<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 June 30, 1998 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 July 17, 1998 there were 9,479,513 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......11
Part II - Other Information
Item 1. Legal Proceedings........................................17
Item 2. Changes in Securities....................................17
Item 3. Defaults Upon Senior Securities..........................17
Item 4. Submission of Matters to a Vote of Security Holders......17
Item 5. Other Information........................................17
Item 6. Exhibits and Reports on Form 8-K.........................17
Signatures.................................................................17
</TABLE>
<PAGE> 3
FPIC Insurance Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
6/30/98 12/31/97
========================= ========================
(unaudited)
<S> <C> <C>
Assets
Bonds and U.S. Government securities:
Available-for-sale, at fair value $283,586,274 $259,574,210
Preferred stock, at fair value 1,025,000 0
Common stocks, at fair value 2,658,802 2,540,735
Real estate investments 4,956,069 4,571,465
Other invested assets 4,000,000 2,000,000
------------------------- ------------------------
Total Investments 296,226,145 268,686,410
Cash and cash equivalents 4,907,826 7,679,822
Premiums receivable, net 28,852,342 17,924,658
Accrued investment income 4,282,052 3,740,979
Reinsurance recoverable on paid losses 2,258,995 866,149
Due from reinsurers on unpaid losses and advance premiums 14,501,937 14,115,000
Deposits with reinsurers 260,551 18,070,341
Property and equipment, net of accumulated depreciation 2,309,251 1,982,898
Deferred policy acquisition costs 1,807,124 1,411,420
Deferred income taxes 8,806,264 8,937,094
Finance charge receivable 450,675 281,217
Prepaid expenses 107,535 423,328
Intangible assets 6,977,706 7,173,841
Other assets 4,765,525 1,556,594
------------------------- ------------------------
Total Assets $376,513,928 $352,849,751
========================= ========================
Liabilities and Shareholders' Equity
Liabilities
Loss and loss adjustment expense reserves $194,197,000 $188,086,000
Unearned premiums 37,187,123 28,217,537
Paid in advance and unprocessed 2,406,913 4,782,835
Short term debt 4,000,000 2,000,000
Federal income tax payable 1,006,599 2,735,527
Accrued expenses and other liabilities 7,098,610 6,963,432
------------------------- ------------------------
Total Liabilities 245,896,245 232,785,331
------------------------- ------------------------
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;
9,215,697 and 9,179,581 shares issued and outstanding
in 1998 and 1997, respectively 921,569 917,958
Additional paid-in capital 26,119,068 25,789,144
Accumulated total other comprehensive income, net 4,022,432 3,634,299
Retained earnings 99,554,614 89,723,019
------------------------- ------------------------
Total Shareholders' Equity 130,617,683 120,064,420
------------------------- ------------------------
Total Liabilities and Shareholders' Equity $376,513,928 $352,849,751
========================= ========================
</TABLE>
See accompanying notes.
3
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FPIC Insurance Group, Inc.
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
============================================= ========================================
1998 1997 1998 1997
================== =================== =============== ================
<S> <C> <C> <C> <C>
Revenues
Net premiums earned $22,954,687 $16,093,632 $40,809,986 $31,583,649
Net investment income 4,372,425 3,891,617 8,712,179 8,033,398
Net realized investment gains (losses) (32,497) (41,314) (47,219) (54,241)
Claims administration fees 2,513,422 2,016,684 5,103,421 3,840,665
Commission income 242,839 185,794 468,943 388,628
Other income 408,995 482,739 899,241 858,800
--------------------- --------------------- ---------------- -----------------
Total revenues 30,459,871 22,629,152 55,946,551 44,650,899
--------------------- --------------------- ----------------- -----------------
Expenses
Net losses and loss adjustment expenses 18,164,209 13,541,389 32,682,159 26,703,225
Other underwriting expenses 2,677,750 1,465,364 4,494,938 3,140,087
Claims administration expenses 2,582,759 1,999,872 5,030,884 3,868,694
--------------------- ---------------------- ------------------- -----------------
Total expenses 23,424,718 17,006,625 42,207,981 33,712,006
--------------------- ---------------------- ------------------- -----------------
Income before income taxes 7,035,153 5,622,527 13,738,570 10,938,893
Income taxes 1,988,666 1,712,317 3,906,975 3,238,117
---------------------- ---------------------- ------------------- ------------------
Net income $5,046,487 $3,910,210 $9,831,595 $7,700,776
====================== ====================== =================== ==================
Basic earnings per common share $0.55 $0.43 $1.07 $0.85
====================== ====================== =================== ==================
Diluted earnings per common share $0.52 $0.42 $1.01 $0.83
====================== ====================== =================== ==================
Basic weighted average shares outstanding 9,211,851 9,021,001 9,205,918 9,013,717
============== ================= =============== =================
Diluted weighted average shares outstanding 9,719,184 9,337,521 9,713,251 9,330,237
============== ================= ================ ================
</TABLE>
See accompanying notes.
4
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FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30
======================================================
1998 1997
========================= ========================
<S> <C> <C>
Cash flows from operating activities
Net income $9,831,595 $7,700,776
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 956,822 1,145,816
Realized losses on investments 47,219 54,241
Net earnings from equity investment (74,612) 0
Deferred income taxes (69,840) 1,009,180
Changes in assets and liabilities:
Premiums receivable (6,498,062) (6,400,941)
Accrued investment income (541,073) (250,368)
Reinsurance recoverable on paid losses (1,392,846) 70,353
Due from reinsurers on unpaid losses
and advance premiums (386,937) 450,702
Deposits with reinsurers 17,809,790 (1,049,352)
Deferred policy acquisition costs (395,704) (849,651)
Other assets (7,638,553) (809,923)
Prepaid expenses and finance charge receivable 146,335 211,937
Loss and loss adjustment expense reserves 6,111,538 8,039,000
Unearned premiums 8,969,586 10,151,566
Paid in advance and unprocessed (2,375,922) (2,772,173)
FIGA accrual 0 (562,622)
Federal income tax payable (1,728,928) (1,297,994)
Accrued expenses and other liabilities 134,640 (68,866)
------------------------- ------------------------
Net cash provided by operating activities 22,905,048 14,771,681
------------------------- ------------------------
Cash flows from investing activities
Proceeds from sale or maturity of securities available-for-sale 26,173,165 44,437,348
Purchase of securities available-for-sale (50,326,165) (55,368,113)
Purchase of goodwill 0 (1,077,173)
Purchase of real estate investments (261,783) (580,411)
Purchase of other invested assets (2,000,000) 0
Purchase of preferred stock (1,000,000) 0
Purchase of subsidiary's net other assets 0 (289,384)
Purchase of property and equipment, net (595,796) (342,953)
------------------------- ------------------------
Net cash used in investing activities (28,010,579) (13,220,686)
------------------------- ------------------------
Cash flows from financing activities
Receipt of short term debt 2,000,000 0
Issuance of common stock, net 333,535 107,898
------------------------- ------------------------
Net cash provided by financing activities 2,333,535 107,898
------------------------- ------------------------
Net decrease in cash (2,771,996) 1,658,893
Cash and cash equivalents, beginning of period 7,679,822 5,463,096
------------------------- ------------------------
Cash and cash equivalents, end of period $4,907,826 $7,121,989
========================= ========================
Supplemental disclosure of cash flow information:
Federal income taxes paid $5,068,000 $2,216,000
Interest paid $71,374 $0
</TABLE>
See accompanying notes.
5
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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, FPIC Insurance Agency, and
McCreary Corporation and its subsidiaries, 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 six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. 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, 1997, which were filed with the Securities and Exchange Commission
on Form 10-K on March 26, 1998.
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 that become necessary are
included in current income. Incurred losses and loss adjustment expenses for the
six-month periods ended June 30, 1998 and 1997 were principally determined by
considering prior loss experience, loss trends, the Company's loss retention
levels, and changes in frequency and severity of claims.
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.
6
<PAGE> 7
4. Investments
Proceeds from sales of investments available-for-sale were $26,173,165 and
$44,437,348 during the six months ended June 30, 1998 and 1997, respectively.
Gross realized gains and (losses) from sales of debt securities based on
specific identification, were $81 and $(47,300); and $25,342 and $(79,583) for
the six months ended June 30, 1998 and 1997, respectively.
The amortized cost of investments in securities available-for-sale was
$281,158,016 and $256,523,717 as of June 30, 1998 and December 31, 1997,
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, 1997, the Company paid an additional $900,000
in 1997. In addition, projected earnings for the twelve month period ended June
30, 1998 were attained and an $800,000 payment will be made in 1998.
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
acquisition agreement specified additional payments, based upon earnings, to be
made to the selling shareholders from 1997 through 2000. Since the projected
earnings for EMI were attained for the twelve-month period ended December 31,
1997, the Company paid an additional $250,000 in 1998.
The remaining payments for these two acquisitions are as follows:
<TABLE>
<CAPTION>
McCreary EMI
-------- ---
<S> <C> <C>
1998 800,000 0
1999 700,000 250,000
2000 600,000 250,000
2001 0 250,000
</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 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.
On July 1, 1997, the Company purchased 20% of the common stock of APS Insurance
Services, Inc. (APS), a Texas insurance service corporation, for a cost of
$2,000,000. The purchase agreement provides an option to purchase an additional
35% of the common stock of APS after two years, allowing the Company 55%
ownership. This investment is accounted for under the equity method.
7
<PAGE> 8
On September 22, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. (Frontier) to combine their medical professional liability
businesses in Florida. Beginning December 1, 1997, and continuing for 12 months
thereafter, the Company's subsidiary, FPIC, began underwriting Frontier's
Florida book of business. The cost of the transaction was $3.2 million, paid in
Company common stock, with a cash adjustment based on actual results at the end
of one year. The excess of the purchase price over tangible assets is included
in intangible assets and will be amortized over the expected life of this book
of business, considering the Company's historical policy renewal rate. In
addition, the two companies will establish a jointly-owned claims entity in two
locations in Florida.
6. Subsequent Events
On July 1, 1998, the Company acquired Anesthesiologists' Professional Assurance
Company (APAC), a Florida-domiciled risk retention group with a $10 million book
of anesthesiologist medical professional liability business. The cost of the
transaction was $18 million, paid in a combination of cash, Company common
stock, and assumption of debt. In connection with this transaction, the Company
also acquired a 9.9% interest in American Professional Assurance Ltd., a
reinsurance company and an affiliate of APAC, for $5.5 million in cash and $3.5
million in non-compete agreements and other fees.
On July 1, 1998, the Company's subsidiary, EMI, acquired Sy. Med Development,
Inc. (Sy. Med), a software development and consulting company headquartered
in Nashville, Tennessee. The transaction was a stock purchase structured on
an earn-out over the next four years. The initial payment was $400,000, and
all future payments are contingent on future earnings.
7. 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.
8. 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
9. Borrowing Arrangements
The Company maintains a $30,000,000 revolving credit facility. The credit
facility agreement terminates on May 31, 1999. The Company is not required to
maintain compensating balances in connection with this credit facility. As of
June 30, 1998, $4,000,000 had been borrowed under this agreement.
10. Reconciliation of Basic and Diluted Earnings Per Share
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
Net income and Income from
continuing operations $5,046,487 $3,910,210 $9,831,595 $7,700,776
========== ========== ========== ==========
Basic weighted average shares
outstanding 9,211,851 9,021,001 9,205,918 9,013,717
Common stock equivalents 507,333 316,520 507,333 316,520
------- ------- ------- -------
Diluted weighted average
shares outstanding 9,719,184 9,337,521 9,713,251 9,330,237
========= ========= ========= =========
Basic earnings per share $0.55 $0.43 $1.07 $0.85
===== ===== ===== =====
Diluted earnings per share $0.52 $0.42 $1.01 $0.83
===== ===== ===== =====
</TABLE>
11. Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January 1,
1998. Comprehensive income is divided into net income and other comprehensive
income. The following represents other comprehensive income for the three and
six months ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
6/30/98 6/30/98 6/30/97 6/30/97
<S> <C> <C> <C> <C>
Unrealized gains on investments, net of tax:
Unrealized holding gains arising during period
(net of tax of $184,622 and $192,468 in 1998; and
$1,074,366 and $229,722
in 1997) $342,869 $ 357,441 $ 2,085,535 $445,932
Less: reclassification adjustment
for losses realized in net income
(net of tax of $11,374 and
$16,527 in 1998; and
$14,047 and $18,442 in 1997) 21,123 30,692 27,267 35,799
------ ------ ------ ------
Net unrealized gains (net of tax of
$195,996 and $208,995 in 1998;
and $1,088,413 and $248,164
in 1997) $363,992 $ 388,133 $2,112,802 $ 481,731
======== ============ ========== ==========
Other comprehensive income $363,992 $ 388,133 $2,112,802 $ 481,731
======== ============ ========== ==========
</TABLE>
The tax rate used in the presentation above was 35% in 1998 and 34% in 1997.
12. Reclassification of 1997 presentation
Certain amounts for 1997 have been reclassified to conform with the 1998
presentation.
9
<PAGE> 10
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 subsidiaries. All amounts
in this management discussion and analysis have been rounded to the nearest
$100,000.
The Company's primary source of revenue is dividends from its subsidiaries. The
primary sources of revenues for these dividends are premiums earned and
investment income derived from the insurance operations of FPIC, and fee and
commission income from McCreary and FPIC Insurance Agency. 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 Employers
Mutual, Inc. (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's primary market consists of hospitals and provider-sponsored delivery
organizations.
On July 1, 1997, the Company completed the purchase of a 20 percent interest in
APS Insurance Services, Inc. (APS) for $2 million, with the option to purchase
an additional 35 percent after two years. The primary source of revenue for APS
is fee income from its subsidiary that manages the business of a medical
professional liability company domiciled in Texas. This interest will allow FPIC
an opportunity to expand its market potential in Texas.
On December 1, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. (Frontier) to combine their medical professional liability
businesses in Florida. Beginning December 1, 1997, and continuing for 12 months
thereafter, the Company's subsidiary, FPIC, began underwriting Frontier's
Florida book of business. An initial purchase price of $3.2 million was set and
was paid in Company common stock, with a cash adjustment based on actual results
at the end of one year. In addition, the two companies will establish a
jointly-owned claims entity in two locations in Florida.
On July 1, 1998, the Company acquired Anesthesiologists' Professional Assurance
Company (APAC), a Florida-domiciled risk retention group with $10 million of
anesthesiologist MPL business. The cost of the transaction was $18 million, paid
in a combination of cash, Company common stock, and assumption of debt. In
connection with this transaction, the Company also acquired a 9.9% interest in
American Professional Assurance Ltd., a reinsurance company and an affiliate of
APAC, for $5.5 million in cash and $3.5 million in non-compete agreements and
other fees.
10
<PAGE> 11
On July 1, 1998, the Company's subsidiary, EMI, acquired Sy. Med Development,
Inc. (Sy. Med), a software development and consulting company headquartered in
Nashville, Tennessee. The initial payment was $400,000, and future payments
are on a four year earn-out basis, contingent on future earnings.
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, particularly in the Company's prior two policy
years, would have a material adverse effect on the Company. Additionally,
reevaluations of the Company's loss and loss adjustment expense (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.
Results of Operations - Three Months Ended June 30, 1998 Compared to Three
Months Ended June 30, 1997.
Premiums
Direct premiums written and assumed increased $7.9 million, or 44%, from $17.8
million for the three months ended June 30, 1997 to $25.7 million for the three
months ended June 30, 1998. Net premiums earned increased $6.9 million, or 43%,
from $16.1 million for the three months ended June 30, 1997 to $23.0 million for
the three months ended June 30, 1998. These increases were primarily due to an
increase in the number of insureds, a rate increase of 7.3% on physician MPL
premiums effective January 1, 1998, $1.6 million of new premiums written in
Texas and the addition of health premiums of approximately $4.5 million.
Net Investment Income
Net investment income increased $.5 million, or 13%, from $3.9 million for the
three months ended June 30, 1997 to $4.4 million for the three months ended June
30, 1998. The increase is due to an increase in invested assets, primarily in
tax-exempt securities.
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 of
health and workers compensation plans. Neither McCreary nor the Company assumes
any risk on these products; 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.
11
<PAGE> 12
Claims administration fees and commission income increased $.6 million, or 27%,
from $2.2 million for the three months ended June 30, 1997 to $2.8 million for
the three months ended June 30, 1998. This increase is attributable to the
addition of new contracts.
Net Losses and Loss Adjustment Expenses (LAE)
Net losses and LAE increased $4.7 million, or 35%, from $13.5 million for the
three months ended June 30, 1997 to $18.2 million for the three months ended
June 30, 1998, reflecting primarily an increase in insured exposures. The loss
and LAE ratios were 84.1% for the three months ended June 30, 1997 and 79.1% for
the three months ended June 30, 1998. The reserve for losses and LAE represents
management's best estimates of the ultimate cost of all losses incurred but
unpaid. The estimated liability is continually reviewed and any adjustments that
become necessary are included in current operations.
Other Underwriting Expenses
Other underwriting expenses increased $1.2 million, or 80%, from $1.5 million
for the three months ended June 30, 1997 to $2.7 million for the three months
ended June 30, 1998. This increase was attributable to an increase in
acquisition expenses and general and administrative expenses. In addition, in
1997 these expenses were net of $0.8 million, which related to an accrual for
state guaranty fund bonds. In 1997, the state informed the Company that these
bonds were likely to be defeased early. As a result, the Company began to reduce
its liability for future payments. Excluding the effect of this one time
adjustment in 1997, other underwriting expenses increased 17%.
Claims Administration Expenses
These expenses relate entirely to the operation of McCreary, and increased $.6
million, or 30%, from $2.0 million for the three months ended June 30, 1997 to
$2.6 million for the three months ended June 30, 1998. This increase was
primarily attributable to an increase in the core operations of McCreary.
Net Income
For the reasons stated above, net income increased $1.1 million, or 28%, from
$3.9 million for the three months ended June 30, 1997 to $5.0 million for the
three months ended June 30, 1998. Diluted earnings increased $.10 per share or
24%, from $.42 per share for the three months ended June 30, 1997 to $.52 per
share for the three months ended June 30, 1998.
Results of Operations - Six Months Ended June 30, 1998 Compared to Six Months
Ended June 30, 1997.
Premiums
Direct premiums written and assumed increased $10.0 million, or 22%, from $45.5
million for the six months ended June 30, 1997 to $55.5 million for the six
months ended June 30, 1998. Net premiums earned increased $9.2 million, or 29%,
from $31.6 million for the six months ended June 30, 1997 to $40.8 million for
the six months ended June 30, 1998. These increases were primarily due to an
increase in the number of insureds, a rate increase of 7.3% on physician MPL
premiums effective January 1, 1998, $3.3 million of new premiums written in
Texas and the addition of health premiums of approximately $5.2 million.
12
<PAGE> 13
Net Investment Income
Net investment income increased $.7 million, or 9%, from $8.0 million for the
six months ended June 30, 1997 to $8.7 million for the six months ended June 30,
1998. The increase is due to an increase in invested assets, primarily in
tax-exempt securities.
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 of
health and workers compensation plans. Neither McCreary nor the Company assumes
any risk on these products; 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 $1.4 million, or 33%,
from $4.2 million for the six months ended June 30, 1997 to $5.6 million for the
six months ended June 30, 1998. This increase is attributable to the addition of
new contracts.
Net Losses and Loss Adjustment Expenses (LAE)
Net losses and LAE increased $6.0 million, or 22%, from $26.7 million for the
six months ended June 30, 1997 to $32.7 million for the six months ended June
30, 1998, reflecting primarily an increase in insured exposures. The loss and
LAE ratios were 84.5% for the six months ended June 30, 1997 and 80.1% for the
six months ended June 30, 1998. The reserve for losses and LAE represents
management's best estimates of the ultimate cost of all losses incurred but
unpaid. The estimated liability is continually reviewed and any adjustments that
become necessary are included in current operations.
Other Underwriting Expenses
Other underwriting expenses increased $1.4 million, or 45%, from $3.1 million
for the six months ended June 30, 1997 to $4.5 million for the six months ended
June 30, 1998. This increase was attributable to an increase in acquisition
expenses and general and administrative expenses. In addition, in 1997 these
expenses were net of $1.1 million, which related to an accrual for state
guaranty fund bonds. In 1997, the state informed the Company that these bonds
were likely to be defeased early. As a result, the Company began to reduce its
liability for future payments.
13
<PAGE> 14
Claims Administration Expenses
These expenses relate entirely to the operation of McCreary, and increased $1.1
million, or 28%, from $3.9 million for the six months ended June 30, 1997 to
$5.0 million for the six months ended June 30, 1998. This increase was primarily
attributable to an increase in the core operations of McCreary.
Net Income
For the reasons stated above, net income increased $2.1 million, or 27%, from
$7.7 million for the six months ended June 30, 1997 to $9.8 million for the six
months ended June 30, 1998. Diluted earnings increased $.18 per share or 22%,
from $.83 per share for the six months ended June 30, 1997 to $1.01 per share
for the six months ended June 30, 1998.
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 $22.9 million during the six months ended June 30, 1998 and was
sufficient to meet the Company's needs. Of the $22.9 million, approximately
$17.7 million related to the expiration of a finite reinsurance contract on
December 31, 1997. The proceeds were received in the first quarter of 1998 and
were invested in fixed income securities. 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 maintains a $30 million revolving credit facility (credit facility)
with a Florida lending institution to meet certain non-operating cash needs as
they may arise. The credit facility terminates May 31, 1999. The Company is not
charged a fee nor is it required to maintain compensating balances in connection
with this credit facility. As of June 30, 1998, the Company had borrowed $4
million against the credit facility for non-operating purposes.
Dividends payable by FPIC to the Company are subject to certain limitations
imposed by Florida law. In 1998, FPIC is permitted, within insurance regulatory
guidelines, to pay dividends to the Company of approximately $12.4 million
without regulatory approval.
The Company filed a Form 8-K with the Securities and Exchange Commission on July
15, 1998 to report the authorization by the Board of Directors to purchase up to
500,000 shares of the Company's common stock over the next twelve months. The
Company can purchase the shares on the open market at the discretion of
management.
14
<PAGE> 15
Year 2000
The advent of the Year 2000 will pose significant issues for organizations
across the country and will require consideration of converting or replacing
millions of lines of code. The Year 2000 issue exists due to program developers
creating databases and programs to store and process a year as a two-digit
field. The Company converted its database and reprogrammed its system software
in 1994 and believes that it has made all necessary known changes to ensure
compliance with the Year 2000.
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, 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. Primary risks to FPIC
are unexpected increases in frequency for the current policy year and unexpected
increases in severity for the current and prior two policy years.
15
<PAGE> 16
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
The Company's Annual Meeting of Shareholders was held June 10, 1998. At
the meeting, the following items were passed by the vote shown.
<TABLE>
<CAPTION>
Against or Abstentions and
For Withheld Broker non-votes
<S> <C> <C> <C>
I. Election of Four Directors:
James W. Bridges, M.D. 6,664,648 127,849
J. Stewart Hagen, M.D. 6,724,543 67,954
D.L. Van Eldik, M.D. 6,715,561 76,936
Henry M. Yonge, M.D. 6,711,738 80,759
II. Approve Amendments to
the Director Stock Option Plan 5,007,607 1,784,890
III. Approve Amendments to
the Omnibus Incentive Plan 5,305,456 1,487,041
</TABLE>
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
August 12, 1998 Robert B. Finch, Senior Vice President,
Chief Financial Officer and Treasurer
(a duly authorized officer and the
principal financial officer of the
registrant)
16
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FPIC Insurance Group, Inc. for the six months
ended June 30, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-30-1998
<DEBT-HELD-FOR-SALE> 283,586
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,684
<MORTGAGE> 0
<REAL-ESTATE> 4,956
<TOTAL-INVEST> 296,226
<CASH> 4,908
<RECOVER-REINSURE> 2,259
<DEFERRED-ACQUISITION> 1,807
<TOTAL-ASSETS> 376,514
<POLICY-LOSSES> 194,197
<UNEARNED-PREMIUMS> 37,187
<POLICY-OTHER> 2,407
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,000
0
0
<COMMON> 922
<OTHER-SE> 125,674
<TOTAL-LIABILITY-AND-EQUITY> 376,514
40,810
<INVESTMENT-INCOME> 8,712
<INVESTMENT-GAINS> (47)
<OTHER-INCOME> 6,471
<BENEFITS> 32,682
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 4,495
<INCOME-PRETAX> 13,739
<INCOME-TAX> 3,907
<INCOME-CONTINUING> 9,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,832
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.01
<RESERVE-OPEN> 188,086
<PROVISION-CURRENT> 36,490
<PROVISION-PRIOR> (8,571)
<PAYMENTS-CURRENT> 984
<PAYMENTS-PRIOR> 20,824
<RESERVE-CLOSE> 194,197
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
