United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2000
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
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FPIC Insurance Group, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-3359111
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
225 Water Street, Suite 1400, Jacksonville, Florida 32202
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(Address of principal executive offices) (Zip Code)
(904) 354-2482
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(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 August 7, 2000, there were 9,493,353 shares of the registrant's common
stock outstanding.
<PAGE>
Table of Contents
Page
Part I - Financial Information ----
Item 1. Consolidated Financial Statements (unaudited) of FPIC
Insurance Group, Inc. and Subsidiaries:
o Consolidated Balance Sheets 3
o Consolidated Statements of Income 4
o Consolidated Statements of Comprehensive Income 5
o Consolidated Statements of Changes in Shareholders' Equity 6
o Consolidated Statements of Cash Flows 7
o Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets (in thousands, except share data)
As of June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(unaudited)
2000 1999
Assets --------- ---------
<S> <C> <C>
Cash and cash equivalents $ 8,889 $ 6,830
Bonds and U.S. Government securities, available for sale 371,151 327,076
Equity securities, available for sale 8,891 8,823
Other invested assets 7,345 5,455
Real estate investments 5,051 5,235
Total cash and investments 401,327 353,419
--------- ---------
Premiums receivable, net 46,235 45,012
Accrued investment income 6,078 5,426
Reinsurance recoverable on paid losses 8,662 3,081
Due from reinsurers on unpaid losses and advance premiums 66,144 60,356
Property and equipment, net 3,584 3,774
Deferred policy acquisition costs 4,620 2,789
Deferred income taxes 23,988 21,244
Finance charge receivable 368 379
Prepaid expenses 1,666 1,126
Goodwill and intangible assets, net 62,084 73,922
Federal income tax receivable -- 4,128
Other assets 5,847 7,567
--------- ---------
Total assets $ 630,603 $ 582,223
========= =========
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 274,924 $ 273,092
Unearned premiums 90,764 55,759
Paid in advance and unprocessed premiums 3,211 5,459
Revolving credit facility 67,219 62,719
Federal income taxes payable 2,196 --
Accrued expenses and other liabilities 17,491 18,815
--------- --------
Total liabilities 455,805 415,844
--------- --------
Commitments and contingencies
Common stock, $.10 par value, 50,000,000 shares authorized;
9,488,353 and 9,621,298 shares issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 949 962
Additional paid-in capital 38,806 41,858
Unearned compensation (168) (231)
Accumulated other comprehensive loss (6,929) (8,495)
Retained earnings 142,140 132,285
--------- ---------
Total shareholders' equity 174,798 166,379
--------- ---------
Total liabilities and shareholders' equity $ 630,603 $ 582,223
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income (in thousands, except per-share data)
<TABLE>
<CAPTION>
(unaudited)
----------------------------------------------------------
Three months ended June 30 Six months ended June 30
2000 1999 2000 1999
-------- ------ ------- -------
<S> <C> <C> <C> <C>
Revenues
Net premiums earned $ 33,468 26,550 $ 62,616 54,133
Net investment income 6,133 4,881 12,150 9,333
Net realized investment (losses) gains (90) 9 (110) 313
Claims administration and management fees 7,435 6,237 14,556 12,471
Commission income 409 831 1,065 1,177
Finance charges and other income 458 850 1,823 1,939
-------- ------ -------- ------
Total revenues 47,813 39,358 92,100 79,366
-------- ------ -------- ------
Expenses
Net losses and loss adjustment expenses 26,531 14,726 50,693 33,375
Other underwriting expenses 4,541 6,492 8,597 10,494
Claims administration and management expenses 7,213 6,160 14,191 12,078
Interest expense 1,013 912 2,254 1,755
Other expenses 1,438 1,044 2,631 2,134
-------- ------ -------- ------
Total expenses 40,736 29,334 78,366 59,836
-------- ------ -------- ------
Income before income taxes 7,077 10,024 13,734 19,530
Income taxes 1,934 2,622 3,879 4,893
-------- ------ -------- ------
Net income $ 5,143 7,402 $ 9,855 14,637
======== ====== ======== ======
Basic earnings per common share $ 0.54 0.75 $ 1.04 1.50
======== ====== ======== ======
Diluted earnings per common share $ 0.54 0.71 $ 1.02 1.41
======== ====== ======== ======
Basic weighted average common shares outstanding 9,452 9,814 9,508 9,773
======== ====== ======== ======
Diluted weighted average common shares outstanding 9,533 10,454 9,628 10,413
======== ====== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Comprehensive Income (in thousands)
<TABLE>
<CAPTION>
(unaudited)
-----------------------------------------------------
Three months ended June 30 Six months ended June 30
2000 1999 2000 1999
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Net income $ 5,143 7,402 $ 9,855 14,637
-------- ------ -------- ------
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 216 (7,643) 2,660 (9,488)
Less reclassification adjustment for (losses) gains included
in net income (90) 9 (110) 313
Income tax (expense) benefit related to unrealized gains and
losses on securities (49) 2,672 (984) 3,211
-------- ------ -------- ------
Other comprehensive income (loss) 77 (4,962) 1,566 (5,964)
-------- ------ -------- ------
Comprehensive income $ 5,220 2,440 $ 11,421 8,673
======== ====== ======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity (in thousands)
Six Months Ended June 30, 2000 and Year Ended December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Other
Common Additional Unearned Comprehensive Retained
Stock Paid-in capital Compensation Income (Loss) Earnings Total
-------- --------------- ------------ ------------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1998 $ 952 34,299 (357) 5,621 110,416 150,931
Net income -- -- -- -- 21,869 21,869
Compensation earned on options -- -- 126 -- -- 126
Net unrealized loss on debt and equity securities -- -- -- (14,116) -- (14,116)
Issuance of shares, net 10 7,559 -- -- -- 7,569
-------- -------- ------- ------- ------- -------
Balances at December 31, 1999 $ 962 41,858 (231) (8,495) 132,285 166,379
Net income -- -- -- -- 9,855 9,855
Compensation earned on options -- -- 63 -- -- 63
Net unrealized gain on debt and equity securities -- -- -- 1,566 -- 1,566
Repurchase of shares, net (13) (3,052) -- -- -- (3,065)
-------- -------- ------- ------- ------- -------
Balances at June 30, 2000 (unaudited) $ 949 38,806 (168) (6,929) 142,140 174,798
======== ======== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
(unaudited)
------------------------
Six months ended June 30
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,855 $ 14,637
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 2,457 2,702
Realized loss (gain) on investments 110 (313)
Realized loss on sale of property and equipment -- 16
Noncash compensation 63 63
Net (gain) loss from equity investments (11) 87
Deferred income taxes (2,996) (347)
Changes in assets and liabilities:
Premiums receivable, net (1,223) (6,826)
Accrued investment income, net (652) 177
Reinsurance recoverable (5,581) 1,192
Due from reinsurers on unpaid losses and advance premiums (5,788) 833
Deferred policy acquisition costs (1,831) 35
Prepaid expenses and finance charge receivable (530) (60)
Other assets and accrued expenses and other liabilities (588) (4,571)
Loss and loss adjustment expenses 1,832 (12,688)
Unearned premiums 4,016 9,852
Paid in advance and unprocessed premiums (2,247) (2,836)
Federal income tax receivable 6,324 (89)
-------- --------
Net cash provided by operating activities 3,210 1,864
-------- --------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 17,739 44,256
Purchase of bonds and U.S. Government securities (16,040) (32,162)
Purchase of goodwill and intangible assets (2,523) (49,045)
Proceeds from sale of real estate investments 160 --
Purchase of real estate investments (104) (651)
Purchase of other invested assets (1,783) (410)
Purchase of property and equipment, net (220) (214)
Proceeds from sale of subsidiary 185 --
Purchase of subsidiary's net other assets and stock -- (919)
-------- --------
Net cash used in investing activities (2,586) (39,145)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility 4,500 31,013
(Repurchase) issuance of common stock, net (3,065) 1,124
-------- --------
Net cash provided by financing activities 1,435 32,137
-------- --------
Net increase (decrease) in cash and cash equivalents 2,059 (5,144)
Cash and cash equivalents at beginning of period 6,830 7,062
-------- --------
Cash and cash equivalents at end of period $ 8,889 $ 1,918
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
(unaudited)
-------------------------
Six months ended June 30
2000 1999
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,409 $ 1,755
======== =========
Federal income taxes $ 1,450 $ 4,200
======== =========
Supplemental schedule of noncash investing and financing activities:
Effective January 1, 2000, the Company's insurance subsidiaries entered into
a 100% quota share reinsurance agreement to assume the death, disability,
and retirement (DD&R) risks under Physicians' Reciprocal Insurers' (PRI) claims
made insurance policies. The Company received cash and bonds in exchange
for business assumed from PRI
Assumed unearned premiums $ 33,749 $ --
Reduction in goodwill and intangible assets 13,205 --
Receipt of bonds (44,194) --
-------- --------
Net cash received $ 2,760 $ --
======== =========
Effective January 1, 1999, The Company purchased all of the capital stock of
Administrators For The Professions, Inc. for $53,830 and a 70% equity
interest in a limited liability company for $2,500. In conjunction with the
acquisitions, common stock was issued as follows:
Common stock issued and related additional paid-in capital $ -- $ 11,630
Goodwill and other tangible assets acquired -- (56,330)
-------- --------
Net cash paid $ -- $(44,700)
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
FPIC INSURANCE GROUP, INC.
Unaudited Notes to the Consolidated Financial Statements
(all dollar amounts in thousands, except per-share data)
1. Organization and Basis of Presentation
The accompanying unaudited, consolidated financial statements include the
accounts of FPIC Insurance Group, Inc. and subsidiaries ("the Company"),
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 ("GAAP") for complete financial statements. In the opinion of
management, all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included. Operating
results for the six months ended June 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2000. These unaudited, consolidated financial statements and
notes should be read in conjunction with the consolidated financial
statements and notes included in the audited, consolidated financial
statements of the Company for the year ended December 31, 1999, which were
filed on Form 10-K with the Securities and Exchange Commission on March
30, 2000.
The Company is an insurance holding company. The Company's principal
direct and indirect subsidiaries include: Florida Physicians Insurance
Company, Inc. ("FPIC"), Anesthesiologists' Professional Assurance Company,
Inc. ("APAC"), Administrators For The Professions, Inc. ("AFP"), The
Tenere Group, Inc. ("Tenere") and its two subsidiaries: Intermed Insurance
Company ("Intermed") and Interlex Insurance Company ("Interlex"), and
McCreary Corporation ("MCC") and its subsidiary Employer's Mutual, Inc.
("EMI").
The Company, through FPIC, APAC, Intermed, and Interlex, operates in the
property and casualty insurance industry and is a provider of medical and
legal professional liability insurance, primarily in Florida and Missouri.
The Company's wholly owned insurance subsidiaries are licensed to write
insurance in various states and are subject to regulation by the
departments of insurance in these states.
Through McCreary and its subsidiary, EMI, the Company offers third party
administration services specializing in the administration of self-insured
plans for large employers. The Company, through AFP, provides reciprocal
management and administrative services to Physicians' Reciprocal Insurers
("PRI), a medical professional liability reciprocal insurer for physicians
in the state of New York.
2. Investments
Proceeds from sales of investments available-for-sale were $17,739 and
$44,256 during the six months ended June 30, 2000 and 1999, respectively.
Gross realized gains and (losses) from investments available-for-sale were
$70 and $(180), and $346 and $(33) for the six months ended June 30, 2000
and 1999, respectively. The amortized cost of investments
available-for-sale was $391,323 and $349,730 as of June 30, 2000 and
December 31, 1999, respectively.
3. Reinsurance
Effective January 1, 2000, the Company's insurance subsidiaries entered
into a 100% quota share reinsurance agreement with PRI, to assume the
death, disability and retirement "DD&R") risks under PRI's claims made
insurance policies in exchange for cash and investments. Subsequent to
recording the agreement, a GAAP valuation of the underlying liability was
completed and a deferred credit in the amount of $13,205 was recognized
and reclassified from unearned premiums to goodwill and intangible assets.
The deferred credit, which will be amortized into income over 20 years,
represents the difference between the GAAP valuation of the underlying
liability and the initial premium received. The liability was calculated
using benefit assumptions and elements of pension actuarial models (i.e.
mortality, morbidity, retirement, interest and inflation rate
assumptions).
9
<PAGE>
4. Business Acquisitions
The acquisition agreements for MCC and EMI specified additional contingent
payments to be made to the sellers from the acquisition date through 2001.
The effect of such payments is to increase the original purchase price and
the recorded goodwill. Payments of $227 and $250 were made for the six
months ended June 30, 2000 and 1999, respectively. During the first
quarter of 2000, the remaining payments under these agreements were fixed
and the recorded amounts of goodwill were increased, accordingly. The
remaining payments, which have been recorded as liabilities, and the year
of payment are as follows:
MCC EMI
-------- ------
2000 $ 1,668 2001 $ 538
5. Borrowing Arrangements
The Company maintains a $75 million revolving credit facility, in which
four banks participate, to meet certain non-operating cash needs as they
may arise. The credit facility terminates January 4, 2002, and bears
interest at various rates ranging from LIBOR plus .75% to Prime plus .50%.
The Company is not required to maintain compensating balances in
connection with this credit facility. As of June 30, 2000, the Company had
borrowed approximately $67 million against the credit facility for
non-operating purposes.
6. Reconciliation of Basic and Diluted Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- --------
<S> <C> <C> <C> <C>
Net income and income from
continuing operations $5,143 7,402 9,855 14,637
------ ------ ------ ------
Basic weighted average shares outstanding 9,452 9,814 9,508 9,773
Common stock equivalents 81 640 120 640
------ ------ ------ ------
Diluted weighted average shares outstanding 9,533 10,454 9,628 10,413
------ ------ ------ ------
Basic earnings per common share $ .54 .75 1.04 1.50
====== ====== ====== ======
Diluted earnings per common share $ .54 .71 1.02 1.41
====== ====== ====== ======
</TABLE>
7. Segment Information
Under the provisions of SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," the Company has three reportable
operating segments as follows: insurance, third party administration
("TPA"), and reciprocal management ("RM"). The insurance segment primarily
provides medical and legal professional liability insurance. The TPA
segment provides management and third party administrative services such
as the administration of self-insurance plans for large employers. The RM
segment provides insurance management and administrative services to PRI,
a reciprocal insurer.
The Company evaluates a segment's performance based on net income or loss
after eliminating intersegment revenues and expenses. All segments are
managed separately as each business requires different technology and
marketing strategies. Information by industry segment follows:
Three Months Ended Six Months Ended
------------------- --------------------
6/30/00 6/30/99 6/30/00 6/30/99
------- ------- ------- -------
Revenues:
Insurance $39,736 31,595 75,428 64,489
TPA 3,281 2,738 7,081 5,281
RM 4,796 5,025 9,591 9,596
------- ------- ------- -------
Total Revenues $47,813 39,358 92,100 79,366
======= ======= ======= =======
10
<PAGE>
Three Months Ended Six Months Ended
------------------- --------------------
6/30/00 6/30/99 6/30/00 6/30/99
--------- --------- --------- ---------
Net income:
Insurance $ 3,154 6,289 8,472 12,694
TPA 1,273 (108) 947 (517)
RM 716 1,221 436 2,460
--------- --------- --------- ---------
Total Net Income $ 5,143 7,402 9,855 14,637
========= ========= ========= =========
Identifiable assets:
Insurance $ 556,233 509,049
TPA 13,204 10,282
RM 61,166 56,739
--------- ---------
Total Assets $ 630,603 576,070
========= =========
8. Commitments and Contingencies
The Company's insurance subsidiaries are named as defendants in various
legal actions primarily arising from claims made under insurance policies
and contracts. These actions are considered by the Company's insurance
subsidiaries in establishing the liability for loss and loss adjustment
expense. While the outcomes of all legal actions are not presently
determinable, 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. Reclassification
Certain amounts for 1999 have been reclassified to conform to the 2000
presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
For purposes of this management discussion and analysis, the term "Company"
refers to FPIC Insurance Group, Inc. and its subsidiaries. The following
discussion and analysis of financial condition and results of operations should
be read in conjunction with the audited, consolidated financial statements and
notes included in the Company's Form 10-K for the year ended December 31, 1999,
which was filed with the Securities and Exchange Commission on March 30, 2000.
All dollar amounts in this discussion and analysis have been presented in
millions.
Forward-Looking Statements
This discussion contains historical information, as well as forward-looking
statements (identified by words such as, but not limited to, "believe,"
"expect," "intend," "anticipate," "estimate," and other analogous expressions)
that are based upon the Company's estimates and anticipation of future events
that are subject to certain risks and uncertainties that could cause actual
results to vary materially from the expected results described in the
forward-looking statements. The Company's expectations regarding earnings,
losses, the retention of current business, expansion of product lines, and
development of business in new geographical areas depend on a variety of
factors, including economic, competitive and market conditions which may be
beyond the Company's control and are thus difficult or impossible to predict. In
view of the many uncertainties inherent in the forward-looking statements made
in this document, the inclusion of such information should not be taken as a
representation by the Company or any other person that the Company's objectives
or plans will be realized.
The assumptions underlying certain forward-looking statements are that the
Company will continue to: (i) profitably price its insurance products; (ii)
maintain its underwriting standards; (iii) market its insurance products
competitively; (iv) maintain its successful handling of claims; (v) retain
existing agents and key management personnel; and (vi) reserve adequately for
losses and loss adjustment expenses ("LAE"). Additionally, the primary risk in
maintaining adequate reserves is unexpected changes in the frequency or severity
of reported claims, particularly adverse development that may occur during the
last three report years.
General
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,
11
<PAGE>
APAC, Intermed and Interlex, and management and administrative fees, and
commission income from McCreary and AFP. The Company concentrates on liability
insurance products for medical and legal professionals, with medical
professional liability insurance for physicians and dentists as its primary
products.
For information concerning the Company's acquisitions during 1999, 1998 and
1997, see the Company's report on Form 10-K for the year ended December 31,
1999.
Selected Balance Sheet Items - June 30, 2000 compared to December 31, 1999
Investments. Investments increased $44.1 million, or 13%, to $380.0 million at
June 30, 2000, from $335.9 million at December 31, 1999. The increase in
investments is primarily related to amounts received under a reinsurance
agreement whereby the Company's insurance subsidiaries assumed the death,
disability, and retirement ("DD&R") risks under Physicians' Reciprocal Insurers'
("PRI") claims made insurance policies.
Goodwill and intangible assets, net. These assets decreased $11.8 million, or
16%, to $62.1 million at June 30, 2000, from $73.9 million at December 31, 1999.
The decline in net goodwill and intangible assets is primarily related to
recognition and reclassification from unearned premiums of a deferred credit on
the assumed DD&R reinsurance agreement between the Company's insurance
subsidiaries and PRI.
Unearned Premiums. Unearned premiums increased $35.0 million, or 63%, to $90.8
million at June 30, 2000, from $55.8 million at December 31, 1999. The increase
in unearned premiums is primarily related to the DD&R reinsurance agreement
between the Company's insurance subsidiaries and PRI.
Results of Operations - Three Months Ended June 30, 2000 Compared to Three
Months Ended June 30, 1999 Premiums.
Premiums. Direct premiums written and assumed decreased $2.3 million, or 6%, to
$35.9 million for the three months ended June 30, 2000, from $38.2 million for
the three months ended June 30, 1999. The decrease in direct written and assumed
premiums is primarily related to a decline in direct written premiums at APAC
and an overall decline in assumed premiums written by PRI and other insurers.
Net premiums earned increased $6.9 million, or 26%, to $33.5 million for the
three months ended June 30, 2000, from $26.6 million for the three months ended
June 30, 1999. The increase in net premiums earned is primarily related to an
increase in assumed premiums earned from PRI resulting from growth that occurred
in the underlying assumed premiums written in the second half of 1999.
Net Investment Income. Net investment income increased $1.2 million, or 24%, to
$6.1 million for the three months ended June 30, 2000, from $4.9 million for the
three months ended June 30, 1999. The increase in net investment income is
primarily related to additional interest on investments received in connection
with the DD&R reinsurance agreement.
Claims Administration and Management Fees. Claims administration and management
fees increased $1.2 million, or 19%, to $7.4 million for the three months ended
June 30, 2000, from $6.2 million for the three months ended June 30, 1999. The
growth in claims administration and management fees is attributable to an
acquisition made by McCreary's subsidiary, EMI, during the third quarter of
1999.
Net Losses and Loss Adjustment Expense. Net losses and LAE increased $11.8
million, or 80%, to $26.5 million for the three months ended June 30, 2000, from
$14.7 million for the three months ended June 30, 1999. The loss ratios were 79%
and 55% for the three months ended June 30, 2000 and 1999, respectively. The
loss ratio is defined as the ratio of losses and loss adjustment expenses to net
premiums earned. The increase in the Company's loss ratio is primarily due to a
reduction in the amount of prior years' reserves released offset by an increase
in the current year provision for its medical professional liability business.
The liability for losses and LAE represents management's estimate of the
ultimate cost of all losses incurred but unpaid and considers prior loss
experience, loss trends, the Company's loss retention levels and changes in the
frequency and severity of claims.
12
<PAGE>
Given competitive market conditions in recent years, which have lessened the
Company's ability to underwrite and price its business at as favorable terms as
in years prior, management anticipates more conservative reserve releases
relative to 1999. Furthermore, given the inherent uncertainties in the
estimation of the liability for loss and LAE, there can be no assurance
concerning future adjustments, positive or negative, for prior years' claims.
Other Underwriting Expenses. Other underwriting expenses decreased $2.0 million,
or 31%, to $4.5 million for the three months ended June 30, 2000, from $6.5
million for the three months ended June 30, 1999. The decrease is primarily
attributable to a decline in assumed reinsurance costs and the accretion, or
negative amortization expense, associated with the assumed DD&R reinsurance
agreement with PRI offset to a small extent by an increase in consulting
expenses.
Claims Administration and Management Expenses. Claims administration and
management expenses increased $1.0 million, or 16%, to $7.2 million for the
three months ended June 30, 2000, from $6.2 million for the three months ended
June 30, 1999. The growth in claims administration and management expenses is
attributable to an acquisition made by McCreary's subsidiary, EMI, during the
third quarter of 1999.
Results of Operations - Six Months Ended June 30, 2000 Compared to Six Months
Ended June 30, 1999
Premiums. Direct premiums written and assumed increased $48.6 million, or 64%,
to $124.3 million for the six months ended June 30, 2000, from $75.7 million for
the six months ended June 30, 1999. The increase in written and assumed premiums
is primarily related to the assumed DD&R reinsurance agreement between the
Company's insurance subsidiaries and PRI. Net premiums earned increased $8.5
million, or 16%, to $62.6 million for the six months ended June 30, 2000 from
$54.1 million for the six months ended June 30, 1999. The increase in net
premiums earned is mainly related to growth in assumed reinsurance and the
acquisition of Tenere on March 17, 1999.
Net Investment Income. Net investment income increased $2.9 million, or 31%, to
$12.2 million for the six months ended June 30, 2000, from $9.3 million for the
six months ended June 30, 1999. The increase in net investment income is
primarily related to additional interest on investments received in connection
with the assumed DD&R reinsurance agreement and a full six months of interest
earned at Tenere compared to less than four months of interest earned during
1999.
Claims Administration and Management Fees. Claims administration and management
fees increased $2.1 million, or 17%, to $14.6 million for the six months ended
June 30, 2000, from $12.5 million for the six months ended June 30, 1999. The
growth in claims administration and management fees is attributable to an
acquisition made by McCreary's subsidiary, EMI, during the third quarter of
1999.
Net Losses and Loss Adjustment Expense. Net losses and LAE increased $17.3
million, or 52%, to $50.7 million for the six months ended June 30, 2000, from
$33.4 million for the six months ended June 30, 1999. The loss ratios were 81%
and 62% for the six months ended June 30, 2000 and 1999, respectively. The loss
ratio is defined as the ratio of losses and loss adjustment expenses to net
premiums earned. The increase in the Company's loss ratio is primarily due to a
reduction in the amount of prior years' reserves released offset by an increase
in the current year provision for its medical professional liability business.
The liability for losses and LAE represents management's estimate of the
ultimate cost of all losses incurred but unpaid and considers prior loss
experience, loss trends, the Company's loss retention levels and changes in the
frequency and severity of claims.
Given competitive market conditions in recent years, which have lessened the
Company's ability to underwrite and price its business at as favorable terms as
in years prior, management anticipates more conservative reserve releases
relative to 1999. Furthermore, given the inherent uncertainties in the
estimation of the liability for loss and LAE, there can be no assurance
concerning future adjustments, positive or negative, for prior years' claims.
Other Underwriting Expenses. Other underwriting expenses decreased $1.9 million,
or 18%, to $8.6 million for the six months ended June 30, 2000, from $10.5
million for the six months ended June 30, 1999. The decrease is primarily
attributable to a decline in assumed reinsurance costs and the accretion, or
negative amortization expense,
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associated with the assumed DD&R reinsurance agreement with PRI offset to a
small extent by an increase in consulting expenses.
Claims Administration and Management Expenses. Claims administration and
management expenses increased $2.1 million, or 17%, to $14.2 million for the six
months ended June 30, 2000, from $12.1 million for the six months ended June 30,
1999. The growth in claims administration and management expenses is
attributable to an acquisition made by McCreary's subsidiary, EMI, during the
third quarter of 1999.
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. Operating cash flows for
the six months ended June 30, 2000 provided cash of approximately $3.2 million.
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. These factors include, among others, loss trends, and changes in the
frequency and severity of claims in the Company's book of business. In addition,
factors such as inflation, changes in medical procedures, the influence of
managed care and adverse legislative changes could influence the level of losses
and LAE.
The Company maintains a $75 million revolving credit facility with four banks to
meet certain non-operating cash needs as they may arise. The credit facility
terminates January 4, 2002. The Company is not required to maintain compensating
balances in connection with this credit facility but is charged a fee on the
unused portion, which ranges from 20 to 30 basis points. As of June 30, 2000,
the Company had borrowed approximately $67 million against the credit facility
for non-operating purposes.
Dividends payable by the Company's insurance subsidiaries are subject to certain
statutory limitations imposed by the laws in the states in which they operate.
In 2000, insurance subsidiaries are permitted, within insurance regulatory
guidelines, to pay dividends to the Company of approximately $19.7 million
without regulatory approval.
Stock Repurchase Plans
On June 29, 1999 and September 11, 1999, the Company's Board of Directors
approved stock repurchase plans pursuant to which the Company is authorized to
repurchase, at management's discretion, up to 1,000,000 of its shares on the
open market. On January 25, 2000, the Company's Board approved a third stock
repurchase plan for an additional 500,000 shares, under which the Company can
repurchase shares upon completion of the first two plans. As of June 30, 2000,
the Company has repurchased 740,500 shares, at a cost of approximately $14.8
million, leaving 759,500 shares available under the Company's stock repurchase
plans.
Accounting Pronouncements
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
was issued in June 1998, and establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. As issued, SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," was issued in June 1999 and defers the effective
date of SFAS No. 133. SFAS No. 133 is now effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. Management believes that SFAS
No. 133 will not have a significant impact on the Company's consolidated
financial position or results of operations.
In December 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements." SAB No. 101 summarizes the SEC staff's view in applying
generally accepted accounting principles to the recognition of revenues.
Management believes that SAB No. 101 will not have a significant impact on the
Company's consolidated financial position or results of operations.
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Guaranty Fund Assessments
The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. and the Missouri Property and Casualty Insurance Guaranty
Association, 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. In addition to the standard
assessments, the Florida and Missouri Legislatures may levy special assessments
to settle claims caused by certain catastrophic losses. The Company would be
assessed on a basis of premium written. No provision for special assessments was
made in the 2000 financial statements. However, damages caused by future
catastrophes could subject the Company to additional assessments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
Market risk is the risk of loss arising from adverse changes in market
conditions, such as changes in interest rates, spreads among various asset
classes, foreign currency exchange rates, and other relevant market rate or
price changes. Market risk is directly influenced by the volatility and
liquidity in the markets in which the related underlying assets are traded. The
following is a discussion of the Company's primary market risk exposures and how
those exposures are currently managed as of June 30, 2000. The Company's market
risk sensitive instruments are entered into for purposes other than trading.
The fair value of the Company's debt and equity investment portfolio as of June
30, 2000 was approximately $380 million. Approximately 98% of the portfolio was
invested in fixed maturity securities. The primary risks to the investment
portfolio are interest rate risk and credit risk associated with investments in
fixed maturity securities. The Company's exposure to equity risk is not
significant.
The Company obtains reinsurance in London, England and in other European
markets. The Company does not believe it has any foreign currency exposure since
all reinsurance obtained is denominated in U.S. dollars. The Company does not
conduct any operations outside of the United States nor does the Company own any
non-U.S. dollar denominated securities.
Generally, the Company does not invest in derivatives and does not currently use
hedging strategies in its investment portfolio. However, the Company has
invested in one interest rate swap to fix the interest rate in connection with
its revolving credit facility. As of June 30, 2000, the Company's investments in
collateral mortgage obligations and asset-backed securities represented less
than 7% of the investment portfolio. The Company's investment portfolio is
predominately fixed-income with approximately 43% allocated to the municipal
sector. The balance is diversified through investments in treasuries, agencies,
corporates, and mortgage-backed securities. The three market risks that can most
directly affect the investment portfolio are changes in U.S. interest rates,
credit risks and legislative changes.
Adverse impacts to the Company resulting from changes in interest rates are
primarily controlled by limiting the duration, or average maturity, of the
overall portfolio. The Company manages the duration of its portfolio relative to
the duration of the anticipated liabilities of the Company. Credit risks are
controlled by investing in securities with above average credit ratings.
Approximately 65% of the portfolio is AAA, 13% is AA, 6% is A and 16% is BBB
rated. From time to time discussion arises in the United States Congress
relative to changing or modifying the tax-exempt status of municipal securities.
While the Company is diligent in its efforts to stay current on legislative acts
that could adversely impact the tax exempt status of municipal securities, and
while it is uncertain as to whether these changes would ultimately affect
valuation of municipal securities currently held in the portfolio, at present
there are no hedging or other strategies being used to minimize this risk. If
interest rates were to rise 100 basis points, the fair value of the Company's
fixed maturity securities would decrease approximately $19.6 million.
There have been no significant changes to the Company's exposure to financial
market risks during the year nor does the Company anticipate any significant
changes in future reporting periods.
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Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on June 7, 2000.
At the meeting, the following items were passed by the vote shown.
Abstentions and
For Against Broker non-votes
--- ------- ----------------
I. Election of Directors
Richard J. Bagby, M.D. 6,338,506 -- 430,203
Robert O. Baratta, M.D. 6,392,950 -- 375,759
Louis C. Murray, M.D. 6,323,752 -- 444,957
William R. Russell. 6,382,181 -- 386,528
II. Approve Amendments to
Director Stock Option Plan 5,534,742 1,145,170 88,797
III. Approve Amendments to
Omnibus Incentive Plan 5,133,108 1,518,068 117,533
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - None
a) The following exhibits are included herewith:
Exhibit 10(d)--Director Stock Option Plan, an amended, incorporated by
reference to the Company's definitive proxy statement
filed on May 5, 2000.
Exhibit 10(e)--Omnibus Incentive Plan, as amended, incorporated
by reference to the Company's definitive proxy
statement filed on May 5, 2000.
Exhibit 27 --Financial Data Schedule.
b) Reports on Form 8-K:
On April 28, 2000, the Company filed a Form 8-K notifying the
Securities and Exchange Commission of a change in the Registrant's
Certifying Accountant.
On July 17, 2000, the Company filed a Form 8-K notifying the Securities
and Exchange Commission, that William R. Russell, the Registrant's
President and Chief Executive Officer, and a director, tendered his
resignation. The Registrant further reported that John R. Byers was
elected interim President and Chief Executive Officer and a director of
the Company.
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/ Kim D. Thorpe
August 14, 2000 ---------------------------------------
Kim D. Thorpe, Executive Vice President
and Chief Financial Officer
(a duly authorized officer and the principal
financial officer of the registrant)
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