United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

Commission file number 1-11983

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

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)

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. |_|

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
Yes |X|    No |_|

The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 30, 2002 was $139,120,725.

As of March 20, 2003, there were 9,415,548 shares of the Registrant’s Common Stock, $.10 Par Value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

FPIC Insurance Group, Inc.
2002 Annual Report on Form 10-K
Index

Part I.

Item 1.   Business

Companies and Business Segments

FPIC Insurance Group, Inc. (“FPIC”) was formed in 1996 in a reorganization of First Professionals Insurance Company, Inc. (“First Professionals,” formerly named Florida Physicians Insurance Company, Inc.) and McCreary Corporation (“McCreary”). Under the reorganization plan, First Professionals’ shareholders became the shareholders of FPIC. They received five shares of FPIC common stock for each share of their First Professionals’ common stock. McCreary also became a subsidiary of FPIC. Effective January 1, 2002, McCreary was merged into its subsidiary, Employers Mutual, Inc. (“EMI”), with EMI continuing as the surviving entity. FPIC and its subsidiaries operate in three business segments: Insurance, Reciprocal Management and Third Party Administration (“TPA”). The following table provides additional information about FPIC, its business segments and subsidiaries.

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The main sources of revenue for FPIC are dividends and management fees from its subsidiaries. The main sources of revenue for the subsidiaries are premiums earned and investment income (insurance segment) and claims administration and management fees and commission income (reciprocal management and TPA segments).

Growth Through Acquisitions

Since 1995, FPIC has grown and expanded its business interests and operations significantly. The following table presents a chronological summary of businesses.

FPIC has also made a small number of other acquisitions, which have since been disposed of or converted to an inactive status and are not shown in the table above. FPIC has not made any acquisitions since 1999, instead devoting its resources and efforts to managing and growing its current businesses.

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Insurance Segment

Principal Business. First Professionals, APAC, and Intermed insure doctors, dentists and other healthcare providers for professional liability claims and also offer coverage for their professional corporations. On October 3, 2002, Interlex entered into an agreement with an unrelated insurance organization to sell the renewal rights to all of its LPL policies. Prior to December 1, 2002, Interlex provided lawyers with LPL insurance. The following table summarizes (in thousands) direct and assumed premiums written subdivided by state for the years ended December 31, 2002, 2001 and 2000:

As of December 31, 2002, FPIC’s insurance subsidiaries were also licensed in Arizona, Delaware, Illinois, Indiana, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, North Carolina, Oregon, South Carolina, Utah, Virginia, Washington and West Virginia.

In 2002, 84.6% of our direct and assumed insurance business was written in Florida, Missouri, Texas, Tennessee, New York and Pennsylvania. Florida and Missouri represent the core states for direct insurance business. New York represents assumed reinsurance from PRI. Insurance business in Texas, Tennessee and Pennsylvania is conducted mainly under the fronting programs of First Professionals and APAC. Under these fronting programs, the direct insurance is written on First Professionals or APAC policy forms and reinsured to other insurance or reinsurance carriers in exchange for fee income. These other insurance or reinsurance carriers assume all or most of the insurance or underwriting risks.

Net premiums written are net of reinsurance ceded, including premiums under fronting programs, and represent the direct and assumed premiums we retain. The following table summarizes (in thousands) net premiums written by state and presents a more representative picture of the insurance business and underwriting risks we retain for our own account.

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Our insurance subsidiaries offer a variety of insurance products. The following table summarizes the premiums written by product for the years ended December 31, 2002, 2001 and 2000.

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LPL Insurance

•

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Claims-Made Policy Forms. A substantial majority of our MPL and LPL insurance policies are issued on a claims-made basis. Under the claims-made policy form, only claims reported to us prior to the expiration of the policy are covered. Claims made after the expiration of the policy are not covered unless the underlying incident or act was reported before the expiration of the policy. This is unlike most other property and casualty insurance policy forms, which cover accidents or perils occurring during the policy period regardless of whether they are reported before or after the end of the policy period.

We also offer prior acts coverage, which covers reported claims that occur because of incidents or acts that happened before the initial claims-made policy period. Prior acts coverage is offered to new claims-made policyholders and is automatic when an existing claims-made policyholder renews his or her policy. In the case of a renewing policyholder, prior acts coverage is cumulative with each successive renewal.

We also offer tail coverage, which covers claims reported after the expiration of our MPL and LPL policies regarding incidents occurring within the policy period. The prices of successive renewals of claims-made policies and tail coverage become higher as the length of time an insured has been covered under the claims-made policy grows. Renewals are also subject to re-underwriting and re-pricing except in the event of the death, disability or retirement of the insured. The claims-made policy includes free tail coverage to protect the insured’s estate in the event of death, disability or retirement. To qualify for the free retirement coverage, a claims-made policyholder must have been insured for at least five consecutive years.

Insurance Cycles. Large numbers of insurers and relative ease of entry and exit have historically had a significant cyclical effect on property and casualty insurance markets. Soft market conditions correspond with the down portion of the industry cycle. In the down cycle, capital and capacity are relatively more abundant creating more competition and depressed prices. At some point in the cycle, competition and depressed prices give way to rising loss trends, the depletion of capital with an exit of capacity, and rising prices. This “hardening” of the market is the beginning of an up-turn in the insurance cycle.

The cyclical nature of the insurance business presents both risks and opportunities to property and casualty insurers. It is more difficult for an insurance company to raise its prices to keep pace with loss costs in a down cycle because competition is usually more intense. A prolonged down cycle creates conditions that can potentially weaken a company, especially a smaller one. An up cycle creates conditions that can improve a company’s chances of maintaining or growing profitable business. The risks and opportunities presented by the up and down insurance cycles manifest themselves by magnifying or reducing other risks, including competition, pricing and underwriting risks. The timing of strategic decisions within these cycles can affect profitability and capital adequacy. The unpredictability of changes in the cycle adds to these risks. We attempt to manage insurance cycle risks by monitoring the cycles and taking steps to mitigate the extreme effects they can cause. Conservative pricing and underwriting and avoiding rapid expansion are two strategies that we believe have helped us mitigate the extreme effects of the changing cycles. For example, we do not enter and exit markets aggressively. Instead, we focus mainly on our core markets where we believe we can compete effectively based upon our name, reputation and service rather than relying on having the lowest prices.

The MPL insurance markets across the country began to harden in 2001 following a five to six year period of soft market conditions. Consequently, we experienced unprecedented premium growth from new policyholders, higher renewals and higher prices. Growth at our insurance companies was so significant that we ceased accepting most applications for new policyholders in June 2002. We have begun accepting applications from new policyholders once again in 2003, although we intend to manage the number of our 2003 policyholders to approximate year-end 2002 levels.

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Reinsurance.     FPIC’s insurance subsidiaries reinsure portions of their business. The following table summarizes our reinsurance programs for the years ended December 31, 2002, 2001 and 2000.

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Although reinsurance does not legally discharge our insurance subsidiaries from their obligations to policyholders as the primary insurer, it does make the reinsurer liable to us to the extent of the risk ceded. The placement of reinsurance with a number of individual companies and syndicates mitigates the concentration of credit risk. We monitor the financial condition and creditworthiness of our reinsurers periodically and use reinsurance brokers and intermediaries to assist in the process of the placement of our reinsurance. Most of FPIC’s reinsurers are rated A- or better by A.M. Best Company (“A.M. Best”). Reinsurers that are neither authorized nor accredited are required to provide collateral in the form of an irrevocable letter of credit or investment securities held in a trust account to secure their respective balances due.

On August 2, 2002, Gerling Global Reinsurance Corporation of America (“Gerling”), one of our reinsurers, had its financial strength rating lowered by A.M. Best from A- (Excellent) to B+ (Very Good). On December 20, 2002, Gerling’s A.M. Best rating was further downgraded to B- (Fair). These rating actions by A.M. Best followed an announcement by Gerling of its intention to exit the U.S. non-life reinsurance market. Since then, Gerling has essentially placed itself in voluntary run-off with respect to its U.S. non-life reinsurance business and A.M. Best has withdrawn Gerling’s financial strength rating and replaced it with the designation “NR-3,” which means that A.M. Best’s rating methodology no longer applies. Gerling has participated in our excess of loss reinsurance programs in 2000 at 15%, and in 2001 and 2002 at 20%. Gerling has also provided facultative reinsurance coverage for non-standard risks. We replaced Gerling’s participation in our reinsurance programs, effective with our renewal, as of January 1, 2003. As of December 31, 2002, the estimated amount of net reinsurance recoverables from Gerling was approximately $13 million, comprised of the gross recoverables from Gerling, less reinsurance payables to Gerling of approximately $4 million. Gerling is an authorized reinsurer in our markets; therefore, we do not hold collateral for these reinsurance recoverables.

Gerling’s actions, including placing itself in run-off with respect to its U.S. non-life reinsurance business, have been voluntary and as recently as March 10, 2003, it has publicly stated that it is paying its outstanding claims. Consequently, we currently expect that Gerling will fully meet its obligations to us. We will continue to monitor developments at Gerling and should its financial condition worsen, we could, in-turn, recognize a charge for uncollectible reinsurance recoverables.

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Competition.     The property and casualty insurance and reinsurance industries are very competitive. Results depend on a number of factors, such as underwriting and investment performance, direct costs associated with the delivery of insurance products, including the costs of regulation, the frequency and severity of claims, as well as inflation. Decisions we make about the risks we insure (pricing and risk selection), the way we operate and provide policyholder service and our financial condition and ratings can all affect our competitive position. The relative size and reputation of an insurer in comparison with others may also influence the purchasing decisions of agents and customers.

The MPL insurance markets in Florida and Missouri, our two primary markets, are competitive in terms of pricing and, until 2002, the number of competitors. Although the number of companies offering MPL insurance products in our core markets declined significantly in 2002, more competitors may enter our markets in the future and affect our position in those markets. In addition, some of our competitors are larger and have greater resources than we do and some have higher ratings. The number of healthcare entities that allow or tolerate self-insurance for their practicing physicians may also increase. In addition to external competitive pressures, our insurance products are largely marketed through independent insurance agencies, all of which represent more than one company, so we also face competition within our own agency system.

We compete in this environment on the basis of our leadership positions in Florida and Missouri and our relationships with the medical and professional communities. In Florida, name recognition, service reputation, medical society endorsements, physician involvement, healthcare activism, and agency force and program development have all contributed to helping FPIC and First Professionals maintain the leading market position. We believe our longstanding position in Florida is an additional competitive advantage that has given us the means to more effectively attract and retain groups and specialties that exhibit better than average risks and maintain a relatively high-quality book of insured business. This helps us maintain greater financial stability and staying power.

First Professionals and APAC are the only stock MPL insurance companies domiciled in Florida. First Professionals has the exclusive endorsements of both the Florida Medical Association and the Florida Dental Association. First Professionals is also endorsed by a number of county medical and state specialty societies.

In both Missouri and Kansas, Intermed competes with regional and national companies. In 2001, the last year for which statistics were available from the Missouri Department of Insurance, there were fifty companies writing MPL insurance for physicians and surgeons in the state. The top four writers had 77% of the market. Intermed was the largest writer in the state in 2001 and had a market share of 26%.

As noted above, FPIC has decided to cease writing LPL insurance. This will allow the capital currently supporting the LPL product to be re-dedicated to our core MPL insurance products.

Some hospitals in Missouri have purchased fee-for-service medical practices and hired the physicians as employees. A number of these physicians purchased professional liability insurance through smaller insurance companies like Intermed. As a result of this consolidation, these same physicians may now have access to self-insured plans offered by the hospitals or professional liability insurance offered by larger insurers and at lower premiums.

Insurance Ratings. Insurance specific ratings represent the opinion of rating agencies on the financial strength of a company and its capacity to meet its insurance obligations. These ratings are based on factors most relevant to policyholders, agents and intermediaries and are not specifically directed toward the protection of investors. They are not recommendations to buy, sell or hold a company’s securities. The significance of individual agencies and their ratings vary among different users. They can be significant to investors and lenders among other factors as an indication of a company’s suitability for investment or creditworthiness. A.M. Best is the primary rating organization for FPIC and is the only insurance rating agency FPIC uses on an interactive basis. Other organizations that rate FPIC develop their ratings independently using publicly available data and without consulting with us. These ratings are generally consumer oriented and involuntary on the part of the company being rated.

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In October 2002, A.M. Best lowered its rating of FPIC from A- (Excellent), with a negative outlook, to B++ (Very Good), with a stable outlook. Among other things, A.M. Best attributed this rating action to our recent significant growth in premiums in the face of its serious concerns about loss trends and reserve adequacy in the MPL insurance sector. Additional information may be found at the A.M. Best website at www.ambest.com.

An insurance company’s rating, and particularly its A.M. Best rating, is a potential source of competitive advantage or disadvantage in the marketplace. In addition, some of the independent agents and brokers who place business with our companies and other competitors have a minimum A.M. Best rating standard of A-. The significance of the A.M. Best rating varies depending upon the products involved, the customers and agents and the competition and market conditions. Although any rating downgrade is a negative, the lowering of our A.M. Best rating to B++ (Very Good) has not had a material negative impact on our business to date. The B++ rating reflects very good financial strength and remains within A.M. Best’s “Secure Ratings” range. We also believe that insurance ratings are generally not as significant to MPL agents and policyholders as they are with regard to certain other insurance products. The hardening markets have also substantially reduced the number of MPL insurers and capacity in the MPL markets served by FPIC.

Regulation.     Our insurance subsidiaries are regulated at the state level. The state insurance departments of Florida and Missouri, where our insurance companies are domiciled, are the primary regulators. Our insurance companies are also regulated in other states where they do business. State insurance laws also regulate FPIC as an insurance holding company. FPIC and all its subsidiaries are required to register and furnish information about our operations, management and financial condition to the Florida and Missouri insurance departments. The insurance departments perform financial and market conduct examinations of our insurance companies periodically and also require disclosure or approval of material transactions, such as dividends from our insurance subsidiaries to FPIC above certain levels. All transactions within the holding company structure involving our insurance companies must also be fair and reasonable.

Except as described below, Florida insurance laws do not allow any person to acquire, directly or indirectly, five percent or more of the voting securities of an insurance company without the prior written approval of the Florida insurance department. Any purchaser of five percent or more of FPIC common stock is presumed to have acquired a similar level of control of our insurance subsidiaries. Instead of obtaining prior approval, a purchaser of more than five percent, but less than ten percent, of an insurance company may file a disclaimer of affiliation and control with the Florida insurance department. Similar laws exist in Missouri, except that the approval threshold is ten percent or more of a company’s voting securities.

The primary purpose or mission of insurance regulation is the protection of policyholders. State insurance laws generally delegate broad regulatory powers to insurance departments including granting and revoking licenses, approving policy forms and premium rates, regulating trade practices, establishing required statutory financial statements and prescribing the types and amounts of investments permitted.

Insurance companies are required to file detailed annual reports in each state in which they do business. The financial statements contained in these reports are prepared using regulatory accounting principles, or statutory-basis financial statements as they are referred to in the insurance industry. Statutory accounting practices represent a comprehensive basis of accounting that is different from GAAP and so the accounting practices used by the insurance subsidiaries in their regulatory financial statements are different from the accounting policies used in preparing the consolidated financial statements included in this Form 10-K.

The National Association of Insurance Commissioners (“NAIC”) has adopted the Codification of Statutory Accounting Principles (the “NAIC Codification”). The NAIC Codification became applicable to all statutory-basis financial statements issued after January 1, 2001. While the NAIC Codification represents the official guidance on the statutory basis of accounting, the individual states and insurance departments continue to have the discretion to modify its guidance or establish their own statutory accounting practices for insurance companies.

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Insurance companies are also subject to assessments by state financial guaranty associations. The primary purpose of these guaranty associations is to fund the unpaid claims and policyholder benefits of insolvent insurers. Generally, these associations can assess member insurers on the basis of written premiums in their states.

The Gramm-Leach-Bliley Act of 1999 (the “Act”) significantly changed the previous regulatory framework that generally prevented affiliations among commercial banks, insurance companies, securities firms and other financial service providers. The Act revised and expanded Federal banking laws to permit a bank holding company to engage in other financial services, including insurance, through a new entity known as a “financial holding company.”

The insurance industry is under continuous scrutiny by Congress, state legislatures and state and federal regulatory agencies. From time to time, regulatory and legislative changes are proposed that could have a material effect, positive or negative, on individual insurers or reinsurers. Current proposals address a wide range of topics and issues that could be material to FPIC. These include tort reform, patient rights and Federal versus state regulation of insurers to name a few. It is not possible to predict which, if any, of these proposals will be adopted or the impact they may have on FPIC.

Marketing.     FPIC markets its MPL policies primarily through independent agencies. We also sell insurance products directly through our subsidiary, FPIC Agency. An integral part of our marketing strategy is targeting sectors of the MPL insurance industry of which we are knowledgeable and that we believe can generate above average operating profits. We periodically identify and target selected medical specialties and “claims-free” physicians within those specialties. Pricing is also determined based upon specialties and geographic regions.

Risk Management. FPIC also participates in comprehensive risk management services to policyholders. These services are designed to help policyholders avoid potential liability by educating them on ways to avoid or prevent risks to patients in their medical practices. Reports containing recommendations about areas of the policyholder’s medical practice that may need attention are provided. FPIC also participates in seminars on risk management with medical societies and other groups. We believe our risk management services enhance risk awareness and loss prevention.

Underwriting.     The underwriting process determines whether or not to accept a new policyholder or renew an existing policyholder and on what terms. When FPIC receives applications for new or renewal MPL insurance, one of the most fundamental underwriting steps is to verify the physician’s claims history. FPIC utilizes its own MPL claims data, as well as information collected by the states in which we operate when making these decisions. If a physician has an excessive claims history, the application is denied. Other information, including status of licensure, educational background, residency experience, practice history and personal references are also evaluated in reaching underwriting decisions. The underwriting departments re-examine each policyholder annually at renewal time before coverage is renewed.

Claims Administration. FPIC’s claims departments are responsible for the investigation of claims, the establishment of case reserves, case management and defense strategy and the coordination and control of defense attorneys. FPIC has networks of defense attorneys who assist in the defense of claims. Our policy is to aggressively defend against claims that do not have merit. When a claim is believed to have merit, the claims department attempts to settle the case expeditiously and as economically as possible. In the mid-1990s, the First Professionals’ claims department shifted its focus towards settling cases more quickly. It was believed that by getting cases settled more quickly, whether with or without a loss payment, the resulting savings in defense costs would be significant. During this same period, First Professionals also saw the ratio of the number of claims it settles with a loss payment to all claims settled (the “CWIP ratio”) begin to rise. Upon analyzing this trend, the rise in the CWIP ratio could not be attributed to specific changes in loss trends or First Professionals’ policyholder base or exposures. It was determined instead that the most likely cause was the focus on settling claims faster, which, in turn, resulted in settling more claims with a loss payment.

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In 2001, First Professionals refocused on identifying non-meritorious claims and aggressively defending policyholders once again. Several initiatives were undertaken, including the re-education and re-training of claims personnel, increasing the number of claims personnel, restructuring of the claims department, and enhancements to claims data and reporting. In addition, a new claims management team has been put in place with significant MPL claims experience in Florida. As a result of these initiatives, the ratio of claims closed with an incident payment (“CWIP”) to all closed claims and the average amounts paid for losses and loss adjustment expenses (“LAE”) per claim have begun to improve in 2001 and 2002. We believe that these trends are sustainable; however, losses and LAE are affected by numerous other factors, many of which are outside our control. Given the broad range of uncertainties that can affect MPL claims, there can be no assurance that these trends will be sustained.

Investments.     FPIC’s investment strategy is to maintain a diversified investment portfolio that is focused on high grade, fixed-income securities. The majority of these securities are held as invested assets by the various insurance subsidiaries. At the close of 2002, approximately 20% of the fixed-income portfolio was invested in tax-exempt securities and approximately 80% in taxable securities.

Realized investment gains and losses are recorded when investments are marked-to-market, sold, deemed other-than-temporarily impaired, or in other situations as required by GAAP, with the corresponding gain or loss included in earnings. Variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net earnings.

Liability for Losses and LAE. The liability for losses and LAE (“loss and LAE reserves”) represents our aggregate best estimate of the amounts we expect to pay out in the future on account of all insured unpaid claims and incidents as of the end of the period. This liability also contains estimates for insured losses and LAE incurred but not yet reported to us (“IBNR”) including losses under tail policies and covered extended reporting endorsements issued following the death, disability or retirement of claims-made insureds. IBNR reserves are also established for some occurrence MPL business issued in the recent past and for assumed reinsurance, which is written on an occurrence basis. However, substantially all of our core direct MPL business is written on the claims-made policy form, which does not have significant IBNR losses. Loss and LAE reserve estimates are made primarily by the application of actuarial techniques to historical claims information. The techniques used differ depending upon what data is being used to make the projection. However, most of these techniques have the common feature of producing mathematical projections of all losses and LAE for a given period once all the claims have been reported and settled. These estimates are usually referred to as the “ultimate loss” and are the basis for estimation of the loss and LAE reserves. Despite the sophistication of these mathematical techniques, considerable judgment is required both in the selection of assumptions used and in determining which techniques best fit a company’s particular circumstances and trends. Furthermore, each of these techniques contains biases, which can have a material bearing on the accuracy and reliability of the estimate.

We set our loss and LAE reserves taking into account the results of the actuarial techniques applied as well as other assumptions, some of which are not strictly mathematical in nature. Multiple actuarial techniques are applied and a range of projected values is produced from these methods. We select our best estimates for each of our lines of business, compare them with our carried reserves, and make adjustments where differences are significant.

Our actuarial techniques and those used by other property and casualty insurers rely heavily on historical loss experience. It is assumed and generally accepted that historical experience provides a reliable starting point for estimating future loss experience even though uncertainties are always present where future loss cost trends are concerned. MPL insurance is a long-tail line of business meaning that it takes a long time to settle the average claim. A claim can be adversely impacted by events occurring long after the claim occurs and is reported to the insuring company, such as sudden severe inflation or adverse judicial decisions in similar cases. As claims are settled and additional information becomes available, estimates of the loss and LAE reserves may be revised. Because of the size and prominence of loss and LAE reserves, any revision to these estimates could be material to operating results. All changes in loss and LAE reserves, including adjustments to prior year loss and LAE reserves, are accounted for as a charge (or credit) to income in the most recent period presented.

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Beginning in 2002, our MPL insurance companies began utilizing the in-house actuarial staff of First Professionals for support in determining rates and estimating loss and LAE reserves. Our aggregate liability for losses and LAE as of December 31, 2002, was recorded at our best estimate, which was primarily determined based upon actuarial studies performed by our in-house actuarial staff. In establishing the best estimates of our loss and LAE reserves for various lines of business and in aggregate as of December 31, 2002, we calculated and selected point estimates and our in-house actuarial staff did not develop formal ranges of reasonable values. By recording our loss and LAE reserves at our best point estimate rather than at the midpoint or best point within a range, we are not representing that our reserves are subject to less uncertainty or volatility than other companies that do formally establish reserve ranges. A typical range of reasonableness for loss and LAE reserve estimates in our lines of business, which is primarily medical professional liability insurance, can range from 10% to 15% of the aggregate reserves in width.

Our appointed statutory independent actuarial firm also performed actuarial studies of the loss and LAE reserves for our insurance companies as of December 31, 2002, which opinions have been filed with the statutory annual statements of our insurance companies.

The following table sets forth (in thousands) the development of our loss and LAE reserves, net of reinsurance recovered or recoverable, for the 10-year period ended December 31, 2001 ⁽¹⁾:

(1)     Data presented from 1992 to 1997 reflects only First Professionals’ liability for losses and LAE. The 1998 year reflects losses and LAE data for First Professionals and APAC. The data presented from 1999 to 2002 reflects all of FPIC’s insurance subsidiaries.

This table demonstrates how our total loss and LAE reserves as of the end of each of the last ten calendar years compares with paid losses and re-estimates of those reserves after the end of each of these years. A positive difference at the base of each column means that the reserves carried as of the end of that particular calendar year (including reserves on claims still open, if any) have developed downward. When reserves develop downward, this means that we now believe we will have to pay less for these claims than we had previously set aside in reserves. A negative difference means that the reserves have been increased since the end of the calendar year. This means that we now believe we will have to pay more for these claims than we previously set aside in reserves. For example, the table indicates that the aggregate reserves carried at the end of calendar years 1992 through 1998 have been higher than subsequent payments and re-estimates. In contrast, the reserves at the end of calendar years 1999, 2000 and 2001 have been increased by $6.6 million, $8.0 million and $2.4 million, respectively.

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The following table rolls forward (in thousands) FPIC’s aggregate liability for losses and LAE reserves, showing the changes for the period beginning January 1, 2000 and ending December 31, 2002.

In the year 2000, most of the prior year’s reserve increase occurred on claims reported to us in 1997 and 1998. We made this increase primarily because, upon re-estimation, we determined that severity (the average cost of a claim) had increased more than we expected. We also increased reserves on other lines of business at First Professionals in 2000, including its now discontinued accident and health line and its assumed reinsurance. The upward development on prior years’ reserves in 2001 includes some increase in the initial estimate for 2000 MPL losses and LAE. In addition, and while most claims and incidents reported are closed without a loss payment, we also raised our estimates relative to the ratio of claims closed with a loss payment to all claims and incidents closed in 2000 and 2001.

For additional information, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Reciprocal Management Segment

Principal Business. AFP is the administrator and attorney-in-fact for PRI, the second largest MPL insurer of physicians in the state of New York. AFP has an exclusive ten-year management agreement with PRI. The current term of the management agreement runs through December 31, 2008. AFP provides all of the marketing, underwriting, administrative and investment functions for PRI. AFP’s compensation under the agreement is equal to 13% of PRI’s direct premiums written with an adjustment for expected returned premiums. As such, our revenues and results of operations are financially sensitive to the revenues and financial condition of PRI. PRI, as an MPL insurer, is subject to many of the same types of risks as those of our insurance subsidiaries and MPL companies generally. Growth at PRI is subject to surplus constraints; however, as a reciprocal, PRI is able to operate at higher leverage ratios than non-reciprocals such as our insurance subsidiaries. Further, as allowed under New York insurance laws, PRI has requested and received permission from the New York State Insurance Department to follow the permitted practice of discounting its loss and LAE reserves. PRI’s rates, including rates charged for policies in excess of $1.3 million, which have been reinsured to First Professionals, are mandated by the New York State Insurance Department (“DOI”). Prior to 2002, AFP’s compensation also included an additional incentive provision equal to plus or minus 10% of PRI’s statutory net income or loss. AFP is also reimbursed by PRI for certain expenses paid on PRI’s behalf. The expenses reimbursed by PRI are principally salaries and related payroll expenses, and overhead costs associated with claims, legal and risk management course personnel employed by AFP who work on PRI business. During 2002, the agreement was amended by AFP and PRI to remove the sharing by AFP of 10% of PRI’s statutory net income or loss, effective January 1, 2002.

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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 development of and related adjustments, if any, to loss and LAE reserves for those years. AFP has earned and collected profit sharing amounts under the original agreement totaling $3.6 million for the three years ended December 31, 2001. In addition, under the amendment, AFP will be reimbursed for 50% of the costs of the risk management department it maintains for PRI insureds, for which it is not already reimbursed. The management agreement and amendments were reviewed and approved by the New York DOI.

In addition, reinsurance brokerage and placement services are provided by AFP’s subsidiary, FPIC Intermediaries. FPIC Intermediaries also provides these services for our insurance companies. Certain brokerage and administration services for professional liability insurance programs are provided to PRI through a third entity, FPIC’s 70% owned subsidiary, PMA. PMA is licensed as an insurance broker in New York and the Commonwealth of Pennsylvania. As a program manager, PMA is responsible for the underwriting, claims administration, risk management, marketing and accounting for the programs that it administers.

Competition.     AFP has no direct competition for the services it provides to PRI. PRI, however, is subject to competition. The MPL insurance market in New York is tightly regulated relative to other states. Two carriers make up over 80% of the market: Medical Liability Mutual Insurance Company (“MLMIC”), with 55% of the MPL market; and PRI with a 25% market share. While MLMIC has a B++ rating by A.M. Best and PRI has no rating, we believe, as exhibited by historical experience, that PRI’s name recognition, service and reputation contribute to its ability to maintain its market share.

Marketing.     AFP markets PRI policies in New York to physicians, podiatrists, chiropractors, dentists and healthcare facilities through AFP’s in-house marketing representatives and through independent brokers. As of December 31, 2002, PRI wrote 59% of its business directly and 41% of its business through brokers. AFP also offers certain other insurance coverage underwritten by other carriers to PRI’s insureds on a non-commission basis. AFP markets PRI’s healthcare facilities professional liability insurance in New York primarily through outside brokers.

PRI has also received the exclusive endorsement agreement of one of New York’s largest preferred provider organization (“PPO”) networks. Through this endorsement agreement, the PPO completes two mailings per year to its credentialed members endorsing PRI. Since inception in 1998, PRI has underwritten approximately 2,000 insureds under this program.

The risk management department of AFP has developed multiple specialty related seminars for doctors. These programs are designed to educate the insureds on ways to improve their medical practice procedures and to assist them in implementing risk modification measures. AFP also conducts on-site surveys for doctors and healthcare facilities to review their practice procedures. All policyholders are provided with a complete detailed report on the findings and the recommended actions, if any, to be taken.

During 2000, AFP introduced dental liability coverage to PRI’s list of specialties. This line of business is primarily marketed through local brokers. AFP has also begun to introduce preferred banking products and services for PRI insureds as ancillary products.

Regulation.     Both AFP, as reciprocal manager and attorney-in-fact, and PRI are subject to regulatory oversight by the New York DOI. In addition, AFP is subject to examination by the New York DOI and is required to file an annual statement audited and certified by the same independent certified public accountant that audits PRI. Additional requirements are imposed upon the attorney-in-fact by statutorily mandated provisions, which must be included in the agreement between the reciprocal and its subscribers as well as the agreement between the reciprocal and the attorney-in-fact.

For additional information, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Third-Party Administration (“TPA”) Segment

Principal Business. EMI provides TPA services for group accident and health, workers’ compensation, general liability and property casualty insurance to self-insured employer groups. Our TPA services include claims administration, utilization review, loss control, COBRA administration and insurance placement. We do not assume insurance risks on these services; instead, each employer assumes this risk. We do act as a broker on behalf of some of our clients and place excess insurance coverage on their behalf with various insurers and reinsurers. We earn commission income from the placement of this excess coverage and ancillary products. We also provide administration services for emerging managed care organizations and an ambulance service organization.

During the fourth quarter 2001, we disposed of our Brokerage Services, Inc. division of EMI located in Albuquerque, New Mexico, and incurred a pre-tax charge of approximately $0.6 million. We sold the division’s assets and cancelled most of its service agreements with self-insured customers. We retained some contracts that are now serviced by our Jacksonville, Florida, division.

We provided TPA services to fifty-two clients at December 31, 2002, five of which accounted for approximately 37% or $4.7 million of the claims administration fees generated by the TPA segment. Approximately 13% or $1.6 million was derived from our single largest client. EMI also manages one workers’ compensation program for which APAC has the corresponding fronting program.

Regulation.     The Florida Department of Insurance and the United States Department of Labor regulate EMI. EMI is also regulated by other states in which it conducts business. EMI is required to furnish annual reports on operational activity to state supervisory agencies and such agencies may examine EMI from time to time.

As noted earlier, the insurance industry is under continuous review by Congress, state legislatures and state and federal regulatory agencies. From time to time, regulatory and legislative changes are proposed for the insurance industry, some of which could impact the TPA business if adopted. Most recently, the Health Insurance Portability and Accountability Act (“HIPAA”) privacy and non-discrimination rules and patient bill of rights laws were enacted. We are in compliance with current mandates as related to this legislation and in a position to remain compliant as implementation of the legislation is completed. We cannot predict whether other regulatory or legislative proposals being considered will ultimately be adopted and, if so, what impact they may have on our TPA business.

Competition. We believe our TPA is competitive with regard to prices and services, and our principal competitors in the group accident and health market are other similar TPA’s and insurance companies that offer fully insured products and administrative services to self-insurance programs. While we believe our TPA enjoys strong name recognition within our niche and a good service reputation with regard to our core administration services, we also recognize that access to insurance provider networks is a major factor and perhaps the greatest factor in some cases in obtaining and retaining clients.

Within the market for workers’ compensation and property insurance, we must contend with our clients’and potential clients’ perception that larger companies will be more competitive with regard to prices and have greater access to insurance markets. Our TPA also enjoys strong name recognition and loyalty among its current client base that has resulted in the maintenance of long-term client relationships.

Marketing. EMI primarily markets its TPA services in Florida. EMI may sell services directly or operate through agents and brokers. EMI’s marketing strategy includes superior service, competitive pricing and delivery of support services. EMI’s plan is to focus geographically with an emphasis in Florida and to continue to use agents and brokers to receive requests for proposals as well as utilize various services in which proposals are listed.

For additional information, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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Employees

At December 31, 2002, FPIC employed 612 people. None of our employees are covered by a collective bargaining agreement. We believe our relationships with our employees are very important and that the significant number of long-term employees we have and our low attrition are indicative of good employee relations.

Additional Information with Respect to FPIC’s Business

The amounts of operating revenue and identifiable assets attributable to the aforementioned business segments are included in Note 21 to FPIC’s consolidated financial statements contained in Item 8, Financial Statements and Supplementary Data. Additional information regarding FPIC’s investments is included in Note 5 to FPIC’s consolidated financial statements. Finally, information concerning FPIC’s revolving credit facility and term loan is included in Note 14 to FPIC’s consolidated financial statements.

Item 2. Properties

The physical properties used by FPIC and its subsidiaries are summarized below:

Item 3. Legal Proceedings

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 December 31, 2002, and believes its position 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, which serves to limit exposure to such claims. However, in one such case, arising in 1993, no such coverage is available and an estimate of possible loss currently cannot be made. In addition, multiple claims for extra contractual obligations in a single year could result in potential exposures materially in excess of insurance coverage or in increased costs of insurance coverage.

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 December 31, 2002, and in all cases, believes its position and defenses are meritorious. However, there can be no absolute assurance as to the outcome of such exposures.

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 2002.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Our common equity has been publicly traded on the NASDAQ National Market System since August 1, 1996 under the symbol, “FPIC”. Additional information about FPIC can be found on our website www.fpic.com. 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, markdown, or commission and may not necessarily represent actual transactions.

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We estimate that as of March 20, 2003 there were approximately 2,330 shareholders of record of FPIC common stock. In the past two years ended December 31, 2002, we have not paid any dividends and we do not anticipate paying any cash dividends in the foreseeable future. In addition, our credit facility and term loan agreement places restrictions on the amount of dividends we can pay our shareholders without the consent of our Lenders.

Equity Compensation Plan Information as of December 31, 2002

Item 6. Selected Financial Data

The selected financial data presented below for the fiscal years ended December 31 should be read in conjunction with FPIC’s consolidated financial statements and the notes thereto which are included elsewhere herein.

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For additional information with respect to FPIC’s business see Item 7, management’s discussion and analysis of financial condition and results of operations.

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 FPIC’s wholly owned and majority owned subsidiaries.

Safe Harbor Disclosure

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by or on behalf of FPIC may include forward-looking statements, which reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to:

The words “believe,” “anticipate,” “foresee,” “estimate,” “project,” “plan,” “expect,” “intend,” “hope,” “should,” “will,” “will likely result” or “will continue” and variations thereof or similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. FPIC undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to income taxes, loss and loss adjustment expense (“LAE”) reserves, contingencies and litigation.

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We generally base our estimates on historical experience or other appropriate assumptions that we believe are reasonable and relevant under the circumstances. The results of these estimation processes form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of the consolidated financial statements:

Goodwill and Intangible Assets. We have made acquisitions in the past that included significant amounts of goodwill and other intangible assets. Under GAAP in effect through December 31, 2001, we amortized these assets with charges to income over their estimated useful lives, and tested them periodically to determine if they were recoverable from operating earnings on the basis of an estimate of undiscounted cash flows over their useful lives.

Effective January 1, 2002, we adopted Financial Accounting Standard No. (“FAS”) 142, “Goodwill and Other Intangible Assets.” Under FAS 142, goodwill and indefinite-lived intangible assets are no longer amortized through charges to income, but do continue to be subject to annual (or under certain circumstances more frequent) impairment testing based on estimated fair values. Other intangible assets that meet certain criteria continue to be amortized over their useful lives and will also be subject to impairment testing based on estimated fair values. During the first quarter of 2002, we performed transitional impairment testing required under the new standard and took a charge in the form of a cumulative effect of accounting change for $29.6 million, net of tax effects, as of the beginning of the year.

Loss and Loss Adjustment Expenses. We estimate our liability for losses and LAE (“loss and LAE reserves”) using actuarial techniques and projections of the amounts of ultimate losses and LAE for each period. We also integrate other quantitative and qualitative analyses of conditions into our actuarial analysis that we expect to affect the future development of claims and related expenses. Our loss and LAE reserves comprise the largest liability and most significant estimate or compilation of estimates in our financial statements. Furthermore, our loss and LAE reserves are subject to significant inherent uncertainties and so there can be no assurance as to whether the actual results will be higher or lower than these estimates. Any adjustments or changes for such differences will almost certainly be material, especially to our operating results for a period. As our loss and LAE reserves are re-estimated, changes to those estimates and our carried reserves, if any, are recognized as a charge or credit to income, as the case may be, in the financial statements for the most recent period presented.

With regard to our core medical professional liability (“MPL”) business, which is written primarily on the claims-made policy form, the estimated liability for losses and LAE is basically comprised of our reserves on individual reported losses (“case reserves”), plus provisions for case reserve development and incurred but not reported (“IBNR”) reserves to arrive at our best estimate of what our losses and LAE will be once all cases are settled. These provisions are negative, in aggregate, or a net reduction from the sum total of our individual case reserve estimates for most years. This is because our case loss reserves have historically developed downward, in aggregate, from the time they become fully established to the time they are settled and we expect this trend to continue. Our core claims-made policies do not have IBNR losses, as do traditional occurrence based property and casualty insurance policies. We do estimate and set aside IBNR for LAE, tail coverage and covered extended reporting endorsements issued in the event of death, disability or retirement of claims-made insureds. We also have IBNR loss reserves on some of the direct MPL business we wrote in recent years and on our assumed reinsurance where the coverage is occurrence based.

For the purposes of setting aside reserves on risks insured during the most recent year, including interim periods, for which very little experience is present, forecasted loss ratios were applied to earned premiums during the interim periods. The forecasted loss ratios were judgmentally determined taking into account the results of the most recent actuarial studies performed, current pricing and underwriting, expected loss and LAE trends and other pertinent considerations. In addition, we monitored and analyzed key loss and LAE indicators and trends throughout the year. These included paid losses, newly reported claims and incidents, closed claim activity and other metrics. These indicators were taken into account in assessing the reasonableness of our loss reserve estimates throughout the year and the forecasted loss and LAE ratios applied during each interim period.

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Reinsurance.     Reinsurance recoverables are the balances due for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force. We estimate the amounts recoverable from reinsurers in a manner consistent with our estimates for the underlying claim liabilities that we reinsured. Reinsurance does not relieve us from our primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to us. We evaluate the financial condition of our reinsurers and monitor concentrations of credit risk with respect to the individual reinsurers that participate in our ceded programs to minimize our exposure to significant losses from reinsurer insolvencies. We hold collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not designated as authorized reinsurers by the domiciliary Departments of Insurance.

Income Taxes. We account for income taxes in accordance with FAS 109, “Accounting for Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary 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. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all or some portion of the benefits related to the deferred tax assets will not be realized. Valuation allowances are based on estimates of taxable income and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods, we may need to establish a valuation allowance, which would impact our financial position and results of operations. No such valuation allowance has been established to date, as we believe it is more likely than not that our deferred tax assets will be fully realized.

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.

Revenue Recognition. Premium income, which is our main source of revenue, is generally recognized pro-rata over the respective period of each policy. Premium receivables are recorded net of an estimated allowance for uncollectible amounts. Some of our assumed reinsurance agreements with Physicians’ Recipricol Insurers (“PRI”) contain adjustable premiums based upon loss experience and our financial statements include estimated adjustments accrued through the end of the reporting period corresponding with our loss experience under these agreements for the period.

Management fees of the reciprocal management segment, determined as a percentage of PRI’s premiums, are recognized as billed and earned under the contract, which generally corresponds with the reported premiums written of PRI, net of an estimate for premium refunds, for the calendar year. Such management fees are estimated, billed and earned for quarterly reporting purposes based upon semi-annual estimates of the reported premiums written of PRI rather than actual written premiums for a quarter, which may vary significantly from quarter to quarter. This convention is used so that management fees are recognized more ratably over the period in relation to the services provided by the reciprocal management segment to PRI.

General

FPIC Insurance Group, Inc. (“FPIC”) was formed in 1996 through a reorganization (the “Reorganization”) in which it became the parent company of Florida Physicians Insurance Company, Inc. (“Florida Physicians”) and McCreary Corporation (“McCreary”), a third party administrator. Under the Reorganization, Florida Physicians shareholders became the shareholders of FPIC and received five shares of FPIC common stock for each share of Florida Physicians common stock. In May 2001, we changed the name of Florida Physicians to First Professionals Insurance Company, Inc. (“First Professionals”). In January 2002, McCreary was merged into its subsidiary, Employers Mutual, Inc. (“EMI”), with EMI continuing as the surviving entity.

We have three main operating segments: insurance, reciprocal management and third party administration (“TPA”). FPIC’s primary sources of revenue are management fees and dividends from its subsidiaries. The main sources of revenue for these amounts are premiums earned and investment income (insurance segment) and claims administration and management fees and commission income (reciprocal management and TPA segments).

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Our insurance segment specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. On October 3, 2002, Interlex entered into an agreement with an unrelated insurance organization to sell the renewal rights to all of its legal professional liability policies. The reciprocal management segment contains our subsidiary Administrators For The Professions (“AFP”), which serves as the exclusive manager and attorney-in-fact for PRI, an insurance reciprocal in New York. We do not own PRI and so its financial statements are not consolidated or included in ours. Instead, PRI is similar to a mutual insurer and the risks and rewards of ownership basically vest with the policyholders of PRI. The reciprocal management segment also provides brokerage, administration and intermediary services for insurance and reinsurance programs to PRI and FPIC. Our TPA segment markets and administers self-insured plans for both large and small employers, including group accident and health, workers’compensation and general liability and property insurance. Our financial position and results of operations are subject to fluctuations due to a variety of factors and our historical results of operations are not necessarily indicative of future earnings.

Results of Operations

Overview: Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December 31, 2001

For the year ended December 31, 2002, we reported a net loss of ($14.7) million, or ($1.56) per diluted share, compared to net income of $2.9 million, or $0.31 per diluted share, for the year ended December 31, 2001. Our net loss for 2002 includes a $29.6 million after-tax charge for the cumulative effect of accounting change related to the adoption of FAS 142 on goodwill and other intangible assets ($48.4 million pre-tax). The transitional impairment charges, resulting from the adoption of FAS 142, were associated entirely with our non-insurance segments. Our income before the cumulative effect of accounting change was $14.9 million, or $1.58 per diluted share, for the year ended December 31, 2002.

Our total revenues for the year ended December 31, 2002 increased 12% to $220.9 million from $197.6 million for the year ended December 31, 2001. The increase in revenues is primarily the result of price improvements on our core MPL business and growth in the number of policyholders. Net premiums earned on our MPL business increased 23% to $148.6 million for the year ended December 31, 2002 from $120.5 million for the year ended December 31, 2001. Revenues earned by our reciprocal management segment increased $2.4 million primarily as the result of an increase in claims administration and management fees earned. In addition, brokerage commissions earned by FPIC Intermediaries, Inc. (“Intermediaries”) also increased when compared with the prior year.

Our total expenses for the year ended December 31, 2002 increased less than 1% to $197.2 million from $196.5 million for the year ended December 31, 2001. Net losses and LAE incurred for the year ended December 31, 2002 increased $11.3 million or 9% when compared with the year ended December 31, 2001. Net losses and LAE incurred on our MPL business increased 17% to $137.7 million for the year ended December 31, 2002 from $117.4 million for the year ended December 31, 2001. Net losses and LAE incurred in 2002 were also reduced by losses and LAE incurred of $39.0 million, which was ceded under the Hannover Re reinsurance agreement. The increase in net losses and LAE incurred for the year ended December 31, 2002, reflects the growth in our business, taking into consideration expected loss trends. The increases in total expenses were offset primarily by ceding commissions related to the Hannover Re finite reinsurance agreement and our adoption of FAS 142. The adoption of FAS 142 eliminated amortization expense of approximately $3.5 million for the year ended December 31, 2002.

One of the most significant financial developments for us in 2002 was our new finite reinsurance agreement with Hannover Re. It is supplemental to our other reinsurance programs and represents a very large additional reinsurance cession for us. The following table summarizes the effects of the Hannover Re agreement on our condensed consolidated income statement and balance sheet accounts. These pro-forma condensed consolidated financial statements are non-GAAP presentations and are not intended to serve as a substitute for our audited consolidated financial statements presented elsewhere. Instead, this presentation is intended to help discern the impact of the Hannover Re agreement in the context of the overall trends in our reported operating results and financial position for 2002 discussed elsewhere.

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FPIC INSURANCE GROUP, INC.
Condensed Pro-Forma (“Non-GAAP”) Consolidated Statements of Financial Position and (Loss) Income
As of and for the years ended December 31, 2002 and 2001
(in thousands, except common share data)

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Overview: Twelve Months Ended December 31, 2001 Compared to Twelve Months Ended December 31, 2000

Net income for the year ended December 31, 2001, totaled $2.9 million, or $0.31 per diluted share, compared with net income of $0.6 million, or $0.06 per diluted share, for the year ended December 31, 2000. The 2001 results include the after-tax effects of $5.4 million for an adjustment made to increase reserves on prior years’ business and $0.4 million in restructuring charges associated with our TPA operations. Improved pricing and growth in policyholders during 2001 generated significant top-line growth.

Total revenues for the year ended December 31, 2001 increased 9%, to $197.6 million, from $182.1 million for the year ended December 31, 2000. Annual revenue growth was driven primarily by growth in earned premiums, which contributed $10.6 million to such growth. Significant improvements in pricing and the addition of MPL policyholders, primarily in Florida and Missouri, were the primary source of premium growth. Commission income and claims administration and management fees earned by our non-insurance subsidiaries in New York and Florida also grew, contributing $7.2 million to the growth in total revenues. The growth in total revenues during 2001 was offset by a $1.4 million decline in investment income as a result of lower market yields.

Total expenses for the year ended December 31, 2001 increased 6%, to $196.5 million, from $185.1 million for the year ended December 31, 2000. Net losses and LAE incurred for the year ended December 31, 2001 increased $5.6 million or 5%, over the prior year. Excluding the prior year portions of pre-tax reserve charges in 2001 and 2000 of $8.6 million and $6.5 million, respectively, net losses and LAE incurred increased $3.5 million, or 3% during the year 2001. The increase reflects growth and the continuation of our policy to maintain our reserves at a conservative level. Other underwriting expenses also contributed to the increase in total expenses, primarily as a result of enhancements made to our financial and reporting systems and an increase in operating expenses related to growth in business. Offsetting the increases in expenses was a reduction in the allowance for bad debts of $1.0 million.

Insurance Segment
Our insurance segment is made up of our four insurance subsidiaries, First Professionals, Anesthesiologists Professional Assurance Company (“APAC”) and The Tenere Group, Inc. (“Tenere”) companies, Intermed Insurance Company and Interlex Insurance Company. FPIC operations are also included in the insurance segment due to its size and prominence and the substantial attention the holding company devotes to the segment.

Effective October 3, 2002, we sold the renewal rights on Interlex’s legal professional liability insurance business to a subsidiary of Professionals Direct, Inc., a non-affiliate, for $0.4 million. The sale of Interlex’s renewal rights allows us to re-dedicate Interlex’s capital to our core MPL business.

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Financial and selected other data of our insurance segment for the years ended December 31, 2002, 2001 and 2000 is summarized in the table below. Dollar amounts are in thousands.