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, 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
----------
FPIC Insurance Group, Inc.
------------------------------------------------------
(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
---------------------------------------------------------- ------------
(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 November 2, 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. Unaudited Consolidated Financial Statements 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 Unaudited Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
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 17
Signatures 17
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets (in thousands, except share data)
As of September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
(unaudited)
2000 1999
--------- ---------
Assets
<S> <C> <C>
Cash and cash equivalents $ 9,206 $ 6,830
Bonds and U.S. Government securities, available for sale 382,073 327,076
Equity securities, available for sale 1,224 1,055
Other invested assets, at equity 3,360 3,549
Other invested assets, at cost 11,460 10,576
Real estate investments 3,982 4,333
--------- ---------
Total cash and investments 411,305 353,419
Premiums receivable, net 47,120 44,909
Accrued investment income 7,051 5,426
Reinsurance recoverable on paid losses 7,316 4,450
Due from reinsurers on unpaid losses and advance premiums 74,344 58,400
Ceded unearned premiums 2,911 6,283
Property and equipment, net 3,961 3,774
Deferred policy acquisition costs 6,691 2,789
Deferred income taxes 20,565 21,244
Finance charge receivable 506 482
Prepaid expenses 1,623 1,126
Goodwill and intangible assets, net 61,555 73,922
Federal income tax receivable 90 4,128
Other assets 9,260 7,568
--------- ---------
Total assets $ 654,298 $ 587,920
========= =========
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 279,904 $ 273,092
Unearned premiums 102,748 61,314
Reinsurance payable 5,741 3,339
Paid in advance and unprocessed premiums 1,159 5,459
Revolving credit facility 67,219 62,719
Accrued expenses and other liabilities 15,009 15,618
--------- ---------
Total liabilities 471,780 421,541
--------- ---------
Commitments and contingencies
Common stock, $.10 par value, 50,000,000 shares authorized;
9,493,353, and 9,621,298 shares issued and outstanding at
September 30, 2000 and December 31, 1999, respectively 949 962
Additional paid-in capital 38,847 41,858
Unearned compensation (136) (231)
Accumulated other comprehensive loss (4,208) (8,495)
Retained earnings 147,066 132,285
--------- ---------
Total shareholders' equity 182,518 166,379
--------- ---------
Total liabilities and shareholders' equity $ 654,298 $ 587,920
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
3
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income (in thousands, except pershare data)
<TABLE>
<CAPTION>
(unaudited)
-------------------------------------------------------------------------
Three months ended September 30 Nine months ended September 30
2000 1999 2000 1999
------- ------- --------- -------
<S> <C> <C> <C> <C>
Revenues
Net premiums earned $29,868 33,171 $ 92,420 87,304
Net investment income 6,396 5,010 18,546 14,342
Net realized investment gains (losses) 52 (2) (58) 312
Claims administration and management fees 7,873 6,814 22,429 19,285
Commission income 1,930 1,198 2,995 2,375
Finance charges and other income 878 1,327 2,523 3,120
------- ------- --------- -------
Total revenues 46,997 47,518 138,855 126,738
------- ------- --------- -------
Expenses
Net losses and loss adjustment expenses 23,138 26,066 73,831 59,440
Other underwriting expenses 5,438 5,957 13,793 16,305
Claims administration and management expenses 7,999 7,605 22,190 19,684
Interest expense 934 985 3,189 2,740
Other expenses 2,808 3,204 5,438 5,338
------- ------- --------- -------
Total expenses 40,317 43,817 118,441 103,507
------- ------- --------- -------
Income before income taxes 6,680 3,701 20,414 23,231
Income taxes 1,754 1,039 5,633 5,932
------- ------- --------- -------
Net income $ 4,926 2,662 $ 14,781 17,299
======= ======= ========= =======
Basic earnings per common share $ 0.52 0.27 $ 1.56 1.77
======= ======= ========= =======
Diluted earnings per common share $ 0.51 0.26 $ 1.54 1.66
======= ======= ========= =======
Basic weighted average common shares outstanding 9,493 9,760 9,503 9,775
======= ======= ========= =======
Diluted weighted average common shares outstanding 9,572 10,417 9,616 10,433
======= ======= ========= =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
4
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Comprehensive Income (in thousands)
<TABLE>
<CAPTION>
(unaudited)
---------------------------------------------------------------
Three months ended September 30 Nine months ended September 30
2000 1999 2000 1999
------- ------ -------- -------
<S> <C> <C> <C> <C>
Net income $ 4,926 2,662 $ 14,781 17,299
------- ------ -------- -------
Other comprehensive income
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 4,379 (5,721) 7,038 (15,211)
Less reclassification adjustment for gains (losses) included
in net income 52 (2) (58) 312
Income tax (expense) benefit related to unrealized gains and
losses on securities (1,710) 2,003 (2,693) 5,215
------- ------ -------- -------
Other comprehensive income (loss) 2,721 (3,720) 4,287 (9,684)
------- ------ -------- -------
Comprehensive income (loss) $ 7,647 (1,058) $ 19,068 7,615
======= ====== ======== =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
5
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity (in thousands)
Nine Months Ended September 30, 2000 and Year Ended December 31, 1999
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Unearned Comprehensive Retained
Stock 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 -- -- -- -- 14,781 14,781
Compensation earned on options -- -- 95 -- -- 95
Net unrealized gain on debt and equity securities -- -- -- 4,287 -- 4,287
Repurchase of shares, net (13) (3,011) -- -- -- (3,024)
-------------------------------------------------------------------
Balances at September 30, 2000 (unaudited) $ 949 38,847 (136) (4,208) 147,066 182,518
===================================================================
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
6
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
(unaudited)
------------------------------
Nine months ended September 30
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,781 $ 17,299
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,683 4,055
Realized loss (gain) on investments 58 (312)
Realized loss on sale of property and equipment -- 16
Noncash compensation 95 94
Net loss from equity investments 180 261
Deferred income tax (benefit) provision (1,320) 73
Changes in assets and liabilities:
Premiums receivable, net (2,211) (14,584)
Accrued investment income, net (1,624) (681)
Due from reinsurers (13,036) 1,999
Deferred policy acquisition costs (3,902) (444)
Prepaid expenses and finance charge receivable (521) 298
Other assets and accrued expenses and other liabilities (3,285) 1,055
Loss and loss adjustment expenses 6,812 (7,311)
Unearned premiums 10,446 15,035
Paid in advance and unprocessed premiums (4,300) (4,399)
Federal income tax receivable 4,039 (2,882)
-------- --------
Net cash provided by operating activities 9,895 9,572
-------- --------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 37,358 50,251
Purchase of bonds and U.S. Government securities (42,189) (39,538)
Purchase of goodwill and intangible assets (2,523) (51,043)
Proceeds from sale of real estate investments 275 --
Purchase of other invested assets (889) (1,317)
Purchase of property and equipment, net (1,213) (389)
Proceeds from sale of subsidiary 185 --
Purchase of subsidiary's net other assets and stock -- (507)
-------- --------
Net cash used in investing activities (8,996) (42,543)
-------- --------
Cash flows from financing activities:
Net borrowings under revolving credit facility 4,500 36,554
Repurchase of common stock, net (3,023) (3,444)
-------- --------
Net cash provided by financing activities 1,477 33,110
-------- --------
Net increase in cash and cash equivalents 2,376 139
Cash and cash equivalents at beginning of period 6,830 7,063
-------- --------
Cash and cash equivalents at end of period $ 9,206 $ 7,202
======== ========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
Continued
7
<PAGE>
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
<TABLE>
<CAPTION>
(unaudited)
Nine months ended September 30
------------------------------
2000 1999
-------- --------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,769 $ 1,796
======== ========
Federal income taxes $ 2,950 $ 6,000
======== ========
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 net 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 the unaudited consolidated financial statements.
8
<PAGE>
FPIC Insurance Group, Inc.
Notes to the Unaudited Consolidated Financial Statements
(Dollars in Thousands)
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of FPIC Insurance Group, Inc. ("FPIC" or "the Company")
consolidated with the accounts of all its subsidiaries. Reference is made
to FPIC's most recently issued Form 10-K that included information
necessary or useful to understanding the Company's businesses and
financial statement presentations. In particular, FPIC's significant
accounting policies and practices were presented as Note 1 to the
consolidated financial statements included in that report.
Financial information in this report reflects adjustments, consisting only
of normal recurring accruals, that are, in the opinion of management,
necessary to a fair statement of results for interim periods.
For a number of reasons, FPIC's results for interim periods may not be
indicative of results to be expected for the year. The timing and
magnitude of losses incurred by insurance subsidiaries and the estimation
error inherent in the process of determining the liabilities for loss and
loss adjustment expenses can be relatively more significant to results of
interim periods than to results for a full year. Also, see the discussion
of the Company's liabilities for loss and loss adjustment expenses in Item
2 of the Form 10-Q.
2. Investments
Data with respect to available-for-sale investments in fixed maturities
and equity securities are shown in the tabulation below (in thousands):
Sept 30, Dec 31,
2000 1999
----------- ----------
Amortized cost ............................. $ 389,765 $ 349,730
Sept 30, Sept 30,
2000 1999
----------- ----------
Proceeds from sales ........................ $ 37,358 $ 50,251
Gross realized gains ....................... 133 345
Gross realized (losses) .................... (158) (34)
Realized investment gains and losses are recorded when investments are
sold, other-than-temporarily impaired or in certain situations, as
required by Generally Accepted Accounting Principles ("GAAP"), when
investments are marked-to-market with the corresponding gain or loss
included in earnings. Variations in the amount and timing of realized
investment gains and losses could cause significant variations in periodic
net earnings.
3. Reinsurance
Effective January 1, 2000, the Company's insurance subsidiaries entered
into a 100% quota share reinsurance agreement with Physicians' Reciprocal
Insurers ("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 $13.2 million 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>
FPIC Insurance Group, Inc.
Notes to the Unaudited Consolidated Financial Statements
(Dollars in Thousands)
4. Revolving Credit Facility
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 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 September 30, 2000, the Company had
borrowed approximately $67 million against the credit facility for
non-operating purposes.
5. Reconciliation of Basic and Diluted Earnings Per Common Share
Data with respect to the Company's basic and diluted earnings per common
share are shown in the tabulation below (in thousands, except per-share
data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/00 9/30/99 9/30/00 9/30/99
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income and income from
continuing operations ................... $4,926 2,662 $14,781 17,299
====== ====== ======= ======
Basic weighted average shares outstanding .. 9,493 9,760 9,503 9,775
Common stock equivalents ................... 79 657 113 658
------ ------ ------- ------
Diluted weighted average shares outstanding 9,572 10,417 9,616 10,433
====== ====== ======= ======
Basic earnings per common share ............ $ .52 .27 $ 1.56 1.77
====== ====== ======= ======
Diluted earnings per common share .......... $ .51 .26 $ 1.54 1.66
====== ====== ======= ======
</TABLE>
6. 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. Holding company operations are included within the
insurance segment due to the size and prominence of the segment and the
substantial attention devoted to it.
Prior to September 2000, the Company evaluated a segment's performance
based on net income or loss after eliminating intersegment revenues and
expenses. The Company now evaluates a segment's performance based on net
income and accounts for intersegment sales and transfers as if the sales
and transfers were to third parties. All segments are managed separately
as each business requires different technology and marketing strategies.
Information by industry segment follows (in thousands):
Three Months Ended Nine Months Ended
9/30/00 9/30/99 9/30/00 9/30/99
-------- ------- --------- --------
Revenues:
Insurance ................ $ 36,698 38,964 $ 111,884 103,388
TPA ...................... 4,757 3,880 12,711 9,779
RM ....................... 7,387 4,918 20,104 14,514
Intersegment ............. (1,845) (244) (5,844) (943)
-------- ------- --------- --------
Total Revenues ......... $ 46,997 47,518 $ 138,855 126,738
======== ======= ========= ========
10
<PAGE>
FPIC Insurance Group, Inc.
Notes to the Unaudited Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/00 9/30/99 9/30/00 9/30/99
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Net income:
Insurance .................... $ 3,004 2,144 $ 10,309 15,917
TPA .......................... 383 282 262 384
RM ........................... 1,539 236 4,210 998
-------- ------- -------- ------
Total Net Income ........... $ 4,926 2,662 $ 14,781 17,299
======== ======= ======== ======
<CAPTION>
<S> <C> <C>
Identifiable assets: 9/30/00 12/31/99
-------- --------
Insurance .................... $576,280 519,252
TP ........................... 15,288 10,361
RM ........................... 62,730 58,307
-------- -------
Total Assets ............... $654,298 587,920
======== =======
</TABLE>
7. 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.
8. Reclassification
Certain amounts for 1999 have been reclassified to conform to the 2000
presentation.
11
<PAGE>
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.
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as
well as some statements in periodic press releases and some oral statements of
FPIC officials during presentations about the Company, are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are identified by words such as, but not
limited to, "believe," "expect," "intend," "anticipate," "estimate," and other
analogous expressions and 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.
Insurance Segment
The Company's pre-tax insurance segment underwriting results for the three
months ended and nine months ended September 2000 and September 1999 are
summarized in the table below. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------------- ------------------------------
2000 1999 2000 1999
--------------- ---------------- -------------- -------------
Amount % Amount % Amount % Amount %
------- ---- ------- ---- -------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct & assumed premiums written $54,610 -- 45,698 -- $178,889 -- 121,380 --
======= ======= ======== =======
Net premiums earned ............. $29,868 100 33,171 100 $ 92,420 100 87,304 100
Losses and LAE incurred ......... 23,138 77 26,066 79 73,831 80 59,440 68
Other underwriting expenses ..... 5,438 18 5,957 18 13,793 15 16,305 19
------- ------- -------- -------
Underwriting gain ............... $ 1,292 1,148 $ 4,796 11,559
======= ======= ======== =======
Net investment income ........... $ 6,329 -- 4,965 -- $ 18,372 -- 14,227 --
======= ======= ======== =======
</TABLE>
12
<PAGE>
Direct and assumed premiums written in the third quarter of 2000 were $54.6
million, up 19% from $45.7 million in 1999. For the nine months ended September
30, 2000, direct and assumed premiums written were $178.9 million, up 47% from
$121.4 million in 1999. The increase in direct and assumed premiums written is
related to a 100% quota share reinsurance agreement written in the first quarter
of 2000, an increase in written premiums in Texas (which are 100% reinsured),
and the acquisition of The Tenere Group, Inc. ("Tenere") on March 17, 1999 which
was not included for the entire nine month period in 1999.
Net premiums earned in the third quarter of 2000 were $29.9 million, down 10%
from $33.2 million in 1999. The decrease in net premiums earned is due to a
decline in the number of policyholders in the physician's market in Florida and
an increase in ceded premiums under new reinsurance terms. For the nine months
ended September 30, 2000, net premiums earned were $92.4 million, up 6% from
$87.3 million in 1999. The increase in net premiums earned for the nine-month
period is related to growth in assumed reinsurance and the acquisition of Tenere
on March 17, 1999 offset by the decline in the Florida physician's market.
Net losses and LAE decreased $3.0 million, or 11%, to $23.1 million for the
three months ended September 30, 2000, from $26.1 million for the three months
ended September 30, 1999. The loss ratios were 77% and 79% for the three months
ended September 30, 2000 and 1999, respectively. A loss ratio is defined as the
ratio of losses and loss adjustment expenses to net premiums earned. The decline
in net losses and LAE during the third quarter of 2000, as compared with the
third quarter of 1999, was largely due to improvement in group accident and
health ("A&H") results following a 40% rate increase with respect to the Florida
Dental Association A&H program in the second quarter, and was otherwise in line
with a corresponding decline in net premiums earned.
Net losses and LAE increased $14.4 million, or 24%, to $73.8 million for the
nine months ended September 30, 2000, from $59.4 million for the nine months
ended September 30, 1999. The loss ratios were 80% and 68% for the nine months
ended September 30, 2000 and 1999, respectively. The increase in the Company's
loss ratio for the nine months ended September 30, 2000 is primarily due to a
reduction in the amount of prior years' reserves released.
The liability for losses and LAE represents management's best 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. Competitive market conditions in recent years
have lessened the Company's ability to underwrite and price its business on as
favorable terms as in prior years. Consequently, the Company has significantly
increased it provisions for losses and LAE in 2000.
Management closely monitors the adequacy of its reserves and underlying claims
trends, including having the Company's outside consulting actuary perform
calculations periodically. The Company's recorded amount of the liability for
losses and LAE represents management's best estimate and falls within the range
of reasonable values as determined by the actuary's calculation. In the course
of calculating the liability for losses and LAE during the third quarter,
certain potentially unfavorable claims trends were identified in the underlying
data with respect to Florida Physicians Insurance Company's core physicians'
medical professional liability business. These developments included an increase
in the rate of claims closed with indemnity payment (as opposed to without
payment), and a slow down in the overall closure rate of pending claims,
resulting in an increase in the number of outstanding claims. An indicated
increase in the severity of the average amount of 1999 report year cases closed
with indemnity payment during 2000 thus far was also present.
13
<PAGE>
Management has reviewed and analyzed these developments along with other related
information and understandings as to their causes or potential causes, and
believes that they are an aberration. Furthermore, the Company's outside
consulting actuary has not advised the Company that additional incurred but not
reported ("IBNR") claim liabilities are required. However, should one or more of
these developments prove not to be aberrant, there is a possibility that recent
actual claims experience could be indicative of an unfavorable trend that could
require additional IBNR claim liabilities in the future.
At this time, it is not possible to precisely estimate the potential amount of
such an adjustment, if any. To do so would require speculation about future
events and the ability to conclude on the meaning of these developments, which
can only be done upon further analysis of a full year's data. However, based
solely upon current data and with the benefit of the outside consulting
actuary's calculations, assumptions, and potential outcomes, management believes
such a potential adjustment, if any, would fall in the range of 0% to 6% of the
Company's recorded amount of the liability for losses and LAE, or from $0 to $16
million, pre-tax.
This range of possibility does not include any projection of experience,
positive or negative, that might occur during the remainder of 2000, nor the
possibility that a full year's development of data may vary significantly from
the partial year data underlying the interim calculations. It also does not
reflect other key qualitative matters that are normally considered by
management, such as the degree or margin of conservatism that might be included.
Furthermore, given the inherent uncertainties in the estimation of the liability
for losses and LAE in general, there can be no assurance concerning future
adjustments, positive or negative.
Other underwriting expenses incurred during the third quarter of 2000 decreased
$0.4 million from 1999. For the nine months ended September 2000, other
underwriting expenses incurred were $13.8 million, down 15%, from $16.3 million
for the nine months ended September 30, 1999. The decline in other underwriting
expenses is attributable to a decline in assumed reinsurance costs and the
accretion, or amortization, of the deferred credit associated with the 100%
quota share reinsurance agreement entered into during the first quarter of 2000.
Third Party Administration ("TPA") and Reciprocal Management ("RM") Segments
Income before taxes for the Company's non-insurance segments for the three
months ended and nine months ended September 2000 and September 1999 are
summarized in the table below. Dollar amounts are in thousands.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
2000 1999 2000 1999
------------ ----------- ------------- ------------
Amount % Amount % Amount % Amount %
------ --- ------ --- ------- --- ------ ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Claims administration &
management fees ..... $7,873 80 6,814 85 $22,429 88 19,285 89
Commission income ... 1,931 20 1,198 15 2,996 12 2,375 11
------ --- ----- --- ------- --- ------ ---
Total revenues ........ $9,804 100 8,012 100 $25,425 100 21,660 100
====== === ===== === ======= === ====== ===
Claims administration &
management expenses . $7,999 82 7,605 95 $22,190 87 19,684 91
Net other expense ..... 543 6 392 4 1,266 5 983 5
------ --- ----- --- ------- --- ------ ---
Total expenses ...... $8,542 88 7,997 99 $23,456 92 20,667 96
====== === ===== === ======= === ====== ===
</TABLE>
14
<PAGE>
Claims administration and management fees in the third quarter of 2000 were $7.9
million, up 16% from $6.8 million in 1999. Claims administration and management
fees increased $3.1 million, or 16%, to $22.4 million for the nine months ended
September 30, 2000, from $19.3 million for the nine months ended September 30,
1999. The growth in claims administration and management fees is primarily
attributable to an acquisition of assets by Employers Mutual, Inc. ("EMI")
during the third quarter of 1999.
Commission income in the third quarter of 2000 was $1.9 million, up 58% from
$1.2 million in 1999. Commission income increased $0.6 million, or 25%, to $3.0
million for the nine months ended September 30, 2000, from $2.4 million for the
nine months ended September 30, 1999. The increase in commission income is
attributable to growth related to the placement of insurance and reinsurance
with external parties during 2000.
Claims administration and management expenses in the third quarter of 2000 were
$8.0 million, up 5% from $7.6 million in 1999. Claims administration and
management expenses increased $2.5 million, or 13%, to $22.2 million for the
nine months ended September 30, 2000, from $19.7 million for the nine months
ended September 30, 1999. The growth in claims administration and management
expenses is attributable to an acquisition of assets by EMI during the third
quarter of 1999.
Liquidity and Capital Resources
The payment of losses, LAE, and operating expenses, including interest and
taxes, 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 nine months ended September
30, 2000 provided cash of approximately $9.9 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
including future levels of premiums written, investment income and operating
expenses could have direct affects on operating cash flows. For example, an
increase in the dollar amount of losses and LAE paid may adversely affect future
reserve development and cash flow needs. Additional factors including, among
others, loss trends, and changes in the frequency and severity of claims in the
Company's book of business could also affect cash flow needs. In addition,
factors such as inflation, changes in medical procedures, and 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 September 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.
15
<PAGE>
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 September 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
In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 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. In June 1999, the FASB issued SFAS No.
137, which delayed the effective date for implementing SFAS No. 133 until the
beginning of 2001. In June 2000, the FASB issued SFAS No. 138, which amended
certain provisions of SFAS No. 133 with the objective of easing the
implementation difficulties expected to arise. 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
GAAP 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.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles ("the Codification"), which
will replace the current Accounting Practices and Procedures Manual as the
NAIC's primary guidance on statutory accounting effective January 1, 2001. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas, e.g. deferred
income taxes are recorded, and limitations will be imposed on goodwill and
electronic data equipment. The Company has not estimated the potential effect of
the Codification if adopted by the Florida Department of Insurance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk:
There have been no material changes in the reported market risks, as described
in the Company's 1999 annual report on Form 10-K, since the end of the most
recent fiscal year.
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 - None
Item 5. Other Information - None
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) The following exhibits are included herewith:
Exhibit 27 -- Financial Data Schedule.
b) Reports on Form 8-K:
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.
On September 21, 2000, the Company filed a Form 8-K notifying the
Securities and Exchange Commission that John R. Byers had been
elected as President and Chief Executive Officer of the Company on a
permanent basis. Mr. Byers will also serve as 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
----------------------------
November 14, 2000 Kim D. Thorpe, Executive Vice President and
and Chief Financial Officer
(a duly authorized officer and the principal
financial officer of the registrant)
17
