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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
[X] ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from _______ to ________
Commission file number __________
FPIC INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
FLORIDA 59-3359111
(State or other jurisdiction of (I.R.S.) Employer
incorporation or organization) Identification No.)
1000 RIVERSIDE AVENUE, SUITE 800 32204
(Address of principal executive offices) (zip code)
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(Registrant's telephone number, including area code): (904) 354-5910
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
(Title of Class)
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 the 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. [ X ]
The Aggregate market value of the Registrant's Common Stock (its only voting
stock) held by non-affiliates of the Registrant as of March 13, 1998 was
approximately $277,249,000.
As of March 13, 1998, there were 9,204,031 shares of the Registrant's Common
Stock, $.10 Par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1998 Annual Shareholders'
Meeting are incorporated by reference into Part III, Items 10, 11, 12 and 13 of
this Report. Such Proxy Statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this Report on Form 10-K.
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FPIC INSURANCE GROUP, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for the Registrants' Common Stock and
Related Stockholder Matters 11
Item 6. Selected Financial Data 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 22
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 22
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
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PART I
Item 1. Business
General
FPIC Insurance Group, Inc. (the Company) was formed in 1996. On June 11, 1996,
the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved
the formation of a holding company structure (the Reorganization) that resulted
in FPIC becoming a subsidiary of the Company. In connection with the
Reorganization, FPIC's shareholders became the shareholders of the Company and
received five shares of the Company's common stock for each of their shares of
FPIC's common stock. The purposes of the Reorganization included providing a
more flexible operating structure, increasing financial flexibility and
satisfying the liquidity needs of the Company's shareholders. The Company has
three wholly-owned subsidiaries: FPIC, FPIC Insurance Agency, Inc. (the Agency)
and McCreary Corporation (McCreary).
Overview
The Company is the largest provider of medical professional liability (MPL)
insurance in Florida, based on the number of physicians and dentists insured.
For more than 20 years, the Company and its predecessors have provided MPL
insurance to Florida's medical community. MPL insures the physician, dentist,
hospital or other healthcare provider against liabilities arising from the
rendering of or failure to render professional healthcare services. Under the
typical MPL insurance policy, the insurer also pays the legal costs of
defending the claim. The Company has the exclusive endorsement of both the
Florida Medical Association (FMA) and the Florida Dental Association (FDA).
The MPL premium in Florida accounts for approximately 93% of the Company's
total premiums written. As of December 31, 1997, the Company was also licensed
in Alabama, Georgia, Kentucky, Ohio, Pennsylvania, Texas and West Virginia, and
will begin marketing in each such states when it determines that an opportunity
exists to write profitable business.
Insurance is the Company's only significant industry segment. For financial
information relating to the Company's operations, see Management's Discussion
and Analysis and the notes to the Consolidated Financial Statements, which are
incorporated herein by reference.
Insurance Products
The Company has developed a variety of insurance products for participants in
the healthcare industry. These products include: MPL insurance for medical
professionals, managed care liability insurance, professional and comprehensive
general liability insurance for healthcare facilities, AHCA/OSHA insurance
coverage, provider stop loss insurance, third party administration and group
accident and health coverage. The following table summarizes by product the
premium for the periods indicated.
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<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Medical professional liability for physicians $71,056 $58,860 $52,134
Medical professional liability for dentists 3,726 3,539 3,190
Managed care 130 330 215
Professional and comprehensive general liability 814 627 317
AHCA/OSHA 1,056 936 785
Group accident and health 989 0 0
------- ------- -------
Totals $77,771 $64,292 $56,641
======= ======= =======
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Medical Professional Liability. The principal product offered by the Company
is MPL insurance for physicians and dentists. The Company's MPL insurance is
offered to physicians and dentists in all types of settings including solo
practices, group practices and hospitals. MPL insurance provides coverage
against the legal liability of an insured for such things as injury caused by
or as a result of treatment of a patient, failure to treat a patient and
failure to diagnose a patient.
MPL policies are issued on a "claims-made" basis. Coverage is provided for
claims reported to the Company during the policy period arising from incidents
that occurred at any time the insured was covered by the policy. The Company
also offers "tail coverage" for claims reported after the expiration of the
policy for occurrences during the coverage period. The price of tail coverage
is based on the length of time the insured has been covered under the Company's
claims-made form. The Company provides free tail coverage for insured
physicians who die or become disabled during the coverage period of the policy
and those who have been insured by the Company for at least five consecutive
years and retire completely from the practice of medicine. MPL insurance
policies offered by the Company are issued with liability limits up to $5.0
million per incident and $7.0 million in annual aggregate for physicians and
$1.0 million per incident and $3.0 million in annual aggregate for dentists.
At December 31, 1997, the Company had 4,872 physician insureds and 1,772
dentist insureds. For the year ended December 31, 1997, the Company has $74.8
million in direct premium written from MPL insurance, representing 96% of the
Company's total direct premium written.
Managed Care. Managed care liability insurance provides coverage for liability
arising from the errors and omissions of a managed care organization, the
vicarious liability of a managed care organization for acts or omissions by
contracted and employed providers ("E&O") and the liability of directors and
officers of a managed care organization ("D&O"). These policies are issued on
a claims-made basis. The typical limits of coverage offered by the Company for
E&O policies is $1.0 million per incident and $1.0 million in annual aggregate
and for D&O policies is $3.0 million per incident and $3.0 million in annual
aggregate.
Professional and Comprehensive General Liability. The Company also offers
professional and comprehensive general liability insurance to healthcare
facilities, such as ambulatory surgery centers and walk-in medical care
clinics. The policy issued to healthcare facilities provides protection for
professional liability related to the operation of a healthcare facility and
its various staff committees, together with comprehensive general liability.
Professional liability insurance is offered by the Company to healthcare
facilities on a claims-made basis. Commercial general liability is available
on a claims-made or occurrence basis, although all policies issued as of
December 31, 1997 were on a claims-made basis. The limits of coverage for
these policies available to non-hospital healthcare facilities is $1.0 million
per incident and $3.0 million in annual aggregate and to hospitals is $10.0
million per incident and $10.0 million in annual aggregate. Higher liability
limits are placed through facultative reinsurance arrangements. As of December
31, 1997, the Company had 17 facility insureds.
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AHCA/OSHA. The Company also offers defense coverage to physicians and
dentists for costs associated with investigations initiated by Florida's Agency
for Healthcare Administration ("AHCA") as well as the Occupational Safety and
Health Administration ("OSHA"). This coverage is offered to the Company's
insureds for investigations that are not related to an MPL claim;
investigations related to an MPL claim are provided to the Company's insureds
as part of their policy coverage. AHCA/OSHA coverage is also offered to
physicians and dentists not otherwise insured by the Company. Policy limits
for this coverage are $25,000 per incident and $75,000 in annual aggregate.
For the year ended December 31, 1997, the Company had $1.1 million in direct
premium written from AHCA/OSHA insurance, representing 1.4% of the Company's
total direct premium written.
Group Accident and Health. The Company began writing and assuming group
accident and health (A&H) premium in 1997. Through its relationship with the
Florida Dental Association (FDA), the Company will underwrite a small employer,
limited risk, accident and health program for dentists. The A&H insurance
provides comprehensive coverage for preventive care and medically necessary
expenses at various deductible, co-insurance and stop loss limits.
Third Party Services. Through McCreary and its subsidiary, Employers Mutual,
Inc. (EMI), the Company offers third party administration services. McCreary
specializes in the administration of self insurance plans for large employers.
The lines of insurance that McCreary primarily administers are group health,
workers' compensation, general liability and property. The main product of EMI
is the administration for emerging managed care organizations. The Company
intends to offer these services to its existing and potential customer base of
healthcare facilities and managed care organizations on both a self insured
basis and a fully insured basis. For the year ended December 31, 1997,
McCreary contributed $10.5 million to the Company's total revenue.
Rates
The Company establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and dentist
insureds based on the loss and loss adjustment expenses (LAE) experience it has
developed over the past 20 years and upon rates charged by its competitors.
The Company uses certain relative risk factors based on geographic location,
medical specialty and policy limits. The Company has established its premium
rates and rating classifications for healthcare facilities and managed care
organizations utilizing data publicly filed by other insurers and guidelines
provided by its reinsurers. All rates for liability insurance are subject to
review by the relevant insurance regulatory authority. As part of its pricing
strategy, the Company targets medical professionals with low levels of previous
MPL claims. The Company offers such medical professionals a "claims-free"
credit.
Marketing and Policyholder Services
The Company's insurance products are primarily marketed by independent
agencies. In addition, insurance products are sold by the Company directly.
As of December 31, 1997, the Company's products were sold through 111
independent agencies. During 1997, approximately 75% of the Company's MPL
direct premium written was produced by independent agents, five of which
accounted for approximately 53% of such premiums. The Company added 24 new
independent agencies in 1997. The insurance products that are sold by the
Company directly are a result of direct requests from physicians.
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An integral part of the Company's marketing strategy is targeting segments of
the MPL industry that it believes generate above average underwriting profits.
The Company has identified certain medical specialties and "claims-free"
physicians as segments in which it wishes to increase its market share. This
marketing strategy includes sending targeted physicians personal mail
solicitation packages, encouraging agents to refer targeted physicians and
providing an expedited application process for those physicians. As a result
of this strategy, approximately 50% of the increase in direct premium written
in 1997 was received from physicians in the targeted specialties.
The Company has also entered into endorsement and marketing agreements with
local medical associations and other provider-supported organizations that
provide rate credits and certain services for insureds of the programs. These
endorsement and marketing agreements gain the Company access to meetings of
these groups in order to make presentations and provide access to their
respective publications for advertisements. In addition, several local
associations have agreed to assist the Company in developing loss prevention
programs, monitoring proposed legislation and administrative regulations and
providing information on healthcare matters relating primarily to professional
liability.
The Company provides comprehensive risk management services designed to
heighten its insureds' awareness of situations giving rise to potential loss
exposures, to educate its insureds on ways to improve their medical practice
procedures and to assist its insureds in implementing risk modification
measures. In addition, the Company conducts surveys for hospitals and large
medical groups both to review their practice procedures generally and to focus
on specific areas in which there may be some concern. Complete reports that
specify areas of the insured's medical practice that may need attention are
provided to the policyholder. The Company presents and participates in
periodic seminars with medical societies and other groups at which pertinent
subjects are presented. These educational offerings are designed to increase
risk awareness and the effectiveness of various medical professionals.
Underwriting
The underwriting of the Company's MPL insurance is performed internally by five
underwriters with over 40 years of combined experience underwriting MPL
insurance for the Company. The Company has given its internal underwriting
department complete authority for all initial underwriting decisions. The
Company's agents have no binding authority.
As part of the underwriting process, the Company utilizes the State of
Florida's database, which consolidates a record of all MPL claims-paid
information that insurers are required to report to the State. When
applications are received from physicians for MPL insurance, the Company
reviews this database to verify the physician's claims-paid record. If a
physician has an excessive claims-paid history, the application is denied. All
other applicants are reviewed on the basis of the physician's educational
background, residency experience, practice history and the comments received
from personal references. Annually, the Company's underwriting department also
reexamines each insured before coverage is renewed, including verifying that
each insured's license is current and that any reported claims for the insured
were within acceptable limits.
The underwriting of the Company's other insurance products is conducted in
conjunction with external underwriters. With respect to these products, the
Company receives applications from prospective insureds. After a review of the
information contained in such applications, the Company forwards them to an
external underwriter. The external underwriter performs its
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review procedures for each application and consults with the Company on the
amount of premium to charge each insured.
Claims
The Company's claims department is responsible for the supervision of claims
investigation, the establishment of case reserves, case management, development
of the defense strategy and the coordination and control of attorneys engaged
by the Company. The Company's claims department has 19 employees, including 4
supervisors and 5 field investigators who are located in Orlando, Tampa, Miami
and Jacksonville in order to provide localized and timely attention to claims.
Employees in the claims department with settlement authority have an average of
15 years of experience with the Company.
The Company's claims department has complete settlement authority for most
claims filed against the Company's insureds. The Company's policy is and has
been to refuse settlement and to defend aggressively all claims that appear to
have no merit. In those instances where claims may have merit, the claims
department attempts to settle the case as expeditiously as possible. The
Company believes that it has developed relationships with attorneys in Florida
who have significant experience in the defense of MPL claims and who are able
to defend in an aggressive, cost-efficient manner the claims against the
Company's insureds.
Reinsurance
The Company follows customary industry practice by reinsuring a portion of its
risks. The Company cedes to reinsurers a portion of its risks and pays a fee
based upon premiums received on all policies subject to such reinsurance.
Insurance is ceded principally to reduce net liability on individual risks and
to provide protection against large losses. Although reinsurance does not
legally discharge the ceding insurer from its primary liability for the full
amount of the policies reinsured, it does make the reinsurer liable to the
insurer to the extent of risk ceded.
For MPL insurance and professional and comprehensive general liability
insurance, the Company has established a policy of reinsuring risks in excess
of $500,000 per loss. The Company reinsures risks associated with these
policies under treaties pursuant to which reinsurers agree to assume those
risks insured by the Company in excess of its individual risk retention level
and up to its maximum individual policy limit offered. For managed care
liability insurance the Company has entered into a separate quota share
reinsurance treaty. Under this treaty, the reinsurers bear 90% of all losses
and LAE incurred under these policies.
Reinsurance is placed under reinsurance treaties and agreements with a number
of individual companies and syndicates to mitigate concentration of credit
risk. General Reinsurance Corporation is the Company's largest reinsurer of MPL
insurance, with 25% of the ceded risks and for professional and comprehensive
general liability insurance, with 50% of the ceded risks. The Company relies on
reinsurance brokers and intermediaries to assist in the analysis of the credit
quality of its reinsurers. The Company also requires reinsurers that are not
authorized to do business in Florida to post an evergreen letter of credit to
secure their reinsurance recoverables.
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Reinsurance ceded is recorded on a gross basis. Ceding commissions, which are
25 percent of gross ceded premiums, are deducted from other operating expenses.
Ceding commissions were $1.4 million in 1997 and $1.2 million in each of the
years ended 1996 and 1995. In the event the Company has the opportunity to
settle a claim within policy limits but fails to do so, and a judgment is
rendered against a policyholder for an amount exceeding the policy limit, the
Company may be charged with bad faith in failing to settle. The Company may be
held responsible for the amount exceeding the policy limit or extra contractual
damages. Beginning in 1996, the Company's primary reinsurance contract
includes coverage for policies with limits greater than or equal to $1 million
for which the claim exceeds policy limits or extra contractual damage. In the
past five years, the Company has not paid a claim, including bad faith claims,
in excess of $3.0 million.
Loss and LAE Reserves
The determination of loss reserves is a projection of ultimate losses through
an actuarial analysis of the claims history of the Company and other MPL
insurers, subject to adjustments deemed appropriate to the Company due to
changing circumstances. Included in its claims history are losses and LAE paid
by the Company in prior periods and case reserves for anticipated losses and
LAE developed by the Company's claims department as claims are reported and
investigated. The Company relies primarily on such historical loss experience
in determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss cost trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss and LAE reserves may be revised. Any increase in the amount of reserves,
including reserves for insured events of prior years, could have an adverse
effect on the Company's results for the period in which the adjustments are
made.
The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among
other factors, changes in the rate of inflation and changes in the propensities
of individuals to file claims. The inherent uncertainty of establishing
reserves is relatively greater for companies writing long-tail casualty
insurance, including MPL insurance, due primarily to the long-term nature of
the resolution of claims. The Company utilizes both its staff and independent
actuaries in establishing its reserves. The Company's independent actuaries
review the Company's loss and LAE reserves bi-annually and prepare a report
that includes a recommended level of reserves. The Company considers this
recommendation as well as other factors, such as known, anticipated or
estimated changes in frequency and severity of losses, loss retention levels
and premium rates, in establishing the amount of its loss and LAE reserves.
The Company continually refines reserve estimates as experience develops and
further claims are reported and settled. The Company reflects adjustments to
reserves in the results of the periods in which such adjustments are made. MPL
insurance is a long-tail line of business for which the initial loss and LAE
estimates may be adversely impacted by events occurring long after the
reporting of the claim, such as sudden severe inflation or adverse judicial or
legislative decisions.
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The following table sets forth the development of loss and LAE reserves of the
Company for the 10-year period ended December 31, 1997:
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Year Ended December 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Reserves(2) 188,086 172,738 164,506 152,268 138,745 126,651 118,995 119,031 97,302 79,893 63,088
Reestimated Liability (2)
As Of:
One year later 154,066 140,322 137,746 128,333 98,706 101,844 103,523 104,996 92,801 80,637
Two years later 130,137 113,682 111,028 89,182 80,716 86,133 89,427 96,179 97,259
Three years later 100,141 91,138 75,848 71,318 64,124 72,164 80,686 97,121
Four years later 82,049 67,535 66,276 56,127 56,695 77,714 90,617
Five years later 68,472 62,758 54,728 53,007 68,034 88,584
Six years later 61,993 53,826 52,714 66,199 83,195
Seven years later 52,619 52,412 65,894 83,144
Eight years later 51,451 66,776 82,768
Nine years later 65,783 82,887
Ten years later 82,550
Cumulative Paid (2)
As Of:
One year later 35,382 35,562 28,701 24,794 25,924 26,482 17,500 22,656 28,900 31,930
Two years later 60,450 52,321 44,882 42,401 44,542 37,283 34,656 47,038 64,280
Three years later 63,213 56,806 55,278 52,340 47,357 43,754 55,172 72,868
Four years later 61,825 59,538 56,633 49,655 49,298 61,111 76,213
Five years later 62,534 58,183 51,869 49,224 64,669 79,289
Six years later 58,497 51,504 50,407 63,810 81,434
Seven years later 51,593 50,493 64,830 81,646
Eight years later 50,528 64,857 82,043
Nine years later 64,860 82,061
Ten years later 82,094
Redundancy (Deficiency) (1) 18,672 34,369 52,127 56,696 58,179 57,002 66,412 45,851 14,110 (19,462)
% Redundancy (Deficiency) 10.8% 20.9% 34.2% 40.9% 45.9% 47.9% 55.8% 47.1% 17.7% (30.8%)
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(1) There may be a difference of 1 (,000) in the redundancies due to rounding.
(2) Due to the adoption of SFAS No. 113 in 1993, amounts in the years 1993
through 1997 are presented on a gross basis. Amounts in the years 1987
through 1992 are presented net of reinsurance recoverables. Prior to the
issuance of SFAS No. 113, the Company maintained its reinsurance records
on a net basis. As detailed records on a gross basis are not available for
years prior to 1993, the Company has not restated these years on a gross
basis.
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The following table sets forth an analysis of the Company's reserves for losses
and LAE and provides a reconciliation of beginning and ending loss and LAE
reserves, net of reinsurance for the periods presented:
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Year Ended December 31,
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1997 1996 1995
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(in thousands)
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Reserve liability, at beginning of period $161,124 $155,318 $143,415
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Provisions for losses and LAE occurring
in the current period 69,126 61,617 58,868
Decrease in estimated losses and
LAE for claims occurring in prior periods (15,115) (14,669) (14,029)
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Total incurred during current period 54,011 46,948 44,839
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Losses and LAE payments for claims occurring
during:
The current period 8,061 5,253 4,320
Prior periods 33,103 35,889 28,616
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Total paid during current period 41,164 41,142 32,936
-------- -------- --------
Reserve liability, at end of period $173,971 $161,124 $155,318
======== ======== ========
Gross liability at end of period $188,086 $172,738 $164,506
Reinsurance recoverable at end of period 14,115 11,614 9,188
-------- -------- --------
Net liability at end of period $173,971 $161,124 $155,318
======== ======== ========
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As shown above, as a result of the Company's bi-annual reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior years'
claims, the Company reduced its reserves for claims occurring in prior periods
by $15.1 million, $14.7 million and $14.0 million for the years ended December
31, 1997, 1996, and 1995, respectively. There can be no assurance concerning
future adjustments or reserves, positive or negative, for prior years' claims.
Investment Portfolio
The Company's investment strategy is to maintain a diversified investment-grade
fixed income portfolio, provide liquidity and maximize after-tax yield. As of
December 31, 1997 the Company's portfolio was managed internally and the
Company had $259.6 million of fixed income securities. All of the Company's
fixed income securities are classified as available-for-sale.
The Company believes that its focus on income generation rather than capital
appreciation has reduced the portfolio's overall volatility. In addition, the
Company has invested a greater portion of its portfolio in municipal bonds,
which the Company believes generate a greater after-tax return than investments
in taxable fixed income securities of comparable risk, duration, and other
investment characteristics. The Company does not, and is not contemplating,
investing in any off-balance sheet derivative financial investments including
futures, options, forwards, interest rate swaps, floors or caps. All of the
fixed maturity securities held in the investment portfolio are publicly traded
securities.
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Competition
The MPL insurance market in Florida is highly competitive. Several companies
in the state offer products at lower premium rates than the Company and more
companies may enter the Florida market in the future. In addition, the Company
believes that the number of healthcare entities that insure their affiliated
physicians through self-insurance may begin to increase. Many of the MPL
insurers are substantially larger and have considerably greater resources than
the Company. Additionally, several of these insurers have received A.M. Best
ratings that are higher than FPIC's rating of "A- (Excellent)." In addition,
because a substantial portion of the Company's products are marketed through
independent insurance agencies, all of which represent more than one company,
the Company faces competition within each agency in its own agency system.
However, the Company's name recognition, medical society endorsements,
physician board of directors, agency force and program development have all
contributed to helping the Company increase its number of insureds every year
since 1985. The Company has been successful at target marketing groups and
specialties that exhibit above average profitability. The Company believes that
its marketing success has allowed it to improve the quality and profitability
of its overall business.
The Company believes that the principal competitive factors in its business in
Florida are service, name recognition and price, and that it is competitive in
Florida in all of these areas. The Company enjoys strong name recognition in
Florida by virtue of having been organized by, and operated for the principal
benefit of, Florida physicians. The services offered insureds of the Company
as well as the healthcare community in general are intended to promote name
recognition and to maintain and improve loyalty among the insureds of the
Company. MPL insurance offered by the Company has the exclusive endorsement of
both the FMA and the FDA. The Company's MPL insurance is also endorsed by
various county medical societies and various state medical specialty societies.
In general, the MPL market in other states is dominated by local carriers who
have been able to maintain strong customer loyalty. The same targeted
specialty and loss-free approach developed in Florida will be used in these
other states. The Company will also recruit and develop an agency force to
expand its market, provide service and develop name recognition.
Insurance Ratings
FPIC currently has a financial condition rating from A.M. Best of "A-
(Excellent)". An A.M. Best rating is intended to provide an independent
opinion of an insurer's ability to meet its obligations to policyholders and
should not be considered an investment recommendation. A.M. Best's ratings are
based upon a comprehensive review of a company's financial performance that is
supplemented by certain data, including responses to A.M. Best's
questionnaires, quarterly NAIC filings, state insurance department examination
reports, loss reserve reports, annual reports and reports filed with the
Securities and Exchange Commission. A.M. Best undertakes a quantitative
evaluation based upon profitability, leverage and liquidity and a qualitative
evaluation based upon the composition of an insurer's book of business or
spread of risk, the amount, appropriateness and soundness of reinsurance, the
quality, diversification and estimated market value of its assets, the adequacy
of its loss reserves and policyholders' surplus and the experience and
competency of its management.
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Regulation
FPIC and the Company are subject to extensive state regulatory oversight in
Florida and in the other jurisdictions in which they conduct business.
Florida insurance law regulates insurance holding company structures, including
the Company and its subsidiaries, FPIC, the Agency and McCreary. Each
insurance company in a holding company structure is required to register with
the Florida Department of Insurance (the "Department of Insurance") and furnish
information concerning the operations of companies within the holding company
structure that may materially affect the operations, management or financial
condition of the insurers within the structure. Pursuant to these laws, the
Department of Insurance may examine the Company, and/or FPIC at any time and
require disclosure of and/or approval of material transactions involving any
insurance subsidiary of the Company, such as extraordinary dividends from FPIC.
All transactions within the holding company structure affecting FPIC must be
fair and reasonable.
Florida insurance law provides that no person may acquire directly or
indirectly five percent or more of the voting securities of a Florida domiciled
insurance company unless such person has obtained the prior written approval of
the Department of Insurance for such acquisition. Any purchaser of 5% or more
of the Company's or FPIC's outstanding common stock will generally be presumed
to have acquired control of FPIC. In lieu of obtaining such prior approval, a
purchaser owning less than 10% of the outstanding shares of the Company or FPIC
may file a disclaimer of affiliation and control with the Department of
Insurance.
Since FPIC is domiciled in Florida, the Department of Insurance is its
principal supervisor and regulator. However, FPIC is also subject to
supervision and regulation in the states in which it transacts business in
relation to numerous aspects of FPIC's business and financial condition. The
primary purpose of such supervision and regulation is to insure the financial
stability of FPIC for the protection of policyholders. The laws of the various
states establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade
practices, required statutory financial statements and prescribing the types
and amount of investments permitted. Although premium rate regulations vary
among states and lines of insurance, such regulations generally require
approval by each state regulator of the rates and policies to be used in its
state.
Insurance companies are required to file detailed annual reports with the
supervisory agencies in each state in which they do business, and their
business and accounts are subject to examination by such agencies at any time.
The NAIC annually calculates 12 financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a "usual range" of results for each ratio,
established by the NAIC. In 1997, two of the twelve ratios for the Company
were slightly outside the range. Both of these were outside the range because
of the effect of the expiration of a finite reinsurance contract in 1997. This
contract affected the statutory financial statements in 1997 only and not the
GAAP results of the Company. For the years 1996 and 1995, FPIC's results were
within the usual range for each of the 12 ratios.
FPIC is subject to assessment by the Financial Guaranty Associations in the
states in which it conducts business for the provision of funds necessary for
the settlement of covered claims under
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<PAGE> 13
certain policies of insolvent insurers. Generally, these associations can
assess member insurers on the basis of net direct written premiums in their
particular states.
The insurance industry is under continuous review by Congress, state
legislatures and state and federal regulatory agencies. From time to time
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an effect on insurers or reinsurers. Among
the proposals that have in the past been, or are at present being, considered
are the possible introduction of state and federal limits on certain damages
for MPL as well as federal regulation in addition to, or in lieu of, the
current system of state regulation of insurers. The Company is unable to
predict whether any of these proposals will be adopted, the form in which any
such proposals would be adopted, or the impact, if any, such adoption would
have on the Company, although such impact could be material.
Employees
At December 31, 1997, the Company employed 254 persons. None of these
employees are covered by a collective bargaining agreement. Management
considers the Company's relationships with its employees to be good.
Item 2. Properties
The Company's corporate headquarters are located in Jacksonville, Florida. The
headquarters property is an 8-story, 70,000 sq. ft. office building owned by
the Company where 26,600 sq. ft. of space is occupied for its offices and 8,500
sq. ft. is occupied by McCreary's subsidiary, EMI. The Company and its
subsidiaries lease additional facilities that management believes are adequate
for the Company's current needs.
Item 3. Legal Proceedings
There are no material pending legal proceedings against the Company or its
subsidiaries other than litigation arising in connection with the settlement of
insurance claims.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders in the fourth
quarter of 1997.
PART II
Item 5. Market for the Registrants' Common Equity and Related Stockholder
Matters
The Company's Common Stock has been publicly traded on the Nasdaq National
Market System since August 1, 1996 under the symbol FPIC. The following table
sets forth for the periods indicated the high and low bid quotations as
reported. Such quotations reflect inter-dealer bids and offers, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.
11
<PAGE> 14
<TABLE>
<CAPTION>
1997 High Bid Low Bid
- ---- -------- -------
<S> <C> <C>
First quarter $19.13 $13.63
Second quarter $22.75 $17.38
Third quarter $29.50 $22.25
Fourth quarter $29.75 $26.50
</TABLE>
As of March 5, 1998, the Company estimated that there are approximately 4,700
beneficial owners of the Company's common stock.
During the fourth quarter of 1997, the Company issued 111,663 shares of its
common stock to Frontier Insurance Company d/b/a/ Frontier Insurance Company of
New York in connection with the Company's acquisition of Frontier's Florida
physicians MPL business on a "best-efforts" renewal basis. The shares were not
registered under the Securities Act of 1933 in reliance upon the exemption
provided from registration by Section 4(2) of the Act and Regulation D.
Prior to the formation of the Company, its subsidiary, FPIC, paid cash
dividends on its common stock of $819,965 in 1996 and $775,986 in 1995. The
Company presently intends to retain any future earnings for use in its business
and does not anticipate paying any cash dividends in the foreseeable future.
Item 6. Selected Financial Data
The selected financial data presented below for the fiscal years ending
December 31 should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto, which are included elsewhere herein.
All per share amounts have been stated giving retroactive effect for the stock
split that occurred as a result of the reorganization in June 1996.
<TABLE>
<CAPTION>
Income Statement Data:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Direct written premiums $77,771 $64,292 $56,641 $52,454 $51,568
Total revenues 93,216 76,982 69,531 52,306 52,685
Net income 16,557 13,324 11,686 5,877 8,541
Basic earnings per share $1.83 $1.57 $1.47 $.76 $1.10
Diluted earnings per share $1.76 $1.53 $1.47 $.76 $1.10
Cash dividend declared
per share $0 $.10 $.10 $.10 $0
<CAPTION>
Balance Sheet Data:
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
Total investments $268,300 $238,497 $221,604 $192,867 $180,721
Total assets 352,849 303,553 276,699 244,266 233,120
Loss and LAE reserves 188,086 172,738 164,506 152,268 138,745
Total liabilities 232,785 207,141 195,143 182,660 169,199
Shareholders' equity 120,064 96,411 81,556 61,606 63,921
</TABLE>
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<PAGE> 15
Item 7. Management's Discussion & Analysis
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes appearing elsewhere in this
report. The consolidated financial statements include the results of the
Company's wholly-owned subsidiary, McCreary Corporation, since July 1, 1995.
All amounts have been rounded to the nearest $100,000.
GENERAL
FPIC Insurance Group, Inc. ("FIG" or the "Company") is the largest provider of
medical professional liability (MPL) insurance in Florida, based on the total
number of physicians and dentists insured. On June 11, 1996, the shareholders
of Florida Physicians Insurance Company, Inc. (FPIC) approved the formation of
a holding company, FPIC Insurance Group, Inc., to be the parent company for
FPIC, the McCreary Corporation (McCreary) and FPIC Insurance Agency, Inc. (the
Agency). McCreary also includes its wholly-owned subsidiary, Employers Mutual
Inc. (EMI), acquired in January 1997.
The Company's primary sources of revenue are dividends from subsidiaries. The
dividends are the result of premium earned and investment income generated from
the insurance operations of FPIC, and fee and commission income from McCreary
and the Agency. FPIC specializes in liability insurance products and services
for the healthcare community, with MPL insurance for physicians and dentists as
its primary product. FPIC's MPL insurance is written on a "claims-made" basis
(as opposed to an "occurrence" basis) providing protection to the insured only
for those claims that arise out of incidents occurring, and of which notice to
the insurer is given, while coverage is in effect. The advantage of a
claims-made policy is that it allows the insurer to accrue reserves in the year
that the claim is reported. Consequently, the insurer is able to measure
frequency of claims, and therefore estimate reserves, with greater accuracy.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpected changes in loss trends in
any period could have a materially adverse effect on the Company. In addition,
reevaluations of loss and loss adjustment expense (LAE) reserves could result
in an increase or decrease in reserves and a corresponding adjustment to
earnings. LAE are costs associated with the settlement of claims. The
Company's historical results of operations are not necessarily indicative of
future earnings.
OVERVIEW
During fiscal 1997, the Company had an exceptional year in almost every
financial category, with most business segments growing revenues over 20%. In
addition to the top-line growth, the Company's growth in net income exceeded
24% and, despite a competitive Florida medical professional liability market,
FPIC was able to grow its direct premiums written 21%. The Company also
continued to diversify its revenues in areas other than its physicians MPL core
market. Excluding investment income, the amount of revenue generated from
non-core market sources grew to 23.7% of total revenues at year-end 1997.
As part of its expansion efforts, the Company completed three transactions in
1997: Employers Mutual, Inc., a third party administrator was purchased in
January; a 20% interest in APS Insurance Services Inc., an Austin-based
management company for a Texas MPL insurer, was acquired in July; and FPIC's
acquisition of Frontier Insurance Company's Florida book of physician MPL
business that began renewing in December. The positive impact of these three
transactions should be fully realized in the 1998 fiscal year.
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<PAGE> 16
INSURANCE OPERATIONS
Relative to FPIC's core MPL business, total insureds increased 14.8%, from
5,952 in 1996 to 6,831 in 1997. Physician insureds grew 15.2%, from 4,229 in
1996 to 4,872 in 1997. Dental insureds grew 5.9%, from 1,674 in 1996 to 1,772
in 1997. All other MPL insureds grew 281.6%, from 49 in 1996 to 187 in 1997.
Net premiums earned on the company's MPL business grew 14.8%, from $55.3
million in 1996 to $63.5 million in 1997.
Considerable growth was achieved in other product areas such as legal defense
for healthcare provider licensure investigations, group accident and health
insurance coverage and errors & omissions and directors & officers liability
insurance for managed care organizations. Net premiums earned for these
products increased 150%, from $0.8 million in 1996 to $2.0 million in 1997.
FPIC experienced another solid year of underwriting results, with frequency of
claims reported continuing its downward trend. In addition, loss experience on
the 1995 and prior report years is developing as expected and, in some
instances, better than expected. Report years 1996 and 1997 are not mature
enough to accurately project at this time.
The combined ratio for the fiscal year, calculated using generally accepted
accounting principles (GAAP), declined 1.7% from 95.5% in 1996 to 93.8% in
1997. This positive trend was primarily the result of a 1.2% decrease in the
loss ratio and a 0.5% decrease in the FPIC's company's overall expense ratio.
For the year the total return in FPIC's fixed-income investment portfolio was
8.27%, equating to a 9.47% taxable equivalent yield when adjusted for the
municipal bond allocation. While FPIC invests primarily in high grade
fixed-income securities with an average duration of less than five years, the
return on average investments dropped from 5.9% in 1996 to 5.8% in 1997
primarily due to a higher level of invested assets and a greater allocation to
federally tax-exempt securities. The total amount of the portfolio invested in
tax-free securities increased from 41% in 1996 to 50% in 1997. The current
investment policy permits greater allocation to tax-free securities when the
taxable equivalent yield exceeds that of taxable securities of comparable
credit, maturity and structure. The benefit of this strategy is evidenced by
the drop in the Company's effective tax rate from 31% in 1996 to 29% in 1997.
On a consolidated basis, the Company's total investment portfolio grew $29.8
million, or 12.5%, from $238.5 million in 1996 to $268.3 million in 1997. The
growth in investments exceeded expectations and consisted of a $5.6 million
year-over-year increase in market value for securities held, the reinvestment
of $15.7 million in net interest income and a net contribution of $8.5 million
from operations and other sources. Net investment income earned increased $1.2
million from $13.6 million in 1996 to $14.8 million in 1997.
ACQUISITIONS AND NEW PRODUCTS
The Company continued to expand TPA operations during the year with McCreary
Corporation's acquisition of EMI in January 1997. Combining these operations
doubled McCreary's revenues, from $5.3 million in 1996 to $10.5 million in
1997, and increased net income 85.7%, from $0.7 million in 1996 to $1.3 million
in 1997.
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<PAGE> 17
EMI's primary product, customized administration for emerging managed care
organizations, also provides McCreary a new product niche. EMI, with its
experienced staff of managed care professionals, will provide managed care
related products and services that are specifically geared toward easing the
burden that managed care has placed on all healthcare providers. To further
enhance profitability, McCreary is focused on creating significant cost
savings through investment in technology.
As previously mentioned, on July 1, 1997 the Company acquired a 20% interest in
APS Insurance Services, Inc. (APS) for $2,000,000. APS is the management
company for American Physicians Insurance Exchange (APIE), which is a Texas MPL
insurer with approximately $17 million in direct premiums written in 1997. As
a result of this transaction, the Company now directly writes MPL business in
Texas for those APIE insureds who require a strongly rated A.M. Best company.
During 1997, there were approximately $2.5 million of direct premiums written
by the Company under this arrangement.
On December 1, 1997, the Company acquired Frontier Insurance Company's Florida
physician MPL business. These policies were acquired on a "best efforts"
renewal basis, with an estimate that only 50% of the $16 million in premium
written would likely be renewed by FPIC. This led to establishment of an
initial expected written premium target of $8 million and 40% of this amount
was negotiated as the purchase price. At closing the $3.2 million purchase
price was paid by issuing 111,663 shares of Company common stock at an average
price of $28.66 each.
The second condition of this transaction calls for an adjustment to the
purchase price based on the above formula, to be paid in cash, at the end of
the 12 month underwriting period which ends November 30, 1998. This cash
payment will reflect any deviation from what develops as the actual renewal
results of the book versus what the expected renewal results were at time of
closing. Our current estimate now indicates FPIC will renew only 33% of the
original $16 million book, a reflection of both the increased MPL competition
in Florida and FPIC's more stringent underwriting and pricing policies. If
correct, this difference will result in a cash payment back to the Company from
Frontier of approximately $1.1 million in early 1999, reducing the purchase
price.
An additional benefit to FPIC in conjunction with this transaction was the
assumption over time of Frontier's legal division in Florida. This entity acts
as an in-house legal department which FPIC believes could lead to a more
efficient way to litigate claims. While relationships with outside legal firms
will always be an important, value-added component of the claims litigation
process, FPIC will continually seek innovative ways to reduce costs and improve
litigation results.
In 1997, the Company made several unsolicited offers to negotiate with
Physicians Protective Trust Fund (PPTF), a Florida trust fund providing MPL to
physicians, for an amount up to $180,000,000 in Company common stock. After
several meetings and numerous discussions with the advisors and senior
management of PPTF, the Company was unable to negotiate a definitive agreement
with PPTF and all discussions ceased in the fourth quarter of 1997. Although
the proposal is still outstanding, it is our belief that the management of PPTF
is committed to and is diligently pursuing a merger with PICOM Insurance
Company (PICOM). At present the Company does not intend to make any other
proposals to PPTF.
Another component of FPIC's product diversification plan is the recent
agreement to underwrite and administer the Florida Dental Association (FDA)
group health plan. The FDA health plan is
15
<PAGE> 18
a very unique cross-selling opportunity whereby FPIC will underwrite a small
employer, limited risk, accident and health program for dentists. In addition,
the Company's McCreary subsidiary will receive a fee for administering the
program. The majority of the premium will begin rolling over in April of 1998.
Based on the amount of premium currently in the plan, the Company anticipates
$7 million to $8 million of net premiums will be earned in 1998.
In summary, the Company will continue to seek accretive acquisitions, expand
geographic territories and develop value-added products and services. As the
Company grows, cross-selling opportunities will also be identified to
distribute more efficiently these new products and services to our core market
and growing base of new customers.
OUTLOOK
Our assessment of the current Florida MPL market indicates the growth prospects
for 1998, without any acquisitions, appear to be slowing and may fall to a
single digit rate. Some of the reasons we might experience slower MPL growth
in the Florida market are:
1) Until the proposed business combination of PPTF and PICOM is either
consummated or terminated, there could be a tendency for PPTF insureds not to
change carriers during the year due to the potential payout to PPTF
policyholders. In the past two years former PPTF insureds have been a
consistent source of growth for FPIC.
2) The Company anticipates there will continue to be increasing competition in
the Florida MPL market both from the large number of writers already present
and new MPL writers entering the state. This competition conceivably could
keep pressure on rates.
3) Effective January 1, 1998, FPIC instituted a rate increase averaging 5%
overall, with certain diagnostic and primary care specialties increasing 30%.
Within these specialties FPIC has continued to realize deteriorating loss
experience with loss ratios reaching levels that, over time, could negatively
impact earnings.
The Company's strategy is to increase pricing on these negatively
developing medical specialties to the level where, at a minimum, some
contribution is being made toward covering related fixed expenses. These
specialties make up less than 10% of FPIC's direct premiums written and a
portion of this market could be lost in 1998. To date, however, a loss in
these specialties is not evident based on early 1998 renewal results.
Conversely, FPIC continues to remain very competitive in its target specialties
and claims-free program, where applications for new business continue at a
strong pace.
Indications are the MPL industry has entered the early stages of a
consolidation phase and, as a result of this trend, a number of MPL companies
could either merge or be acquired. Management is committed to a disciplined
acquisition strategy as a way to increase shareholder value and, in the normal
course of business, will evaluate business combinations with other companies.
Management believes ideal candidates should be as strong or stronger than the
Company, on a relative basis, and that the combination be immediately accretive
to earnings. There are a number of capital sources available to finance these
transactions including internally generated funds, bank credit facilities and
newly issued debt and/or equity securities.
While management continues to closely monitor the growth in core MPL business,
the Company is committed to adding new products and services that should result
in revenue and profitability
16
<PAGE> 19
growth rates consistent with 1996 and 1997. Any acquisitions, mergers or
business combinations that might occur should further enhance these
expectations.
Results of Operations - Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996
Premiums
Direct premiums written and assumed increased $13.5 million, or 21%, from $64.3
million in 1996 to $77.8 million in 1997. This increase was primarily
attributable to growth in the number of insureds and a rate increase of 2.4% on
physician MPL premiums effective January 1, 1997. In addition, the Company
added $2.5 million of direct premium written in Texas and assumed $1.0 million
in group accident and health coverage in 1997. Reinsurance premium ceded
increased $1.8 million, or 32%, from $5.7 million in 1996 to $7.5 million in
1997 due to the increase in premium written in Texas. Net premiums earned
increased $9.4 million, or 17%, from $56.1 million in 1996 to $65.5 million in
1997 due to the increase in direct premiums written and the assumed premium.
Net Investment Income
Net investment income increased $1.2 million, or 9%, from $13.6 million in 1996
to $14.8 million in 1997. The increase was primarily attributable to a higher
level of invested assets. The increase was achieved despite a shift in the
portfolio from 41% of tax free securities in 1996 to 50% of tax-free securities
in 1997. The Company's investment policy is to acquire investment grade fixed
income securities with an average duration of approximately five years. Due
to the falling interest rate environment, maturities in the portfolio were
extended and the average duration of the portfolio was increased from 4.2 years
in 1996 to 5.0 years in 1997.
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 areas. 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 nearly doubled, from $5.2
million in 1996 to $10.2 million in 1997. This increase is attributable to the
addition of new contracts and the inclusion of EMI, which was purchased in 1997
and added revenue of $4.6 million.
Losses and LAE
Losses and LAE increased $7.0 million, or 15%, from $47.0 million in 1996 to
$54.0 million in 1997 reflecting, in part, the increase in insureds. The GAAP
loss ratios of 82.5% in 1997 and 83.7% in 1996 reflect the stability the
Company has experienced in its loss trends in recent years. In connection with
the Company's bi-annual reserving review, which includes a reevaluation of the
adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $15.1 million in 1997 and
$14.7 million in 1996. There is no
17
<PAGE> 20
assurance that reserve adequacy reevaluations will produce similar reserve
reductions in the future. Factors that could adversely affect the loss and LAE
reserve estimate and future redundancies include, but are not limited to,
inflation, changes in frequency and severity trends or changes in the judicial
or legislative environment. The Company cannot predict whether similar
redundancies will be experienced in future years.
The Company believes that its favorable loss and LAE reserve development has
primarily resulted from the following factors: (i) tort reform; (ii) the
Company's approach to establishing reserves; (iii) the Company's targeting of
medical specialties in which it believes it has developed substantial knowledge
and experience; and (iv) the Company's targeting of "claims-free" business.
Other Underwriting Expenses
Other underwriting expenses increased $0.8 million, or 12%, from $6.6 million
in 1996 to $7.4 million in 1997. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written, and the expansion into other product lines.
Other Operating Expenses
Other operating expenses more than doubled from $4.1 million in 1996 to $8.5
million in 1997. These expenses are for MCC and this increase was primarily
attributed to the inclusion of the EMI operations in the 1997 financial
statements.
Income Tax
Income taxes increased $0.8 million, or 13%, from $6.0 million in 1996 to $6.8
million in 1997. This increase was lower than the percentage change in income
before tax, which increased 21% to $23.3 million, due to the shift in the
investment policy from taxable to tax-free securities.
Net Income
For the reasons stated above, net income increased $3.3 million, or 25%, from
$13.3 million in 1996 to $16.6 million in 1997.
Results of Operations - Year Ended December 31, 1996 Compared to Year Ended
December 31, 1995
Premiums
Direct premium written increased $7.7 million, or 14%, from $56.6 million in
1995 to $64.3 million in 1996. This increase was despite a 2.4% decrease in
rates. This increase was primarily attributable to growth in the number of
insureds. Reinsurance premium ceded increased $3.4 million, or 148%, from $2.3
million in 1995 to $5.7 million in 1996 due to a return of ceded premium of
$3.4 million upon the expiration of a reinsurance contract in 1995 which was
recorded as a decrease to ceded premium. Excluding this transaction,
reinsurance premium ceded would have decreased $0.1 million. Net premium
earned increased $3.4 million, or 6%, from $52.7 million in 1995 to $56.1
million in 1996 due to the increase in direct premium written and the decrease
in ceded premium. Excluding the one time effect of the return of ceded premium
received in conjunction with the above-mentioned reinsurance contract, net
premium earned increased $6.8 million from $49.3 million to $56.1 million.
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<PAGE> 21
Net Investment Income
Net investment income increased $1.6 million, or 13%, from $12.0 million in
1995 to $13.6 million in 1996. Investment income in 1995 is net of a $0.5
million writedown of the Company's home office building. The increase was
primarily attributable to a higher level of invested assets. The increase was
achieved despite a shift in the portfolio to a higher concentration of
tax-free securities. The Company's investment policy is to acquire investment
grade fixed income securities with an average duration of approximately four
years. The average duration of the portfolio increased from 3.6 years in 1995
to 4.2 years in 1996.
Net Realized Investment Gains (Losses)
Net realized investment losses in 1996 were $0.1 million as compared to net
realized investment gains of $0.2 million in 1995. With the buy and hold
approach described earlier, net realized investment gains or losses are
expected to be minimal.
Claims Administration Fees and Commission Income
Claims administration fees and commission income increased from $2.6 million in
1995 to $5.2 million in 1996. This increase is attributable to the inclusion
of a full year of income form McCreary.
Losses and LAE
Losses and LAE increased $2.2 million, or 5%, from $44.8 million in 1995 to
$47.0 million in 1996 reflecting, in part, the increase in insureds. The GAAP
loss ratios of 83.7% in 1996 and 85.1% in 1995 reflect the stability the
Company has experienced in its loss trends in recent years. In connection with
the Company's bi-annual reserving review, which includes a reevaluation of the
adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $14.7 million in 1996 and
$14.0 million in 1995. There is no assurance that reserve adequacy
reevaluations will produce similar reserve reductions in the future.
Factors that could adversely affect the loss and LAE reserve estimate and
future redundancies include, but are not limited to, inflation, changes in
frequency and severity trends or changes in the judicial or legislative
environment. The Company cannot predict whether similar redundancies will be
experienced in future years.
The Company believes that its favorable loss and LAE reserve development has
primarily resulted from the following factors: (i) tort reform; (ii) the
Company's approach to establishing reserves; (iii) the Company's targeting of
medical specialties in which it believes it has developed substantial knowledge
and experience; and (iv) the Company's targeting of "claims-free" business.
Other Underwriting Expenses
Other underwriting expenses increased $1.5 million, or 29%, from $5.1 million
in 1995 to $6.6 million in 1996. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written.
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<PAGE> 22
Other Operating Expenses
Other operating expenses more than doubled from $2.0 million in 1995 to $4.1
million in 1996. These expenses are for McCreary and this increase was
primarily attributed to the inclusion of a full year of McCreary operations in
the 1996 financial statements.
Income Tax
Income taxes increased $0.1 million, or 2%, from $5.9 million in 1995 to $6.0
million in 1996. Income tax expense was flat even though net income before tax
increased by $1.7 million, from $17.6 million in 1995 to $19.3 million in 1996,
due to the shift in the investment policy from taxable to tax-free securities.
Net Income
For the reasons stated above, net income increased $1.6 million, or 14%, from
$11.7 million in 1995 to $13.3 million in 1996.
Liquidity and Capital Resources
The payment of losses and LAE, and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to
pay these items has been provided by operating activities. Cash provided from
these activities was sufficient during 1997 to meet the Company's needs.
Management believes these sources will be sufficient to meet the Company's cash
needs for operating purposes for at least the next twelve months. However, a
number of factors could cause increases in the dollar amount of losses and LAE
and may therefore adversely affect future reserve development and cash flow
needs. Management believes these factors include, among others, inflation,
changes in medical procedures, increasing use of managed care and adverse
legislative changes. In order to compensate for such risk, the Company: (i)
maintains what its management considers to be adequate reinsurance; (ii)
conducts regular actuarial reviews of loss reserves every six months; and (iii)
maintains adequate asset liquidity (by managing its cash flow from operations
coupled with its fixed income maturities). On September 30, 1997, the Company
secured a $10 million revolving 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 and bears interest at various rates at
the option of the Company at the time of borrowing. The interest rates range
from LIBOR plus 0.50% to Prime less 0.50%. The Company is not charged a fee
nor is it required to maintain compensating balances in connection with this
credit facility. As of December 31, 1997, the Company had borrowed $2 million
against the credit facility for non-operating purposes, at a rate of
approximately 6.26%. The Company will continue to evaluate its need to obtain
financing sources to meet future non-operating needs.
At December 31, 1997, the Company held approximately $11.2 million in
investments scheduled to mature during the next twelve months, which combined
with net cash flows from operating activities, are expected to provide the
Company with sufficient liquidity and working capital. As highlighted in the
accompanying Consolidated Statements of Cash Flows, the Company generated
positive net cash from operations of $29.1 million in 1997.
Shareholder dividends payable by the Company's insurance subsidiary, FPIC, are
subject to certain limitations imposed by Florida law. In 1998, FPIC is
permitted, within insurance
20
<PAGE> 23
regulatory guidelines, to pay dividends of approximately $12.4 million without
prior regulatory approval.
In recent years the National Association of Insurance Commissioners (NAIC) has
developed risk-based capital ("RBC") measurements for insurers. The
measurements provide state regulators with varying levels of authority based on
the adequacy of an insurer's RBC. At December 31, 1997, FPIC's statutory
annual statement reported a total adjusted surplus to policyholders of $87.9
million, which is $77.7 million more than the NAIC's authorized RBC control
level of $10.2 million. The authorized control level permits an insurance
regulator to take whatever regulatory actions are considered necessary to
protect the best interests of the policyholders and creditors of the insurer,
which may include placing the insurer under regulatory control (i.e.,
rehabilitation or liquidation). The Florida Department of Insurance has not
adopted the NAIC's RBC standards, although it does use the standard to identify
companies that may need regulatory attention.
Guaranty Fund Assessments
FPIC is subject to assessment by the Florida Insurance Guaranty Association,
Inc. (FIGA) as well as similar associations in other states where it is
licensed, for the provision of funds necessary for the settlement of covered
claims under certain policies of insolvent insurers. Standard assessments
levied annually by these associations on an "as needed" basis are expensed as
paid.
In addition to the standard FIGA assessments, the Florida Legislature may levy
special assessments to settle claims caused by certain catastrophic losses.
FPIC would be assessed on a basis of premium written. No provision for special
assessments was made in the 1997 financial statements. However, damages caused
by future catastrophes, such as hurricanes, could subject the Company to
additional assessments.
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 addressed the year 2000 issue when it converted
its database and reprogrammed its system software in 1994.
Forward-Looking Statements
The statements which are not historical facts contained in this report are
forward-looking statements that involve certain risks and uncertainties. These
forward-looking statements include the plans, objectives and expectations of
management for future operations relating to the products and future economic
performance of the Company. The forward-looking statements are based on
assumptions that the Company will continue to: (i) price and market its
insurance products competitively; (ii) reserve appropriately for losses and
LAE; (iii) maintain its successful handling of claims; and (iv) retain existing
agents and key management personnel. The forward-looking statements are also
based upon assumptions that (i) competitive conditions within the MPL insurance
business will not change materially or adversely; (ii) demand for MPL insurance
will remain strong; (iii) the market will accept the Company's new products and
services; and (iv) the Company's reinsurers will remain solvent. In addition,
if the Company
21
<PAGE> 24
does acquire one or more businesses, management's ability to identify suitable
businesses to acquire and to effectively integrate the combined operations of
such businesses with the Company may cause the Company's actual results to
differ materially from the results anticipated in these forward-looking
statements. Assumptions relating to the foregoing are difficult or impossible
to predict accurately and many are beyond the control of the Company. In light
of the significant uncertainties inherent in the forward-looking information
included herein, the inclusion of such information should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved.
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page 29.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required hereunder with respect to directors and the five highest
compensated officers will appear under the heading Executive Compensation in
the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders,
which information is incorporated herein by reference.
Information regarding the Company's other executive officers is as follows:
<TABLE>
<CAPTION>
Name Age Capacity
---- --- --------
<S> <C> <C>
R. Jeannie Whitter 47 Vice President
Charles W. Emanuel 47 Vice President and Secretary
Ray A. Carey 59 Vice President
Kurt F. Driscoll 47 Vice President
Paul T. Luckman 41 Vice President
Donald J. Sabia 39 Vice President and Controller
</TABLE>
R. Jeannie Whitter has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1988. She has been
involved in the Company's underwriting since 1976.
Charles W. Emanuel has served as Vice President and Secretary of the Company
since its formation in 1996 and as Vice President and Assistant Secretary of
FPIC since 1988. Since 1982, Mr. Emanuel has been responsible for the
Company's management information systems.
Ray A. Carey has served as Vice President of the Company since its formation in
1996 and as Vice President of FPIC since 1992. Since 1978, Mr. Carey has been
responsible for the Company's claims administration.
22
<PAGE> 25
Kurt F. Driscoll has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1992 and has been
responsible for the Company's risk management since 1988.
Paul T. Luckman has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since March 1996 and is responsible for
the Company's marketing. Mr. Luckman served as Director of Hospitals and
Managed Care programs for MAG Mutual Insurance Company from 1993 to 1996. He
served as Director of Insurance and Risk Management for Crozar-Keytone Health
System from 1992 to 1993. Mr. Luckman served as Associate Director of Risk
Management for Franciscan Health System from 1991 to 1992.
Donald J. Sabia has served as Vice President and Controller of the Company
since its formation in 1996 and as Controller of FPIC since 1995 and has been
employed by the Company since 1993. From 1986 to 1993, Mr. Sabia was an audit
supervisor for Coopers & Lybrand. Mr. Sabia is a Certified Public Accountant.
Item 11. Executive Compensation
The information required herein will appear under the heading Executive
Compensation in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required herein will appear under the heading Principal
Shareholders and Securities Ownership of Management in the Company's Proxy
Statement for the 1998 Annual Meeting of Shareholders, which information is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required herein will appear under the heading Certain
Relationships and Related Transactions in the Company's Proxy Statement for the
1998 Annual Meeting of Shareholders, which information is incorporated herein
by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
<S> <C>
(a) 1. Financial Statements and Schedules
----------------------------------
FPIC Insurance Group, Inc.:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31,
1997, 1996 and 1995
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
2. Notes to the Consolidated Financial Statements
----------------------------------------------
</TABLE>
23
<PAGE> 26
<TABLE>
<S> <C>
(Schedules other than those listed are omitted for the reason that they are not
required or are not applicable or the required information is shown in the
financial statements or notes thereto)
I - Summary of Investments - Other than Related Party Investments
II - Condensed Financial Information of Registrant
III - Supplemental Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts
3. Exhibits
---------
Exhibit No.
-----------
3.1 Articles of Incorporation of FPIC Insurance Group, Inc.,
incorporated by reference to the Company's Registration Statement on Form
S-4 (Registration No. 333-02040) first filed on March 7, 1996.
3.2 Bylaws of FPIC Insurance Group, Inc., incorporated by reference to the
Company's Registration Statement on Form S-4 (Registration No. 333-
02040) first filed on March 7, 1996.
10(a) Reinsurance Agreement with Cologne Reinsurance Company (Dublin)
Ltd, incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(b) Casualty Excess of Loss Treaty Agreement No. AR-4373(97) Final
Placement Slip (Practitioner Liability Reinsurance) with Various
Subscribing Reinsurers.
10(c) Casualty First Excess Cession Treaty Agreement No. AR-4374(97) Final
Placement Slip (Healthcare Facilities Liability Reinsurance) with Various
Subscribing Reinsurers.
10(d) Form of Employment Agreements dated December 30, 1992, amended
November 4, 1995, and amended February 28, 1996, between FPIC and
William R. Russell and Steven R. Smith, incorporated by reference to the
Company's Registration Statement on Form S-4 (Registration No. 333-
02040) first filed on March 7, 1996.
10(e) Form of Severance Agreements dated February 28, 1996, between FPIC
and William R. Russell, Steven R. Smith, Steven M. Rosenbloom, and
Robert B. Finch, incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(f) Form of Indemnity Agreement dated February 28, 1996 between the
Registrant and Drs. Acosta-Rua, Gause, Shapiro, Selander, White, Bagby,
Baratta, Murray, Bridges, Hagen, Van Eldik, Yonge, Messrs. Russell,
Smith, Rosenbloom, Finch, Sabia, Emanuel, Carey, Driscoll and
Ms. Whitter, incorporated by reference to the Company's Registration
</TABLE>
24
<PAGE> 27
<TABLE>
<S> <C>
Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996).
10(g) Omnibus Incentive Plan, incorporated by reference to the Company's
Registration Statement on Form S-4 (Registration No. 333-02040)
first filed on March 7, 1996.
10(h) Director Stock Option Plan, incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(i) Supplemental Executive Retirement Plan, as amended, incorporated by reference to
the Company's Third Quarter Statement on Form 10-Q (Registration No. 0-28730)
filed on November 14, 1996.
10(j) Excess Benefit Plan, incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
10(k) Deferred Compensation Plan, incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No. 333-04585) first
filed on May 24, 1996.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K
-------------------
None.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized, on this
the 14th day of March , 1998.
FPIC Insurance Group, Inc.
By /s/ William R. Russell
-------------------------------
William R. Russell, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
25
<PAGE> 28
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ William R. Russell President, Chief Executive March 14, 1998
- ---------------------------------- Officer and Director
William R. Russell (Principal Executive Officer)
/s/ Robert B. Finch Senior Vice President March 14, 1998
- ---------------------------------- and Chief Financial Officer
Robert B. Finch (Principal Financial Officer)
/s/ Donald J. Sabia Vice President and March 14, 1998
- ----------------------------------- Controller
Donald J. Sabia (Principal Accounting Officer)
/s/ James G. White Chairman of the Board March 14, 1998
- -----------------------------------
James G. White, M.D.
/s/ Guy T. Selander Vice Chairman March 14, 1998
- ------------------------------------
Guy T. Selander, M.D.
/s/ Gaston J. Acosta-Rua Director March 14, 1998
- ------------------------------------
Gaston J. Acosta-Rua, M.D.
/s/ Richard J. Bagby Director March 14, 1998
- ------------------------------------
Richard J. Bagby, M.D.
/s/ Robert O. Baratta Director March 14, 1998
- ------------------------------------
Robert O. Baratta, M.D.
/s/ James W. Bridges Director March 14, 1998
- --------------------------------------
James W. Bridges, M.D.
/s/ Curtis E. Gause Director March 14, 1998
- ---------------------------------------
Curtis E. Gause, D.D.S.
</TABLE>
26
<PAGE> 29
<TABLE>
<S> <C> <C>
/s/ J. Stewart Hagen Director March 14, 1998
- ----------------------------------------
J. Stewart Hagen, M.D.
/s/ Louis C. Murray Director March 14, 1998
- ----------------------------------------
Louis C. Murray, M.D.
/s/ David M. Shapiro Director March 14, 1998
- -----------------------------------------
David M. Shapiro, M.D.
/s/ Dick L. Van Eldik Director March 14, 1998
- ------------------------------------------
Dick L. Van Eldik, M.D.
/s/ Henry M. Yonge Director March 14, 1998
- -------------------------------------------
Henry M. Yonge, M.D.
</TABLE>
27
<PAGE> 30
Independent Auditors' Report
The Board of Directors
FPIC Insurance Group, Inc.
We have audited the consolidated financial statements of FPIC Insurance Group,
Inc. as listed in the accompanying index. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedules as listed in the accompanying index. These consolidated financial
statements and financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FPIC Insurance
Group, Inc. as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
KPMG Peat Marwick LLP
Jacksonville, Florida
March 6, 1998
28
<PAGE> 31
FPIC Insurance Group, Inc.
Consolidated Balance Sheets
as of December 31, 1997 and December 31, 1996
<TABLE>
<CAPTION>
12/31/97 12/31/96
-------------- --------------
<S> <C> <C>
ASSETS
Bonds and U.S. Government securities:
Available-for-sale, at fair value $259,574,210 $234,650,172
Other invested assets 2,000,000 0
Common stocks, at fair value 2,540,735 185,000
Real estate investments 4,184,768 3,661,726
-------------- --------------
TOTAL INVESTMENTS 268,299,713 238,496,898
-------------- --------------
Cash and cash equivalents 7,679,822 5,463,096
Premiums receivable, net of allowance for doubtful
accounts of $681,175 in 1997 and $383,580 in 1996 17,924,658 12,551,992
Accrued investment income 3,740,979 3,641,391
Reinsurance recoverable on paid losses 866,149 73,873
Due from reinsurers on unpaid losses and advance premiums 14,115,000 12,020,239
Deposits with reinsurers 18,070,341 16,419,179
Property and equipment, net of accumulated depreciation 2,369,595 1,617,750
Deferred policy acquisition costs 1,411,420 1,212,035
Deferred income taxes 8,937,094 8,913,225
Finance charge receivable 281,217 230,443
Prepaid expenses 423,328 409,718
Intangible assets 7,173,841 1,989,113
Other assets 1,556,594 513,566
-------------- --------------
TOTAL ASSETS $352,849,751 $303,552,518
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense reserves $188,086,000 $172,738,000
Unearned premiums 28,217,537 23,458,641
Paid in advance and unprocessed 4,782,835 5,250,755
Short term debt 2,000,000 0
FIGA accrual 0 1,345,244
Federal income taxes payable 2,735,527 520,585
Accrued expenses and other liabilities 6,963,432 3,827,903
-------------- --------------
TOTAL LIABILITIES 232,785,331 207,141,128
-------------- --------------
Commitments and contingencies (note 15)
SHAREHOLDERS' EQUITY
Common stock, $.10 par value: 25,000,000 shares authorized;
9,179,581 and 9,021,670 shares issued and outstanding
in 1997 and 1996, respectively 917,958 902,167
Additional paid-in capital 25,789,144 22,444,711
Net unrealized gain on investments 3,634,299 80,169
Retained earnings 89,723,019 73,166,334
-------------- --------------
120,064,420 96,593,381
Less Treasury Stock 0 (181,991)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 120,064,420 96,411,390
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $352,849,751 $303,552,518
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 32
FPIC Insurance Group, Inc.
Consolidated Statements of Income
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUES
Net premiums earned $65,503,675 $56,074,436 $52,674,850
Net investment income 14,820,373 13,611,373 11,987,414
Net realized investment gains (losses) 32,065 (71,288) 238,275
Claims administration and management fees 8,758,651 4,071,460 1,904,324
Commission income 1,465,282 1,120,455 652,848
Finance charge and other income 2,635,985 2,175,079 2,072,811
-------------- -------------- --------------
TOTAL REVENUES 93,216,031 76,981,515 69,530,522
-------------- -------------- --------------
EXPENSES
Net losses and loss adjustment expenses 54,010,515 46,947,946 44,839,234
Other underwriting expenses 7,400,029 6,589,743 5,134,525
Other operating expenses 8,461,264 4,124,404 1,960,755
-------------- -------------- --------------
TOTAL EXPENSES 69,871,808 57,662,093 51,934,514
-------------- -------------- --------------
Income before income taxes 23,344,223 19,319,422 17,596,008
Income taxes 6,787,538 5,995,697 5,909,835
-------------- -------------- --------------
NET INCOME $16,556,685 $13,323,725 $11,686,173
============== ============== ==============
BASIC EARNINGS PER COMMON SHARE $1.83 $1.57 $1.47
============== ============== ==============
DILUTED EARNINGS PER COMMON SHARE $1.76 $1.53 $1.47
============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING 9,407,093 8,723,967 7,949,750
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE> 33
FPIC Insurance Group, Inc.
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
ADDITIONAL NET UNREALIZED
COMMON PAID-IN GAIN (LOSS)
STOCK CAPITAL ON INVESTMENTS
-----------------------------------------------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $775,986 $18,492,687 ($7,414,848)
Net income
Issuance of shares, net 37,978 (37,978)
Payment of cash dividend
Net unrealized gain on debt securities 9,040,023
-----------------------------------------------------
BALANCES, DECEMBER 31, 1995 813,964 18,454,709 1,625,175
Net income
Payment of cash dividend
Payment of prior year dividend
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding
Issuance of shares, net 38,203 (38,203)
Shares issued and net proceeds received from IPO 50,000 4,028,205
-----------------------------------------------------
BALANCES, DECEMBER 31, 1996 902,167 22,444,711 80,169
Net income
Net unrealized gain on debt and equity securities 3,554,130
Retirement of treasury shares (1,957) (180,034)
Issuance of shares, net 17,748 3,524,467
-----------------------------------------------------
BALANCES, DECEMBER 31, 1997 $917,958 $25,789,144 $3,634,299
=====================================================
<CAPTION>
RETAINED TREASURY
EARNINGS STOCK TOTAL
------------------------------------------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1994 $49,752,387 $0 $61,606,212
Net income 11,686,173 11,686,173
Issuance of shares, net 0
Payment of cash dividend (775,986) (775,986)
Net unrealized gain on debt securities 9,040,023
------------------------------------------------
BALANCES, DECEMBER 31, 1995 60,662,574 0 81,556,422
Net income 13,323,725 13,323,725
Payment of cash dividend (813,965) (813,965)
Payment of prior year dividend (6,000) (6,000)
Net unrealized loss on debt securities (1,545,006)
Purchase of shares outstanding (181,991) (181,991)
Issuance of shares, net 0
Shares issued and net proceeds received from IPO 4,078,205
------------------------------------------------
BALANCES, DECEMBER 31, 1996 73,166,334 (181,991) 96,411,390
Net income 16,556,685 16,556,685
Net unrealized gain on debt and equity securities 3,554,130
Retirement of treasury shares 181,991 0
Issuance of shares, net 3,542,215
------------------------------------------------
BALANCES, DECEMBER 31, 1997 $89,723,019 $0 $120,064,420
================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
31
<PAGE> 34
FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $16,556,685 $13,323,725 $11,686,173
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 2,108,350 1,757,526 1,687,038
Realized (gains) losses on investments (32,065) 71,288 (238,275)
Realized loss on sale of equipment 7,275 0 0
Bad debt expense 297,595 147,422 153,498
Loss on write down of real estate investment 0 0 500,000
Deferred income taxes (1,939,499) 1,355,093 909,805
Changes in assets and liabilities:
Premiums receivable (5,670,261) (1,853,407) (1,082,670)
Accrued investment income (99,588) (576,525) 227,653
Reinsurance recoverable on paid losses (792,276) 735,027 (754,849)
Due from reinsurers on unpaid losses and advance premiums (2,094,761) (2,539,962) 17,439
Deposits with reinsurers (1,651,162) (1,576,227) (4,619,072)
Deferred policy acquisition costs (199,385) (393,723) (222,840)
Federal income tax receivable 0 1,665,764 (401,722)
Other assets (784,846) 38,465 (520,935)
Prepaid expenses and finance charge receivable (64,385) (88,142) (48,371)
Loss and loss adjustment expense reserves 15,348,000 8,232,000 12,238,000
Unearned premiums 4,758,896 2,510,756 1,641,082
Paid in advance and unprocessed (467,920) 1,268,612 (519,493)
FIGA accrual (1,345,244) (1,686,990) (730,295)
Federal income tax payable 2,214,942 520,585 0
Accrued expenses and other liabilities 2,973,378 1,153,818 (146,383)
-------------- -------------- --------------
Net cash provided by operating activities 29,123,729 24,065,105 19,775,783
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of short-term investments 0 500,000 4,148,996
Purchase of short-term investments 0 0 (803,760)
Proceeds from sale or maturity of securities available-for-sale 81,416,058 80,865,600 162,579,137
Purchase of securities available-for-sale (102,081,907) (101,186,056) (182,116,512)
Purchase of goodwill (5,407,588) (1,000,000) (1,144,879)
Proceeds from sale of real estate investments 281,060 0 0
Purchase of real estate investments (864,224) (1,021,392) (225,000)
Purchase of other invested assets (2,000,000) 0 0
Purchase of common stock (2,331,950) (60,000) (60,000)
Purchase of subsidiary's net other assets and stock (285,726) 0 (855,121)
Purchase of property and equipment, net (1,174,941) (270,505) (41,232)
-------------- -------------- --------------
Net cash (used in) investing activities (32,449,218) (22,172,353) (18,518,371)
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of short term debt 2,000,000 0 0
Issuance of common stock 3,542,215 4,078,205 0
Purchase of common stock-treasury 0 (181,991) 0
Dividends paid on common stock 0 (819,965) (775,986)
-------------- -------------- --------------
Net cash provided by (used in) financing activities 5,542,215 3,076,249 (775,986)
-------------- -------------- --------------
Net increase in cash and cash equivalents 2,216,726 4,969,001 481,426
Cash and cash equivalents, beginning of year 5,463,096 494,095 12,669
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF YEAR $7,679,822 $5,463,096 $494,095
============== ============== ==============
Supplemental disclosure of cash flow information:
Federal income taxes paid $6,071,204 $2,599,703 $6,071,000
Exchange of mortgage note for deed on real estate investment $0 $0 $2,200,000
Retirement of treasury stock $181,991 $0 $0
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE> 35
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1997, 1996 and 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FPIC Insurance Group, Inc. (the Company) is an insurance holding company
comprised of three wholly-owned subsidiaries: Florida Physicians Insurance
Company, Inc. (FPIC), FPIC Insurance Agency (the Agency), and McCreary
Corporation and its subsidiary (MCC). On June 11, 1996, the shareholders of
FPIC approved the formation of a holding company structure that resulted in
FPIC becoming a subsidiary of the Company. In connection with the
reorganization, FPIC's shareholders became the shareholders of the Company and
received five shares of the Company's common stock for each of their shares of
FPIC's common stock. FPIC is a licensed casualty insurance carrier and writes
professional liability insurance for physicians, dentists, hospitals and other
healthcare providers, primarily in the state of Florida. MCC is a third-party
administrator of various lines of business in the insurance segment, operating
in Florida. The Agency conducts various insurance agency activities.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). These
financial statements include the accounts of FPIC, the Agency, and MCC. Less
than majority-owned entities in which the company has at least a 20% interest
are reported on the equity basis. All significant intercompany transactions
and balances have been eliminated in consolidation.
NATURE OF OPERATIONS
The Company operates in the property and casualty insurance industry, is
licensed to write insurance in several states, and is subject to regulation by
the Departments of Insurance in these states. Following is a description of
the most significant risks facing property and casualty insurers and how the
Company mitigates those risks:
Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will change and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those currently recorded in
the financial statements. This risk is concentrated in Florida, where the
Company writes most of its business, but may expand to other states as it
begins writing in those states.
Credit Risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers which owe the Company money,
will not pay. The Company minimizes this risk by adhering to a conservative
investment and reinsurance strategy. Financial instruments which potentially
expose the Company to concentrations of credit risk consist primarily of
premiums receivable and deposits with reinsurers. The Company has not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. Management believes no additional credit risk beyond amounts provided
for collection losses is inherent in the Company's premiums receivable. The
Company typically requires that deposits with reinsurers be held in trust and,
as a result, has not experienced significant losses related to such deposits.
Interest Rate Risk is the risk that interest rates will change and cause a
decrease in the value of insurer's investments. The Company mitigates this
risk by following a conservative investment strategy. To the extent that
liabilities come due more quickly than assets mature, an insurer would have to
sell assets prior to maturity and recognize a gain or loss. Given the
Company's liquidity position and prior history, it is unlikely that it would
need to liquidate its investment portfolio prior to its scheduled maturity.
Use of Estimates. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and revenues
and expenses for the period. Actual results could differ from these estimates.
The estimates most susceptible to change are those used in determining the
reserve for losses and loss adjustment expenses. Although considerable
variability is inherent in these estimates, management believes that these
reserves are adequate. The estimates are continually reviewed and adjusted as
necessary in current operations.
INVESTMENTS
The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" (SFAS No.
115). Under the provisions of SFAS No. 115, the Company is required
33
<PAGE> 36
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to classify investments in debt securities (bonds, redeemable preferred stocks
and mortgage-backed securities) into one of three categories: held-to-maturity,
available-for-sale, or trading.
Market values for debt and equity securities were based on quoted market prices
or dealer quotations. Where a quoted market price was not available, fair
value was measured utilizing quoted market prices for similar securities or by
using discounted cash flow methods.
Other invested assets include an investment in a limited partnership. The
partnership invests in the stock of publicly held companies operating in the
insurance industry.
Investments in common stocks include common stock of affiliates and
nonaffiliates and are recorded at market value.
Income on investments is net of amortization of premium and accretion of
discount on the yield-to-maturity method relating to debt securities acquired
at other than par value. Realized investment gains and losses were determined
on the specific identification basis. Declines in the fair value of securities
considered to be other than temporary, if any, would be recorded as realized
losses in the consolidated statements of income.
REAL ESTATE INVESTMENTS
Real estate investments consist of a building, which includes the Company's
home office, various rental units and vacant lots. Depreciation is computed
over the estimated useful lives of the property, using the straight-line
method. Estimated useful lives range from 27.5 to 39 years. Rental income and
expenses are included in net investment income.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all demand deposits, overnight investments and instruments with a
maturity of three months or less to be cash equivalents.
REINSURANCE
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. The Company retains a maximum of $500,000 per
occurrence. Amounts recoverable from reinsurers were estimated in a manner
consistent with the claim liability associated with the reinsured policy. The
Company evaluates the financial condition of reinsurers since failure of
reinsurers to honor their obligations could result in losses to the Company.
The Company generally obtains collateral in the form of letters of credit for
amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance. Reinsurance assumed is not
material. The Company records its reinsurance contracts under the provisions
of Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (SFAS
No. 113).
PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis with estimated
useful lives ranging from five to fifteen years.
DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs, principally commissions, are amortized over
the estimated life of the insurance contracts.
INCOME TAXES
Income taxes were accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. 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.
34
<PAGE> 37
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS
In general, the excess of cost over net assets purchased relating to business
acquisitions and the cost of insurance and renewal rights purchased is being
amortized into income over periods not exceeding forty years using the
straight-line method. The carrying value of the intangible assets is reviewed
regularly by management by determining whether the amortization of the
intangible assets can be recovered through undiscounted future operating cash
flows of the acquired operation.
RECOGNITION OF REVENUES
Premiums are recognized as revenues on a monthly pro rata basis over the terms
of the policies. Policy terms generally do not exceed one year.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As more fully described in Note 9, loss and loss adjustment expense reserves
are based on actuarial projections of the best estimate of ultimate losses and
loss adjustment expenses as interpreted by the Company's independent consulting
actuary. The estimated liability is continually reviewed and any adjustments
which become necessary are included in current operations.
PER SHARE DATA
Net income per common share is based upon the weighted average number of common
shares outstanding during each year. Earnings per share data for all years
have been stated giving retroactive effect for the stock split that occurred as
a result of the reorganization in June 1996 (see Note 14).
In February 1997, SFAS No. 128, "Earnings per Share" was issued. This
statement requires specific computations, presentations and disclosures for
earnings per share (EPS) amounts in order to make EPS amounts more compatible
with international accounting standards. The Company adopted SFAS No. 128 for
the period ended December 31, 1997. This statement requires that any
prior-period EPS amounts be restated. The adoption of SFAS No. 128 had no
effect on diluted EPS amounts reported in prior periods.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, SFAS No. 123, "Accounting for Stock-based Compensation" was
issued. This statement requires the fair value of stock options and other
stock-based compensation issued to employees to either be recognized as
compensation expense in the income statement, or be disclosed as a pro forma
effect on net income and earnings per share in the footnotes to the Company's
financial statements. Effective January 1, 1996, the Company elected to adopt
SFAS No.123 on a disclosure basis only. Accordingly, implementation of SFAS
No. 123 did not have an effect on the Company's consolidated balance sheet or
income statement.
PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a defined benefit plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during the years of service (maximum 15 years). The cost of this
program is being funded currently.
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.
REPORTING COMPREHENSIVE INCOME
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. The
statement requires that all items that meet the definition of components of
comprehensive income be reported in the financial statements for the period in
which they are recognized. Effective for fiscal years beginning after December
15, 1997, the Company will present the additional disclosures required under
SFAS No. 130.
35
<PAGE> 38
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENTS
The amortized cost and estimated fair value of investments in debt and equity
securities as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 56,716,848 $ 997,833 $ 45,395 $ 57,669,286
Debt securities issued by states
and political subdivisions 102,786,576 2,921,699 30,109 105,678,166
Corporate securities 28,830,440 246,408 75,670 29,001,178
Mortgage-backed securities 65,672,904 1,903,177 350,501 67,225,580
------------- ---------- -------- -------------
Total debt securities 254,006,768 6,069,117 501,675 259,574,210
Equity securities 2,516,949 23,786 0 2,540,735
------------- ---------- ------- -------------
Total Securities Available-for-Sale $ 256,523,717 $ 6,092,903 $501,675 $ 262,114,945
============= =========== ======== =============
</TABLE>
<TABLE>
<CAPTION>
1996
----
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale:
U.S. Treasury securities and obligations
of U.S. Government corporations
and agencies $ 59,509,013 $ 133,548 $ 317,843 $ 59,324,718
Debt securities issued by states
and political subdivisions 54,042,865 379,025 182,499 54,239,391
Corporate securities 35,603,548 234,194 444,137 35,393,605
Mortgage-backed securities 85,373,279 1,163,925 844,746 85,692,458
------------- ----------- ---------- ------------
Total debt securities 234,528,705 1,910,692 1,789,225 234,650,172
Equity securities 185,000 0 0 185,000
------------- ----------- ---------- ------------
Total Securities Available-for-Sale $ 234,713,705 $ 1,910,692 $1,789,225 $234,835,172
============= =========== ========== ============
</TABLE>
The Company's other invested assets include an investment in a limited
partnership. The asset is recorded at cost of $2,000,000 and the market value
at December 31, 1997 was $2,091,538.
36
<PAGE> 39
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of debt and equity securities at
December 31, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities, because borrowers have the
right to call or prepay these obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
---- ----------
<S> <C> <C>
Securities Available-for-Sale:
Due in one year or less $ 11,217,698 $ 11,200,274
Due after one year through five years 30,085,215 30,454,597
Due after five years through ten years 48,654,909 49,593,000
Due after ten years, primarily U.S. Government
and mortgage-backed securities 164,048,946 168,326,339
Equity securities 2,516,949 2,540,735
------------- -------------
Totals $ 256,523,717 $ 262,114,945
============= =============
</TABLE>
Treasury notes with a carrying value of $2,500,000 and a market value of
$2,533,600 were on deposit with the Insurance Department of the State of
Florida as of December 31, 1997, as required by law.
For the years ended December 31, 1997, 1996, and 1995, net investment income
earned was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ----- ----
<S> <C> <C> <C>
Investment income earned:
Bonds and U.S. Government securities $15,470,451 $ 14,571,284 $ 13,072,522
Real estate investments 368,270 305,187 159,224
Mortgage receivable 0 0 (48,889)
Other invested assets 176,877 88,362 34,777
Short-term investments 132,721 161,180 497,313
Cash on hand and on deposit 13,846 9,232 23,872
----------- ------------ ------------
Total investment income earned 16,162,165 15,135,245 13,738,819
Investment expenses (1,341,792) (1,523,872) (1,251,405)
Loss on write down of real estate 0 0 (500,000)
------------ ------------ ------------
Net investment income $14,820,373 $ 13,611,373 $ 11,987,414
=========== ============ ============
</TABLE>
Gross realized gains and gross realized losses on sales of debt securities and
real estate investments based on specific identification, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross realized gains-available-for-sale $ 42,643 $ 59,804 $ 1,100,705
Gross realized losses-available-for-sale (89,057) (150,265) (862,430)
Gross realized gains-real estate 78,479 19,173 0
----------- ------------- -------------
Net realized gains (losses) $ 32 ,065 $ (71,288) $ 238,275
=========== ============= =============
</TABLE>
The changes in net unrealized gains (losses) on available-for-sale investments
were $5,469,762, $(2,340,918), and $13,697,004 in 1997, 1996, and 1995,
respectively.
37
<PAGE> 40
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REAL ESTATE INVESTMENTS
At December 31, 1997 and 1996, real estate investments consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Land and building $ 3,934,570 $ 3,070,659
Rental units 461,200 722,402
Other 37,670 37,670
------------ -----------
4,433,440 3,830,731
Accumulated depreciation (248,672) (169,005)
------------ -----------
Net real estate investments $ 4,184,768 $ 3,661,726
============ ===========
</TABLE>
Total depreciation expense of real estate investments was $138,598, $54,817,
and $45,709 in 1997, 1996, and 1995, respectively.
4. PROPERTY AND EQUIPMENT
At December 31, 1997, and 1996, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Leasehold improvements $ 1,096,737 $ 857,180
Data processing equipment, including software 1,074,972 871,720
Automobiles 231,647 227,218
Furniture, fixtures and equipment 1,824,844 914,721
--------- ------------
4,228,200 2,870,839
Accumulated depreciation (1,858,605) (1,253,089)
------------ ------------
Net property and equipment $ 2,369,595 $ 1,617,750
============ ============
</TABLE>
Total depreciation expense of property and equipment was $605,516, $389,495,
and $328,420, in 1997, 1996, and 1995, respectively.
5. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the years ended December 31,
1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 1,212,035 $ 818,312 $ 595,472
Additions 4,194,981 3,236,689 2,243,056
Amortization expense (3,995,596) (2,842,966) (2,020,216)
------------- ----------- ------------
Balance, ending $ 1,411,420 $ 1,212,035 $ 818,312
============ =========== ============
</TABLE>
6. BUSINESS ACQUISITIONS
On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a
Florida third party administrator, for a cost of $2,000,000. The acquisition
agreement specified annual payments to be made to the seller from 1996 through
2000.
On January 17, 1997, MCC 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.
38
<PAGE> 41
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1998 through 2001. The
remaining contingent payments and the year of payment for these two
acquisitions are as follows:
<TABLE>
<CAPTION>
McCreary EMI
-------- ---
<S> <C> <C>
1998 800,000 250,000
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. In 1997, McCreary met its earnings
target and made a $900,000 payment in accordance with the acquisition
agreement.
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 market value of APS approximates the book value at December
31, 1997. 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.
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, the Company's
subsidiary, FPIC, began underwriting Frontier's Florida book of business. The
cost of the transaction was $3.2 million, payable in the Company's common
stock, with a cash adjustment based on actual results. The excess of the
purchase price over tangible assets is included in intangible assets and will
be amortized over the expected life of this book of business, considering the
Company's historical policy renewal rate.
7. INTANGIBLE ASSETS
Intangible assets include goodwill associated with business acquisitions and at
December 31, 1997 and 1996 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance, beginning $ 1,989,113 $ 1,108,117 $ 0
Additions at cost 5,407,588 1,000,000 1,144,879
Amortization expense (222,860) (119,004) (36,762)
------------- ----------- -----------
Balance, ending $ 7,173,841 $ 1,989,113 $ 1,108,117
============ =========== ===========
</TABLE>
8. BORROWING ARRANGEMENTS
The Company maintains a $10,000,000 revolving credit facility with SunTrust
Bank which is payable on demand. The credit facility agreement terminates on
May 31, 1999 and bears interest at various rates at the option of the Company
at the time of borrowing. The interest rates range from LIBOR plus 0.50% to
Prime less 0.50%. The Company is not required to maintain compensating
balances in connection with this credit facility. As of December 31, 1997,
$2,000,000 had been borrowed under this agreement at a rate of approximately
6.26% and $31,289 of interest expense was accrued.
9. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss and loss adjustment expense (LAE) reserves are generally determined on the
basis of individual claims and actuarially determined estimates of future
claims based upon the Company's actual experience, assumptions and projections
as to claims frequency, severity and inflationary trends and settlement
payments. Such estimates may vary significantly from the eventual outcome.
The ranges of reasonably expected ultimate unpaid losses and LAE
39
<PAGE> 42
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are estimated by the Company's consulting actuary on an undiscounted basis. The
assumptions used in making such estimates and for establishing the resulting
reserves are continually reviewed and updated based upon current circumstances,
and any adjustments resulting therefrom are reflected in current income.
Activity in the reserves for losses and loss adjustment expenses was as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $172,738,000 $164,506,000 $152,268,000
Less reinsurance recoverables 11,614,000 9,188,000 8,853,000
------------- ------------ ------------
Net balance at January 1 161,124,000 155,318,000 143,415,000
------------- ------------ ------------
Incurred related to:
Current year 69,126,000 61,617,000 58,868,000
Prior year (15,115,000) (14,669,000) (14,029,000)
------------- ------------ ------------
Total incurred 54,011,000 46,948,000 44,839,000
------------- ------------ ------------
Paid related to:
Current year 8,061,000 5,253,000 4,320,000
Prior year 33,103,000 35,889,000 28,616,000
------------- ------------ ------------
Total paid 41,164,000 41,142,000 32,936,000
------------- ------------ ------------
Net balance at end of period 173,971,000 161,124,000 155,318,000
Plus reinsurance recoverables 14,115,000 11,614,000 9,188,000
------------- ------------ ------------
Balance at December 31 $ 188,086,000 $172,738,000 $164,506,000
============= ============ ============
</TABLE>
The provision for losses and loss adjustment expenses for prior years (net of
reinsurance recoveries of $5,834,000, $4,921,000, and $5,328,000, in 1997,
1996, and 1995, respectively) decreased because of lower-than-anticipated
losses, caused by the Company's underwriting of certain target specialties and
loss free business.
10. 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 reinsuring company might be unable to meet its obligations, the
Company would be liable for such defaulted amounts not already covered by
letters of credit.
The amount of earned premiums ceded to reinsurers for the years ended December
31, 1997, 1996, and 1995 was $7,508,160, $5,707,095, and $2,325,634,
respectively.
On July 1, 1993, the Company entered into a contingent aggregate excess of loss
reinsurance contract to cover the Company against certain risks, including
extended reporting endorsement claims and extra contractual obligations and/or
excess of policy limits claims. It was determined that the contract did not
meet the risk transfer requirements of SFAS No. 113 and therefore, has been
accounted for as a deposit. The amounts deposited under the term of this
contract were $500,000 in 1997 and $500,000 in 1996 and $14 million in prior
years. Under the provisions of this contract, 3.35 percent of the amount
deposited was not available for return to the Company for profit commission
purposes and was amortized over the life of the contract. This contract
expired on December 31, 1997. The Company is not renewing the contract and
plans to use the proceeds for investment purposes.
40
<PAGE> 43
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1997, 1996, and 1995 was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
Written Earned Written Earned Written Earned
<S> <C> <C> <C> <C> <C> <C>
Direct & assumed $77,770,733 $73,011,835 $64,292,287 $61,781,531 $56,641,565 $ 55,000,484
Ceded (7,485,436) (7,508,160) (5,552,785) (5,707,095) (2,335,577) (2,325,634)
----------- ----------- ---------- ---------- ------------ -----------
Net premiums $70,285,297 $65,503,675 $58,739,502 $56,074,436 $54,305,988 $52,674,850
=========== =========== =========== =========== =========== ===========
</TABLE>
11. SHAREHOLDERS' EQUITY
The Company has a stock option plan for officers and key employees (the
employee plan) and a plan for non-employee directors (the director plan). Both
plans became effective in 1996. Under the plans, both an incentive stock
option and a nonqualified stock option may be granted to the same individual.
The option price of an incentive stock option may not be less than 100% of the
fair market value of such shares on the grant date. The option price of a
non-qualified option shall not be less than 50% of the fair market value of
such shares on the grant date. Under the terms of the director plan, 5,000
shares are granted to each director on the date that person becomes a director,
and on a discretionary basis at future dates as approved by the Board, at a
price not less than 100% of the fair market value on the grant date. During
1996, 320,000 incentive stock options and 335,000 nonqualified stock options
were issued under both plans. During 1997, 120,000 nonqualified stock options
were granted under the director plan, subject to shareholder approval, and
265,000 nonqualified stock options were issued under the employee plan. Options
granted under the plans are exercisable at such dates as are determined in
connection with their issue, but not later than ten years after the date of
grant.
A summary of the status of the Company's stock option plan as of December 31,
1997 is presented below:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE
- ------------- ------ --------------
<S> <C> <C>
Outstanding at beginning of year 655,000 $9.11
Granted 385,000 $23.44
Exercised (48,500) $9.11
-------
Outstanding at end of year 991,500
=======
Options exercisable at year-end 202,167 $9.11
=======
</TABLE>
At December 31, 1997, 340,000 shares of the Company's common stock were
reserved for issuance in connection with the stock option plans.
The Company maintains an Employee Stock Purchase Plan that allows employees to
purchase the Company's common stock at 85% of the market value on the first or
last day of the offering period, whichever was lower.
41
<PAGE> 44
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant assumptions used to estimate the fair values of options using the
Black-Sholes option-pricing model were as follows:
<TABLE>
<CAPTION>
1997 1996 1996
NONQUALIFIED NONQUALIFIED INCENTIVE
STOCK OPTION STOCK OPTION STOCK OPTION
------------ ------------ ------------
<S> <C> <C> <C>
a. current price of underlying stock $29.13 $29.13 $29.13
b. exercise price of the option $23.625 $8.22 $10.00
c. expected life of the option 5 years 5 years 5 years
d. expected volatility of underlying stock 26.74% 26.87% 26.87%
e. expected dividends on the stock $0 $0 $0
f. risk-free interest rate during the expected option term 6.17% 5.37% 6.31%
</TABLE>
Total compensation expense recognized in the income statement was $0. The
weighted average fair value of options granted during the year was $23.44.
The pro forma disclosures required under SFAS No.123 methodology were as
follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Pro Forma Net Income $ 16,002,439 $ 12,672,186
Pro Forma Tax Expense $ 6,489,098 $ 5,660,055
Pro Forma Diluted Earnings Per Share $ 1.70 $ 1.45
</TABLE>
12. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal $ 7,230,181 $ 3,839,423 $ 4,199,925
State 1,496,856 801,181 800,105
------------ ----------- -----------
Total 8,727,037 4,640,604 5,000,030
------------ ----------- -----------
Deferred income tax (benefit) expense:
Federal (1,695,163) 1,157,033 777,578
State (244,336) 198,060 132,227
------------- ----------- -----------
Total (1,939,499) 1,355,093 909,805
------------- ----------- -----------
Net income tax expense $ 6,787,538 $ 5,995,697 $ 5,909,835
============ =========== ===========
</TABLE>
The provision for income taxes differed from the statutory corporate tax rate
of 35 percent for 1997, and 34 percent for 1996 and 1995, as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax
expense $ 8,170,478 $ 6,568,603 $ 5,982,643
Municipal bond interest (1,834,950) (1,316,743) (770,301)
State income taxes, net of
federal benefit 814,138 659,500 615,339
Compensation expense on
exercised options (272,508) 0 0
Other, net (89,620) 84,337 82,154
------------- ----------- -----------
Actual expense $ 6,787,538 $ 5,995,697 $ 5,909,835
============ =========== ===========
</TABLE>
42
<PAGE> 45
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997 and 1996, the significant components of the net deferred
tax asset were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets arising from:
Loss reserve discounting $ 9,166,279 $ 7,612,055
Unearned premium reserves 2,176,983 1,595,188
FIGA assessment 0 457,383
Other 814,250 586,154
----------- -----------
Total deferred tax assets 12,157,512 10,250,780
----------- -----------
Deferred tax liabilities arising from:
Unrealized gains on securities 1,956,928 41,299
Deferred acquisition costs 544,455 412,092
Accrued interest on reinsurance deposits 0 817,676
Other 719,035 66,488
----------- -----------
Total deferred tax liabilities 3,220,418 1,337,555
----------- -----------
Net deferred tax asset $ 8,937,094 $ 8,913,225
=========== ===========
</TABLE>
The Company has not recorded a valuation allowance, as the deferred tax assets
were considered by management to be realizable based on the level of
anticipated future taxable income. Net deferred tax assets and federal income
tax expense in future years can be significantly affected by changes in enacted
tax rates or by unexpected adverse events that would impact management's
conclusions as to the ultimate realizability of deferred tax assets.
13. EMPLOYEE BENEFIT PLAN
The Company's employees are covered by a qualified defined benefit plan and a
defined contribution pension plan sponsored by the Company.
The benefits of the defined benefit plan are based on years of service and the
employee's compensation. The actuarially computed net periodic pension cost
for December 31, 1997, 1996, and 1995 included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period $ 94,015 $ 88,239 $ 72,802
Interest cost on projected benefit obligation 106,284 95,970 81,879
Actual return on plan assets (219,877) (75,464) (83,334)
Net amortization and deferral 181,770 45,258 63,737
--------- ----------- ------------
Net periodic pension cost $ 162,192 $ 154,003 $ 135,084
========= ========== ============
Actuarial present value of benefit obligation:
Vested benefit obligation $ (1,121,303) $ (873,840) $ (795,082)
Accumulated benefit obligation $ (1,156,683) $ (890,071) $ (811,070)
Projected benefit obligation for
service rendered to date $ (1,945,621) $ (1,477,290) $(1,383,634)
Plan assets at fair value 1,139,563 854,139 748,937
------------ ----------- ------------
Projected benefit obligation in
excess of plan assets (806,058) (623,151) (634,697)
Unrecognized net loss (gain)
from past experience different
from that assumed 117,581 (21,467) 32,513
Prior service cost not yet
recognized in net periodic
pension cost (48,679) (52,991) (57,303)
</TABLE>
43
<PAGE> 46
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C>
Unrecognized net obligation at
inception recognized over
15.29 years 314,672 345,252 375,832
------------ ------------ -----------
Accrued pension cost $ (422,484) $ (352,357) $ (283,655)
============= ============= ============
</TABLE>
Assumptions used in the accounting for net periodic pension cost at December
31, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rates 6.50% 7.25% 7.00%
Rate of increase in
compensation levels 5.23% 5.23% 5.19%
Expected long-term rate of
return on assets 9.00% 7.25% 7.25%
</TABLE>
The defined contribution plan has two parts. The first part is a
profit-sharing plan. The second part allows employees to contribute, beginning
in 1997, up to 5 percent of their annual compensation (2.5 percent in prior
years), of which up to 2.5% is matched 100 percent by the Company. The
Company's policy is to fully fund the liability at the end of each year. At
December 31, 1997, the fair market value of plan assets was $5,594,506. The
expense for this plan amounted to $426,291, $324,376, and $310,112 in 1997,
1996, and 1995, respectively.
The Company also has a supplemental executive retirement plan (SERP) that
provides certain executives with income at retirement equal to 60 percent of
preretirement base compensation, less qualified pension plan benefits paid by
the Company and all predecessor plans and Social Security benefits. The plan
had a net periodic pension cost of $75,660 for 1997. The projected benefit
obligation at December 31, 1997 was $363,923 and the accrued pension cost was
$220,158, using a discount rate of 6.5 percent. The plan has no vesting prior
to age 55. The Company accrued $95,000 to cover any liability under this plan
in 1997 and 1996, and $20,000 for 1995. The total liability included in the
financial statements for this plan amounted to $250,000 as of December 31,
1997.
14. STOCK TRANSACTIONS
As part of the reorganization in June 1996, a stock split was transacted in
which five shares of the Company's $.10 par value common stock were received
for each share of FPIC's $1 par value common stock. The accompanying financial
statements reflect the transaction retroactively in a manner similar to a stock
split. In January 1996, a cash dividend of 10 cents per common share was
declared amounting to $813,964. In addition, the Company paid $6,000 in
retroactive dividends in 1996 to certain shareholders. In January 1995, a cash
dividend of 10 cents per common share was declared amounting to $775,986.
15. COMMITMENTS AND CONTINGENCIES
The future minimum annual rentals under noncancellable leases were as follows:
<TABLE>
<S> <C>
1998 $ 550,793
1999 487,644
2000 480,782
2001 335,509
Thereafter 324,630
------------
$ 2,179,358
============
</TABLE>
Total rental expense was $386,016, $332,821, and $219,380 for 1997, 1996, and
1995, respectively.
The Company is involved in numerous legal actions arising primarily from claims
under insurance policies. The legal actions arising from claims under
insurance policies have been considered by the Company in establishing its
reserves. While the outcome of all legal actions is not presently
determinable, the Company's management is of the opinion that the settlement of
these actions will not have a material adverse effect on the Company's
financial position or results of operations.
44
<PAGE> 47
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a Florida insurer, the Company is subject to assessment by the Florida
Insurance Guaranty Association, Inc. (FIGA) for the provision of funds
necessary for the settlement of covered claims under certain policies of
insolvent insurers. Under the Florida Insurance Guaranty Association Act, FIGA
can assess member insurers on the basis of net direct premiums written in the
State of Florida at a level established by the Florida Legislature.
FIGA may also levy special assessments to settle claims caused by certain
catastrophic losses. No provision for special assessments was made in the 1997
financial statements. However, damages caused by future catastrophic losses,
such as a hurricane, could subject the Company to additional FIGA assessments.
16. STATUTORY ACCOUNTING
FPIC is required to file statutory financial statements with state insurance
regulatory authorities. Shareholders' equity on a statutory basis was
$87,875,717, $76,519,879, and $70,038,945 at December 31, 1997, 1996, and 1995,
respectively. Statutory net income amounted to $12,404,838, $10,442,464, and
$11,283,820 for the years ended December 31, 1997, 1996, and 1995,
respectively. During 1996 and in connection with the reorganization, FPIC, by
way of dividend, transferred its $2.5 million investment in MCC to the Company.
This amount was charged directly to statutory surplus.
FPIC is restricted under the Florida Insurance Code as to the amount of
dividends it may pay without regulatory consent. In 1997, the Company can pay
dividends up to approximately $12,400,000 without regulatory consent.
17. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net income and income from
continuing operations $16,556,685 $13,323,725 $11,686,173
=========== =========== ===========
Basic weighted average shares outstanding 9,044,984 8,518,211 7,949,750
Common stock equivalents 362,109 205,756 0
----------- ----------- -----------
Diluted weighted average shares outstanding 9,407,093 8,723,967 7,949,750
=========== =========== ===========
Basic earnings per share $1.83 $1.56 $1.47
===== ===== =====
Diluted earnings per share $1.76 $1.53 $1.47
===== ===== =====
</TABLE>
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for
1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums written and assumed $ 27,710,231 $ 17,806,822 $ 18,512,127 $ 13,741,553
Net investment income 3,823,088 3,653,959 3,757,665 3,585,661
Net income 3,790,566 3,910,210 4,278,310 4,577,599
Basic earnings per share $.42 $.43 $.47 $.50
Diluted earnings per share $.41 $.42 $.46 $.48
<CAPTION>
Year Ended December 31, 1996
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums written and assumed $22,555,877 $15,616,746 $16,658,242 $ 9,461,422
Net investment income 3,148,582 3,376,768 3,495,433 3,590,590
Net income 2,075,288 3,883,565 3,628,299 3,736,573
Basic earnings per share $.25 $.48 $.44 $.44
Diluted earnings per share $.25 $.47 $.43 $.43
</TABLE>
45
<PAGE> 48
FPIC INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Quarterly earnings per share for 1997 and 1996 were stated after giving
retroactive effect as if the stock split in June 1996 had occurred on January
1, 1996.
46
<PAGE> 49
SCHEDULE I
FPIC INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
AMOUNT AT
WHICH SHOWN IN
Securities Available-for-Sale COST (1) VALUE BALANCE SHEET
------------- ------------- -------------
<S> <C> <C> <C>
Fixed Maturities:
U.S. Treasury securities
and obligations of
U.S. Government corporations
and agencies $ 56,716,848 $ 57,669,286 $ 57,669,286
Debt securities issued by states
and political subdivisions 102,786,576 105,678,166 105,678,166
Corporate securities 28,830,440 29,001,178 29,001,178
Mortgage-backed securities 65,672,904 67,225,580 67,225,580
------------ ------------ ------------
Total fixed maturities 254,006,768 259,574,210 259,574,210
Equity Securities:
Industrial, miscellaneous, and other 2,516,949 2,540,735 2,540,735
Real Estate 4,184,768 4,184,768 4,184,768
Other Invested Assets 2,000,000 2,091,538 2,000,000
------------ ------------ ------------
Totals $262,708,485 $268,391,251 $268,299,713
============ ============ ============
</TABLE>
(1) Original cost of equity securities and real estate adjusted for any
permanent write downs, and, as to fixed maturities, original cost
reduced by repayments, write downs and adjusted for amortization of
premiums or accrual of discounts.
<PAGE> 50
Schedule II
Condensed Financial Information of Registrant
Condensed Balance Sheet
FPIC Insurance Group, Inc. (Parent Only)
<TABLE>
<CAPTION>
12/31/97 12/31/96
============= =============
<S> <C> <C>
ASSETS
Investments and cash:
Investments in subsidiaries * $112,449,713 $92,456,266
Bonds 0 3,881,315
Common stocks 2,086,090 0
Other invested assets 2,000,000 0
Cash and cash equivalents (2,613) 4,300
------------- -------------
Total Investments and Cash 116,533,190 96,341,881
Property and equipment, net 150,059 0
Due from subsidiaries * 5,938,784 0
Intangible assets 3,207,661 0
Prepaid expenses 263,245 0
Other assets 327,767 142,364
------------- -------------
TOTAL ASSETS $126,420,706 $96,484,245
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Federal income taxes payable $2,620,083 $0
Short term debt 2,000,000 0
Other liabilities 1,736,203 72,855
------------- -------------
TOTAL LIABILITIES 6,356,286 72,855
SHAREHOLDERS' EQUITY
Common Stock, $.10 PAR VALUE:
25,000,000 shares authorized;
9,179,581 and 9,201,670 shares issued and
outstanding in 1997 and 1996, respectively 917,958 902,167
Additional paid-in capital 25,789,144 22,444,711
Net unrealized gain on investments 3,634,299 80,169
Retained Earnings 89,723,019 73,166,334
------------- -------------
120,064,420 96,593,381
Less Treasury Stock 0 (181,991)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 120,064,420 96,411,390
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $126,420,706 $96,484,245
============= =============
</TABLE>
* Eliminated in consolidation
See the accompanying Notes to Condensed Financial Statements.
<PAGE> 51
Schedule II
Condensed Financial Information of Registrant
Condensed Statements of Earnings
FPIC Insurance Group, Inc. (Parent Only)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996
----------- -----------
<S> <C> <C>
REVENUES
Management fees from subsidiaries * $11,204,829 $0
Dividends from subsidiaries * 0 2,500,000
Net investment income 63,846 107,137
Other income 0 536
----------- -----------
TOTAL REVENUES 11,268,675 2,607,673
EXPENSES
Other operating expenses 9,057,547 18,416
----------- -----------
TOTAL EXPENSES 9,057,547 18,416
Income before income taxes 2,211,128 2,589,257
Income taxes 843,660 30,347
----------- -----------
EARNINGS BEFORE EQUITY IN
UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 1,367,468 2,558,910
Equity in undistributed earnings of subsidiaries 15,189,217 10,764,815
----------- -----------
NET EARNINGS $16,556,685 $13,323,725
=========== ===========
</TABLE>
* Eliminated in consolidation.
See the accompanying Notes to Condensed Financial Statements.
<PAGE> 52
Schedule II
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
FPIC Insurance Group, Inc. (Parent Only)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 16,556,685 $ 13,323,725
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in undistributed earnings of (15,189,217) (10,764,815)
subsidiaries
Common stock dividend from subsidiary 0 (2,500,000)
Depreciation 21,151 0
Changes in assets and liabilities:
Due from subsidiaries (5,938,784) 0
Prepaid expenses (263,245) 0
Other assets (185,403) (142,364)
Federal income taxes payable 2,620,083 0
Other liabilities 1,663,348 72,855
------------ ------------
Net cash (used in) operating activities (715,382) (10,599)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of goodwill (3,207,661) 0
Purchase of common stocks (2,086,090) 0
Purchase of other invested assets (2,000,000) 0
Additional investment in subsidiaries (1,250,100)
Proceeds from sale or maturity of securities 0
available for sale 3,881,315 0
Purchase of securities available for sale 0 (3,881,315)
Purchase of property and equipment, net (171,210) 0
------------ ------------
Net cash (used in) investing activities (4,833,746) (3,881,315)
CASH FLOWS FROM FINANCING ACTIVITIES
Receipt of short term debt 2,000,000 0
Issuance of common stock 3,542,215 4,078,205
Purchase of common stock-treasury 0 (181,991)
------------ ------------
Net cash provided by financing activities 5,542,215 3,896,214
Net (decrease) increase in cash and
cash equivalents (6,913) 4,300
Cash and cash equivalents, beginning of year 4,300 0
------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR ($2,613) $4,300
============ ============
Supplemental disclosure of cash flow information:
Federal income taxes paid $6,071,204 $2,599,703
Retirement of treasury stock $811,991 $0
</TABLE>
See the accompanying Notes to Condensed Financial Statements.
<PAGE> 53
Schedule II
Condensed Financial Information of Registrant
Notes to Condensed Financial Statements
FPIC Insurance Group, Inc. (Parent Only)
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of FPIC
Insurance Group and Subsidiaries (see Part II Item 8).
1. The Parent Company was formed on June 11, 1996. The shareholders of a
subsidiary company approved the formation of a holding company structure. The
shareholders of the subsidiary company became the shareholders of the Parent
Company in a five for one exchange of common stock. Prior to the approval of the
holding company structure, the Parent Company had no activity.
2. Investments
See Investments in the consolidated financial statements Part II Item 8 and
in Note 2 of the Notes to the Consolidated Financial Statements.
3. Intangible assets
See Intangible Assets in the consolidated financial statements Part
II Item 8 and in Note 7 of the Notes to the Consolidated Financial Statements.
4. Short term debt
See Borrowing Arrangements in Note 8 of the Notes to the Consolidated
Financial Statements.
5. Income Taxes
The Company and its eligible subsidiaries file a consolidated U.S. federal
income tax return. Income tax liabilities or benefits are recorded by each
subsidiary based upon separate return calculations, and any difference between
the consolidated provision and the aggregate amounts recorded by the
subsidiaries is reflected in the Parent Company financial statements.
For further information on income taxes, see Income Taxes in Note 12 of the
Notes to the Consolidated Financial Statements.
6. Dividend Restrictions
See Statutory Accounting in Note 17 of the Notes to the Consolidated
Financial Statements.
7. Accounting Changes
For information concerning new accounting standards adopted in 1997 and
1996, see Note 1 of the Notes to the Consolidated Financial Statements.
<PAGE> 54
SCHEDULE III
FPIC INSURANCE GROUP, INC.
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Other
Deferred Future Policy Policy
Policy Benefits Claims & Net
Acquisition Losses, Claims Unearned Benefits Premium Investment
Segment Costs Loss Expenses Premiums Payable Revenue Income
- ------- ----- ------------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
1997:
Medical professional
and other liabiltiy $1,411 $188,086 $ 28,218 $0 $ 65,504 $ 14,820
1996:
Medical professional
and other liability $1,212 $172,738 $ 23,459 $0 $ 56,074 $ 13,611
1995:
Medical professional
and other liabiltiy $ 818 $164,506 $ 20,948 $0 $ 52,675 $ 11,987
<CAPTION>
Amortization
Benefits of Deferred
Losses and Policy Net
Loss Acquisition Other Premiums
Segment Expenses Costs Expenses Written
- ------- -------- ----- -------- -------
<S> <C> <C> <C> <C>
1997:
Medical professional
and other liabiltiy $ 54,011 $ 3,996 $ 3,404 $ 70,285
1996:
Medical professional
and other liability $ 46,948 $ 2,843 $ 3,747 $ 58,740
1995:
Medical professional
and other liabiltiy $ 44,839 $ 2,020 $ 3,114 $ 54,306
</TABLE>
<PAGE> 55
SCHEDULE IV
FPIC INSURANCE GROUP, INC.
REINSURANCE
FOR THE YEARS DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
PROPERTY AND GROSS OTHER FROM OTHER NET ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------- ------ --------- --------- ------ ------
<S> <C> <C> <C> <C> <C>
1997 $71,277,054 $7,508,160 $ 1,734,781 $65,503,675 2.60%
1996 $61,628,450 $5,707,095 $ 153,081 $56,074,436 0.30%
1995 $54,948,908 $2,325,634 $ 51,576 $52,674,850 0.10%
</TABLE>
<PAGE> 56
SCHEDULE V
FPIC INSURANCE GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Year-ended December 31, 1997
Allowance for Doubtful
Accounts, net $383,580 $297,595 $ 0 $681,175
Year-ended December 31, 1996
Allowance for Doubtful
Accounts, net $236,158 $147,422 $ 0 $383,580
</TABLE>
<PAGE> 1
EXHIBIT 10(b)
PHYSICIANS, ALLIED MEDICAL PRACTITIONERS, DENTISTS, &
CHIROPRACTORS
CASUALTY FIRST THROUGH FOURTH AND CLASH EXCESS OF LOSS
REINSURANCE AGREEMENT
FINAL PLACEMENT SLIP
COMPANY: FPIC Insurance Group
a Florida corporation
and/or
Florida Physicians Insurance Company
a Florida corporation
and/or
any company now or hereafter affiliated with
FPIC Insurance Group
INCEPTION: January 1, 1997
EFFECTIVE: Effective from 12:01 a.m., Eastern Standard Time,
January 1, 1997, to 12:01 a.m., Eastern Standard
Time, January 1, 2000, as respects:
First, Second, Third, and Fourth Layers
Claims made on and after 12:01 a.m., Eastern
Standard Time, January 1, 1997 (including
prior acts), on policies attaching from 12:01
a.m., Eastern Standard Time, January 1, 1997,
to 12:01 a.m., Eastern Standard Time, January
1, 2000.
Clash Layer:
Claims made during the currency of this
Agreement, regardless of the limits or
effective dates of the Company's policies
(but in the event of cancellation or
expiration of this Agreement on a run-off
basis, coverage will continue to apply in
respect of all claims made during the runoff
period arising from policies in effect at the
cancellation or expiration date). The date
of loss in respect to this Layer will be
deemed to be the earliest date that any
individual claim was first made against the
Company under any of its policies.
- 1 OF 21 -
<PAGE> 2
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
CANCELLATION: At January 1, 1998, or January 1, 1999, by
either party via 90 days prior notice by
certified or registered mail.
EXPIRATION
AND
CANCELLATION
OPTIONS: At expiration or in the event of cancellation, the
Reinsurers' liability for each policy in force at
expiration or cancellation date will be run off until
its cancellation, natural expiration, or next
anniversary date, whichever first occurs. During the
run-off period, the Company will continue to cede to
the Reinsurers the appropriate earned premium (in the
case of the Clash Layer, the runoff premium will be
determined at the rates in effect at the cancellation
date). Alternatively, the Company may elect to have
the Reinsurers' liability terminate on a cut-off
basis as of the date of expiration or cancellation,
and the Reinsurers will not be liable for any claims
made on or after the expiration or cancellation date.
Regardless of the option chosen by the Company at
expiration or cancellation, Reinsurers' liability
will continue in the event any extended reporting
period options are exercised in accordance with the
Company's claims made policies and/or in the event
the Company is bound by statute or regulation to
continue coverage.
BUSINESS
COVERED: All business written and classified by the
Company as Professional Liability, including
Loss of Privileges coverage and Owners,
Landlords, and Tenants coverage, issued to
Physicians, Dentists, Nurse Anesthetists,
Licensed Physicians' Assistants,
Chiropractors and other Allied Medical
Practitioners, Clinics, and Professional
Associations (corporate policies) of
Physicians, Dentists, and Chiropractors.
The Company's policies will not exceed 12
months duration and will contain a warranty
to the effect that there have been no known
- 2 OF 21 -
<PAGE> 3
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
incidents likely to give rise to a claim,
other than those already reported to the
Company.
DEFINITIONS: "Agreement year" as used in this Agreement will mean
a calendar year.
"Claims made" as used in this Agreement will mean
those claims first made against the insured during
the policy period and occurring on or after the
retroactive date, if any. The date on which a claim
is made or reported will be understood to be the
earlier of the date on which a written notice of
claim is received by the Company, or a report by
telephone is made to the Company by the insured or
their representative.
"Retroactive date" as used in this Agreement will
mean the date prescribed in the Company's policy,
which is the earliest date losses can actually occur
for which an insured can claim coverage.
"Extended reporting period" as used in this Agreement
will mean a time period after a policy's termination
date within which claims may be made with respect to
occurrences happening between the original
retroactive date, if any, and the original
termination date of the policy. As regards deceased,
disabled, and retired insureds and other withdrawing
insureds, the extended reporting coverage will be
understood to commence with:
1. The date the insured deceases as certified in
their death certificate; or
2. The date the insured ceases to practice as a
result of their permanent disability as
certified by the insured's physician; or
3. The date the insured is retired as indicated
in their written notification to the Company;
or
4. The date that the Company's policy is
terminated.
EXCLUSIONS: As attached.
- 3 OF 21 -
<PAGE> 4
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
TERRITORY: To follow the Company's policies.
RETENTION First Layer (all Insureds)
AND
LIMIT: $500,000 ultimate net loss each and every loss, each
and every insured, each and every policy,
excess of
$500,000 ultimate net loss each and every loss, each
and every insured, each and every policy.
Second Layer (all Insureds except Dentists)
$500,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$1,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy.
Third Layer (all Insureds except Dentists)
$500,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$1,500,000 ultimate net loss each and every loss,
each and every insured, each and every policy.
Fourth Layer (Clinics and Corporation Policies only) -
(Applicable to CNA International Reinsurance Company
Limited only)
$3,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$2,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy;
- 4 OF 21 -
<PAGE> 5
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
subject to a maximum recovery hereunder any one
Agreement year of $3,000,000 in respect to each
insured.
Clash Layer (all Insureds)
$750,000 ultimate net loss each and every loss
excess of
$750,000 ultimate net loss each and every loss;
subject to a maximum recovery hereunder any one Agreement
year of $1,500,000.
Coverage applicable only when two or more insureds
are involved in the same loss.
Recoveries under the First through Fourth Layers will
inure to the benefit of this Layer.
LOSS Applying to the First, Second, and Clash Layers Combined
CORRIDOR:
In addition to the Company's retentions as shown above in
respect to the captioned Layers, for each Agreement year that
this Agreement remains in force the Company will retain the
aggregate of ultimate net loss and loss expense otherwise
collectable under the captioned Layers for the Agreement year
in question which exceeds an amount equal to 100% of net
reinsurance premium ceded under the captioned Layers; however,
such retention will not exceed an amount equal to 25% of net
reinsurance premium ceded under the First and Second Layers
(but excluding net reinsurance premium in respect of Dentists)
for the Agreement year in question.
PREMIUM: First through Third Layers
Annual deposit premium $3,000,000 payable quarterly in
advance.
- 5 OF 21 -
<PAGE> 6
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
Adjustable at the end of each Agreement year, and quarterly
thereafter, to net reinsurance premium (earned premium basis)
as determined by the rates shown in Exhibit A attached hereto.
Fourth Layer
Net reinsurance premium (written premium basis) as determined
by the rates shown in Exhibit A attached hereto, payable
quarterly in arrears.
Clash Layer
Annual deposit premium $300,000 payable quarterly in advance,
adjustable at:
1. .6% of the sum of the Company's gross earned premium;
plus
2. 45.0% of the gross original written premium charged
by the Company for the first $500,000 of limits on
corporation policies.
"Gross earned premium" is defined as the Company's premium for
the first $500,000 of limits on all business the subject
matter of this Agreement (but excluding premium for
corporation policies), earned during the Agreement year
(without regard to the original effective dates of the
policies).
- 6 OF 21 -
<PAGE> 7
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
All Layers
The Company's policies use rates loaded for unlimited
discovery for deceased insureds, insureds who through
disability are unable to practice, and insureds who retire
from practice; however, the net reinsurance premium relating
to the load for any such discovery extension will not be ceded
hereunder until and unless such extension comes into effect.
CREDIT As Respects the First through Third Layers Combined
FUND:
The Company has the option to maintain a Credit Fund equal to
15% of the net reinsurance premium which would have been ceded
under the First through Third Layers, and the final
disposition of such Fund will be at the sole discretion of the
Company. The amounts used to constitute such Fund will be
withheld by the Company prior to making payment of premium
(other than deposit premiums) to Reinsurers, and regardless of
the eventual disposition of the Fund, all amounts withheld by
the Company will reduce the net reinsurance premium.
CONTINGENT As Respects the First, Second, and Clash Layers Combined
PROFIT
COMMISSION: As attached.
As Respects the Third and Fourth Layers
Nil.
OTHER
REINSURANCE: Company permitted to purchase facultative reinsurance and to
deduct the premium therefor; Company permitted to purchase
other treaty reinsurance, and to deduct the premium therefor
if it inures to the benefit of this Agreement.
- 7 OF 21 -
<PAGE> 8
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
FUNDING OF
RESERVES: Letters of Credit required from unauthorized Reinsurers--full
text as attached.
LOSS EXPENSE: Pro rata in addition to the ultimate net loss.
DECLARATORY
JUDGMENT
EXPENSE: Included hereunder, whether or not a loss is sustained as a
result of the action, as per the definition attached.
REPORTS: Reports within 60 days following the end of each quarter, to
include all information required by Reinsurers for completion
of their NAIC reports.
OTHER
PROVISIONS: Reinsurers will be subject to terms, conditions,
interpretations, waivers, modifications, and alterations of
the Company's policies that are the subject of this Agreement.
Access to Records Clause
Amendments Clause
Aon Re Inc. Intermediary Clause (DOES NOT APPLY TO GENERAL RE)
Arbitration Clause - as attached
Claims Review Clause
Correspondence and Payments Clause (APPLICABLE TO GENERAL RE
ONLY)
Delays, Errors, or Omissions Clause
Excess of Original Policy Limits (90%)/Extra Contractual
Obligations (90%) Clause - included within
ultimate net loss; coverage exists as respects the
First through Third Layers if any cession has been
made to this Agreement; coverage exists as respects
the Fourth Layer only if a cession has been made to
that Layer in respect to the policy under which the
EOPL/ECO loss arises. No EOPL/ECO coverage in
respect to the Clash Layer.
Insolvency Clause
- 8 OF 21 -
<PAGE> 9
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
Loss Notices and Settlements Clause - as attached
Offset Clause - this Agreement only
Net Retained Liability Clause
Subrogation Clause
Service of Suit Clause (NMA 1998)
Ultimate Net Loss, Loss Expense, and Declaratory Judgment
Expense Clause - as attached
INFORMATION: Aon Fee for General Re: 5% of ceded premium
- 9 OF 21 -
<PAGE> 10
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
In accordance with your instructions, we have placed reinsurance with the
Reinsurers listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms, conditions, or
Reinsurers vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer. Should
you desire financial information regarding the Reinsurers listed hereon, please
contact us and we will furnish it.
The Reinsurers' obligations under this Agreement are several and not joint and
are limited solely to the extent of their individual participation. The
Reinsurers are not responsible for the participation of any co-subscribing
Reinsurer that for any reason does not satisfy all or part of its obligations.
<TABLE>
<CAPTION>
Domestic Reinsurers First Second Third Fourth Clash
- ------------------- Layer Layer Layer Layer Layer
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
General Reinsurance Corporation 25.0000% 25.0000% 25.0000% 0.0000% 25.0000%
TIG Reinsurance Company 16.3650% 16.3650% 16.3650% 0.0000% 16.3650%
TOTAL DOMESTIC REINSURERS 41.3650% 41.3650% 41.3650% 0.0000% 41.3650%
</TABLE>
LONDON MARKETS THROUGH DENIS M. CLAYTON AND COMPANY LIMITED
<TABLE>
<CAPTION>
London Companies:
- -----------------
<S> <C> <C> <C> <C> <C>
CNA International Reinsurance Company
Limited 13.7980% 13.798% 13.7980% 100.00% 13.7980%
Hannover Ruckversicherungs-
Aktiengesellschaft 5.17400% 5.1740% 5.17400% 0.0000% 5.17400%
Terra Nova Insurance Company
Limited 2.06900% 2.0690% 2.06900% 0.0000% 2.06900%
Unionamerica Insurance Company
Limited 15.1750% 15.1750% 15.1750% 0.0000% 15.1750%
Zurich Re (UK) Limited 13.7960% 13.7960% 13.7960% 0.0000% 13.7960%
TOTAL LONDON COMPANIES: 50.0120% 50.0120% 50.0120% 100.0000% 50.0120%
</TABLE>
- 10 OF 21 -
<PAGE> 11
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
<TABLE>
<CAPTION>
UNDERWRITERS AT LLOYD'S
- -----------------------
<S> <C> <C> <C> <C> <C>
Lloyd's Syndicate #0991 AEG 3.4490% 3.4490% 3.4490% 0.0000% 3.4490%
Lloyd's Syndicate #1141 JEM 5.17400% 5.17400% 5.17400% 0.0000% 5.1740%
Total Underwriters At Lloyd's 8.62300% 8.6230% 8.6230% 0.0000% 8.6230%
Total Denis M. Clayton & Company
Limited 58.6350% 58.6350% 58.6350% 100.0000% 58.6350%
Total Non-Domestic Companies 58.6350% 58.6350% 58.6350% 100.0000% 58.6350%
TOTAL ALL PARTICIPANTS: 100.0000% 100.0000% 100.0000% 100.0000% 100.0000%
</TABLE>
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc., 201
California Street, Suite 900, San Francisco, California 94111.
ACCEPTED AND
APPROVED BY: DATED:
--------------------------------- ------------------
REFERENCE
NUMBER:
---------------------
(For processing purposes it is important that you provide your Company's
reference number for this program.)
- 11 OF 21 -
<PAGE> 12
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
EXCLUSION LIST
No reinsurance indemnity will be afforded under this Agreement for:
A. All liability of the Company arising, by contract, operation of law,
or otherwise from its participation or membership, whether voluntary
or involuntary, in any insolvency fund. "Insolvency fund" includes
any guaranty fund, insolvency fund, plan, pool, association, fund, or
other arrangement, howsoever denominated, established, or governed,
which provides for any assessment of or payment or assumption by the
Company of part or all of any claim, debt, charge, fee, or other
obligation of an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent or which is
otherwise deemed unable to meet any claim, debt, charge, fee, or other
obligation in whole or in part.
B. Reinsurance assumed by the Company other than inter-company
reinsurance.
C. Loss or liability excluded by the provisions of the Nuclear Incident
Exclusion Clause - Liability - Reinsurance - U.S.A. - attached to this
Agreement, or as may be revised hereafter by the Lloyd's Underwriters'
Non-Marine Association.
- 12 OF 21 -
<PAGE> 13
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
LOSS NOTICES AND SETTLEMENTS
The Company will advise the Reinsurers promptly of all losses reserved
at:
A. $100,000 from the ground up as respects the Clash Layer; or
B. $100,000 from the ground up as respects the First through
Third Layers, but reported to each Layer only if a cession has
been made to that Layer; or
C. $1,500,000 from the ground up as respects the Fourth Layer but
only if a cession has been made to that Layer;
or that, in the opinion of the Company, may involve the Reinsurers under this
Agreement, and of all subsequent developments pertaining thereto that may
materially affect them as well. Inadvertent omission in dispatching the
aforementioned notices will in no way affect the obligation of the Reinsurers
under this Agreement, provided the Company informs the Reinsurers of such
omission promptly upon discovery.
The Company will have the right to settle all claims under its
policies. The settlements, provided they are within the terms of the Company's
policies and of this Agreement, will be unconditionally binding on the
Reinsurers in proportion to their participation in this Agreement. The Company
will likewise, at its sole discretion, commence, continue, defend, or withdraw
from actions, suits, or proceedings and generally handle all matters related to
all claims and losses, and all payments made and costs and expenses incurred in
connection therewith, or in taking legal advice therefor, will be shared by the
Reinsurers. When so requested, however, the Company will afford the
Reinsurers, at the Reinsurers' own expense, an opportunity to be associated
with the Company in the defense of any claim, suit, or proceeding involving
this Agreement, and the Company and the Reinsurers will cooperate in every
respect in such defense. Amounts due the Company hereunder in the settlement
of ultimate net loss and loss expense will be payable by the Reinsurers
immediately upon being furnished by the Company with reasonable evidence of the
amount paid or to be paid in excess of the Company's retention as set forth in
the Retention and Limit Sections of the Agreement.
- 13 OF 21 -
<PAGE> 14
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
ULTIMATE NET LOSS, LOSS EXPENSE, AND
DECLARATORY JUDGMENT EXPENSE
"Ultimate net loss" as used in this Agreement will mean the amount of
any settlement, award, or judgment paid by the Company or for which the Company
has become liable to pay, including: plaintiff's attorney fees where applicable;
interest accrued prior to final judgment if included as part of loss on
reinsured policies; 90% of any claims-related extra contractual obligations
where applicable; 90% of any claims-related excess limits liability where
applicable; and declaratory judgment expense where the Company has not paid or
has not become liable to pay any settlement, award, or judgment under its
policy. Ultimate net loss will also include any coinsurance retention,
deductible, or self-insured retention paid by the insured. Ultimate net loss
will not include loss expense. All recoveries and subrogations which are
actually recovered, and inuring reinsurance whether recovered or not, will be
deducted from the amount of the ultimate net loss. Nothing, however, in this
Agreement will be construed as meaning that losses are not recoverable
hereunder until the actual loss to the Company has been ascertained.
"Loss expense" as used in this Agreement will mean all expenses
incurred by the Company in the investigation, appraisal, adjustment, litigation
and/or defense of claims under policies reinsured hereunder, including court
costs, interest accrued prior to judgment if included as part of expense on
reinsured policies, and interest accrued after final judgment, but excluding
internal office expenses, salaries, per diem, and other remuneration of regular
Company employees. Loss expense will also include declaratory judgment expense
incurred by the Company in an action that results in a loss to the Company
(however, the maximum contribution to loss expense as respects declaratory
judgment expense arising from any one declaratory judgment action will be
$2,000,000). Loss expense where incurred in connection with claims involving
this Agreement will be apportioned between the Company and the Reinsurers in
proportion to their respective interests as finally determined. However, in
the event a verdict or judgment is reduced by an appeal or a settlement,
subsequent to the entry of the judgment, resulting in an ultimate saving on
such verdict or judgment, or a judgment is reversed outright, the loss expense
incurred in securing such final reduction or reversal will be prorated between
the Reinsurers and the Company in the proportion that each benefits from such
reduction or reversal, and the expenses incurred up to the time of the original
verdict or judgment will be (a) prorated in proportion to each party's interest
in such verdict or judgment, or (b) added to the Company's loss when the terms
and conditions of the Company's policies reinsured hereunder include loss
expense as part of the policy limit.
- 14 OF 21 -
<PAGE> 15
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
"Declaratory judgment expense" as used in this Agreement will mean all
expenses incurred by the Company in connection with declaratory judgment
actions brought to determine the Company's defense and/or indemnification
obligations that are allocable to specific policies and claims subject to this
Agreement. Declaratory judgment expense will be deemed to have been fully
incurred by the Company on the date of the actual or alleged loss under the
Company's policy giving rise to the action.
CONTINGENT PROFIT COMMISSION
(This Article applies only to the First, Second, and Clash Layers, on
a combined basis.)
The Reinsurers will allow the Company a contingent profit commission
of 50% of the combined net profit of the First, Second, and Clash Layers under
this Agreement. "Net profit" as used herein is the amount by which the earned
reinsurance premium as in A. below, less reinsurance losses as in B. below, and
less net expenses as in C. below, produces a positive balance:
A. "Earned reinsurance premium" is the sum of the actual net
reinsurance premiums ceded in respect of the adjustment
period, less the Reinsurers' portion of the unearned premium
reserve on those premiums at the time of the contingent profit
commission computation (calculated on a monthly pro rata
expiration basis).
B. 1. As respects the First and Second Layers, "Reinsurance
losses" are the Reinsurers' portion of payments
(including loss expense) for claims made on policies
written or renewed with effective dates during the
period of this Agreement, plus the Company's estimate
of the Reinsurers' portion of the reserve for
outstanding losses (including loss expense) on
policies written or renewed with effective dates
during the period of this Agreement as such estimate
stands at the time of the contingent profit
commission computation.
2. As respects the Clash Layer, "Reinsurance losses" are
the Reinsurers' portion of payments (including loss
expense) for claims made during the period of this
Agreement, plus the Company's estimate of the
Reinsurers' portion of the reserve for outstanding
losses (including loss expense) on claims made during
the period of this Agreement as such estimate stands
at the time of the contingent profit commission
computation.
- 15 OF 21 -
<PAGE> 16
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
C. "Net expenses" are the Reinsurers' home office expenses of 20%
of A. above, and federal excise tax paid by Reinsurers where
applicable.
The entire term of this Agreement will constitute a single adjustment
period for all purposes of this Article. If the adjustment period becomes less
than three years, whether due to cancellation of this Agreement, cancellation
of an individual Reinsurer's participation, or inception of an individual
Reinsurer's participation at a date when the adjustment period is already
in progress, such shortened adjustment period will be subject to adjustment as
if it were the complete adjustment period.
The first computation of contingent profit commission as respects the
adjustment period will include only the first year within the period, and will
be computed and a statement forwarded to the Reinsurers 36 months after the
inception of the adjustment period. Upon verification of amount due, the
Reinsurers will immediately pay the Company. The first recomputation,
including the first and second years within the adjustment period, and the
second recomputation, including all three years within the adjustment period,
will be computed 48 and 60 months after the inception of the adjustment period,
respectively. Annual recomputations will continue to be made thereafter until
all losses affecting this Agreement are fully settled and/or all liability is
discharged and all premium is earned, when a final computation will be
determined; cancellation of this Agreement will have no affect on the said
annual recomputations. The debtor party will pay the other party whatever
amount, if any, is due as a result of each recomputation.
Should this Agreement be canceled on a cut-off basis, only the premium
earned and the claims made during the period will be considered in the
computations for the adjustment period; notwithstanding the foregoing, losses
associated with extended reporting coverages in effect at the time of
cancellation will continue to be taken into account in the computations, as
will the premium therefor.
- 16 OF 21 -
<PAGE> 17
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
RESERVES AND LETTERS OF CREDIT
As regards policies issued by the Company coming within the scope of
this Agreement, the Company agrees that, when it files with the Insurance
Department or sets up on its books statutory reserves, it will forward to the
Reinsurers a statement showing the proportion of such reserves applicable to
them. Such reserves will consist of:
A. The difference between the deposit premiums and the earned
premiums in respect to the First through Third and Clash
Layers; and
B. Losses, including:
1. Loss and loss expense paid by the Company, but not
recovered from the Reinsurers, and
2. Loss and loss expense reserves (both case and bulk),
as set out in Schedule F of the Company's annual
statement.
The Reinsurers hereby agree that they will apply for and secure
delivery to the Company of a clean, irrevocable, and unconditional Letter of
Credit, dated on or before December 31 of the year in which the request is
made, issued by Citibank, N.A. (or another member of the Federal Reserve
System or any other bank approved for use by the NAIC Securities Valuation
Office), and containing provisions acceptable to the insurance regulatory
authorities having jurisdiction over the Company's reserves in an amount equal
to the Reinsurers' proportion of such reserves as shown in the statement
prepared by the Company.
The Letter of Credit will be issued for a period of not less than one
year, and will be automatically extended for one year from its date of
expiration or any future expiration date unless 30 days prior to any expiration
date the issuing bank notifies the Company by registered mail that it elects
not to consider the Letter of Credit extended for any additional period. An
issuing bank, not a member of the Federal Reserve System or not chartered in
the state of domicile of the Company, will provide 60 days notice to the
Company prior to any expiration in the event of nonextension.
Notwithstanding any other provisions of this Agreement, the Company or
its court-appointed successor in interest may draw upon such credit at any time
without diminution because of the insolvency of the Company or of any Reinsurer
for one or more of the following purposes only:
- 17 OF 21 -
<PAGE> 18
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
A. To pay the Reinsurer's share or to reimburse the Company for
the Reinsurer's share of any loss reinsured by this Agreement,
which has not been otherwise paid.
B. To make refund of any sum in excess of the actual amount
required to pay the Reinsurer's share of any liability
reinsured by this Agreement.
C. To make refund of the difference between the deposit premiums
and the earned premiums in respect to the First through Third
and Clash Layers.
D. To make refund of the unearned premium portion of premium
ceded to the Fourth Layer.
E. In the event of nonextension of the Letter of Credit as
provided for above, to establish deposit of the Reinsurer's
share of reserves under this Agreement. Such cash deposit
will be held in an interest bearing account separate from the
Company's other assets, and interest thereon at a rate at
least equal to that paid by Citibank, N.A., in New York, will
accrue to the benefit of the Reinsurer.
The issuing bank will have no responsibility whatsoever in connection
with the propriety of withdrawals made by the Company or the disposition of
funds withdrawn, except to ensure that withdrawals are made only upon the order
of properly authorized representatives of the Company.
At annual intervals, or more frequently as agreed but never more
frequently than quarterly, the Company will prepare, for the sole purpose of
amending the Letter of Credit, a specific statement of the Reinsurers' share of
reserves. If the statement shows that the Reinsurers' share of such reserves
exceeds the balance of credit as of the statement date, the Reinsurers will,
within 30 days after receipt of notice of such excess, secure delivery to the
Company of an amendment of the Letter of Credit, increasing the amount of
credit by the amount of such difference. If, however, the statement shows that
the Reinsurers' share of such reserves is less than the balance of credit as of
the statement date, the Company will, within 30 days after receipt of written
request from the Reinsurers, release such excess credit by agreeing to secure
an amendment to the Letter of Credit, reducing the amount of credit available
by the amount of such excess credit.
- 18 OF 21 -
<PAGE> 19
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
EXHIBIT A - RATING CHART
The net reinsurance premium to be paid by the Company, as called for
in the Premium Section of this Slip, will be determined by applying the rates
in the following chart. For purposes of the chart, the following definitions
will apply:
Net Base Premium (NBP) = 75% of the gross premium charged by the Company for
the first $500,000 of limits.
Net Original Premium (NOP) = Gross premium charged by the Company for limits of
$500,000 excess $500,000.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
PHYSICIANS, NURSE ANESTHETISTS, LICENSED
PHYSICIANS' ASSISTANTS, CHIROPRACTORS,
OTHER ALLIED MEDICAL PRACTITIONERS, AND DENTISTS
CLINICS
-------------------------------------------------------------------------------------------------
Clinics and Corporation
All Types of Insureds within the Policies Only
above-named
-------------------------------------------------------------------------------------------------
1st Layer 2nd Layer 3rd Layer 4th Layer* 1st Layer
-------------------------------------------------------------------------------------------------
500,000 500,000 500,000 3,000,000 500,000
excess of excess of excess of excess of excess of
500,000 1,000,000 1,500,000 2,000,000 500,000
- --------------------------------------------------------------------------------------------------------------
$1,000,000 $2,000,000
xs xs
$2,000,000 $3,000,000
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CLASSES
- --------------------------------------------------------------------------------------------------------------
0 thru 2 21.25% 14.87% 10.41% 20.22% 20.22%
(% of NBP)
- --------------------------------------------------------------------------------------------------------------
3 thru 8 27.62% 17.00% 11.90% 23.10% 23.10%
(% of NBP)
- --------------------------------------------------------------------------------------------------------------
all 75.00%
(% of NOP)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
DISCRETIONARY 10.00% 10.00% nil nil nil nil
CREDIT
- --------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------------
* Note that the Company, at its discretion, may allow a credit of up to 50% on
the NBP against which these rates are to be applied.
- 19 OF 21 -
<PAGE> 20
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute
that arises out of or in connection with this Agreement, including its
formation or validity, will be submitted for decision to an arbitration panel
composed of two arbitrators and an umpire. The arbitration will be conducted
under the Federal Arbitration Act and will proceed as set forth below.
All notices in connection with arbitration will be in writing and sent
certified or registered mail, return receipt requested. The term "days" as
used herein will mean calendar days. Notice requesting arbitration will
reference this Article, will state issues to be resolved in the view of the
claimant, and will appoint the arbitrator selected by the claimant. Within 30
days after receipt of such notice, the respondent will notify the claimant of
any additional issues to be resolved and of the name of its appointed
arbitrator. As time is of the essence, if the respondent fails to appoint its
arbitrator within 30 days after receipt of notice requesting arbitration, the
claimant is authorized to and will appoint the second arbitrator.
Unless otherwise mutually agreed, each member of the arbitration panel
will be an impartial active or former officer of an insurance or reinsurance
company or an Underwriter at Lloyd's of London. Before instituting the hearing
the two appointed arbitrators will choose an impartial umpire. If the two
arbitrators fail to agree on the appointment of an umpire within 30 days after
the appointment of the second arbitrator, within 10 days thereafter the two
arbitrators will request the American Arbitration Association ("AAA") to
appoint an umpire with the qualifications set forth above in this Article
without regard to the AAA's Commercial Arbitration Rules. If the AAA fails to
appoint an umpire within 30 days after its receipt of the arbitrators' request,
either party may apply to a court of competent jurisdiction to appoint an
umpire with the qualifications set forth above in this Article. The umpire
will immediately notify each party of his selection. In the event of the
resignation or death of any member of the arbitration panel, a replacement will
be appointed in the same manner as the resigning or deceased member was
appointed.
Within 30 days after notice of appointment of the umpire, the claimant
and respondent will each submit an initial brief to the panel. Within 45 days
after notice of appointment of the umpire, the panel will meet and determine
timely periods for the submission of reply briefs and amended briefs,
procedures for discovery, and a scheduled date for the hearing. Arbitration
will be held in the city of the Company's home office unless the parties
mutually agree to another venue.
- 20 OF 21 -
<PAGE> 21
FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS
AR 4373
The panel will be relieved of all judicial formality and the umpire
will be the final judge of the panel's procedures, the rules of evidence,
privilege, and production, and the excessiveness and relevancy of any witnesses
and documents upon the petition of any participating party. The panel will be
authorized to issue interim orders and awards in the interest of fairness and
the prompt and orderly resolution of issues in dispute. To the extent
permitted by law, the umpire and the panel will be empowered to issue orders to
enforce such decisions. Insofar as the panel looks to substantive law, it will
consider the law of the State of Florida.
The panel will make its award with regard to the terms expressed in
this Agreement, the original intentions of the parties to the extent reasonably
ascertainable, and the custom and practice of the insurance and reinsurance
business. The panel will make its award within 30 days after the close of the
hearing. Each award by the panel will be in writing and may state factual
findings that served as a basis for the award. Each award by the panel will be
by a majority of the panel's members and will be final and binding on all
parties to the proceeding. Any party may apply to a court of competent
jurisdiction for an order confirming the award, and a judgment of that court
will thereupon be entered on the award. If such an order is issued, the
attorneys' fees of the party so applying and court costs will be paid by the
party against whom confirmation is sought.
Each party will bear the expense of the arbitrator appointed on its
behalf and all remaining costs of the arbitration will be finally allocated by
the panel. Punitive damages will not be awarded; however, the panel may award
interest, costs and expenses as it deems appropriate, including but not limited
to attorneys' fees, to the extent permitted by law,
- 21 OF 21 -
<PAGE> 1
EXHIBIT 10(c)
HEALTH CARE LIABILITY FACILITY
CASUALTY FIRST THROUGH FOURTH CESSIONS EXCESS OF LOSS
FINAL PLACEMENT SLIP
COMPANY: FPIC Insurance Group
a Florida corporation
and/or
Florida Physicians Insurance Company
A Florida corporation
and/or
any company now or hereafter affiliated with
FPIC Insurance Group
PERIOD: Effective as to claims made, including prior acts, or losses
occurring as respects General Liability only, on or after
12:01 a.m., Eastern Standard Time, January 1, 1997, on
policies attaching from 12:01 a.m., Eastern Standard Time,
January 1, 1997, to 12:01 a.m. Eastern Standard Time, January
1, 2000.
CANCELLATION: At January 1, 1998, or January 1, 1999, by either party via 90
days notice by certified or registered mail.
EXPIRATION
AND
CANCELLATION
OPTIONS: At expiration or in the event of cancellation, each policy in
force at the expiration or cancellation date will be run off
until its cancellation, natural expiration, or next
anniversary date, whichever first occurs. Alternatively, the
Company may elect to have the Reinsurers' liability terminate
on a cut-off basis as of the date of expiration or
cancellation, and the Reinsurers will not be liable for any
losses occurring and/or claims made on or after the expiration
or cancellation date.
- 1 OF 16 -
<PAGE> 2
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
Regardless of the option chosen by the Company at expiration
or cancellation, Reinsurers' liability will continue in the
event any extended reporting period options are exercised in
accordance with the Company's claims made policies and/or in
the event the Company is bound by statute or regulation to
continue coverage.
BUSINESS
COVERED: All business written and classified by the Company as Health
Care Facility Liability Insurance, including General Liability
written in conjunction with such business.
The duration of the Company's policies will not exceed 12
months plus odd time not exceeding 18 moths in all, and will
contain a warranty to the effect that there have been no known
incidents likely to give rise to a claim, other than those
already reported to the Company.
DEFINITIONS: "Claims made" as used in this Agreement will mean those claims
first made against the insured during the policy period and
occurring on or after the retroactive date, if any. The date
on which a claim is made or reported will be understood to be
the earlier of the date on which a written notice of claim is
received by the Company, or a report by telephone is made to
the Company by the insured or their representative.
"Retroactive date" as used in this Agreement will mean the
date prescribed in the Company's policy, which is the earliest
date losses can actually occur for which an insured can claim
coverage.
"Extended reporting period" as used in this Agreement will
mean a time period after a policy's termination date within
which claims may be made with respect to occurrences happening
between the original retroactive date, if any, and the
original termination date of the policy.
EXCLUSIONS: As attached.
TERRITORY: To follow the Company's policies.
- 2 OF 16 -
<PAGE> 3
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
RETENTION First Layer
AND
LIMIT: $500,000 ultimate net loss each and every loss, each
and every insured, each and every policy,
excess of
$500,000 ultimate net loss each and every loss, each
and every insured, each and every policy.
Second Layer
$1,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$1,000,000 ultimate net loss each and every
loss, each and every insured, each and every policy.
Third Layer
$4,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$2,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy.
Fourth Layer
$5,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy,
excess of
$6,000,000 ultimate net loss each and every loss,
each and every insured, each and every policy.
- 3 OF 16 -
<PAGE> 4
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
PREMIUM
AND CEDING
COMMISSION: The Company will pay the Reinsurers the following percentages
Of the gross written premium on all policies written or
renewed with an effective date during the term of this
Agreement:
FIRST LAYER
<TABLE>
<CAPTION>
-------------------------------------------------------------------
Counties of Dade, Balance
Location of Insured Broward, and of State
Palm Beach
-------------------------------------------------------------------
<S> <C> <C>
Rate applied to gross written
premium charged by the Com-
pany for the first $500,000 of 27% 18%
limit
-------------------------------------------------------------------
</TABLE>
SECOND THROUGH FOURTH LAYERS
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Counties of Dade, Balance
Location of Insured Broward, and of State
Palm Beach
----------------------------------------------------------------------------
<S> <C>
Rate applied to gross written
premium charged by the Com- Second:......25% .........15%
pany for the first $1,000,000 Third:.......35% .........18%
of limits or pro rata of these Fourth:......26% .........11%
rates if the policy limit exposes
only part of a layer.
----------------------------------------------------------------------------
</TABLE>
ALL LAYERS
25% flat ceding commission on gross written premium ceded.
OTHER
REINSURANCE: Company permitted to purchase facultative reinsurance and to
deduct the premium therefor; Company permitted to purchase
- 4 OF 16 -
<PAGE> 5
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
other treaty reinsurance, and to deduct the premium therefor
if it inures to the benefit of this Agreement.
FUNDING OF
RESERVES: Letters of Credit required from unauthorized Reinsurers as
respects outstanding case and bulk losses, expenses,
recoverables, and unearned premium.
LOSS EXPENSE: Pro rata in addition to the ultimate net loss.
DECLARATORY
JUDGMENT
EXPENSE: Included hereunder, whether or not a loss is sustained as a
result of the action, as per the definition attached.
REPORTS
AND
REMITTANCES: Reports and remittances within 60 days following the end of
each quarter, to include all information required by
Reinsurers for completion of their NAIC reports.
SPECIAL
ACCEPTANCES: The Company may submit to the Reinsurers, for special
acceptance hereunder, business not covered by this Agreement.
The Company agrees to submit the following types of business
for Special Acceptance hereunder (ALL FOUR AS RESPECTS GENERAL
RE; 1, 3, AND 4 ONLY AS RESPECTS ZURICH RE (UK), UNIONAMERICA
INSURANCE COMPANY AND CNA INTERNATIONAL REINSURANCE COMPANY
LTD.):
1. Any SIR business or business with deductibles greater
than $250,000.
- 5 OF 16 -
<PAGE> 6
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
2. All risks involving hospitals producing more than
$500,000 in premiums.
3. Any risk with a reported loss greater than $1,000,000
in any one year or a combined incurred loss ratio of
more than 95 % for the preceding three years.
4. Business attaching in excess of insurance written by
other carriers.
Furthermore, should the Company, by reason of an
inadvertent act, error, or omission, be bound to afford
coverage, or should an existing insured extend its operations
to include coverage for any of the above types of business,
and special acceptance has not been obtained from Reinsurers,
the Reinsurers will waive the requirement for Special
Acceptance. The duration of said waiver will not extend
beyond the time that notice of such coverage has been received
by the responsible underwriting authority of the Company plus:
A. The minimum time period required thereafter for the
Company to obtain special acceptance from the Reinsurers; or
B. If special acceptance is not granted by the
Reinsurers, the minimum time period required thereafter for
the Company to terminate such coverage.
If said business is accepted by the Reinsurers, it will be
subject to the terms of this Agreement, except as such terms
are modified by such acceptance. Any special acceptance
business covered under the reinsurance agreement being
replaced by this Agreement will be automatically covered
hereunder.
Further, should Reinsurers become a party to this Agreement
subsequent to the acceptance of any business not normally
covered hereunder, they will automatically accept same as
being a part of this Agreement.
- 6 OF 16 -
<PAGE> 7
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
OTHER
PROVISIONS: Reinsurers will be subject to terms, conditions,
interpretations, waivers, modifications, and alterations of
the Company's policies that are the subject of this Agreement.
Access to Records Clause
Amendments Clause
Aon Re Inc. Intermediary Clause (NOT APPLICABLE TO GENERAL RE)
Arbitration Clause - as attached
Delays, Errors, or Omissions Clause
Claims Review Clause
Correspondence and Payments Clause (APPLICABLE TO GENERAL
RE ONLY)
Excess of Original Policy Limits (90%)/Extra Contractual
Obligations (90%) Clause - as attached.
Insolvency Clause
Loss Notices and Settlements Clause - as attached
Net Retained Liability Clause
Offset Clause (all Agreements)
Subrogation Clause
Service of Suit Clause (NMA 1998)
Ultimate Net Loss, Loss Expense, Declaratory Judgment
Expense - as attached
UNDERWRITING
1. The maximum schedule credit that the Company will allow in
respect of the base premiums to which the above rates will be
applied will be 15% except as otherwise agreed by lead
reinsurer, General Re.
2. The Minimum Premium amounts are:
$3,000 Acute Care Beds
- 7 OF 16 -
<PAGE> 8
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
$2,000 Clinics with no overnight beds and major surgery
$2,000 Psychiatric Beds
$2,000 Rehab Beds
$ 750 Clinics with no overnight beds and minor surgery
$ 750 Long Term Extended Care
INFORMATION: Aon Fee for Gen Re: 5% ceded premium
- 8 OF 16 -
<PAGE> 9
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
In accordance with your instructions, we have placed reinsurance with the
Reinsurers listed hereon, subject to the terms and conditions hereinabove
stated. We ask that you promptly advise us if the terms, conditions, or
Reinsurers vary in any respect from your instructions. Aon Re Inc. will not be
responsible for the financial or other obligations of any Reinsurer. Should
you desire financial information regarding the Reinsurers listed hereon, please
contact us and we will furnish it.
The Reinsurers' obligations under this Agreement are several and not joint and
are limited solely to the extent of their individual participation. The
Reinsurers are not responsible for the participation of any co-subscribing
Reinsurer that for any reason does not satisfy all or part of its obligations.
<TABLE>
<CAPTION>
DOMESTIC REINSURERS FIRST SECOND THIRD FOURTH
- ------------------- LAYER LAYER LAYER LAYER
----- ----- ----- -----
<S> <C> <C> <C> <C>
General Reinsurance Corporation 50.0000% 50.0000% 50.0000% 50.0000%
TIG Reinsurance Company 10.9100% 10.9100% 10.91000% 10.9100%
Total Domestic Reinsurers: 60.9100% 60.9100% 60.91000% 60.91000%
<CAPTION>
LONDON MARKETS THROUGH DENIS M. CLAYTON AND COMPANY LIMITED:
- ------------------------------------------------------------
LONDON COMPANIES:
- -----------------
<S> <C> <C> <C> <C>
CNA International Reinsurance Company
Limited 5.4800% 5.4800% 10.0300% 12.7500%
Hannover Ruckversicherungs-Aktiengesellschaft 5.4800% 5.4800% 5.0100% 6.3700%
Terra Nova Insurance Company Limited 0.7300% 0.7300% 0.6700% 0.8500%
Unionamerica Insurance Company Limited 5.4800% 5.4800% 10.0200% 6.3700%
Zurich Re (UK) Limited 21.9200% 21.9200% 13.3600% 12.7500%
TOTAL LONDON COMPANIES 39.0900% 39.0900% 39.0900% 39.0900%
Total Denis M. Clayton & Company Limited 39.0900% 39.0900% 39.0900% 39,0900%
Total Non-Domestic Companies 39.0900% 39.0900% 39.0900% 39.0900%
TOTAL ALL PARTICIPANTS 100.0000% 100.0000% 100.0000% 100.0000%
</TABLE>
- 9 OF 16 -
<PAGE> 10
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
Assuming that you find everything in order, please indicate your acceptance and
approval by signing and returning this Final Placement Slip to Aon Re Inc., 201
California Street, Suite 900, San Francisco, California 94111.
ACCEPTED AND
APPROVED BY: DATED:
--------------------------------------- -----------------
REFERENCE
NUMBER:
-----------------------
(For processing purposes it is important that you provide your Company's
reference number for this program.)
- 10 OF 16 -
<PAGE> 11
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
EXCLUSION LIST
No reinsurance indemnity will be afforded under this Agreement for:
A. All liability of the Company arising, by contract, operation
of law, or otherwise from its participation or membership,
whether voluntary or involuntary, in any insolvency fund.
"Insolvency fund" includes any guaranty fund, insolvency fund,
plan, pool, association, fund, or other arrangement, howsoever
denominated, established, or governed, which provides for any
assessment of or payment or assumption by the Company of part
or all of any claim, debt, charge, fee, or other obligation of
an insurer, or its successors or assigns, which has been
declared by any competent authority to be insolvent or which
is otherwise deemed unable to meet any claim, debt, fee, or
other obligation in whole or in part.
B. Reinsurance assumed by the Company other than inter-company
reinsurance.
C. Loss or liability excluded by the provisions of the Nuclear
Incident Exclusion Clause - Liability - Reinsurance - U.S.A. -
attached to this Agreement, or as may be revised hereafter by
the Lloyd's Underwriters' Non-Marine Association.
D. Managed Care Errors and Omissions insurance.
- 11 OF 16 -
<PAGE> 12
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
LOSS NOTICES AND SETTLEMENTS
The Company will advise the Reinsurers promptly of all losses reserved
at $100,000 from the ground up, or that, in the opinion of the Company, may
involve the Reinsurers under this Agreement, and of all subsequent developments
pertaining thereto that may materially affect them as well; however, such
losses will be reported to the Second and higher Layers only if a cession has
been made to the Layer in question. Inadvertent omission in dispatching the
aforementioned notices will in no way affect the obligation of the Reinsurers
under this Agreement, provided the Company informs the Reinsurers of such
omission promptly upon discovery.
The Company will have the right to settle all claims under its
policies. The settlements, provided they are within the terms of the Company's
policies and of this Agreement, will be unconditionally binding on the
Reinsurers in proportion to their participation in this Agreement. The Company
will likewise, at its sole discretion, commence, continue, defend, or withdraw
from actions, suits, or proceedings and generally handle all matters related to
all claims and losses, and all payments made and costs and expenses incurred in
connection therewith, or in taking legal advice therefor, will be shared by the
Reinsurers. When so requested, however, the Company will afford the
Reinsurers, at the Reinsurers' own expense, an opportunity to be associated
with the Company in the defense of any claim, suit, or proceeding involving
this Agreement, and the Company and the Reinsurers will cooperate in every
respect in such defense. Amounts due the Company hereunder in the settlement
of ultimate net loss and loss expense will be payable by the Reinsurers
immediately upon being furnished by the Company with reasonable evidence of the
amount paid or to be paid in excess of the Company's retention as set forth in
the Retention and Limit Sections of the Exhibits attached hereto.
- 12 OF 16 -
<PAGE> 13
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY
This Agreement will extend to cover any losses arising from
claims-related extra contractual obligations and/or excess limits liability:
A. In the case of the First and Second Layers, provided a cession
has been made to this Agreement in respect of the policy under
which the extra contractual obligations and/or excess limits
liability loss arises;
B. In the case of the Third and Fourth Layers, provided a cession
has been made to the Layer in question in respect of the
policy under which the extra contractual obligations and/or
excess limits liability loss arises.
"Extra contractual obligations" as used in this Agreement will mean
those liabilities not covered under any other provision of this Agreement,
which arise from the handling of any claim on business covered hereunder; such
liabilities arising because of, but not limited to, the following: failure to
settle within the policy limit, by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement, in the preparation of
the defense, in the trial of any action against the insured or reinsured, or in
the preparation or prosecution of an appeal consequent upon such action.
"Excess limits liability" as used in this Agreement will mean damages
payable in excess of the policy limit as a result of alleged or actual
negligence, fraud, or bad faith in failing to settle and/or rejecting a
settlement within the policy limit, in the preparation of the defense, in the
trial of any action against the insured or reinsured, or in the preparation or
prosecution of an appeal consequent upon such action. Excess limits liability
is any amount for which the Company would have been contractually liable to pay
had it not been for the limits of the reinsured policy.
There will be no recovery hereunder where the extra contractual
obligation or excess limits liability has been incurred due to fraud committed
by a member of the board of directors or a corporate officer of the Company,
acting individually, collectively, or in collusion with a member of the board
of directors, a corporate officer, or a partner of any other corporation,
partnership, or organization involved in the defense or settlement of a claim
on behalf of the Company.
- 13 OF 16 -
<PAGE> 14
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
The date on which any extra contractual obligation and/or excess
limits liability is incurred by the Company will be deemed, in all
circumstances, to be the date of the original loss (as respects
occurrence-basis policies), or the first claim made against the Company's
policy (in the case of claims-made-basis policies). Nothing in this Article
will be construed to create a separate or distinct loss apart from the original
covered loss that gave rise to the extra contractual obligations and/or excess
limits liability discussed in the preceding paragraphs. In no event will the
total liability of the Reinsurers exceed their applicable limit of liability as
set forth in the Retention and Limit Sections of the Exhibits attached hereto.
ULTIMATE NET LOSS, LOSS EXPENSE AND
DECLARATORY JUDGMENT EXPENSE
"Ultimate net loss" as used in this Agreement will mean the amount of
any settlement, award, or judgment paid by the Company or for which the Company
has become liable to pay, including: plaintiff's attorney fees where applicable;
interest accrued prior to final judgment if included as part of loss on
reinsured policies; 90% of any claims-related extra contractual obligations
where applicable and/or 90% of any claims-related excess limits liability where
applicable (however, the maximum contribution to ultimate net loss as respects
any one extra contractual obligations and/or excess limits liability action
will be $2,000,000); and declaratory judgment expense where the Company has not
paid or has not become liable to pay any settlement, award, or judgment under
its policy. Ultimate net loss will also include any coinsurance retention,
deductible, or self-insured retention paid by the insured. Ultimate net loss
will not include loss expense. All recoveries and subrogations which are
actually recovered, and inuring reinsurance whether recovered or not, will be
deducted from the amount of the ultimate net loss. Nothing, however, in this
Agreement will be construed as meaning that losses are not recoverable
hereunder until the actual loss to the Company has been ascertained.
"Loss expense" as used in this Agreement will mean all expenses
incurred by the Company in the investigation, appraisal, adjustment, litigation
and/or defense of claims under policies reinsured hereunder, including court
costs, interest accrued prior to judgment if included as part of expense on
reinsured policies, and interest accrued after final judgment, but excluding
internal office expenses, salaries, per diem, and other remuneration of regular
Company employees. Loss expense will also include declaratory judgment expense
incurred by the Company in an action that results in a loss to the Company
(however, the maximum contribution to loss expense as respects declaratory
judgment expense arising, from any one declaratory judgment action will be
$2,000,000). Loss expense where incurred in connection
- 14 OF 16 -
<PAGE> 15
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
with claims involving this Agreement will be apportioned between the Company
and the Reinsurers in proportion to their respective interests as finally
determined.
"Declaratory judgment expense" as used in this Agreement will mean all
expenses incurred by the Company in connection with declaratory judgment
actions brought to determine the Company's defense and/or indemnification
obligations that are allocable to specific policies and claims subject to this
Agreement. Declaratory judgment expense will be deemed to have been fully
incurred by the Company on the date of the actual or alleged loss under the
Company's policy giving rise to the action.
ARBITRATION
As a condition precedent to any right of action hereunder, any dispute
that arises out of or in connection with this Agreement, including its
formation or validity, will be submitted for decision to an arbitration panel
composed of two arbitrators and an umpire. The arbitration will be conducted
under the Federal Arbitration Act and will proceed as set forth below.
All notices in connection with arbitration will be in writing and sent
certified or registered mail, return receipt requested. The term "days" as
used herein will mean calendar days. Notice requesting arbitration will
reference this Article, will state issues to be resolved in the view of the
claimant, and will appoint the arbitrator selected by the claimant. Within 30
days after receipt of such notice, the respondent will notify the claimant of
any additional issues to be resolved and of the name of its appointed
arbitrator. As time is of the essence, if the respondent fails to appoint its
arbitrator within 30 days after receipt of notice requesting arbitration, the
claimant is authorized to and will appoint the second arbitrator.
Unless otherwise mutually agreed, each member of the arbitration panel
will be an impartial active or former officer of an insurance or reinsurance
company or an Underwriter at Lloyd's of London. Before instituting the hearing
the two appointed arbitrators will choose an impartial umpire. If the two
arbitrators fail to agree on the appointment of an umpire within 30 days after
the appointment of the second arbitrator, within 10 days thereafter the two
arbitrators will request the American Arbitration Association ("AAA") to
appoint an umpire with the qualifications set forth above in this Article
without regard to the AAA's Commercial Arbitration Rules. If the AAA fails to
appoint an umpire within 30 days after its receipt of the arbitrators' request,
either party may apply to a court of competent jurisdiction to appoint an
umpire with the qualifications set forth above in this Article. The umpire
will immediately notify each party of his selection. In the event of the
resignation or death of any member of the arbitration panel, a replacement will
be appointed in the same manner as the resigning or deceased member was
appointed.
- 15 OF 16 -
<PAGE> 16
FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION
EXCESS OF LOSS
AR 4374
Within 30 days after notice of appointment of the umpire, the claimant
and respondent will each submit an initial brief to the panel. Within 45 days
after notice of appointment of the umpire, the panel will meet and determine
timely periods for the submission of reply briefs and amended briefs,
procedures for discovery, and a scheduled date for the hearing. Arbitration
will be held in the city of the Company's home office unless the parties
mutually agree to another venue.
The panel will be relieved of all judicial formality and the umpire
will be the final judge of the panel's procedures, the rules of evidence,
privilege, and production, and the excessiveness and relevancy of any witnesses
and documents upon the petition of any participating party. The panel will be
authorized to issue interim orders and awards in the interest of fairness and
the prompt and orderly resolution of issues in dispute. To the extent
permitted by law, the umpire and the panel will be empowered to issue orders to
enforce such decisions. Insofar as the panel looks to substantive law, it will
consider the law of the State of Florida.
The panel will make its award with regard to the terms expressed in
this Agreement, the original intentions of the parties to the extent reasonably
ascertainable, and the custom and practice of the insurance and reinsurance
business. The panel will make its award within 30 days after the close of the
hearing. Each award by the panel will be in writing and may state factual
findings that served as a basis for the award. Each award by the panel will be
by a majority of the panel's members and will be final and binding on all
parties to the proceeding. Any party may apply to a court of competent
jurisdiction for an order confirming the award, and a judgment of that court
will thereupon be entered on the award. If such an order is issued, the
attorneys' fees of the party so applying and court costs will be paid by the
party against whom confirmation is sought.
Each party will bear the expense of the arbitrator appointed on its
behalf and all remaining costs of the arbitration will be finally allocated by
the panel. Punitive damages will not be awarded; however, the panel may award
interest, costs and expenses as it deems appropriate, including but not limited
to attorneys' fees, to the extent permitted by law.
- 16 OF 16 -
<PAGE> 1
Exhibit 21
The following is a list of subsidiaries of FPIC Insurance Group, Inc. as of
December 31, 1997:
<TABLE>
<CAPTION>
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
<S> <C>
Florida Physicians Insurance Company Florida
FPIC Insurance Agency Florida
McCreary Corporation Florida
Employers Mutual, Inc. Florida
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FPIC Insurance Group, Inc. for the twelve months ended
December 31, 1997 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 259,574
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 2,541
<MORTGAGE> 0
<REAL-ESTATE> 4,185
<TOTAL-INVEST> 268,300
<CASH> 7,680
<RECOVER-REINSURE> 866
<DEFERRED-ACQUISITION> 1,411
<TOTAL-ASSETS> 352,850
<POLICY-LOSSES> 188,086
<UNEARNED-PREMIUMS> 28,218
<POLICY-OTHER> 4,783
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 2,000
0
0
<COMMON> 918
<OTHER-SE> 115,512
<TOTAL-LIABILITY-AND-EQUITY> 352,850
65,504
<INVESTMENT-INCOME> 14,820
<INVESTMENT-GAINS> 32
<OTHER-INCOME> 12,860
<BENEFITS> 54,011
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 7,400
<INCOME-PRETAX> 23,344
<INCOME-TAX> 6,788
<INCOME-CONTINUING> 16,556
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,556
<EPS-PRIMARY> 1.83
<EPS-DILUTED> 1.76
<RESERVE-OPEN> 172,738
<PROVISION-CURRENT> 69,126
<PROVISION-PRIOR> (15,115)
<PAYMENTS-CURRENT> 8,061
<PAYMENTS-PRIOR> 33,103
<RESERVE-CLOSE> 188,086
<CUMULATIVE-DEFICIENCY> 22,319
</TABLE>
