<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transaction period from ____________to
___________.
Commission file number 1-11983
FPIC Insurance Group, Inc.
------------------------------------------
(Exact name of registrant as specified in its charter)
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<S> <C>
Florida 59-3359111
- ---------------------------------- ------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation of organization) Identification No.)
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<TABLE>
<S> <C>
1000 Riverside Avenue, Suite 800, Jacksonville, FL 32204
- ----------------------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
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(904) 354-5910
---------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ___X___ No ______
As of October 31, 1998 there were 9,413,514 shares of the registrant's common
stock outstanding.
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Table of Contents
<TABLE>
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Part I - Financial Information
Item 1. Consolidated Financial Statements (unaudited)
of FPIC Insurance Group, Inc. and Subsidiaries:
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Income...................................... 4
Consolidated Statements of Cash Flows.................................. 5
Notes to the Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......................... 11
Part II - Other Information
Item 1. Legal Proceedings...................................................... 17
Item 2. Changes in Securities.................................................. 17
Item 3. Defaults Upon Senior Securities........................................ 17
Item 4. Submission of Matters to a Vote of Security Holders.................... 17
Item 5. Other Information...................................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................... 17
Signatures............................................................................... 17
</TABLE>
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FPIC Insurance Group, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
9/30/98 12/31/97
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Bonds and U.S. Government securities:
Available-for-sale, at fair value $326,347,333 $259,574,210
Equity securities, at fair value 3,945,602 2,540,735
Real estate investments 4,642,480 4,571,465
Other invested assets 9,502,313 2,000,000
---------------- ----------------
TOTAL INVESTMENTS 344,437,728 268,686,410
Cash and cash equivalents 5,032,271 7,679,822
Premiums receivable, net 31,924,255 17,924,658
Accrued investment income 5,602,475 3,740,979
Reinsurance recoverable on paid losses 2,967,079 866,149
Due from reinsurers on unpaid losses and advance premiums 30,734,885 14,115,000
Deposits with reinsurers 0 18,070,341
Property and equipment, net of accumulated depreciation 2,877,540 1,982,898
Deferred policy acquisition costs 1,630,182 1,411,420
Deferred income taxes 8,587,898 8,937,094
Finance charge receivable 474,154 281,217
Prepaid expenses 162,467 423,328
Intangible assets 17,272,401 7,173,841
Other assets 4,154,434 1,556,594
---------------- ----------------
TOTAL ASSETS $455,857,769 $352,849,751
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Loss and loss adjustment expense reserves $232,953,746 $188,086,000
Unearned premiums 41,916,949 28,217,537
Paid in advance and unprocessed 1,231,118 4,782,835
Short term debt 23,750,000 2,000,000
Federal income tax payable 1,479,754 2,735,527
Accrued expenses and other liabilities 6,874,236 6,963,432
---------------- ----------------
TOTAL LIABILITIES 308,205,803 232,785,331
---------------- ----------------
SHAREHOLDERS' EQUITY
Preferred stock, $.10 par value, 50,000,000 shares authorized;
no shares issued and outstanding
Common stock, $.10 par value: 25,000,000 shares authorized;
9,453,514 and 9,179,581 shares issued and outstanding
in 1998 and 1997, respectively 945,351 917,958
Additional paid-in capital 34,310,287 25,789,144
Accumulated total other comprehensive income, net 7,360,979 3,634,299
Retained earnings 105,035,349 89,723,019
---------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 147,651,966 120,064,420
---------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $455,857,769 $352,849,751
================ ================
</TABLE>
See accompanying notes.
3
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FPIC Insurance Group, Inc.
Consolidated Statements of Income
(Unaudited)
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<CAPTION>
Three months ended September 30 Nine months ended September 30
----------------------------------- ----------------------------------
1998 1997 1998 1997
----------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Net premiums earned $22,986,070 $16,188,199 $63,796,056 $47,771,848
Net investment income 4,259,182 4,064,362 12,971,361 12,017,067
Net realized investment gains (losses) (700) 7,758 (47,919) (46,483)
Claims administration fees 2,218,371 2,224,914 7,321,792 6,065,579
Commission income 798,250 758,594 1,267,193 1,147,222
Other income 570,000 459,881 1,469,241 1,399,374
--------------- -------------- ---------------- -----------------
Total revenues 30,831,173 23,703,708 86,777,724 68,354,607
--------------- -------------- ---------------- -----------------
Expenses
Net losses and loss adjustment expenses 17,506,225 14,014,005 50,188,384 40,717,230
Other underwriting expenses 2,795,118 1,492,201 7,290,056 4,632,288
Claims administration expenses 2,247,234 2,196,916 7,278,118 6,065,610
Other expenses 955,216 0 955,216 0
--------------- -------------- ---------------- -----------------
Total expenses 23,503,793 17,703,122 65,711,774 51,415,128
--------------- -------------- ---------------- -----------------
Income before income taxes 7,327,380 6,000,586 21,065,950 16,939,479
Income taxes 1,846,645 1,722,276 5,753,620 4,960,393
--------------- -------------- ---------------- -----------------
Net income $5,480,735 $4,278,310 $15,312,330 $11,979,086
=============== ============== ================ =================
Basic earnings per common share $0.58 $0.47 $1.65 $1.33
=============== ============== ================ =================
Diluted earnings per common share $0.55 $0.46 $1.56 $1.28
=============== ============== ================ =================
Basic weighted average shares outstanding 9,471,941 9,028,831 9,295,751 9,019,290
=============== ============== ================ =================
Diluted weighted average shares outstanding 9,970,882 9,382,477 9,794,692 9,373,541
=============== ============== ================ =================
</TABLE>
See accompanying notes.
4
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FPIC Insurance Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
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<CAPTION>
Nine months ended September 30
-----------------------------------
1998 1997
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<S> <C> <C>
Cash flows from operating activities
Net income $15,312,330 $11,979,086
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense 1,533,750 1,610,866
Realized losses on investments 47,919 46,483
Realized losses on sale of equipment 9,733 0
Net earnings from equity investment (124,612) 0
Deferred income taxes (282,748) 1,232,519
Changes in assets and liabilities:
Premiums receivable (10,536,690) (4,526,410)
Accrued investment income (1,452,218) (872,681)
Reinsurance recoverable on paid losses (1,984,612) (506,474)
Due from reinsurers on unpaid losses
and advance premiums 615,615 452,621
Deposits with reinsurers 18,037,425 (1,356,049)
Deferred policy acquisition costs (218,762) (590,799)
Other assets (2,369,305) (1,360,461)
Prepaid expenses and finance charge receivable 67,924 273,720
Loss and loss adjustment expense reserves 5,457,180 11,926,000
Unearned premiums 8,979,875 9,591,775
Paid in advance and unprocessed (4,187,250) (4,259,049)
FIGA accrual 0 (972,622)
Federal income tax payable (1,255,773) 0
Accrued expenses and other liabilities (498,170) 16,685
-------------- -------------
Net cash provided by operating activities 27,151,611 22,685,210
-------------- -------------
Cash flows from investing activities
Proceeds from sale or maturity of securities available-for-sale 35,083,754 59,670,167
Purchase of securities available-for-sale (71,701,990) (77,785,864)
Purchase of goodwill (10,477,754) (1,077,173)
Purchase of real estate investments (261,783) (628,237)
Purchase of other invested assets (7,502,313) 0
Purchase of equity securities (1,280,000) (2,331,949)
Purchase of subsidiary's net other assets (2,681,703) (289,384)
Purchase of property and equipment, net (1,275,909) (603,673)
-------------- -------------
Net cash used in investing activities (60,097,698) (23,046,113)
-------------- -------------
Cash flows from financing activities
Receipt of short term debt 21,750,000 0
Issuance of common stock, net 8,548,536 107,898
-------------- -------------
Net cash provided by financing activities 30,298,536 107,898
-------------- -------------
Net decrease in cash (2,647,551) (253,005)
-------------- -------------
Cash and cash equivalents, beginning of period 7,679,822 5,463,096
-------------- -------------
Cash and cash equivalents, end of period $5,032,271 $5,210,091
============== =============
Supplemental disclosure of cash flow information:
Federal income taxes paid $5,068,000 $2,216,000
Interest paid $474,588 $0
</TABLE>
See accompanying notes.
5
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FPIC INSURANCE GROUP, INC.
Notes to the Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
FPIC Insurance Group, Inc. (the Company) is a Florida corporation formed by
Florida Physicians Insurance Company, Inc. (FPIC) to serve as a holding
corporation for FPIC and other subsidiaries. On June 11, 1996, FPIC and the
Company consummated a reorganization which generally provided that each share
of common stock of FPIC, par value $1 per share, would be exchanged for five
shares of common stock of the Company, par value $.10 per share.
The accompanying unaudited consolidated financial statements include the
accounts of the Company and its subsidiaries, FPIC, FPIC Insurance Agency Inc.,
Anesthesiologists' Professional Assurance Company (APAC), and McCreary
Corporation and its subsidiaries, and have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended September 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. These consolidated financial statements and notes should be
read in conjunction with the financial statements and notes included in the
audited consolidated financial statements of the Company for the year ended
December 31, 1997, which were filed with the Securities and Exchange Commission
on Form 10-K on March 26, 1998.
2. LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY
The liability for loss and loss adjustment expenses represents management's
best estimate of the ultimate cost of all losses incurred but unpaid. The
estimated liability is continually reviewed and any adjustments that become
necessary are included in current income. Incurred losses and loss adjustment
expenses for the nine-month periods ended September 30, 1998 and 1997 were
principally determined by considering prior loss experience, loss trends, the
Company's loss retention levels, and changes in frequency and severity of
claims.
3. INCOME TAXES
Income taxes were accounted for under the asset and liability method. Income
tax expense differs from the normal relationship to financial statement income
principally because of tax exempt interest income.
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4. INVESTMENTS
Proceeds from sales of investments available-for-sale were $35,083,754 and
$59,670,167 during the nine months ended September 30, 1998 and 1997,
respectively.
Gross realized gains and (losses) from sales of debt securities based on
specific identification, were $325 and $(48,244); and $40,791 and $(87,274) for
the nine months ended September 30, 1998 and 1997, respectively.
The amortized cost of investments in securities available-for-sale was
$318,983,423 and $256,523,717 as of September 30, 1998 and December 31, 1997,
respectively.
5. BUSINESS ACQUISITIONS
On July 1, 1995, McCreary Corporation acquired the assets of McCreary
Enterprises, Inc., a Florida third party administrator, for a cost of
$2,000,000 plus certain additional payments based upon earnings. The
acquisition agreement specified additional payments, based upon earnings, to be
made to the seller from 1996 through 2000. Since projected earnings were
attained for the twelve-month period ended June 30, 1997, the Company paid an
additional $900,000 in 1997. In addition, projected earnings for the twelve
month period ended June 30, 1998 were attained and an $800,000 payment was made
in 1998.
On January 17, 1997, McCreary Corporation acquired all of the outstanding
common stock of Employers Mutual, Inc. (EMI), a Florida third party
administrator, for a cost of $1,250,000 plus certain additional payments based
upon earnings. The acquisition agreement specified additional payments, based
upon earnings, to be made to the selling shareholders from 1997 through 2000.
Since the projected earnings for EMI were attained for the twelve-month period
ended December 31, 1997, the Company paid an additional $250,000 in 1998.
The remaining payments for these two acquisitions are as follows:
<TABLE>
<CAPTION>
McCreary EMI
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<S> <C> <C>
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 2001. No individual annual payment will exceed the annual earnings,
and may be reduced if the projected earnings are not attained for that year.
The agreements allow for an additional final payment based on the aggregate
earnings compared to the aggregate projected earnings during the earnout
period. The effect of these subsequent payments is to increase the original
purchase price and the recorded goodwill.
On July 1, 1997, the Company purchased 20% of the common stock of APS Insurance
Services, Inc. (APS), a Texas insurance service corporation, for a cost of
$2,000,000. The purchase
7
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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, and continuing
for 12 months thereafter, the Company's subsidiary, FPIC, began underwriting
Frontier's Florida book of business. The cost of the transaction was $3.2
million, paid in Company common stock, with a cash adjustment based on actual
results at the end of one year. The excess of the purchase price over tangible
assets is included in intangible assets and will be amortized over the expected
life of this book of business, considering the Company's historical policy
renewal rate.
On July 1, 1998, the Company completed its acquisition of Anesthesiologists'
Professional Assurance Company (APAC), a Florida-domiciled risk retention group
with a $10 million book of anesthesiologist medical professional liability
business. The cost of the transaction, accounted for under the purchase method
of accounting, was $18 million, paid in a combination of cash, Company common
stock, and assumption of debt. In connection with this transaction, the
Company also acquired a 9.9% interest in American Professional Assurance Ltd.,
a reinsurance company and an affiliate of APAC, for $5.5 million in cash.
Additionally, $3.5 million was paid in non-compete agreements and other fees to
certain key employees.
On July 14, 1998, the Company's subsidiary, EMI, acquired Sy. Med Development,
Inc. (Sy. Med), a software development and consulting company headquartered in
Nashville, Tennessee. The transaction was a stock purchase structured on an
earn-out over the next four years. The initial payment, accounted for under
the purchase method of accounting, was $400,000, and all future payments are
contingent on future earnings. The purchase agreement sets the initial future
earnout amounts at $175,000 for the six month period ended December 31, 1998
and $400,000, $500,000, and $600,000 for the fiscal years ending December 31,
1999 through 2001 and $325,000 for the six month period January 1, 2002 through
June 30, 2002. These amounts are subject to adjustment depending on the actual
results attained.
6. SUBSEQUENT EVENTS
On October 7, 1998, the Company signed a definitive agreement to purchase The
Tenere Group, Inc., for $20.6 million in cash. The Tenere Group, located in
Springfield, Missouri, is a stock holding company that has two primary
insurance subsidiaries. One subsidiary writes $8.5 million of medical
professional liability insurance and the other subsidiary writes $1.5 million
of lawyer professional liability insurance. The purchase is subject to a
number of conditions, including shareholder and regulatory approvals. The
Company anticipates that this transaction will close in December of this year.
8
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7. REINSURANCE
The Company presently has excess of loss reinsurance contracts that serve to
limit the Company's maximum loss to $500,000 per occurrence. To the extent
that any reinsurer is unable to meet its obligations, the Company would be
liable for such defaulted amounts not covered by letters of credit, which the
Company obtains from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance.
8. COMMITMENTS AND CONTINGENCIES
The Company is involved in numerous legal actions arising primarily from
claims-made insurance policies. The legal actions arising from claims made
insurance policies have been considered by the Company in establishing its
reserves. While the outcomes of all legal actions are not presently
determinable, the Company's management is of the opinion that the settlement of
these actions will not have a material adverse effect on the Company's
financial position or results of operations.
9. BORROWING ARRANGEMENTS
The Company maintains a $30,000,000 revolving credit facility. The credit
facility agreement terminates on May 31, 1999. The Company is not required to
maintain compensating balances in connection with this credit facility. As of
September 30, 1998, $23,750,000 had been borrowed under this agreement.
10. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
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<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
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<S> <C> <C> <C> <C>
Net income and income from
continuing operations $5,480,735 $4,278,310 $15,312,330 $11,979,086
========== ========== =========== ===========
Basic weighted average shares
outstanding 9,471,941 9,027,918 9,295,751 9,018,982
Common stock equivalents 498,941 354,559 498,941 354,559
------- ------- ------- -------
Diluted weighted average
shares outstanding 9,970,882 9,382,477 9,794,692 9,373,541
========= ========= ========= =========
Basic earnings per share $0.58 $0.47 $1.65 $1.33
===== ===== ===== =====
Diluted earnings per share $0.55 $0.46 $1.56 $1.28
===== ===== ===== =====
</TABLE>
9
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11. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on January
1, 1998. Comprehensive income is divided into net income and other
comprehensive income. The following represents other comprehensive income for
the three and nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Unrealized gains on investments,
net of tax:
Unrealized holding gains arising
during period (net of tax of $1,634,199
and $1,974,831 in 1998; and
$881,780 and $1,111,501
in 1997) $3,050,470 $1,711,690 $3,695,533 $2,157,622
Reclassification adjustment
for losses (gains) realized in net
income (net of tax of 245
and $16,772 in 1998; and
$2,638 and $15,805 in 1997) 455 (5,120) 31,147 30,678
--- ------- ------ ------
Net unrealized gains (net of tax of
$1,634,444 and $1,991,603 in 1998;
and $879,142 and $1,127,306
in 1997) $3,050,925 $1,706,570 $3,726,680 $2,188,300
========== ========== ========== ==========
Other comprehensive income $3,050,925 $1,706,570 $3,726,680 $2,188,300
========== ========== ========== ==========
</TABLE>
The tax rate used in the presentation above was 35% in 1998 and 34% in 1997.
12. RECLASSIFICATION OF 1997 PRESENTATION
Certain amounts for 1997 have been reclassified to conform with the 1998
presentation.
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FPIC INSURANCE GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
For purposes of the following discussion and analysis, "Company" refers to FPIC
Insurance Group, Inc., a holding company, and its consolidated subsidiaries,
"FPIC" refers only to Florida Physicians Insurance Company, Inc., "McCreary"
refers to McCreary Corporation and its subsidiaries, and "APAC" refers to
Anesthesiologists' Professional Assurance Company. The results of operations
for the three months and nine months ended September 30, 1998 include the
results of APAC from July 1, 1998. All amounts in this management discussion
and analysis have been rounded to the nearest $100,000.
The Company's primary source of revenue is dividends from its subsidiaries.
The primary sources of revenues for these dividends are premiums earned and
investment income derived from the insurance operations of FPIC and APAC, and
fee and commission income from McCreary and FPIC Insurance Agency Inc.. The
Company concentrates on liability insurance products for the healthcare
community, with medical professional liability (MPL) insurance for physicians
and dentists as its primary product. The Company, through FPIC and APAC, writes
MPL insurance on a claims-made basis, which provides protection to the insured
against only those claims that arise out of incidents occurring and of which
notice to the insurer is given while coverage is effective. The Company
recently supplemented its line of insurance products by adding coverage for
small employer group health plans.
On January 17, 1997, McCreary acquired all of the outstanding stock of
Employers Mutual, Inc. (EMI) a third party administrator of self-insured
managed care health plans in Florida and Texas, for $1,250,000, with additional
payments up to $1,000,000 if specified earnings targets are met over the next
four years. EMI's primary market consists of hospitals and provider-sponsored
delivery organizations.
On July 1, 1997, the Company completed the purchase of a 20 percent interest in
APS Insurance Services, Inc. (APS) for $2 million, with the option to purchase
an additional 35 percent after two years. The primary source of revenue for
APS is fee income from its subsidiary that manages the business of a medical
professional liability company domiciled in Texas. This interest will allow
FPIC an opportunity to expand its market potential in Texas.
On December 1, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. (Frontier) to combine their medical professional
liability businesses in Florida. Beginning December 1, 1997, and continuing
for 12 months thereafter, the Company's subsidiary, FPIC, began underwriting
Frontier's Florida book of business. An initial purchase price of $3.2 million
was set and was paid in Company common stock, with a cash adjustment based on
actual results at the end of one year.
11
<PAGE> 12
On July 1, 1998, the Company completed the acquisition of APAC, a
Florida-domiciled risk retention group with $10 million of anesthesiologist MPL
business. The cost of the transaction was $18 million, paid in a combination
of cash, Company common stock, and assumption of debt. In connection with this
transaction, the Company also acquired a 9.9% interest in American Professional
Assurance Ltd., a reinsurance company, for $5.5 million in cash. Additionally,
$3.5 million was paid in non-compete agreements and other fees to certain key
employees.
On July 1, 1998, the Company's subsidiary, EMI, acquired Sy. Med Development,
Inc. (Sy. Med), a software development and consulting company headquartered in
Nashville, Tennessee. The initial payment was $400,000, and future payments
are on a four year earn-out basis, contingent on future earnings.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpectedly high frequency or
severity of losses in any period, particularly in the Company's prior three
policy years, would have a material adverse effect on the Company.
Additionally, reevaluations of the Company's loss and loss adjustment expense
(LAE) reserves could result in an increase or decrease in reserves and a
corresponding adjustment to earnings. The Company's historical results of
operations are not necessarily indicative of future results.
Results of Operations - Three Months Ended September 30, 1998 Compared to Three
Months Ended September 30, 1997.
Premiums
Direct premiums written and assumed increased $9.4 million, or 51%, from $18.5
million for the three months ended September 30, 1997 to $27.9 million for the
three months ended September 30, 1998. Net premiums earned increased $6.8
million, or 42%, from $16.2 million for the three months ended September 30,
1997 to $23.0 million for the three months ended September 30, 1998. These
increases were primarily due to an increase in the number of insureds, a rate
increase of 7.3% on physician MPL premiums effective January 1, 1998, $1.7
million of new premiums written in Texas and the addition of health premiums of
approximately $5.3 million. The health premium was primarily generated by a
program set up for the members of the Florida Dental Association. In addition,
the acquisition of APAC added $1.8 million in direct premiums written and $1.0
million in net premiums earned since its acquisition on July 1, 1998.
Net Investment Income
Net investment income increased $0.2 million, or 5.0%, from $4.1 million for
the three months ended September 30, 1997 to $4.3 million for the three months
ended September 30, 1998. The increase is due to an increase in invested
assets, primarily in tax-exempt securities.
Net Losses and Loss Adjustment Expenses (LAE)
Net losses and LAE increased $3.5 million, or 25%, from $14.0 million for the
three months ended September 30, 1997 to $17.5 million for the three months
ended September 30, 1998,
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reflecting primarily an increase in insured exposures. The loss and LAE ratios
were 86.6% for the three months ended September 30, 1997 and 76.2% for the
three months ended September 30, 1998. The lower loss ratio in 1998 reflects a
change in the mix of business, particularly the health business, which runs a
much lower loss ratio than MPL. The reserve for losses and LAE represents
management's best estimates of the ultimate cost of all losses incurred but
unpaid. The estimated liability is continually reviewed and any adjustments
that become necessary are included in current operations.
Other Underwriting Expenses
Other underwriting expenses increased $1.3 million, from $1.5 million, or 87%,
for the three months ended September 30, 1997 to $2.8 million for the three
months ended September 30, 1998. This increase was attributable to an increase
in acquisition expenses, general and administrative expenses and the inclusion
of APAC, which was acquired as of July 1, 1998. In addition, the health
insurance products have a higher expense factor than the Company's core MPL
products.
Net Income
For the reasons stated above, net income increased $1.2 million, or 28%, from
$4.3 million for the three months ended September 30, 1997 to $5.5 million for
the three months ended September 30, 1998. Diluted earnings increased $0.09
per share, or 20%, from $0.46 per share for the three months ended September
30, 1997 to $0.55 per share for the three months ended September 30, 1998.
Results of Operations - Nine Months Ended September 30, 1998 Compared to Nine
Months Ended September 30, 1997.
Premiums
Direct premiums written and assumed increased $19.4 million, or 30%, from $64.0
million for the nine months ended September 30, 1997 to $83.4 million for the
nine months ended September 30, 1998. Net premiums earned increased $16.0
million, or 33%, from $47.8 million for the nine months ended September 30,
1997 to $63.8 million for the nine months ended September 30, 1998. These
increases were primarily due to an increase in the number of insureds, a rate
increase of 7.3% on physician MPL premiums effective January 1, 1998, $4.9
million of new premiums written in Texas and the addition of health premiums of
approximately $10.5 million. In addition, the acquisition of APAC added $1.8
million in direct premiums written and $1.0 million in net premiums earned.
Net Investment Income
Net investment income increased $1.0 million, or 8%, from $12.0 million for the
nine months ended September 30, 1997 to $13.0 million for the nine months ended
September 30, 1998. The increase is due to an increase in invested assets,
primarily in tax-exempt securities.
13
<PAGE> 14
Claims Administration Fees and Commission Income
Claims administration fees are revenues generated by McCreary's core business,
which is the administration of self-insured programs for large employers,
primarily of health and workers compensation plans. Neither McCreary nor the
Company assumes any risk on these products; the risk is assumed by each
employer and any excess coverage desired is placed by McCreary with various
insurers and reinsurers. All the commission income was generated from the
placement of this excess coverage by McCreary.
Claims administration fees and commission income increased $1.4 million, or
19%, from $7.2 million for the nine months ended September 30, 1997 to $8.6
million for the nine months ended September 30, 1998. This increase is
attributable to the addition of new contracts.
Net Losses and Loss Adjustment Expenses (LAE)
Net losses and LAE increased $9.5 million, or 23%, from $40.7 million for the
nine months ended September 30, 1997 to $50.2 million for the nine months ended
September 30, 1998, reflecting primarily an increase in insured exposures. The
loss and LAE ratios were 85.2% for the nine months ended September 30, 1997 and
78.7% for the nine months ended September 30, 1998. The lower loss ratio in
1998 reflects a change in the mix of business, particularly the health
business, which runs a much lower loss ratio than MPL. The reserve for losses
and LAE represents management's best estimates of the ultimate cost of all
losses incurred but unpaid. The estimated liability is continually reviewed
and any adjustments that become necessary are included in current operations.
Other Underwriting Expenses
Other underwriting expenses increased $2.7 million, or 58%, from $4.6 million
for the nine months ended September 30, 1997 to $7.3 million for the nine
months ended September 30, 1998. This increase was attributable to an increase
in acquisition expenses, general and administrative expenses and the inclusion
of APAC, which was acquired as of July 1, 1998. In addition, the health
insurance products have a higher expense factor than the Company's core MPL
products. In 1997 these expenses were net of $1.1 million, which related to an
accrual for state guaranty fund bonds. In 1997, the State of Florida informed
the Company that these bonds were likely to be defeased early. As a result,
the Company began to reduce its liability for future payments. Excluding the
effect of this one time adjustment in 1997, other underwriting expenses
increased 35%.
Claims Administration Expenses
These expenses relate to the operation of McCreary, and increased $1.2 million,
or 20%, from $6.1 million for the nine months ended September 30, 1997 to $7.3
million for the nine months ended September 30, 1998. This increase was
primarily attributable to an increase in the core operations of McCreary.
14
<PAGE> 15
Net Income
For the reasons stated above, net income increased $3.3 million, or 28%, from
$12.0 million for the nine months ended September 30, 1997 to $15.3 million for
the nine months ended September 30, 1998. Diluted earnings increased $0.28 per
share, or 22%, from $1.28 per share for the nine months ended September 30,
1997 to $1.56 per share for the nine months ended September 30, 1998.
Liquidity and Capital Resources
The payment of losses, LAE, and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to
pay these items has been provided by operating activities. Cash provided from
these activities was $27.2 million during the nine months ended September 30,
1998 and was sufficient to meet the Company's needs. Of the $27.2 million,
approximately $17.7 million related to the expiration of a finite reinsurance
contract on December 31, 1997. The proceeds were received in the first quarter
of 1998 and were invested in fixed income securities. Management believes
these sources will be sufficient to meet the Company's cash needs for operating
purposes for at least the next twelve months. However, a number of factors
could cause increases in the dollar amount of losses and LAE paid and may,
therefore, adversely affect future reserve development and cash flow needs.
Management believes these factors include, among others, inflation, changes in
medical procedures, increasing influence of managed care and adverse
legislative changes.
The Company maintains a $30 million revolving credit facility (credit facility)
with a Florida lending institution to meet certain non-operating cash needs as
they may arise. The credit facility terminates May 31, 1999. The Company is
not charged a fee nor is it required to maintain compensating balances in
connection with this credit facility. As of September 30, 1998, the Company
had borrowed $23.8 million against the credit facility for non-operating
purposes.
Dividends payable by FPIC to the Company are subject to certain limitations
imposed by Florida law. In 1998, FPIC is permitted, within insurance
regulatory guidelines, to pay dividends to the Company of approximately $12.4
million without regulatory approval.
The Company filed a Form 8-K with the Securities and Exchange Commission on
July 15, 1998 to report the authorization by the Board of Directors to purchase
up to 500,000 shares of the Company's common stock over the next twelve months.
The Company can purchase the shares on the open market at the discretion of
management. As of October 31, 1998, 71,000 shares had been purchased by the
Company on the open market at a cost of approximately $1,840,000. These
purchases were funded through the use of the Company's credit facility.
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 computer code. The Year 2000 (Y2K) issue exists due to
program developers creating databases and programs to store and process a year
as a two-digit field.
15
<PAGE> 16
The Company's Information Systems ("IS") management staff has performed a
thorough review of the Company's operations and the operations of each of its
subsidiaries. These reviews considered the readiness of software systems
written internally and those provided by third parties to process data and
perform the date calculations correctly using dates beginning January 1, 2000
and beyond. Hardware, including servers, PC workstations, network routers, and
communications equipment, were reviewed to determine that firmware and
operating system software were Y2K compliant.
An action plan was created to resolve all known Y2K issues by July 1, 1999.
The Company fully expects its mission critical software and hardware systems to
be fully functional on January 1, 2000 and beyond. Third parties who provide
software and/or hardware to the Company have been requested to provide
statements of Y2K compliance. Any problems that may occur regarding Y2K are
expected to be minor in nature and not have an impact on the Company's ability
to provide service and products to customers.
The cost to convert the Company to Y2K compliance is not expected to exceed
$150,000, including costs to date. Regarding future acquisitions, the Company,
as a part of its due diligence, will determine Y2K compliance and its impact on
the dynamics of the acquisition.
Important Considerations Related to Forward Looking Statements
This Form 10-Q contains certain forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements may be found under "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General" and
"Liquidity and Capital Resources." These statements include or relate to,
among others, the Company having sufficient liquidity and working capital.
These statements are based on current expectations that involve a number of
risks and uncertainties that are discussed in the above sections. Primary
risks to FPIC are unexpected increases in frequency for the current policy year
and unexpected increases in severity for the current and prior two policy
years.
16
<PAGE> 17
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Exhibit (27) - Financial Data Schedule (for SEC use only).
b. Reports on Form 8-K
The Company filed a form 8-K on July 15, 1998 to report the
authorization by the Board of Directors to purchase up to
500,000 shares of the Company's Common Stock over the next
twelve months.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPIC Insurance Group, Inc.
/s/ Robert B. Finch
---------------------------------------
November 11, 1998 Robert B. Finch, Senior Vice President,
Chief Financial Officer and Treasurer
(a duly authorized officer and the
principal financial officer of the
registrant)
17
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of FPIC Insurance Group, Inc. for the nine months ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 326,347
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 3,946
<MORTGAGE> 0
<REAL-ESTATE> 4,642
<TOTAL-INVEST> 344,438
<CASH> 5,032
<RECOVER-REINSURE> 2,967
<DEFERRED-ACQUISITION> 1,630
<TOTAL-ASSETS> 455,858
<POLICY-LOSSES> 232,954
<UNEARNED-PREMIUMS> 41,917
<POLICY-OTHER> 1,231
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 23,750
0
0
<COMMON> 945
<OTHER-SE> 139,345
<TOTAL-LIABILITY-AND-EQUITY> 455,858
63,796
<INVESTMENT-INCOME> 12,871
<INVESTMENT-GAINS> (48)
<OTHER-INCOME> 10,058
<BENEFITS> 50,188
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 7,290
<INCOME-PRETAX> 21,066
<INCOME-TAX> 5,754
<INCOME-CONTINUING> 15,312
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,312
<EPS-PRIMARY> 1.65
<EPS-DILUTED> 1.56
<RESERVE-OPEN> 188,086
<PROVISION-CURRENT> 59,112
<PROVISION-PRIOR> (12,118)
<PAYMENTS-CURRENT> 7,878
<PAYMENTS-PRIOR> 33,660
<RESERVE-CLOSE> 232,954
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
