualified Incentive Incentive
----------------- ----------------- ---------------
a. Current price of underlying
stock at date of grant $48.06 40.00 14.63
b. Exercise price of option $48.06 40.00 14.63
c. Expected life of option 5 years 5 years 5 years
d. Expected volatility of
underlying stock 33.22% 33.56% 45.01%
e. Expected dividends on stock $ -- -- --
f. Risk-free interest rate at the
date of grant 4.45% 4.97% 5.62%
1999 1998 1998
1999 and 1998 stock options Nonqualified Nonqualified Nonqualified
----------------- ----------------- ---------------
a. Current price of underlying
stock at date of grant $15.25 34.38 30.19
b. Exercise price of option $15.25 34.38 30.19
c. Expected life of option 5 years 5 years 5 years
d. Expected volatility of
underlying stock 46.36% 36.01% 36.01%
e. Expected dividends on stock $ -- -- --
f. Risk-free interest rate at the
date of grant 5.64% 5.29% 4.48%
55
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996 1996
1997 and 1996 stock options Nonqualified Nonqualified Incentive
----------------- ----------------- ---------------
a. Current price of underlying
stock at date of grant $ 23.63 8.22 10.00
b. Exercise price of option $ 23.63 8.22 10.00
c. Expected life of option 5 years 5 years 5 years
d. Expected volatility of
underlying stock 26.74% 26.87% 26.87%
e. Expected dividends on stock $ -- -- --
f. Risk-free interest rate at the
date of grant 6.17% 5.37% 6.31%
The weighted average fair value of options granted during 1999 was $30.08.
The pro forma disclosures required under SFAS No.123 methodology were as
follows:
1999 1998 1997
------------ ------------ ------------
Pro forma net income $ 19,399,627 17,946,863 16,002,439
Pro forma tax expense $ 8,003,574 6,693,078 6,489,098
Pro forma diluted earnings per share $ 1.94 1.83 1.70
14. Income Taxes
The provision for income taxes consisted of the following:
1999 1998 1997
------------ ------------ ------------
Current income tax expense
Federal $ 6,306,167 6,974,016 7,230,181
State 1,930,343 1,558,601 1,496,856
------------ ------------ ------------
Total 8,236,510 8,532,617 8,727,037
------------ ------------ ------------
Deferred income tax (benefit) expense
Federal 972,634 (308,340) (1,695,163)
State 124,352 (52,703) (244,336)
------------ ------------ ------------
Total 1,096,986 (361,043) (1,939,499)
------------ ------------ ------------
Net income tax expense $ 9,333,496 8,171,574 6,787,538
============ ============ ============
The provision for income taxes differed from the statutory corporate tax
rate of 35 percent for 1999, 1998 and 1997 as follows:
1999 1998 1997
------------ ------------ ------------
Computed "expected tax expense $ 10,889,122 10,102,476 8,170,478
Municipal bond interest (2,578,598) (2,521,221) (1,834,950)
State income taxes, net of federal
benefit 1,421,674 978,834 814,138
Other, net (398,702) (388,515) (362,128)
------------ ------------ ------------
Actual expense $ 9,333,496 8,171,574 6,787,538
============ ============ ============
56
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999 and 1998, the significant components of the net
deferred tax asset were as follows:
1999 1998
----------- -----------
Deferred tax assets arising from:
Loss reserve discounting $11,528,011 9,970,448
Unearned premium reserves 4,088,269 3,015,392
Net operating loss carry forward 2,711,352 --
Unrealized losses on securities 4,574,003 --
Other 1,067,184 777,289
----------- -----------
Total deferred tax assets 23,968,819 13,763,129
----------- -----------
Deferred tax liabilities arising from:
Unrealized gains on securities -- 3,026,979
Deferred acquisition costs 1,555,056 506,782
Other 1,169,987 880,874
----------- -----------
Total deferred tax liabilities 2,725,043 4,414,635
----------- -----------
Net deferred tax asset $21,243,776 9,348,494
=========== ===========
The Company has not recorded a valuation allowance, as the deferred tax
assets considered by Management to be realized 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
influence management's conclusions as to the ultimate realizability of
deferred tax assets.
15. Employee Benefit Plans
FPIC employees are covered by a qualified defined benefit plan and a
defined contribution pension plan sponsored by the Company.
SFAS No. 132 requires restatement of earlier period amounts provided for
comparative purposes unless the information is not readily available.
Amounts provided for 1997 have not been restated under SFAS No. 132 as the
information is not readily available.
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, 1999, 1998, and 1997 included the following:
1999 1998 1997
--------- --------- ---------
Service cost - benefits earned
during the period $ 172,768 137,691 94,015
Interest cost on projected
benefit obligation 147,110 125,482 106,284
Actual return on plan assets (111,872) (106,633) (219,877)
Recognized net actuarial loss 37,757 -- --
Net amortization and deferral 26,268 26,268 181,770
--------- --------- ---------
Net periodic pension cost $ 272,031 182,808 162,192
========= ========= =========
57
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998 1997
----------- ----------- -----------
Actuarial present value of benefit obligation:
Accumulated benefit obligation $(1,521,877) (1,584,795) (1,156,683)
=========== =========== ===========
Projected benefit obligation for
service rendered to date (2,466,135) (2,690,664) (1,945,621)
Plan assets at fair value 1,470,669 1,219,686 1,139,563
----------- ----------- -----------
Projected benefit obligation in
excess of plan assets (995,466) (1,470,978) (806,058)
Unrecognized net loss (gain)
from past experience different
from that assumed 103,968 746,695 117,581
Prior service cost not yet
recognized in net periodic
pension cost (40,055) (44,367) (48,679)
Unrecognized net obligation at
inception recognized over
15.29 years 253,512 284,092 314,672
----------- ----------- -----------
Accrued pension cost $ (678,041) (484,558) (422,484)
=========== =========== ===========
The following table sets forth the plan's funded status for the fiscal year
ending December 31, 1999 and 1998, respectively.
1999 1998
----------- -----------
Change in Benefit Obligation
Benefit Obligation, January 1 $ 2,690,664 1,945,621
Service Cost 172,768 137,691
Interest Cost 147,110 125,482
Actuarial Gain (513,184) 504,493
Benefits Paid (31,223) (22,623)
----------- -----------
Benefit Obligation, December 31 $ 2,466,135 2,690,664
=========== ===========
Change in Plan Assets
Fair Value of Plan Assets, January 1 $ 1,219,686 1,139,563
Actual Return on Plan Assets 203,658 (17,988)
Employer Contributions 78,548 120,734
Benefits Paid (31,223) (22,623)
----------- -----------
Fair Value of Plan Assets, December 31 $ 1,470,669 1,219,686
=========== ===========
Assumptions used in the accounting for net periodic pension cost at
December 31, 1999, 1998, and 1997, were as follows:
1999 1998 1997
------- ------- ------
Discount rates 6.50% 5.50% 6.50%
Rate of increase in compensation levels 5.19% 5.23% 5.23%
Return on assets 9.00% 9.00% 9.00%
The FPIC defined contribution plan has two parts. The first part is a
profit-sharing plan. The second part allows employees to contribute,
beginning in 1997, up to 5 percent of their annual compensation, of which
up to 2.5% is matched 100 percent by the Company. The Company's policy is
to fully fund the liability at the end of each year. At December 31, 1999,
the fair market value of plan assets was $5,981,532. The expense for this
plan amounted to $516,134, $434,783, and $426,291 in 1999, 1998, and 1997,
respectively.
58
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has a supplemental executive retirement plan (SERP) that
provides certain executives with income at retirement equal to 60 percent
of pre-retirement base compensation, less qualified pension plan benefits
paid by the Company and all predecessor plans and Social Security benefits.
The projected benefit obligation at December 31, 1999 was $846,934 using a
discount rate of 6.5 percent. The plan has no vesting prior to age 55. The
Company had a net periodic pension cost of approximately $188,000, $95,000
and $95,000 to cover any liability under this plan in 1999, 1998, and 1997,
respectively. The total liability included in the financial statements for
this plan amounted to approximately $533,000 and $345,000 as of December
31, 1999 and 1998, respectively.
AFP maintains a noncontributory defined benefit pension plan (the "Plan")
covering substantially all of its employees. The benefits under the Plan
are based on years of service and the employee's compensation during such
years of service. AFP's funding policy is to contribute amounts sufficient
to meet the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, plus such addition amounts as AFP
may determine to be appropriate from time to time. Contributions are
intended to provide amounts sufficient to cover the costs of benefits
attributed to service to date, as well as for those expected to be earned
in the future. AFP contributed $1 million to the Plan in 1998. The Plan's
assets consist principally of investments in United States government
securities.
Effective December 14, 1994, AFP's pension plan was merged retroactive to
January 1, 1989 into the defined benefit plan sponsored by North American
Treaty Corporation, a reinsurance intermediary under common control
together with the defined benefit pension plans of First Rehabilitation
Insurance company of America ("FRICA") and Group Data Corporation
(hereinafter referred to as "the merged plan"), both of which entities are
also under common control. All three plans were substantially identical to
AFP's former plan. Effective January 1, 1996, FRICA left the pension plan,
with no effect on the existing plan. Pension costs allocated to AFP
amounted to approximately $740,200 in 1999.
The benefits of AFP's defined benefit plan are based on years of service
and the employee's compensation. The actuarially computed net periodic
pension cost for December 31, 1999 included the following:
Service cost - benefits earned during the period $ 708,400
Interest cost on projected benefit obligation 341,000
Actual return on plan assets (309,200)
-----------
Net periodic pension cost $ 740,200
===========
Actuarial present value of benefit obligation:
----------------------------------------------
Accumulated benefit obligation $ 3,916,353
===========
Projected benefit obligation for service rendered to date (5,445,600)
Plan assets at fair value 5,065,400
-----------
Projected benefit obligation in excess of plan assets $ (380,200)
===========
The following table sets forth the plan's funded status for the fiscal year
ending December 31, 1999.
Change in Benefit Obligation
----------------------------
Benefit Obligation, January 1 $ 6,092,300
Service Cost 708,400
Interest Cost 341,000
Actuarial Loss --
Benefits Paid (1,696,100)
-----------
Benefit Obligation, December 31 $ 5,445,600
===========
59
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Change in Plan Assets
---------------------
Fair Value of Plan Assets, January 1 $ 5,103,100
Actual Return on Plan Assets 659,200
Employer Contributions 999,200
Benefits Paid (1,696,100)
-----------
Fair Value of Plan Assets, December 31 $ 5,065,400
===========
Assumptions used in the accounting for net periodic pension cost at
December 31, 1999 were as follows:
Discount rates 6.5%
Rate of increase in compensation levels 5.0%
Return on assets 6.5%
16. Commitments and Contingencies
The future minimum annual rentals under noncancellable leases are as
follows:
2000 $ 2,168,723
2001 2,058,661
2002 1,825,759
2003 1,653,631
Thereafter 1,482,255
--------------
$ 9,189,029
==============
Total rental expense was $2,380,660, $371,038, and $386,016 for 1999, 1998,
and 1997, respectively.
The Company is involved in numerous legal actions arising primarily from
claims under insurance policies. The legal actions arising from claims
under insurance policies have been considered by the Company in
establishing its liability for losses. 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.
The Company's insurance subsidiaries are subject to assessment by the
Financial Guaranty Associations in the states in which they conduct
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 written premiums in
their particular states.
In addition to standard assessments, the Florida and Missouri Legislatures
may also levy special assessments to settle claims caused by certain
catastrophic losses. The Company would be assessed on a basis of premium
written. No provision for special assessments was made in the 1999
financial statements. However, damages caused by future catastrophic
losses, such as a hurricane, could subject the Company to additional
assessments.
17. Statutory Accounting
FPIC, APAC, Intermed, and Interlex are required to file statutory financial
statements with state insurance regulatory authorities. The combined
statutory capital and surplus for the Company's insurance subsidiaries was
$134,697,983, $117,277,880, and $87,875,717 at December 31, 1999, 1998, and
1997, respectively. Statutory net income amounted to $19,038,049,
$18,325,503, and $12,404,838, for the years ended December 31, 1999, 1998,
and 1997 respectively.
60
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The insurance subsidiaries are restricted under the Florida and Missouri
Insurance Codes as to the amount of dividends they may pay without
regulatory consent. In 2000, they may pay dividends up to approximately
$19,712,768 without regulatory consent. Restricted net assets of the
Company's insurance subsidiaries as of December 31, 1999 is as follows:
Intermed
FPIC APAC and Interlex
----------- ---------- ----------
Restricted net assets $96,376,647 11,781,392 11,149,614
18. Reconciliation of Basic and Diluted Earnings Per Share
1999 1998 1997
----------- ----------- -----------
Net income and income from
continuing operations $21,869,481 20,692,642 16,556,685
=========== =========== ===========
Basic weighted average
shares outstanding 9,748,190 9,332,206 9,044,984
Common stock equivalents 258,424 476,458 362,109
----------- ----------- -----------
Diluted weighted average
shares outstanding 10,006,614 9,808,664 9,407,093
=========== =========== ===========
Basic earnings per share $ 2.24 2.22 1.83
=========== =========== ===========
Diluted earnings per share $ 2.19 2.11 1.76
=========== =========== ===========
19. Segment Information
Under the provisions of SFAS No. 131, the Company determined it has three
reportable operating segments, which are insurance, third party
administration (TPA), and reciprocal management. The insurance segment
provides a variety of insurance products for participants in the healthcare
industry including MPL insurance for medical professionals, managed care
liability insurance, professional and comprehensive general liability
insurance for healthcare facilities, provider stop loss insurance, workers
compensation insurance, and group accident and health coverage. The TPA
segment provides third party administration services such as the
administration of self-insurance plans for large employers. The reciprocal
management segment provides insurance administration services to an
insurance reciprocal.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates a
segment's performance based on net income or loss. Intersegment revenues
for transactions between the segments are based on actual costs incurred
and are similar to services that may have been obtained from an unrelated
third party. All segments are managed separately because each business
requires different technology and marketing strategies.
Information by industry segment follows (in thousands):
1999 1998 1997
--------- --------- ---------
Revenues:
---------
External customers:
Insurance $ 136,476 108,150 82,732
TPA 13,555 12,171 10,484
Reciprocal management 20,792 -- --
--------- --------- ---------
170,823 120,321 93,216
Intersegment:
Insurance $ -- -- --
TPA 1,268 583 --
Reciprocal management 1,360 -- --
--------- --------- ---------
$ 173,451 120,904 93,216
========= ========= =========
61
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest Revenue:
-----------------
Insurance $ 19,916 18,716 16,872
TPA 189 164 27
Reciprocal management 3 -- --
--------- --------- ---------
$ 20,108 18,880 16,899
========= ========= =========
Interest Expense:
-----------------
Insurance $ 1,887 844 49
TPA -- -- --
Reciprocal management 2,095 -- --
--------- --------- ---------
$ 3,982 844 49
========= ========= =========
Net Income:
-----------
Insurance $ 21,063 19,699 15,380
TPA (205) 994 1,177
Reciprocal management 1,011 -- --
--------- --------- ---------
$ 21,869 20,693 16,557
========= ========= =========
Income taxes
------------
Insurance $ 7,596 7,584 5,209
TPA (114) 638 735
Reciprocal management 1,851 -- --
--------- --------- ---------
$ 9,333 8,222 5,944
========= ========= =========
Identifiable Assets:
--------------------
Insurance $ 668,419 512,246 369,121
TPA 11,951 10,801 7,508
Reciprocal management 59,310 -- --
--------- --------- ---------
$ 739,680 523,047 376,629
========= ========= =========
Depreciation & Amortization:
----------------------------
Insurance $ 2,483 1,289 1,647
TPA 889 708 429
Reciprocal management 2,506 -- --
--------- --------- ---------
$ 5,878 1,997 2,076
========= ========= =========
The following table provides reconciliations of reportable operating
segment revenues, net income, and assets to the Company's consolidated
totals:
1999 1998 1997
--------- --------- ---------
Revenues:
---------
Total revenues for reportable segments $ 173,451 120,904 93,216
Elimination of intersegment revenues (2,628) (583) --
--------- --------- ---------
Total consolidated revenues $ 170,823 120,321 93,216
========= ========= =========
Net Income:
-----------
Total income for reportable segments $ 21,869 20,693 16,557
Other -- -- --
--------- --------- ---------
Total consolidated net income $ 21,869 20,693 16,557
========= ========= =========
Assets:
-------
Total assets for reportable segments $ 739,680 523,047 376,629
Investments in equity method investees (119,224) (42,670) (23,019)
Intercompany receivables (38,233) (999) (760)
--------- --------- ---------
Total consolidated assets $ 582,223 479,378 352,850
========= ========= =========
62
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Related Party Transactions
Effective June 30, 1998, the Company entered into a management services
agreement with APA Management, Inc. ("APAM") to provide the Company with
all necessary insurance management and administrative services of APAC, a
wholly owned subsidiary of the Company. The Company has no financial
interest in APAM other than through its management services agreement. The
agreement terminates on December 31, 2002, unless extended until December
31, 2003, and provides that APAM will receive an annual aggregate of 14.5%
of direct premiums consisting of an annual 10.5% service fee and 4% claims
management fee. The agreement also provides that anesthesiologist business
produced by FPIC or its respective agents will be transferred to APAC upon
renewal, if the insured agrees, and APAM will receive an annual 1% service
fee. The Company incurred $1,382,150 and $1,181,398 in management fees
related to its agreement with APAM during the years ended December 31, 1999
and 1998, respectively.
On July 1, 1998, FPIC began assuming reinsurance from PRI, a writer of
medical malpractice insurance in the state of New York. PRI is managed by
an attorney-in-fact, AFP, which effective January 1, 1999 was acquired and
became a wholly owned subsidiary of the Company. Under one contract, which
reinsures PRI for policies with limits of $1,000,000 in excess of
$1,000,000, FPIC assumes losses only and pays PRI a 15% ceding commission
on the premium assumed. Under the second contract, FPIC reinsures PRI for
losses of $250,000 each and every claim in excess of $500,000 on each and
every loss. During 1999 and 1998, the Company assumed written premiums of
approximately $21,821,000 and $8,738,000, respectively, of which
approximately $15,035,000 and $4,428,000, respectively, was earned under
these contracts. The Company has incurred approximately $6,650,000 and
$2,657,000 in losses related to these reinsurance agreements with PRI for
the years ending December 31, 1999 and 1998, respectively. Premium on these
contracts is paid by PRI on a quarterly basis. As of December 31, 1999 and
1998, the amount due from PRI under these contracts was approximately
$4,291,000 and $4,527,000, respectively.
In accordance with a management agreement AFP performs underwriting,
administrative and investment functions on PRI's behalf for which it
receives compensation. Compensation under the agreement is based upon
PRI's direct written premium and statutory operating results. Total
revenues earned under the agreement were $18,631,688 for 1999. The
management agreement also provides that AFP is to be reimbursed by PRI for
certain expenses paid by AFP on PRI's behalf. The expenses reimbursed by
PRI consist principally of the salary, related payroll, and overhead costs
of AFP's claims, legal, and risk management course personnel who work on
PRI's behalf. These reimbursed expenses amounted to $10,883,893 in 1999.
The management agreement was reviewed and approved by the New York
Insurance Department and is effective January 1, 1999 through December 31,
2008.
21. Quarterly Results of Operations
The following is a summary of unaudited quarterly results of operations for
the year ended December 31, 1999 and 1998:
1999 First Second Third Fourth
---- --------------- ---------------- ------------- -----------
Premiums written and assumed $ 37,521,923 38,159,865 45,697,764 26,836,140
Premiums earned $ 27,583,589 26,549,586 33,170,659 30,885,039
Net investment income $ 4,451,748 4,880,776 5,009,562 4,681,792
Total revenues $ 40,008,377 39,358,067 47,282,158 44,174,198
Net income $ 7,234,434 7,402,265 2,662,265 4,570,517
Basic earnings per share $ .74 .75 .27 .47
Diluted earning per share $ .70 .71 .26 .45
63
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 First Second Third Fourth
---- --------------- ---------------- ------------- -----------
Premiums written and assumed $ 29,851,492 25,662,544 27,915,386 33,560,028
Premiums earned $ 17,855,299 22,954,687 22,986,070 25,765,522
Net investment income $ 4,339,754 4,372,425 4,259,182 4,577,738
Total revenues $ 25,486,680 30,459,871 30,831,173 33,543,086
Net income $ 4,785,108 5,046,487 5,480,735 5,380,312
Basic earnings per share $ 0.58 0.55 0.58 0.57
Diluted earning per share $ 0.50 0.52 0.55 0.54
64
SCHEDULE I
FPIC Insurance Group, Inc.
Summary of Investments Other Than Investments in Related Parties
December 31, 1999
Amount in
Cost (1) Value Balance Sheet
--------------- ---------------- --------------
Bonds:
United States Government
agencies and authorities $ 70,498,384 68,073,874 68,073,874
States, municipalities and
Political subdivisions 151,792,331 145,854,014 145,854,014
Corporate securities 65,407,976 62,148,896 62,148,896
Mortgage-backed securities 52,211,055 50,999,645 50,999,645
--------------- ---------------- --------------
Total bonds 339,909,746 327,076,429 327,076,429
Equity securities:
Industrial, miscellaneous,
and other 9,057,869 8,822,672 8,822,672
Real Estate 5,235,379 5,235,379 5,235,379
Other Invested Assets 5,454,775 6,127,524 5,454,775
--------------- ---------------- ---------------
Total investments $ 359,657,769 347,262,004 346,589,255
=============== ============== ==============
(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.
See accompanying auditors' report.
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Balance Sheet
As of December 31, 1999 and 1998
1999 1998
------------- -------------
Assets
Investments and cash:
Investments in subsidiaries* $ 216,774,162 152,945,528
Equity securities 7,567,654 7,586,136
Real estate 902,312 --
Other invested assets 4,875,329 4,171,771
------------- -------------
Total investments and cash 230,119,457 164,703,435
Property and equipment, net 760,920 293,764
Due from subsidiaries* 2,565,234 5,708,229
Goodwill, net 4,386,704 1,915,528
Intangible assets, net 3,291,364 3,664,288
Federal income tax receivable 5,072,605 1,804,225
Prepaid expenses 325,954 379,856
Other assets 335,312 2,234,210
------------- -------------
Total assets $ 246,857,550 180,703,535
============= =============
Liabilities
Cash overdraft $ 12,614,890 697,173
Revolving credit facility 62,719,109 27,165,000
Other liabilities 5,144,609 1,910,834
------------- -------------
Total liabilities 80,478,608 29,773,007
------------- -------------
Shareholders' Equity
Common stock, $.10 par value,
50,000,000 shares authorized:
9,621,298 and 9,518,679 shares issued and
outstanding in 1999 and 1998, respectively 962,130 951,868
Additional paid-in-capital 41,856,912 34,297,994
Unearned compensation on stock options (230,669) (356,528)
Other comprehensive income (8,494,573) 5,621,533
Retained earnings 132,285,142 110,415,661
------------- -------------
Total shareholders' equity 166,378,942 150,930,528
------------- -------------
Total liabilities and shareholders' equity $ 246,857,550 180,703,535
============= =============
*Eliminated in consolidation.
See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statement of Earnings
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Revenues
Management fees from subsidiaries* $ 17,974,618 12,267,004 11,204,829
Dividends from subsidiaries* 12,674,000 450,000 --
Net investment income 171,207 326,788 63,846
------------ ------------ ------------
Total revenues 30,819,825 13,043,792 11,268,675
Expenses
Other operating expenses 20,228,680 10,809,689 9,057,547
------------ ------------ ------------
Total expenses 20,228,680 10,809,689 9,057,547
Income before income taxes 10,591,145 2,234,103 2,211,128
Income taxes (benefit) expense (1,485,686) (49,958) 843,660
------------ ------------ ------------
Earnings before equity in undistributed
earnings of subsidiaries 12,076,831 2,284,061 1,367,468
Equity in undistributed earnings
of subsidiaries 9,792,650 18,408,581 15,189,217
------------ ------------ ------------
Net earnings $ 21,869,481 20,692,642 16,556,685
============ ============ ============
*Eliminated in consolidation.
See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities
Net earnings $ 21,869,481 20,692,642 16,556,685
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings of
subsidiaries (9,792,650) (18,408,581) (15,189,217)
Common stock dividend from
subsidiaries (12,674,000) (450,000) --
Depreciation and amortization 751,680 251,367 21,151
Noncash compensation 125,859 20,972 --
Net loss in equity investment 18,482 -- --
Loss on sale of furniture 8,041 -- --
Changes in assets and liabilities:
Due from subsidiaries 2,779,145 230,555 (5,938,784)
Prepaid expenses 53,902 (116,611) (263,245)
Other assets 1,898,898 (406,443) (185,403)
Federal income taxes payable -- (2,620,083) 2,620,083
Federal income taxes receivable (3,268,380) (1,804,225) --
Other liabilities 3,233,775 174,631 1,663,348
------------ ------------ ------------
Net cash used in operating activities 5,004,233 (2,435,776) (715,382)
Cash flows from investing activities
Purchase of goodwill (2,708,388) (4,071,107) (3,207,661)
Purchase of common stocks -- (5,500,000) (2,086,090)
Purchase of other invested assets (703,558) (2,171,771) (2,000,000)
Purchase of real estate investments (902,312) -- --
Additional investment in subsidiaries -- -- (1,250,100)
Proceeds from sale or maturity of
available for sale securities -- -- 3,881,315
Purchase of fixed maturity securities
Purchase of subsidiary's net other
assets and stock (55,114,240) (19,650,000) --
Purchase of property and equipment, net (616,741) (196,166) (171,210)
------------ ------------ ------------
Net cash used in investing activities (60,045,239) (31,589,044) (4,833,746)
Cash flows from financing activities
Receipt of revolving credit facility 35,554,109 25,165,000 2,000,000
Issuance of common stock 7,569,180 8,165,260 3,542,215
------------ ------------ ------------
Net cash provided by financing activities $ 43,123,289 33,330,260 5,542,215
See accompanying auditors' report
See the accompanying Notes to Condensed Financial Statements. Continued.
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
(In thousands)
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
Net decrease in cash and cash equivalents $(11,917,717) (694,560) (6,913)
Cash and cash equivalents, beginning of year (697,173) (2,613) 4,300
------------ ------------ ------------
Cash and cash equivalents, end of year $(12,614,890) (697,173) (2,613)
============ ============ ============
Supplemental disclosure of cash flow information:
Federal income taxes paid $ 6,634,000 9,816,000 6,071,204
Cash paid for interest $ 4,015,726 844,151 65,962
See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.
SCHEDULE II
FPIC Insurance Group, Inc
Condensed Financial Information of Registrant
Notes to Condensed Financial Statements (Parent Only)
December 31, 1999
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
FPIC Insurance Group, Inc. (see part III Item 8).
1. The Parent Company was formed on June 11, 1996. The shareholders of a
subsidiary company approved the formation of a holding company
structure. The shareholders of the subsidiary company became the
shareholders of the Parent Company in a five for one exchange of
common stock. Prior to the approval of the holding company structure,
the Parent Company had no activity.
2. Investments
See Investments in the consolidated financial statements Part II Item
8 and in Note 4 of the notes to the consolidated financial statements.
3. Goodwill
See Goodwill in the consolidated financial statements Part II Item 8
and in Note 8 of the notes to the consolidated financial statements.
4. Intangible assets
See Intangible Assets in the consolidated financial statements Part II
Item 8 and in Note 9 of the notes to the consolidated financial
statements.
5. Revolving credit facility
See Borrowing Arrangements in Note 10 of the notes to the consolidated
financial statements.
6. Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S.
Federal Income tax return. Income tax liabilities or benefits are
recorded by each subsidiary based upon separate return calculations,
and any difference between the consolidated provision and the
aggregate amounts recorded by the subsidiaries is reflected in the
Parent Company financial statements.
For further information on income taxes, see Income Taxes in Note 14
of the notes to the consolidated financial statements.
7. Other Comprehensive Income
See Other Comprehensive Income in the consolidated financial
statements Part II Item 8.
8. Dividend Restrictions
See Statutory Accounting in Note 17 of the notes to the consolidated
financial statements.
9. Accounting Changes
For information concerning new accounting standards adopted in 1999
and 1998, see Note 1 of the notes to the consolidated financial
statements.
SCHEDULE III
FPIC Insurance Group, Inc.
Consolidated Supplementary Insurance Information
(in thousands)
For the years ended December 31, 1999, 1998 and 1997
Other Amortization
Deferred Future Policy Policy Benefits of Deferred
Policy Benefits Claims & Net Losses and Policy
Acquisition Losses, Claims Unearned Benefits Premium Investment Loss Acquisition
Segment Costs Loss Expenses Premiums Payable Revenue Income Expenses Costs
- ------- ------------ ------------- -------- ------- ------- ------ -------- -----
1999:
Medical professional
and other liability $ 2,789 273,092 55,759 -- 118,189 19,024 80,968 6,727
1998:
Medical professional
and other liability $ 2,001 242,377 44,310 -- 89,562 17,549 67,362 4,860
1997:
Medical professional
and other liability $ 1,411 188,086 28,218 -- 65,504 15,978 54,011 3,996
Other Premiums
Segment Expenses Written
- ------- -------- -------
1999:
Medical professional
and other liability 15,968 122,126
1998:
Medical professional
and other liability 7,653 101,477
1997:
Medical professional
and other liability 3,083 70,285
See accompanying auditors' report
SCHEDULE IV
FPIC Insurance Group, Inc.
Reinsurance
For the years ended December 31, 1999, 1998 and 1997
Ceded Assumed Percentage
Earned to Earned of
Property and Gross Other From Other Net Assumed
Liability Insurance Amount Companies Companies Earned to net
- ------------------- ------ --------- --------- ------ ------
1999 $ 116,495,754 26,341,160 28,034,279 118,188,873 23.72 %
1998 $ 91,141,795 16,055,262 14,475,045 89,561,578 16.16 %
1997 $ 71,277,054 7,508,160 1,734,781 65,503,675 2.65 %
See accompanying auditors' report.
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, 1999
Allowance for Doubtful Accounts, net $ 908,409 338,171 -- 1,246,580
Year-ended December 31, 1998
Allowance for Doubtful Accounts, net $ 681,175 227,234 -- 908,409
See accompanying auditors' report.