x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2004.

 

or

 

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transaction period from ____________to ___________.

Commission file number 1-11983

	FPIC Insurance Group, Inc.
	(Exact Name of Registrant as Specified in its Charter)

 

Florida		59-3359111
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

 

 

	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)
	www.fpic.com
	(Registrant's Internet Address)

 

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 o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).  Yes x    No o

 

As of October 29, 2004, there were 10,022,034 shares of the registrant's common stock outstanding.

 

See accompanying notes to the condensed consolidated financial statements.
	3

FPIC Insurance Group, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the Three and Nine Months Ended September 30, 2004 and 2003
(in thousands, except per common share data)
		(unaudited)
		Three Months Ended						Nine Months Ended
Revenues			Sept 30, 2004			Sept 30, 2003			Sept 30, 2004			Sept 30, 2003
Net premiums earned (Note 11)		$	38,873			40,895			105,552			101,674
Claims administration and management fees (Note 11)			13,810			10,760			38,598			28,523
Net investment income			5,039			4,680			15,224			13,902
Commission income			2,741			2,192			6,882			6,565
Net realized investment (losses) gains (Note 2)			(110	)		1,286			3,363			1,942
Finance charges and other income (Note 11)			302			279			664			757
Total revenues			60,655			60,092			170,283			153,363
Expenses
Net losses and loss adjustment expenses (Note 11)			32,801			36,985			89,434			93,285
Other underwriting expenses (Note 11)			3,601			3,168			9,447			7,814
Claims administration and management expenses			9,704			8,668			30,214			25,182
Interest expense on debt			656			907			1,852			4,507
Other expenses (Note 11)			2,064			1,704			5,977			4,203
Total expenses			48,826			51,432			136,924			134,991
Income from operations before income taxes			11,829			8,660			33,359			18,372
Less: Income tax expense			4,300			3,279			12,364			6,733
Net income		$	7,529			5,381			20,995			11,639
Basic earnings per common share		$	0.75			0.57			2.11			1.23
Diluted earnings per common share		$	0.72			0.55			2.00			1.22
Basic weighted average common shares outstanding			10,003			9,493			9,954			9,443
Diluted weighted average common shares outstanding			10,522			9,831			10,502			9,578
Comprehensive Income
Net income		$	7,529			5,381			20,995			11,639
Other comprehensive income (loss):
Minimum pension liability adjustment, net			—			—			(392	)		—
Unrealized holding gains (losses) on debt and equity securities and other invested assets			12,835			(4,909	)		(497	)		(1,080	)
Unrealized holding (losses) gains and amortization on derivative financial instruments			(442	)		543			(506	)		740
Settlement of derivative financial instruments			—			—			—			1,609
Income tax (expense) benefit related to unrealized gains and losses			(4,723	)		1,666			356			(529	)
Other comprehensive income (loss)			7,670			(2,700	)		(1,039	)		740
Comprehensive income		$	15,199			2,681			19,956			12,379

 

See accompanying notes to the condensed consolidated financial statements.
	4

 

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

1.   Organization and Basis of Presentation

The accompanying condensed consolidated financial statements represent the consolidation of FPIC Insurance Group, Inc. (“FPIC”) and all majority owned and controlled subsidiaries. The statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant transactions between the parent and consolidated subsidiaries have been eliminated. Reference is made to our most recently filed Form 10-K, which includes information necessary for understanding our businesses and financial statement presentations. In particular, our significant accounting policies are presented in Note 2, Significant Accounting Policies, to the consolidated financial statements included in that report.

These condensed consolidated quarterly financial statements are unaudited. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. These statements include all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for the fair presentation of results for interim periods. Certain prior period amounts presented in the condensed consolidated financial statements have been reclassified to conform to the current presentation. The results reported in these condensed consolidated quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. For example, the timing and magnitude of claim losses incurred by our insurance subsidiaries due to the estimation process inherent in determining the liab ility for losses and loss adjustment expenses (“LAE”) can be relatively more significant to results of interim periods than to results for a full year. Also, variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net income.

New Subsidiary 

Effective July 1, 2004, operations of Administrators For The Professions, Inc.’s (“AFP”) wholly owned subsidiary, Physicians Reciprocal Managers, Inc. (“PRM”), commenced as the administrator and attorney-in-fact of Pennsylvania Physicians’ Reciprocal Insurers (“PaPRI”). PaPRI is an insurance exchange domiciled in Pennsylvania. It was formed to take the place of the unrelated fronting carrier that has underwritten, and ceded as reinsurance to PRI, medical professional liability insurance program business in Pennsylvania. PaPRI commenced underwriting the Pennsylvania program business effective July 1, 2004. PaPRI is not a subsidiary of PRM, AFP or FPIC. As an insurance exchange, the organization of PaPRI is similar to that of a mutual insurance company. PaPRI is also not a subsidiary of PRI, but has received its initial capitalization in the form of a subordi nated surplus note from PRI. For additional information about PRM and PaPRI, refer to Note 11, Related Party Transactions.

FPIC has elected to adopt Statement of Financial Accounting Standards No. (“FAS”) 123, “Accounting for Stock-Based Compensation” on a disclosure basis only and measure stock-based compensation in accordance with Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” using intrinsic values with appropriate disclosures under the fair value based method as required by FAS 123 and FAS 148, “Accounting for Stock-Based Compensation, Transition and Disclosure.” Generally, the exercise price for stock options granted to an employee equals the fair market value of FPIC common stock at the date of grant, thereby resulting in no recognition of compensation expense.

	7

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

 

Had compensation cost for FPIC’s stock option plans been determined based on the fair value method set forth in FAS 123, FPIC’s net income and basic and diluted earnings per common share would have been impacted as follows:

 

2.   Investments

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, are recorded as realized losses in the condensed consolidated statements of income. Data with respect to bonds and U.S. Government and equity securities, available for sale, are presented in the table below.

 

Net realized investment gains on all investments reported for the nine months ended September 30, 2004 and 2003 totaled $3,363 and $1,942, respectively. In addition to the gains and losses on sales of securities summarized in the table above, net realized investment gains for the nine months ended September 30, 2004 and 2003 included gains of $4 and $201, respectively, on the sale of real estate. During the second quarter of 2004, we sold an investment in a limited partnership for $2,309 and realized a gain of $2,120, which is also included in our net realized investment gains for the nine months ended September 30, 2004. Also included in net realized investment gains for the nine months ended September 30, 2004 and 2003 are losses of $787 and $4,899, respectively, resulting from the recognition of other-than-temporary-impairments of private equity holdings included in our other invested assets.< BR>

	8

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

3.   Goodwill

As required by FAS 142 “Goodwill and Other Intangible Assets,” we completed annual impairment testing of our remaining goodwill as of December 31, 2003 and 2002 during the first quarters of 2004 and 2003, respectively, including obtaining updated reports from independent valuation consultants. Based on the results of such testing, we determined that the fair value of our goodwill exceeded its carrying value and, accordingly, no impairment was recognized.

Reference is made to Note 2, Significant Accounting Policies, and Note 9, Goodwill, to the consolidated financial statements included in our most recently filed Form 10-K, which include additional information about our accounting for goodwill.

4.   Reinsurance

The effects of ceded reinsurance on premiums written, premiums earned, and losses and LAE incurred for the three and nine months ended September 30, 2004 and 2003 are presented in the table below.

 

We renewed our excess of loss reinsurance program, effective January 1, 2004. The structure and coverage of such agreements are generally similar to those of our 2003 excess of loss reinsurance program as reported in our most recently filed Form 10-K. Based on analysis of our exposure to extra-contractual obligations and claims in excess of policy limits (“ECO/XPL”), we elected not to renew the supplemental awards made ECO/XPL reinsurance that we had carried in addition to the ECO/XPL coverage already included as part of our primary excess of loss reinsurance program. Therefore, this additional layer of excess reinsurance is no longer in effect after April 27, 2004 and we now retain this excess risk.

 

We have terminated future cessions under the Hannover Re net account quota share reinsurance agreement, effective July 1, 2004. With this termination, business is no longer ceded under the agreement beginning with business written and renewed in the third quarter of 2004. The business already ceded through June 30, 2004, will continue to be subject to the agreement and will go into run-off.

Reference is made to Note 11, Related Party Transactions, to the condensed consolidated financial statements included in this quarterly report for the period ended September 30, 2004, and to Note 12, Reinsurance, and Note 22, Related Party Transactions, to the consolidated financial statements included in our most recently filed Form 10-K, which include additional information regarding reinsurance involving related parties.

	9

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

5.   Long Term Debt

FPIC’s long term debt includes junior subordinated debentures and senior notes, which are uncollateralized and bear floating interest rates equal to the three-month LIBOR plus spreads ranging from 3.85% to 4.20% (the interest rates ranged from 5.52% to 5.99% as of September 30, 2004). The floating interest rates are adjustable quarterly with changes in the three-month LIBOR, and in the case of two offerings, the maximum rate that may be charged under the securities within the first five years is 12.50%. We have also purchased hedging instruments designed to maintain the ultimate floating rate interest cost on all of these securities within a stated range for five years from closing. For additional information on FPIC’s hedging instruments and interest costs, see the discussion under Note 6, Derivative Financial Instruments.

Indenture agreements relating to FPIC’s junior subordinated debentures and trust preferred securities contain limitations, under certain circumstances, as to (i) the declaration or payment of dividends, or distributions thereon, or the redemption, purchase, acquisition or liquidation with respect to any capital stock of FPIC or its affiliates; (ii) the payment, in certain circumstances, of principal, premium or interest on, or the repayment, repurchase or redemption of, debt securities of FPIC or its affiliates that rank in equal standing with or are junior in interest to the debentures; or (iii) the payment, in certain circumstances, under any guarantees of FPIC or its affiliates that rank equal in standing with, or junior in interest to, capital securities guarantees relating to the issuance of the debentures. Circumstances that would result in such limitations include a continuing event o f default, as defined by the indenture agreements, a default with respect to payment of any obligations under capital securities guarantees, or a continuing interest deferral election by FPIC.

Reference is made to Note 13, Long Term Debt, Revolving Credit Facility and Term Loan, to the consolidated financial statements included in our most recently filed Form 10-K, which includes additional information regarding our long term debt.    

6.   Derivative Financial Instruments

As of September 30, 2004, FPIC had four interest rate collars. The collars are designed to maintain FPIC’s ultimate interest costs on its junior subordinated debentures and senior notes to within specified interest ranges for five years from the closing date of the issuance of those liabilities. The initial costs of the hedging instruments acquired for this purpose of $1,134, in aggregate, have been capitalized and will be amortized over their respective five year maturity periods. Reference is made to Note 14, Derivative Financial Instruments, to the consolidated financial statements included in our most recently filed Form 10-K, which includes additional information regarding our interest risk management strategy and the effect of this strategy on FPIC’s consolidated financial statements.

 

The interest rate collars and terms as of September 30, 2004 are presented below with their corresponding effects on the floating rate interest costs associated with the junior subordinated debentures and senior notes.

	10

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

7.  Commitments and Contingencies

FPIC’s insurance subsidiaries from time to time become subject to claims for extra contractual obligations or risks in excess of policy limits in connection with their insurance claims.  These claims are sometimes referred to as “bad faith” actions as it is alleged that the insurance company acted in bad faith in the administration of a claim against an insured.  Bad faith actions are infrequent and generally occur in instances where a jury verdict exceeds the insured’s policy limits. Under such circumstances, it is routinely alleged that the insurance company failed to negotiate a settlement of a claim in good faith within the insured’s policy limit.  FPIC has evaluated such exposures as of September 30, 2004, and believes its positions and defenses are meritorious.  However, there can be no absolute assurance as to the outcome of such exposures.  ; FPIC currently maintains insurance for such occurrences in the form of a component of its ceded reinsurance, which serves to mitigate exposure to such claims.  Such coverage would not apply to future bad faith actions, if any, arising from medical professional liability claims reported prior to 2000. In addition, multiple claims for extra contractual obligations on one or more large claims in a single year could result in potential exposure materially in excess of insurance coverage or in increased costs of such insurance coverage.

First Professionals Insurance Company, Inc. (“First Professionals”) had one bad faith action associated with a claim that arose from a 1993 incident for which no excess reinsurance coverage was in place. A settlement agreement for this action was entered into during October 2004. No additional net charge or increase in First Professionals’ incurred losses or aggregate reserves for losses was required as a result of the settlement.

FPIC may also become involved in legal actions not involving claims under its insurance policies from time to time. FPIC has evaluated such exposures as of September 30, 2004, and in all cases believes its positions and defenses are meritorious. However, there can be no absolute assurance as to the outcome of such exposures.

FPIC’s insurance subsidiaries are subject to assessment by the 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.

While management has evaluated the incidents and circumstances surrounding the above-mentioned asserted or unasserted legal claims and assessments of which it is aware and believes that these will not have materially adverse effects on FPIC beyond amounts already recognized and accrued, there can be no absolute assurance as to their ultimate outcomes.

The management agreement between our subsidiary, AFP, and PRI, the New York insurance reciprocal managed by AFP, was amended to remove the sharing by AFP of 10% of PRI’s statutory net income or loss, effective January 1, 2002. With regard to profit sharing amounts already earned and collected, AFP has agreed to hold the years 1999, 2000 and 2001 open for re-determination and possible adjustment for a period of five years each (expiring 2004, 2005 and 2006, respectively.) Such adjustments would be based primarily on the subsequent redetermination of loss and LAE reserves for those years and related adjustments, if any, to PRI’s statutory net income previously reported for such years. AFP earned and collected profit sharing amounts under the original agreement totaling $3,584 for the three years ended December 31, 2001. As of September 30, 2004, no amounts were payable under this provisio n of the amended management agreement. Reference is made to Note 16, Commitments and Contingencies, and Note 22, Related Party Transactions, to the consolidated financial statements included in our most recently filed Form 10-K for additional information regarding the management agreement with PRI. Also, FPIC has issued an irrevocable letter of credit in the amount of $500 as collateral under the operating lease for the building occupied by AFP and PRI in Manhasset, New York.

	11

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

8.   Reconciliation of Basic and Diluted Earnings Per Common Share 

Data with respect to FPIC’s basic and diluted earnings per common share are shown below.

9.   Employee Benefit Plans

The components of the actuarially computed net periodic pension cost for our two defined benefit plans, our excess benefit plan and our supplemental executive retirement plan for the nine months ended September 30, 2004 and 2003 are summarized in the table below.

Reference is made to Note 19, Employee Benefit Plans, to the consolidated financial statements included in our most recently filed Form 10-K, which includes additional information regarding our employee benefit plans.

	12

FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements (in thousands, except as noted) (unaudited)

10. Segment Information

The accounting policies of FPIC’s segments are also those described in the summary of significant accounting policies found in Note 2, Significant Accounting Policies, to the consolidated financial statements included in our most recently filed Form 10-K. We evaluate a segment’s performance based on net income or loss and account for intersegment sales and transfers, which are eliminated in the condensed consolidated financial statements, as if the sales or transfers were to a third party. Holding company operations are included within the insurance segment due to its size and prominence and the substantial attention devoted to the segment. Management believes that intersegment revenues associated with transactions between the segments would be reasonably approximate with similar products or services that may have been obtained from or provided to unrelated third parties. All segments a re managed separately because each respective business is distinct in terms of markets served, products and services, technology and required business resources and strategies.

Selected financial information by segment is summarized in the tables below.