<PAGE> 1
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended March 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transaction period from _________to _______.
Commission file number 1-11983
FPIC Insurance Group, Inc.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Florida 59-3359111
- ---------------------------------- -----------
(State or other jurisdiction (IRS Employer
of incorporation of organization) Identification No.)
1000 Riverside Avenue, Suite 800, Jacksonville, FL 32204
- ------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(904) 354-5910
-------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ------
As of April 30, 1997 there were 9,012,418 shares of the registrant's common
stock outstanding.
<PAGE> 2
Table of Contents
<TABLE>
<S> <C>
Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
of FPIC Insurance Group, Inc. and Subsidiaries:
Consolidated Balance Sheets......................................... 3
Consolidated Statements of Income................................... 4
Consolidated Statements of Cash Flows............................... 5
Notes to the Consolidated Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 9
Part II - Other Information
Item 1. Legal Proceedings................................................. 12
Item 2. Changes in Securities............................................. 12
Item 3. Defaults Upon Senior Securities................................... 12
Item 4. Submission of Matters to a Vote of Security Holders............... 12
Item 5. Other Information................................................. 12
Item 6. Exhibits and Reports on Form 8-K.................................. 12
Signatures........................................................................... 12
</TABLE>
<PAGE> 3
FPIC Insurance Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
3/31/97 12/31/96
============== ==============
(unaudited)
<S> <C> <C>
ASSETS
Bonds and U.S. Government securities:
Available-for-sale, at fair value $240,708,605 $234,650,172
Common stocks, at fair value 185,000 185,000
Real estate investments 3,799,101 3,661,726
-------------- --------------
TOTAL INVESTMENTS 244,692,706 238,496,898
-------------- --------------
Cash and cash equivalents 4,002,046 5,463,096
Premiums receivable, net 18,794,497 12,551,992
Accrued investment income 4,614,754 3,641,391
Reinsurance recoverable on paid losses 218,282 73,873
Due from reinsurers on unpaid losses and advance premiums 11,357,015 12,020,239
Deposits with reinsurers 17,149,838 16,419,179
Property and equipment, net of accumulated depreciation 1,576,465 1,617,750
Deferred policy acquisition costs 1,698,576 1,212,035
Deferred income taxes 9,267,072 8,913,225
Finance charge receivable 376,181 230,443
Prepaid expenses 415,842 409,718
Goodwill 2,912,895 1,989,113
Other assets 1,001,447 513,566
-------------- --------------
TOTAL ASSETS $318,077,616 $303,552,518
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense reserves $179,703,000 $172,738,000
Unearned premiums 34,238,656 23,458,641
Paid in advance and unprocessed 1,103,708 5,250,755
FIGA accrual 808,933 1,345,244
Accrued expenses and other liabilities 3,622,735 4,348,488
-------------- --------------
TOTAL LIABILITIES 219,477,032 207,141,128
-------------- --------------
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 50,000,000 shares authorized;
no shares issued and outstanding - -
Common stock, $.10 par value: 25,000,000 shares authorized;
9,012,418 and 9,021,670 shares issued and outstanding
in 1997 and 1996, respectively 901,241 902,167
Additional paid-in capital 22,293,345 22,444,711
Net unrealized gain (loss) on investments (1,550,902) 80,169
Retained earnings 76,956,900 73,166,334
-------------- --------------
98,600,584 96,593,381
Less Treasury Stock (19,569 common shares) 0 (181,991)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 98,600,584 96,411,390
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $318,077,616 $303,552,518
============== ==============
</TABLE>
See accompanying notes.
3
<PAGE> 4
FPIC Insurance Group, Inc.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
====================================
1997 1996
============= =============
<S> <C> <C>
REVENUES
Net premiums earned $15,490,017 $12,922,329
Net investment income 3,823,088 3,148,582
Net realized investment losses (12,927) (11,261)
Claims administration fees 1,823,981 1,001,781
Commission income 202,834 147,651
Other income 694,754 556,168
------------- -------------
TOTAL REVENUES 22,021,747 17,765,250
------------- -------------
EXPENSES
Net losses and loss adjustment expenses 13,161,836 12,213,663
Other operating expenses 1,674,723 1,516,683
Claims administration expenses 1,868,822 999,584
------------- -------------
TOTAL EXPENSES 16,705,381 14,729,930
------------- -------------
Income before income taxes 5,316,366 3,035,320
Income taxes 1,525,800 960,032
------------- -------------
NET INCOME $3,790,566 $2,075,288
============= =============
NET INCOME PER COMMON SHARE $0.41 $0.25
============= =============
WEIGHTED AVERAGE COMMON AND COMMON
SHARE EQUIVALENTS OUTSTANDING 9,313,028 8,139,640
============= =============
</TABLE>
See accompanying notes.
4
<PAGE> 5
FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
===================================
1997 1996
============ ============
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $3,790,566 $2,075,288
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 553,908 478,658
Realized losses on investments 12,927 11,261
Deferred income taxes 486,401 471,024
Changes in assets and liabilities:
Premiums receivable (6,242,505) (3,081,072)
Accrued investment income (973,363) (550,938)
Reinsurance recoverable on paid losses (144,409) (159,575)
Due from reinsurers on unpaid losses
and advance premiums 663,224 528,607
Deposits with reinsurers (730,659) (714,834)
Deferred policy acquisition costs (486,541) (437,030)
Federal income tax receivable 0 47,299
Other assets (487,881) 70,247
Prepaid expenses and finance charge receivable 164,654 (60,287)
Loss and loss adjustment expense reserves 6,965,000 4,316,000
Unearned premiums 10,780,015 7,741,003
Paid in advance and unprocessed (4,147,047) (3,298,382)
FIGA accrual (536,311) (191,266)
Accrued expenses and other liabilities (725,753) 268,998
------------ ------------
Net cash provided by operating activities 8,942,226 7,515,001
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term investments 0 500,000
Proceeds from sale or maturity of securities available-for-sale 27,597,845 19,688,097
Purchase of securities available-for-sale (36,505,692) (24,197,491)
Purchase of goodwill (960,616) 0
Purchase of real estate investments (150,140) 0
Purchase of common stock 0 (15,000)
Purchase of subsidiary's net other assets (289,384) 0
Purchase of property and equipment, net (124,988) 0
------------ ------------
Net cash used in investing activities (10,432,975) (4,024,394)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock 29,699 0
Dividends paid on common stock 0 (813,964)
------------ ------------
Net cash provided by (used in) financing activities 29,699 (813,964)
------------ ------------
Net (decrease) increase in cash (1,461,050) 2,676,643
Cash and cash equivalents, beginning of period 5,463,096 494,095
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,002,046 $3,170,738
============ ============
Supplemental disclosure of cash flow information:
Federal income taxes paid $975,356 $0
Interest paid $0 $0
</TABLE>
See accompanying notes.
5
<PAGE> 6
FPIC INSURANCE GROUP, INC.
Notes to the Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
FPIC Insurance Group, Inc. (the Company) is a Florida corporation formed by
Florida Physicians Insurance Company, Inc. (FPIC) to serve as a holding
corporation for FPIC and other subsidiaries. On June 11, 1996, FPIC and the
Company consummated a Reorganization which generally provided that each share
of common stock of FPIC, par value $1 per share, would be exchanged for five
shares of common stock of the Company, par value $.10 per share.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries, FPIC and McCreary Corporation,
including its subsidiary, Employers Mutual, Inc., which was acquired on January
17, 1997, together referred to as McCreary, and have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments, consisting of
normal recurring accruals, considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. These consolidated financial statements and
notes should be read in conjunction with the financial statements and notes
included in the audited consolidated financial statements of the Company for
the year ended December 31, 1996, which were filed with the Securities and
Exchange Commission on Form 10-K on March 26, 1997.
2. LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY
The liability for loss and loss adjustment expenses represents management's
best estimate of the ultimate cost of all losses incurred but unpaid. The
estimated liability is continually reviewed and any adjustments which become
necessary are included in current income. Incurred losses and loss adjustment
expenses for the three-month periods ended March 31, 1997 and 1996 were
principally determined by considering prior loss experience, loss trends, the
Company's loss retention levels, and changes in frequency and severity of
claims.
6
<PAGE> 7
3. INCOME TAXES
Income taxes were accounted for under the asset and liability method. Income
tax expense differs from the normal relationship to financial statement income
principally because of tax exempt interest income.
4. INVESTMENTS
Proceeds from sales of investments available-for-sale were $27,597,845 and
$19,688,097 during the three months ended March 31, 1997 and 1996,
respectively.
Gross realized gains and (losses) from sales of debt securities based on
specific identification, were $20,268 and ($33,195); and $17,961 and ($29,222)
for the three months ended March 31, 1997 and 1996, respectively.
The amortized cost of investments in securities available-for-sale was
$243,058,456 and $234,528,705 as of March 31, 1997 and December 31, 1996,
respectively.
5. BUSINESS ACQUISITIONS
On July 1, 1995, McCreary Corporation acquired the assets of McCreary
Enterprises, Inc., a Florida third party administrator, for a cost of
$2,000,000 plus certain additional payments based upon earnings. The
acquisition agreement specified additional payments, based upon earnings, to be
made to the seller from 1996 through 2000. Since projected earnings were
attained for the twelve-month period ended June 30, 1996, the Company paid an
additional $1,000,000 in 1996.
On January 17, 1997, McCreary Corporation acquired all of the outstanding
common stock of Employers Mutual, Inc. (EMI), a Florida third party
administrator, for a cost of $1,250,000 plus certain additional payments based
upon earnings. The earnings of EMI are not material to the consolidated
results of the Company. The acquisition agreement specified additional
payments, based upon earnings, to be made to the selling shareholders from 1997
through 2000.
The remaining payments for these two acquisitions are as follows:
<TABLE>
<CAPTION>
McCreary EMI
-------- ---
<S> <C> <C>
1997 900,000 250,000
1998 800,000 250,000
1999 700,000 250,000
2000 600,000 250,000
</TABLE>
These payments are subject to adjustment in accordance with the agreements
based on attainment of projected annual earnings from the date of acquisition
through 2000. No individual annual payment will exceed the annual earnings,
and may be reduced if the projected earnings are not
7
<PAGE> 8
attained for that year. The agreements allow for an additional final payment
based on the aggregate earnings compared to the aggregate projected earnings
during the earnout period. The effect of these subsequent payments is to
increase the original purchase price and the recorded goodwill.
.
6. REINSURANCE
The Company presently has excess of loss reinsurance contracts that serve to
limit the Company's maximum loss to $500,000 per occurrence. To the extent
that any reinsurer is unable to meet its obligations, the Company would be
liable for such defaulted amounts not covered by letters of credit, which the
Company obtains from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance.
7. COMMITMENTS AND CONTINGENCIES
The Company is involved in numerous legal actions arising primarily from claims
made insurance policies. The legal actions arising from claims made insurance
policies have been considered by the Company in establishing its reserves.
While the outcomes of all legal actions are not presently determinable, the
Company's management is of the opinion that the settlement of these actions
will not have a material adverse effect on the Company's financial position or
results of operations.
8
<PAGE> 9
FPIC INSURANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
For purposes of this management discussion and analysis, "Company" refers to
FPIC Insurance Group, Inc., a holding company, and its consolidated
subsidiaries, "FPIC" refers only to Florida Physicians Insurance Company, Inc.,
and "McCreary" refers to McCreary Corporation and its wholly-owned subsidiary,
Employers Mutual, Inc. (EMI). EMI was acquired on January 17, 1997. All
amounts in this management discussion and analysis have been rounded to the
nearest $100,000.
The Company's primary sources of revenue are dividends from its subsidiaries.
The primary sources of revenues for these dividends are premium earned and
investment income derived from the insurance operations of FPIC, and fee and
commission income from McCreary. The Company concentrates on liability
insurance products for the healthcare community, with medical professional
liability (MPL) insurance for physicians and dentists as its primary product.
The Company, through FPIC, writes MPL insurance on a claims-made basis, which
provides protection to the insured against only those claims that arise out of
incidents occurring and of which notice to the insurer is given while coverage
is effective.
On January 17, 1997, McCreary acquired all of the outstanding stock of EMI, a
third party administrator of self-insured managed care health plans in Florida
and Texas, for $1,250,000, with additional payments up to $1,000,000 if
specified earnings targets are met over the next four years. EMI had 1996
revenues in excess of $3 million and its primary market consists of hospitals
and provider sponsored delivery organizations.
On April 4, 1997, FPIC entered into an agreement to purchase a 20 percent
interest in APS Insurance Services, Inc. (APS) for $2 million, with the option
to purchase an additional 35 percent within two years. The primary source of
revenue for APS is fee income from its subsidiary that manages the business of
a medical malpractice company domiciled in Texas. This interest will allow
FPIC, recently licensed in Texas, an opportunity to expand its market potential
in that state.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpectedly high frequency or
severity of losses in any period would have a material adverse effect on the
Company. Additionally, reevaluations of the Company's loss and loss adjustment
expenses (LAE) reserves could result in an increase or decrease in reserves and
a corresponding adjustment to earnings. The Company's historical results of
operations are not necessarily indicative of future results.
9
<PAGE> 10
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1996.
Premiums
Direct premium written increased $5.1 million, or 22%, from $22.6 million for
the three months ended March 31, 1996 to $27.7 million for the three months
ended March 31, 1997. Net premium earned increased $2.6 million, or 20%, from
$12.9 million for the three months ended March 31, 1996 to $15.5 million for
the three months ended March 31, 1997. These increases were primarily due to
an increase in the number of insureds and a rate increase of 2.4% on physician
MPL premiums effective January 1, 1997.
Net Investment Income
Net investment income increased $0.7 million, or 23%, from $3.1 million for the
three months ended March 31, 1996 to $3.8 million for the three months ended
March 31, 1997. The increase is primarily due to an increase in invested
assets.
Claims Administration Fees and Commission Income
This income is generated by McCreary and its subsidiary, EMI. Claims
administration fees are revenues generated by McCreary's core business, which
is the administration of self-insured programs for large employers, primarily
in the health and workers compensation area. Neither McCreary nor the Company
assumes any risk on these products. Instead the risk is assumed by each
employer and any excess coverage desired is placed by McCreary with various
insurers and reinsurers. All the commission income was generated from the
placement of this excess coverage by McCreary.
Claims administration fees and commission income increased $0.9 million, or
82%, from $1.1 million for the three months ended March 31, 1996 to $2.0
million for the three months ended March 31, 1997. This increase is
attributable to the addition of new contracts and the inclusion of the EMI
revenue of $0.8 million in the first quarter of 1997.
Net Losses and Loss Adjustment Expenses (LAE)
Net losses and LAE increased $1.0 million, or 8%, from $12.2 million for the
three months ended March 31, 1996 to $13.2 million for the three months ended
March 31, 1997, reflecting primarily an increase in insured exposures. The
loss and LAE ratios were 94.5% for the three months ended March 31, 1996 and
85.0% for the three months ended March 31, 1997. Prior to becoming a public
company on August 1, 1996, the Company allocated its expected reserve
redundancy for the year primarily to the third and fourth quarters. The
Company currently estimates its anticipated reserve redundancy for the year
based on a continual analysis of
10
<PAGE> 11
frequency and severity trends, and allocates it evenly over the quarters. Any
negative development, however, would be recorded in the quarter when a change
in trends became known. The lower loss ratio for the three months ended March
31, 1997 reflects the change in allocation of the expected reserve redundancy.
Other Operating Expenses
Other operating expenses increased $0.2 million, or 13%, from $1.5 million for
the three months ended March 31, 1996, to $1.7 million for the three months
ended March 31, 1997. This increase was primarily attributable to an increase
in agents commission expense and general and administrative expenses.
Claims Administration Expenses
These expenses relate entirely to the operation of McCreary, and increased $0.9
million, or 90%, from $1.0 million for the three months ended March 31, 1996 to
$1.9 million for the three months ended March 31, 1997. This increase was
primarily attributable to the addition of the EMI operations ($0.7 million)
and an increase in the core operations of McCreary.
Income Taxes
Income tax expense, as a percent of income before taxes, decreased from 31% for
the three months ended March 31, 1996 to 29% for the three months ended March
31, 1997. This decrease in the tax rate reflects the Company's increased
investment in tax-free municipal debt securities.
Liquidity and Capital Resources
The payment of losses, LAE, and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to
pay these items has been provided by operating activities. Cash provided from
these activities was $8.9 million during the three months ended March 31, 1997
and was sufficient to meet the Company's needs. Management believes these
sources will be sufficient to meet the Company's cash needs for operating
purposes for at least the next twelve months. However, a number of factors
could cause increases in the dollar amount of losses and LAE paid and may,
therefore, adversely affect future reserve development and cash flow needs.
Management believes these factors include, among others, inflation, changes in
medical procedures, increasing influence of managed care and adverse
legislative changes. The Company did not borrow any funds in the three months
ended March 31, 1996 and 1997, and has no current plans to borrow funds during
1997.
Dividends payable by FPIC to the Company are subject to certain limitations
imposed by Florida law. In 1997, FPIC is permitted, within insurance
regulatory guidelines, to pay dividends to the Company of approximately $10.4
million without regulatory approval.
11
<PAGE> 12
Important Considerations Related to Forward Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements may be found under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General" and
"Liquidity and Capital Resources." These statements include or relate to,
among others: (i) the Company's plans to expand into Texas; and (ii) the
Company having sufficient liquidity and working capital. These statements are
based on current expectations that involve a number of risks and uncertainties
that are discussed in the above sections. In addition, these statements are
based on the assumption that the APS agreement will successfully close.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit (27) - Financial Data Schedule (for SEC use only).
b. No reports on Form 8-K have been filed during the quarter for
which this report is filed.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPIC Insurance Group, Inc.
/s/ Robert B. Finch
--------------------------------------
May 13, 1997 Robert B. Finch, Chief Financial Officer
and Treasurer (a duly authorized officer
and the principal financial officer of the
registrant)
12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's First Quarter 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 240,709
<EQUITIES> 185
<MORTGAGE> 0
<REAL-ESTATE> 3,799
<TOTAL-INVEST> 244,693
<CASH> 4,002
<RECOVER-REINSURE> 218
<DEFERRED-ACQUISITION> 1,699
<TOTAL-ASSETS> 318,078
<POLICY-LOSSES> 179,703
<UNEARNED-PREMIUMS> 34,239
<POLICY-OTHER> 1,104
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 901
<OTHER-SE> 97,670
<TOTAL-LIABILITY-AND-EQUITY> 318,078
15,490
<INVESTMENT-INCOME> 3,823
<INVESTMENT-GAINS> 13
<OTHER-INCOME> 2,722
<BENEFITS> 13,162
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 1,675
<INCOME-PRETAX> 5,316
<INCOME-TAX> 1,526
<INCOME-CONTINUING> 3,790
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,790
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<RESERVE-OPEN> 172,738
<PROVISION-CURRENT> 16,670
<PROVISION-PRIOR> (4,198)
<PAYMENTS-CURRENT> 3
<PAYMENTS-PRIOR> 5,504
<RESERVE-CLOSE> 179,703
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
