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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended December 31, 2000
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
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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
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10
par value
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [___]
The aggregate market value of the Registrant's Common Stock (its only voting
stock) held by non-affiliates of the Registrant as of March 15, 2001 was
approximately $107,935,845.
As of March 15, 2001, there were 9,351,255 shares of the Registrant's Common
Stock, $.10 Par Value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT INCORPORATED IN
- -------------------------------- ----------------------------
Proxy Statement for Registrant's Part III
Annual Shareholders' Meeting to
be held on June 6, 2001
FPIC INSURANCE GROUP, INC.
2000 ANNUAL REPORT ON FORM 10-K
INDEX
PAGE
PART I
Item 1. Business.......................................................................... 3
Item 2. Properties........................................................................ 16
Item 3. Legal Proceedings................................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............................... 16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................................... 16
Item 6. Selected Financial Data........................................................... 17
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 17
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................ 25
Item 8. Financial Statements and Supplementary Data....................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................................. 26
PART III
Item 10. Directors and Executive Officers of the Registrant................................ 27
Item 11. Executive Compensation............................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management.................... 27
Item 13. Certain Relationships and Related Transactions.................................... 27
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................... 27
PART I
ITEM 1. BUSINESS
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SAFE HARBOR DISCLOSURE
- ----------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Any written or oral statements made by or on
behalf of the Company may include forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail elsewhere herein and in documents filed by the Company with the
Securities and Exchange Commission) include, but are not limited to, (i)
uncertainties relating to government and regulatory policies (such as subjecting
the Company to insurance regulation or taxation in additional jurisdictions or
amending, revoking or enacting any laws, regulations or treaties affecting the
Company's current operations), (ii) the occurrence of insured or reinsured
events with a frequency or severity exceeding the Company's estimates, (iii)
legal developments, (iv) the uncertainties of the loss reserving process, (v)
the actual amount of new and renewal business and market acceptance of expansion
plans, (vi) the loss of the services of any of the Company's executive officers,
(vii) changing rates of inflation and other economic conditions, (viii) the
ability to collect reinsurance recoverables, (ix) the competitive environment in
which the Company operates, related trends and associated pricing pressures and
developments, (x) the impact of mergers and acquisitions, including the ability
to successfully integrate acquired businesses and achieve cost savings,
competing demands for the Company's capital and the risk of undisclosed
liabilities, and (xi) developments in global financial markets that could affect
the Company's investment portfolio and financing plans.
The words "believe", "anticipate", "estimate", "project", "plan", "expect",
"intend", "hope", "will likely result" or "will continue" and variations thereof
or similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
GENERAL
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FPIC Insurance Group, Inc. ("FIG" or the "Company") was formed in 1996 in
connection with a reorganization (the "Reorganization") pursuant to which it
became the parent company of Florida Physicians Insurance Company, Inc. ("FPIC")
and McCreary Corporation ("McCreary"), a third party administrator. In
connection with the Reorganization, FPIC's shareholders became the shareholders
of the Company and received five shares of the Company's common stock for each
of their shares of FPIC's common stock.
The Company has three main operating segments as follows: insurance, third party
administration ("TPA") and reciprocal management ("RM"). The Company's primary
sources of revenue are management fees and dividends received from its
subsidiaries. The primary sources of revenues for these amounts are premiums
earned and investment income derived from the insurance segment and fee and
commission income from the TPA and RM segments.
Through the insurance segment, the Company specializes in professional liability
insurance products and services for physicians, dentists, other healthcare
providers and attorneys. The Company provides TPA services through its
subsidiaries that market and administer self-insured and fully insured plans for
both large and small employers, including group accident and health insurance,
workers' compensation and general liability and property insurance. Through the
RM segment, the Company provides management and administrative services and acts
as attorney-in-fact for Physicians' Reciprocal Insurers ("PRI"), a New York
medical professional liability insurance reciprocal.
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ACQUISITIONS
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On July 1, 1995, FPIC acquired the assets of McCreary, a Florida third party
administrator, for $2.0 million plus certain additional payments based on
earnings. On January 17, 1997, McCreary acquired all of the outstanding common
stock of Employers Mutual, Inc. ("EMI"), a Florida third party administrator,
for $1.3 million plus certain additional payments based upon earnings. The
acquisition agreements specified additional payments, based upon earnings, to be
made to the sellers from the acquisition date through 2001. During 2000, the
Company entered into agreements with the sellers to fix the remaining payments
and thereby effectively eliminate the contingent terms under the previous
agreements.
On July 1, 1998, the Company purchased all of the outstanding common stock of
Anesthesiologists Professional Assurance Company ("APAC"), a medical malpractice
insurance company, for $18.0 million. Additionally, $3.5 million was paid in
non-compete agreements and other fees to certain key employees. These amounts
are recorded as intangible assets in the consolidated balance sheet. APAC
insures over 950 anesthesiologists in nineteen states.
Concurrent with the purchase of APAC, the Company purchased a 9.9% interest in
American Professional Assurance Ltd. ("APAL"), a Cayman Islands captive
reinsurer, for $5.5 million.
On November 6, 1998, the Company's subsidiary, FPIC Services, Inc. ("Services"),
a Florida corporation, formed a joint venture, Bexar Credentials, Inc.
("Bexar"), with a Texas corporation and a Texas self insurance trust
association. Services cost for its one-third ownership was $0.9 million. In
December 2000, the Company's investment in Bexar was written down to $75
thousand and effective January 31, 2000, the Company's stock in Bexar was
redeemed for $70 thousand in cash and notes.
Effective January 1, 1999, the Company purchased all of the outstanding common
stock of Administrators for the Professions, Inc. ("AFP") and a 70% interest in
Professional Medical Administrators, LLC ("PMA") for aggregate consideration
equal to $56.3 million, paid in cash of $44.7 million and Company common stock.
AFP is the manager and attorney-in-fact for PRI, the second largest medical
professional liability insurer for physicians in the state of New York.
On March 17, 1999, the Company's subsidiary, FPIC, purchased all of the
outstanding common stock of The Tenere Group, Inc. ("Tenere") for $19.6 million
in cash. Tenere, headquartered in Springfield, Missouri, is a stock holding
company, with two primary insurance subsidiaries, Intermed Insurance Company
("Intermed") and Interlex Insurance Company ("Interlex"). Intermed provides
medical professional liability ("MPL") insurance, and Interlex provides legal
professional liability ("LPL") insurance.
On August 6, 1999, the Company's subsidiary, EMI, purchased all of the assets of
Brokerage Services, Inc. ("BSI") and Group Brokerage, Inc. ("GBI"), related
corporations headquartered in Albuquerque, New Mexico that provide third party
administration services for self-insured and fully insured health plans. The
consideration paid by EMI for such assets aggregated $1.0 million.
INFORMATION ABOUT SEGMENTS
- --------------------------
PRESENTATION. The business segments presented in this document have been
determined in accordance with the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information." As indicated above, the Company has three reportable
segments as follows: insurance, TPA, and RM. 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.
COMPETITION. Competitive forces in the property and casualty insurance and
reinsurance business are substantial. Results are a function of underwriting and
investment performance, direct costs associated with the delivery of insurance
products, including the costs of regulation, the frequency and severity of
medical claims, as well as inflation. Decisions made by insurers concerning
their mix of business (offering certain types of coverage but declining to write
other types), their methods of operations and the quality and allocation of
their assets (including any reinsurance recoverable balances) will affect their
competitive position. The relative size and reputation of
4
insurers may influence purchasing decisions of present and prospective customers
thus contributing to both geographic and industrial sector market penetration.
Abundant capital has historically had the effect of encouraging competition and
depressing prices. The Company's competitive position in the property and
casualty insurance industry is influenced by all of these factors. Individual
competitive information by segment is presented in the presentations below.
RATINGS. The Company and its subsidiaries are rated by nationally recognized
insurance rating agencies. While the significance of individual ratings vary
among agencies, companies assigned ratings at the top end of the range have, in
the opinion of the rating agency, the strongest capacity for payment of claims,
while companies at the bottom end of the range have the weakest capacity.
Insurance specific ratings represent the opinion of the rating agencies on the
financial strength of a company and its capacity to meet the obligations of
insurance policies. These ratings are based on factors relevant to
policyholders, agents and intermediaries and are not directed toward the
protection of investors. Such ratings are not recommendations to buy, sell, or
hold securities. A.M. Best's ratings are based upon a comprehensive review of a
company's financial performance that is supplemented by certain data, including
responses to A.M. Best's questionnaires, quarterly National Association of
Insurance Commissioners ("NAIC") filings, state insurance department examination
reports, loss reserve reports, annual reports and reports filed with the
Securities and Exchange Commission. A.M. Best undertakes a quantitative
evaluation based upon profitability, leverage and liquidity and a qualitative
evaluation based upon the composition of an insurer's book of business or spread
of risk, the amount, appropriateness and soundness of reinsurance, the quality,
diversification and estimated market value of its assets, the adequacy of its
loss reserves and policyholders' surplus and the experience and competency of
its management.
INSURANCE SEGMENT
- -----------------
PRINCIPAL BUSINESS. The Company, through FPIC, APAC, Intermed and Interlex, is a
provider of MPL and other professional liability insurance principally in
Florida, Texas, Missouri, Georgia and Kansas. MPL business in Texas is written
primarily under an agreement with a Texas insurance exchange (the "Exchange")
whereby the Company markets its product through a managing general agent related
to the Exchange and, in turn, cedes 100% of the business to the Exchange. The
Company does not retain the underlying insurance risks under this program but
instead receives a fee in exchange for its participation. MPL insurance protects
the physician, dentist, or other healthcare provider against liabilities arising
from the rendering of or failure to render professional healthcare services.
Under the typical MPL insurance policy, the insurer also pays the legal costs of
defending the claim. The Company has the exclusive endorsement of both the
Florida Medical Association ("FMA") and the Florida Dental Association ("FDA").
The following table summarizes (in thousands) the insurance segment's direct
premiums written by state for the years ended December 31, 2000, 1999 and 1998:
Direct Premiums Written by State
-----------------------------------------------------------------------------------
% of % of % of
2000 TOTAL 1999 TOTAL 1998 TOTAL
------------ -------- -------------- -------- ------------ ---------
Florida.............$ 97,707 73.3% $ 94,583 80.7% $ 90,436 90.1%
Texas............... 17,076 12.8% 11,499 9.8% 7,281 7.3%
Missouri............ 13,014 9.8% 8,140 6.9% -- --
Georgia............. 1,969 1.5% 1,251 1.2% 889 0.9%
Kansas.............. 1,497 1.1% 396 0.3% -- --
All other........... 2,020 1.5% 1,325 1.1% 1,756 1.7%
------------ -------- -------------- -------- ------------ ---------
All states........$ 133,283 100.0% $ 117,194 100.0% $ 100,362 100.0%
============= ======== ============== ======== ============ =========
As of December 31, 2000, the Company was also licensed in Alabama, Arkansas,
Kentucky, Illinois, Indiana, Maryland, Michigan, Mississippi, North Carolina,
Ohio, Pennsylvania, Tennessee, Virginia and West Virginia. The Company has begun
or will begin marketing in each of these states when it determines an
appropriate long-term opportunity exists to write profitable business.
5
INSURANCE PRODUCTS. The Company offers a variety of insurance products including
MPL insurance, LPL insurance, managed care liability insurance, professional and
comprehensive general liability insurance, investigation defense coverage,
provider stop loss insurance, workers' compensation, and group accident and
health ("A&H") coverage. The following table summarizes (in thousands) the
direct premiums written and assumed by product type for the years ended December
31, 2000, 1999 and 1998.
2000 1999 1998
------------- -------------- ------------
Medical professional liability for physicians................$ 162,315 118,044 94,769
Medical professional liability for dentists.................. 5,262 4,529 4,238
Legal professional liability for attorneys................... 2,421 1,197 --
Group accident and health.................................... 24,412 19,190 14,959
Professional and comprehensive general liability............. 789 1,509 1,226
Provider stop loss........................................... 561 1,611 13
Workers' compensation........................................ 1,018 802 552
Managed care................................................. -- -- 141
Investigation defense coverage............................... 502 1,334 1,091
------------- -------------- ------------
All products.......................................$ 197,280 148,216 116,989
============= ============== ============
MEDICAL PROFESSIONAL LIABILITY. The principal product offered by the Company is
MPL insurance for physicians and dentists. The Company's MPL insurance is
offered to physicians and dentists in all types of settings, including solo
practices, group practices and hospitals. MPL insurance provides coverage
against the legal liability of an insured for such things as injury caused by or
as a result of treatment of a patient, failure to treat a patient and failure to
properly diagnose a patient.
The Company's MPL policies are issued substantially on a "claims-made" basis.
Coverage is provided for claims reported to the Company during the policy period
arising from incidents that occurred at any time the insured was covered by the
policy. The Company also offers "tail coverage" for claims reported after the
expiration of the policy for occurrences during the coverage period. The price
of tail coverage is based on the length of time the insured has been covered
under the Company's claims-made policy. The Company provides free tail coverage
for insured physicians who die or become disabled during the coverage period of
the policy and those who have been insured by the Company for at least five
consecutive years and retire completely from the practice of medicine. MPL
insurance policies offered by the Company are issued with liability limits up to
$5.0 million per incident and $7.0 million in annual aggregate for physicians
and $2.0 million per incident and $5.0 million in annual aggregate for dentists.
LEGAL PROFESSIONAL LIABILITY. LPL insurance provides coverage for a wrongful act
committed by an insured while providing professional services as a lawyer,
notary public, arbitrator, or mediator. Coverage is written on a claims-made
basis with a single policy limit shared by all members of the insured firm.
Defense costs are included within the policy limit. Limits up to $1.0 million
per incident and $3.0 million in annual aggregate are available. Higher limits
are placed through semi-facultative reinsurance agreements.
PROFESSIONAL AND COMPREHENSIVE GENERAL LIABILITY. The Company also offers
professional and comprehensive general liability insurance to hospitals and
healthcare facilities; such as ambulatory surgery centers and walk-in medical
care clinics. The policies issued to healthcare facilities provide both
comprehensive general liability and protection for professional liability
related to the operation of a healthcare facility and its various staff
committees. Professional liability insurance is offered by the Company to
healthcare facilities on a claims-made basis. Comprehensive general liability is
available on a claims-made or occurrence basis. The maximum limits of coverage
for these policies available to non-hospital healthcare facilities are $1.0
million per incident and $3.0 million in annual aggregate. The maximum limits of
coverage for policies available to hospitals are $11.0 million per incident and
$13.0 million in annual aggregate. Higher liability limits are placed through
facultative reinsurance arrangements.
6
INVESTIGATION DEFENSE COVERAGE. The Company also offers investigation defense
coverage to physicians and dentists for costs associated with investigations
initiated by state licensing agencies, the Occupational Safety and Health
Administration ("OSHA") and the Equal Employment Opportunity Commission
("EEOC"). This coverage is offered to the Company's insureds for investigations
that are not related to an MPL claim; investigations related to an MPL claim are
provided to the Company's insureds as part of their MPL policy. This coverage is
also offered to physicians and dentists not otherwise insured by the Company.
Policy limits for this coverage are $25 thousand per incident and $75 thousand
in annual aggregate.
WORKERS' COMPENSATION. The Company began writing workers' compensation insurance
in 1998. Workers' compensation insurance covers the liability of an employer for
work-related injuries to employees, in accordance with the requirements of law.
The Company has withdrawn from this line of business on a direct basis, but will
continue to front business for other insurance companies. The Company is
actively seeking partnerships to expand its fronting relationships and may
choose to participate as a reinsurer on a quota share basis for selected risks.
GROUP ACCIDENT AND HEALTH. The Company began writing and assuming A&H premium in
1997. Through its relationships with the FMA and the FDA, the Company began
underwriting small employer, A&H programs for physicians and dentists. A&H
insurance provides comprehensive coverage for preventive care and medically
necessary expenses at various deductible, co-insurance and stop loss limits.
During February 2000, the Company announced its intention to withdraw from its
group A&H programs and in December 2000 began renewing policies for these
programs. See Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations for additional information.
ASSUMED REINSURANCE. In addition to its direct business, the Company reinsures
risks underwritten by other insurers. As an assuming reinsurer, the Company
essentially acts as an insurer of the direct writer for a portion of its
insurance risks, as specified under the terms of the reinsurance agreement. The
Company's assumed reinsurance consists primarily of MPL, LPL, and a group A&H
business written on an excess of loss and a quota share basis. Under excess of
loss contracts, the Company assumes risks over a certain limit on a per loss
basis. Under the Company's quota share agreements, it assumes a pro-rata portion
of each underlying risk, up to and including 100% in some cases. The Company's
assumed reinsurance contracts are treaty agreements whereby terms are set in
advance and the underlying individual contracts of the ceding company are
automatically assumed as they are written.
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 risks under PRI's claims made insurance policies in exchange for
cash and investments. During 2000, a valuation in accordance with generally
accepted accounting principles ("GAAP") of the underlying liability was
completed and a deferred credit in the amount of $13.2 million was recognized.
The deferred credit, which will be amortized into income over 20 years,
represents the difference between the GAAP valuation of the underlying
liabilities 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).
REGULATION. The Company and its insurance subsidiaries are subject to extensive
state regulatory oversight in Florida and Missouri, where its four insurance
subsidiaries are domiciled, and in the other jurisdictions in which they conduct
business. The insurance laws in each state regulate insurance holding company
structures, including the Company and its subsidiaries. Each insurance company
in a holding company structure is required to register with its domiciliary
Department of Insurance (the "Department of Insurance") and furnish information
concerning the operations of companies within the holding company structure that
may materially affect the operations, management or financial condition of the
insurers within the structure. Pursuant to these laws, the Department of
Insurance may examine the Company, and/or FPIC, APAC, Intermed, and Interlex at
any time and require disclosure of and/or approval of material transactions
involving any insurance subsidiary of the Company, such as extraordinary
dividends from FPIC, APAC, Intermed, and Interlex. All transactions within the
holding company structure affecting the Company's insurance subsidiaries must be
fair and reasonable.
7
Florida insurance laws provide that no person may acquire, directly or
indirectly, five percent or more of the voting securities of a domiciled
insurance company unless such person has obtained the prior written approval of
the Florida Department of Insurance for such acquisition. Any purchaser of five
percent or more of the Company's outstanding common stock will generally be
presumed to have acquired control of the insurance company. In lieu of obtaining
such prior approval, a purchaser owning less than ten percent of the outstanding
shares of the Company, FPIC, or APAC may file a disclaimer of affiliation and
control with the Florida Department of Insurance.
Missouri insurance laws generally provide that no person may acquire, directly
or indirectly, ten percent or more of the voting securities of Intermed or
Interlex unless such person has obtained the prior written approval of the
Missouri Department of Insurance for such acquisition.
Since FPIC, APAC, Intermed, and Interlex are insurance companies, the
Departments of Insurance in Florida and Missouri are their principal supervisors
and regulators. However, these companies are also subject to supervision and
regulation in the other states where they transact business in relation to
numerous aspects of their business and financial condition. The primary purpose
of such supervision and regulation is to insure the financial stability of the
insurance companies for the protection of policyholders. Insurance companies are
required to file detailed annual reports with the supervisory agencies in each
state in which they do business, and their business and accounts are subject to
examination by such agencies at any time. The laws of the various states
establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade practices,
required statutory financial statements and prescribing the types and amount of
investments permitted. Although premium rate regulations vary among states and
lines of insurance, such regulations require approval by each state regulator of
the rates and policies to be used in its state.
In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles Project (the "Codification") as the NAIC supported basis of
accounting. Codification affects all statutory financial statements issued after
the adoption date of January 1, 2001. The Codification was approved with a
provision allowing for discretion by each state's Department of Insurance in
determining appropriate statutory accounting for insurers. Accordingly, such
discretion will continue to allow prescribed or permitted accounting practices
that may differ from state to state. The Codification does not affect the
Company's consolidated financial statements, which have been prepared in
accordance with GAAP. The Company expects that statutory surplus after adoption
will continue to be in excess of the current regulatory and risk-based capital
requirements.
The insurance subsidiaries of the Company are subject to assessment by the
Financial Guaranty Associations in the states in which they conduct business for
the provision of funds necessary for the settlement of covered claims under
certain policies of insolvent insurers. Generally, these associations can assess
member insurers on the basis of written premiums in their particular states.
The Gramm-Leach-Bliley Act of 1999 (the "Act") established a comprehensive
framework to permit affiliations among commercial banks, insurance companies,
securities firms and other financial service providers by revising and expanding
the federal Bank Holding Company Act framework to permit a bank holding company
system to engage in a full range of financial activities, including insurance,
through a new entity known as a "financial holding company." Generally, the Act
(i) repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among commercial banks, securities firms,
insurance companies, and other financial service providers; (ii) provides a
uniform framework for the functional regulation of commercial banks, insurance
companies and securities firms; (iii) broadens the activities that may be
conducted by national banks (and derivatively, state banks), banking
subsidiaries of bank holding companies, and their financial subsidiaries; and
(iv) addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of insurance companies and other
financial institutions.
The insurance industry is under continuous review by Congress, state
legislatures and state and federal regulatory agencies. From time to time,
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an adverse effect on individual insurers or
reinsurers. Among the proposals that have in the past been, or are at present
being, considered are the possible introduction of state and federal limits
8
on certain damages for MPL claims as well as federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers. The Company
is unable to predict whether any of these proposals will be adopted, the form in
which any such proposals would be adopted, or the impact, if any, such adoption
would have on the Company, although such impact could be material.
COMPETITION. The MPL insurance markets in Florida and Missouri are highly
competitive from the perspective of pricing and the number of competitors
writing business. Several companies offer similar products at lower premium
rates than the Company. In addition, more competitors may enter the Company's
markets in the future. The Company believes that the number of healthcare
entities that insure their affiliated physicians through self-insurance may
begin to increase and affect both its Florida and Missouri based operations.
Many of the MPL insurers are substantially larger and have considerably greater
resources than the Company. Additionally, several of these insurers have
received A.M. Best ratings that are higher than the Company's insurance
subsidiaries' ratings of "A- (Excellent)." In addition, because a substantial
portion of the Company's products are marketed through independent insurance
agencies, all of which represent more than one company, the Company faces
competition within each agency in its own agency system. The Company competes
within this environment on the basis of its excellent relationship with the
medical and professional communities it serves. In Florida, name recognition,
service reputation, medical society endorsements, physician board of directors,
agency force and program development have all contributed to helping the Company
maintain its number of insureds. Furthermore, the Company believes it has been
successful by target marketing groups and specialties that exhibit better than
average risks and believes that its marketing success has allowed it to improve
the quality and profitability of its overall business.
The Company believes that the principal competitive factors affecting its
business in Florida are service, name recognition, and price, and that it is
competitive in Florida in all of these areas. The Company enjoys strong name
recognition in Florida by virtue of having been organized by, and operated for
the principal benefit of, Florida physicians. The services offered to insureds
of the Company, as well as the healthcare community in general, are intended to
promote name recognition and to maintain and improve loyalty among the insureds
of the Company. MPL insurance offered by FPIC has the exclusive endorsement of
both the FMA and the FDA, and is also endorsed by various county and state
medical societies.
In both Missouri and Kansas, Intermed and Interlex compete with regional and
national companies. In 1999, the last year for which statistics are available
from the Missouri Department of Insurance, there were fifty-three companies
writing medical malpractice insurance for physicians and surgeons in the state.
The top five writers had 71.0% of the market. The largest market share was
23.9%. Intermed was the sixth largest writer in the state in 1999 and had a
market share of 9.6%.
In 1999, nineteen companies wrote LPL insurance in the state of Missouri
according to the latest statistics available from the Missouri Department of
Insurance. One company, sponsored by the Missouri Bar Association, had a market
share of 66.7%. Interlex, which commenced operations in October 1994, had a
market share of 12.1% and was the second largest writer.
A number of hospitals in Missouri have purchased the medical practices of
fee-for-service physicians and hired the physicians as employees of the hospital
or a corporate entity affiliated with the hospital. A number of such physicians
formerly purchased their own professional liability insurance through smaller
insurance companies such as Intermed. As a result of industry consolidation,
many of the hospitals purchasing the practices of physicians have become
self-insured or sought professional liability insurance from professional
liability carriers with capital and surplus greater than that of Intermed and at
premiums lower than those currently offered by Intermed.
In general, local carriers that have been able to maintain strong customer
loyalty dominate the MPL market in other states. The same targeted specialty and
claims-free approach developed in Florida is being used in these other states.
The Company is recruiting and developing an agency force to expand its market,
provide service, and develop name recognition.
9
MARKETING. The Company markets its MPL policies in Florida and Missouri
primarily through independent agencies. The Company also sells insurance
products directly through its subsidiary, FPIC Agency, Inc. (the "Agency"). The
insurance products that are sold directly by the Agency are a result of direct
requests from physicians.
The Company markets its LPL policies in Missouri primarily through a direct
sales force. In October of 1999, the Company signed an agreement with Charlton
Manley, Inc. to serve as the state administrator for all marketing and
underwriting functions in the state of Kansas. During 2000, the direct sales
force produced approximately 78.0% of LPL premiums written.
An integral part of the Company's marketing strategy is targeting sectors of the
MPL industry that it believes generate above average operating profits. The
Company has identified certain medical specialties and "claims-free" physicians
as sectors in which it wishes to increase its market share.
The Company provides comprehensive risk management services, as a service to its
insureds, designed to heighten their awareness of situations giving rise to
potential loss exposures, to educate them on ways to improve their medical
practice procedures and to assist them in implementing risk modification
measures. In addition, the Company conducts surveys for hospitals and large
medical groups to review their practice procedures. Complete reports that
specify areas of the insured's medical practice that may need attention are
provided to the policyholder on a confidential basis. The Company also presents
and participates in periodic seminars with medical societies and other groups at
which pertinent subjects are presented. These educational offerings are designed
to increase risk awareness and the effectiveness of various medical
professionals.
UNDERWRITING. As part of the MPL underwriting process, the Company utilizes the
data collected by the states of Florida and Missouri, which includes a record of
all MPL claims-paid information that insurers are required to report. When
applications are received from physicians for MPL insurance, the Company reviews
this database to verify the physician's claims-paid record. If a physician has
an excessive claims-paid history, the application is denied. All other
applicants are reviewed on the basis of the physician's educational background,
residency experience, practice history and comments received from personal
references. Annually, the Company's underwriting department reexamines each
insured before coverage is renewed, including verifying that the insured's
license is current and that any reported claims for the insured were within
acceptable limits.
In underwriting LPL insurance, the Company's underwriters use an approach
similar to the process for underwriting MPL as described above. The Company has
an underwriting committee composed of lawyers to provide assistance to this
process. The committee is geographically broad-based, and in most instances, has
knowledge of applicants and renewals. This structure has enabled the Company to
maintain high underwriting standards.
The underwriting of the Company's other insurance products is conducted in
conjunction with external underwriters. With respect to these products, the
Company receives applications from prospective insureds. After a review of the
information contained in such applications, the Company forwards them to an
external underwriter. The external underwriter performs review procedures for
each application and consults with the Company on the amount of premium to
charge each insured.
CLAIMS ADMINISTRATION. The Company's claims department is responsible for the
supervision of claims investigation, the establishment of case reserves, case
management, development of the defense strategy and the coordination and control
of attorneys engaged by the Company. The claims department has complete
settlement authority for claims filed against the Company's insureds. The
Company's policy is and has been to refuse settlement and to defend aggressively
all claims that appear to have no merit. In those instances where claims may
have merit, the claims department attempts to settle the case as expeditiously
as possible. The Company believes that it has developed relationships with
attorneys in Florida and Missouri who have significant experience in the defense
of MPL/LPL claims and who are able to defend in an aggressive, cost-efficient
manner the claims against the Company's insureds.
10
REINSURANCE. The Company follows the customary industry practice of reinsuring a
portion of its business. The Company cedes to reinsurers a portion of its risks
and pays a fee based upon premiums received on all policies subject to such
reinsurance. Insurance is ceded principally to reduce the Company's net
liability on individual risks and to provide protection against large losses.
Although reinsurance does not legally discharge the Company from its primary
liability, it does make the reinsurer liable to the Company to the extent of
risks ceded.
For MPL, LPL, and professional and comprehensive general liability insurance
written during 1999 and prior, the Company reinsured risks in excess of $500
thousand per loss, except on the Company's anesthesiology program in which the
Company reinsured risks in excess of $750 thousand. The Company reinsured risks
associated with these policies under treaties pursuant to which reinsurers agree
to assume those risks insured by the Company in excess of its individual risk
retention level and up to its maximum individual policy limit offered. During
2000, the Company changed its ceded reinsurance program to reinsure risks in
excess of $250 thousand per loss subject to an annual aggregate deductible of
$.9 million, except for the Company's anesthesiology program in which the
Company reinsured risks in excess of $438 thousand. In regards to the annual
aggregate deductible, the Company retains the first $9 million of losses that
would otherwise qualify for reinsurance under the agreement. In return, the
Company receives an approximate dollar for dollar reduction in the rate its
reinsurers would have charged for the additional risks they are assuming in
connection with the reduction in the Company's per loss retention from $500
thousand to $250 thousand. Reinsurance is placed under reinsurance treaties and
agreements with a number of individual companies and syndicates to mitigate the
concentration of credit risk. The Company relies on reinsurance brokers and
intermediaries to assist in analysis of the credit quality of its reinsurers.
The Company also requires reinsurers that are not authorized to do business in
Florida or Missouri to post a letter of credit or establish a trust account to
secure their reinsurance recoverables.
Under Florida and Missouri laws, in the event the Company has the opportunity to
settle a claim within policy limits but fails to do so, and a judgment is
rendered against a policyholder for an amount exceeding the policy limit, the
Company may be charged with bad faith in failing to settle. Thus, in such a
case, the Company may be held responsible for an amount exceeding the policy
limit or for extra contractual damages. The Company's primary reinsurance
contracts include coverage for policies with limits equal to or greater than
$1.0 million for which the claim exceeds policy limits, or is for extra
contractual damages. In the past five years, the Company has not paid a claim,
including bad faith claims, in excess of $3.0 million. Effective January 1,
2000, the Company has obtained reinsurance covering claims in excess of $1.0
million.
LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE ("LAE"). The determination of the
total liability for loss and LAE is based upon a projection of ultimate losses
through an actuarial analysis of the claims history of the Company, subject to
adjustments deemed appropriate by the Company due to differing or changing
circumstances. Included in its claims history are losses and LAE paid by the
Company in prior periods and case reserves for anticipated losses and LAE
developed by the Company's claims department as claims are reported and
investigated. The Company relies primarily on such historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss cost trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
liabilities for loss and LAE may be revised. Any increase in the liability,
including amounts for insured events of prior years, could have an adverse
effect on the Company's results for the period in which the adjustments are
made.
The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years, principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. MPL insurance is a long-tail line of business for
which the initial loss and LAE estimates may be adversely impacted by events
occurring long after the reporting of the claim, such as sudden severe inflation
or adverse judicial or legislative decisions. The Company utilizes both its
staff and independent actuaries in establishing its reserves. The Company's
independent actuaries review the Company's liabilities for loss and LAE one or
more times each year and prepare a report that includes a recommended level of
reserves. The Company considers this recommendation as well as other factors
such as known, anticipated or estimated changes in frequency and severity of
losses, loss retention
11
levels and premium rates, in establishing the amount of its liability for loss
and LAE. The Company continually refines its estimates as experience develops
and further claims are reported and settled. The Company reflects adjustments to
reserves in the results of the current period.
The following table sets forth (in thousands) the development of the Company's
liability for loss and LAE, net of reinsurance recovered or recoverable, for the
10-year period ended December 31, 2000:
Year Ended December 31, 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Balance Sheet Liability 223,597 214,692 200,763 173,971 161,124 155,318 143,415 132,190 126,651 118,995 119,031
Reestimated Liability
As of: One Year Later 221,212 182,208 159,639 146,009 140,322 129,472 121,543 98,706 101,844 103,533
Two Years Later 182,498 142,369 127,529 116,151 114,193 105,704 89,301 80,932 86,249
Three Years Later 141,850 112,770 106,937 90,666 91,929 76,247 71,653 64,456
Four Years Later 106,557 104,684 86,154 72,854 68,445 66,891 56,578
Five Years Later 103,402 87,807 73,753 69,396 63,884 55,459
Six Years Later 85,881 75,032 70,596 63,133 55,068
Seven Years Later 74,376 71,547 63,980 53,875
Eight Years Later 70,983 64,714 54,345
Nine Years Later 64,369 54,832
Ten Years Later 55,586
Cumulative Paid
As of: One Year Later 91,269 76,291 49,697 33,103 35,562 28,701 24,794 25,924 26,482 17,500
Two Years Later 121,199 90,165 62,612 60,464 52,832 45,162 42,520 44,758 37,399
Three Years Later 115,336 88,649 78,291 63,738 57,597 55,677 52,675 47,689
Four Years Later 98,027 94,882 73,296 62,630 60,448 57,248 50,106
Five Years Later 100,294 82,840 68,052 63,458 59,309 52,600
Six Years Later 85,047 72,509 66,468 59,637 52,746
Seven Years Later 74,138 69,975 61,258 52,849
Eight Years Later 70,753 63,468 53,653
Nine Years Later 64,233 54,710
Ten Years Later 55,473
(Deficiency) / Redundancy (6,520) 18,265 32,121 54,567 51,916 57,534 57,814 55,668 54,626 63,445
% (Deficiency) / Redundancy (-3%) 9% 18% 34% 33% 40% 44% 44% 46% 53%
The following table sets forth (in thousands) an analysis of the Company's
liability for losses and LAE and provides a reconciliation of the beginning and
ending liability, net of reinsurance, for the years ended December 31, 2000,
1999 and 1998.
2000 1999 1998
---------- --------- --------
Net loss and LAE liability, at the beginning of period............$ 214,692 200,763 173,971
Loss and LAE of entity acquired................................... -- 24,590 23,406
Provisions for losses and LAE occurring in the current
period......................................................... 116,246 99,523 81,694
Increase (decrease) in estimated losses and LAE for claims
occurring in prior periods..................................... 6,520 (18,555) (14,332)
---------- --------- --------
Total incurred during current period......................... 122,766 80,968 67,362
---------- --------- --------
Losses and LAE payments relating to the current period............ 22,592 15,338 14,279
Losses and LAE payments relating to prior periods................. 91,269 76,291 49,697
---------- --------- --------
Total paid during current period............................. 113,861 91,629 63,976
---------- --------- --------
Net loss and LAE liability, at end of period......................$ 223,597 214,692 200,763
=========== ========= ========
Gross loss and LAE liability at end of period.....................$ 281,295 273,092 242,377
Reinsurance recoverable at end of period.......................... 57,698 58,400 41,614
---------- --------- --------
Net loss and LAE liability at end of period.......................$ 223,597 214,692 200,763
=========== ========= ========
12
Incurred losses and LAE for claims relating to prior years reflects the change
in the estimate of the liability charged or credited to earnings in each year
with respect to the liabilities established as of the beginning of that year.
Information regarding incurred losses and LAE is revealed over time and the
estimates of the liability are revised accordingly, resulting in gains or losses
in the period revisions are made. The Company's management closely monitors the
adequacy of its liability for loss and LAE incurred and underlying claims
trends, including having the Company's outside actuaries perform calculations
periodically.
Incurred losses and LAE related to prior years, net of reinsurance recoveries,
was $6.5 million for the twelve months ended December 31, 2000. The increase in
prior years liability for loss and LAE includes a reserve strengthening
resulting from the identification of certain unfavorable trends in the
underlying claim data with respect to FPIC's core physician's MPL business
including an increase in the rate of claims closed with indemnity payment, a
slow down in the overall closure rate of pending claims, and an increase in the
severity of indemnity payments made during 2000 relating to prior periods. The
Company and its outside consulting actuary further analyzed these trends and
determined that additional reserves were required. As a result, the Company
increased its liability for loss and LAE by approximately $21.0 million. For
additional information, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The net reductions of $18.6 million and $14.3 million in incurred loss and LAE
related to prior years for the twelve months ended December 31, 1999 and 1998,
respectively, are the result of reevaluations of the liability for loss and LAE
and reflect overall favorable underwriting results and lower than expected
losses and LAE.
THIRD-PARTY ADMINISTRATION ("TPA") SEGMENT
PRINCIPAL BUSINESS. The Company, through McCreary and EMI, is a provider of TPA
services to self-insured and fully insured employer groups. The lines of
insurance that the Company primarily administers are group accident and health,
workers' compensation, general liability, and property. The Company also
provides administration services for emerging managed care organizations and an
ambulance service organization ("ASO").
The Company primarily generates revenue from fees charged for the administration
of self-insured employer groups. The Company does not assume insurance risks on
this service; each employer assumes this risk and the Company places any desired
excess coverage with various insurers and reinsurers. Commission income is
derived from the placement of this excess coverage. The Company also offers
premium administration, claims adjudication and commission accounting services
to fully insured groups. The revenue for these services is calculated as a
percentage of premiums.
The Company provides TPA services to eighty-five clients, five of which
accounted for approximately 22.0% of the Company's total claims administration
fees generated by the TPA segment. Approximately 7.0% was derived from the
single largest client.
REGULATION. The Company and its TPA subsidiaries are subject to state regulation
from the Department of Insurance and Department of Labor in the states in which
they are licensed. State regulation provides that each company conducting
business in that state furnish annual reports of operational activity to
supervisory agencies. Such agencies may examine the company at any time.
As noted earlier, the insurance industry is under continuous review by Congress,
state legislatures and state and federal regulatory agencies. From time to time,
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an effect on the TPA business. Among the
proposals that have in the past been, or are at present being, considered are
the Health Insurance Portability and Accountability Act ("HIPAA") privacy
issues, HIPAA non-discrimination rules and patient bill of rights laws. The
Company is unable to predict if the regulatory or legislative proposals will
have a material impact on the TPA business.
COMPETITION. The TPA industry is one of constant change. Each year the industry
appears to be under the threat of elimination; however because of innovation,
flexibility and willingness to offer services demanded, the
13
industry has survived and the number of TPAs and amount of business
administrated by the TPAs continues to grow.
The Company's TPAs are highly competitive with regards to prices and services.
The Company believes the principle competitors of its TPA business in the group
A&H market are other similar TPAs, including several larger organizations, many
of which may offer services the Company does not offer, as well as insurance
companies that compete directly with alternative risk markets, including self
insurance programs administered by the TPAs. While the Company believes its TPAs
enjoy strong name recognition and a good service reputation, it also recognizes
that access to the stop-loss market in placing the reinsurance for the
self-funded groups is a major factor and perhaps the greatest factor is some
cases in obtaining and retaining clients. The amount of business in the
stop-loss market has decreased while the pricing of reinsurance has increased.
This has resulted in insurance companies being able to price group A&H insurance
at a lower price than is available through self-funding.
In addition, McCreary provides claims administration services for an ASO through
its subsidiary EMI. Claims are generated by members of a national health
maintenance organization ("HMO"). The ASO in turn has an agreement with a
software organization to maintain the eligibility of HMO members in addition to
providing claims processing software to McCreary. During 2000, the software
organization acquired a TPA. While it is possible that the ASO could transfer
claims processing to the TPA owned by the software organization, EMI has a
strong working relationship with the ASO and does not believe such a transfer
will occur during the coming year.
In regards to workers compensation and property markets, the stop-loss market
has also increased pricing. However, this has not affected the self-funded
workers compensation and property market as much as the group A&H market. In
addition, the commission revenue associated with the placement of property
insurance has increased accordingly. The TPAs also enjoy a strong name
recognition and loyalty among its client base that has resulted in maintaining a
long-term client base.
MARKETING. The Company primarily markets its TPA services in Florida and New
Mexico, however it is licensed in ten additional states. The Company may sell
services directly or operate through agents and brokers. The Company's marketing
strategy includes superior service, competitive pricing and delivery of support
services. The Company's plan is to focus geographically with an emphasis in
Florida and to participate in various periodic seminars with governmental boards
as well as other groups at which pertinent subjects are presented. These
educational offerings are designed to increase the awareness of available TPA
services. The TPAs will continue to use agents and brokers to receive requests
for proposals as well as utilize various services in which proposals are listed.
RECIPROCAL MANAGEMENT ("RM") SEGMENT
- ------------------------------------
PRINCIPAL BUSINESS. The Company, through AFP, provides management and
administrative services and acts as attorney-in-fact for PRI, the second largest
MPL insurer for physicians in the state of New York. AFP has an exclusive
ten-year management agreement with PRI, the current term of which runs through
December 31, 2008, whereby it provides all underwriting, administrative and
investment functions for PRI in exchange for compensation. Compensation under
the agreement is based upon PRI's direct written premium and statutory operating
results. The management agreement also provides that the Company is to be
reimbursed by PRI for certain expenses paid by the Company on PRI's behalf. The
expenses reimbursed by PRI consist principally of salary, related payroll, and
overhead costs of AFP's claims, legal and risk management course personnel who
work on PRI's behalf.
COMPETITION. As an Attorney-in-fact, AFP has no direct competition but is
subject to competition indirectly as the manager of PRI. The MPL insurance
market in New York is tightly regulated relative to other states. All rates are
determined by the New York Department of Insurance. Two carriers make up over
80% of the market, the leading carrier being Medical Liability Mutual Insurance
Company ("MLMIC") with 55% of the MPL market and PRI with 25% of the market.
While MLMIC has an A rating with A.M. Best and PRI has no rating with A.M. Best,
PRI's name recognition and reputation of contesting claims continue to
contribute to maintaining its insureds. By successfully targeting market groups
and specialties that exhibit above average profitability, PRI has been able to
improve the quality and profitability of its overall business.
14
Furthermore, PRI believes that its name recognition, level of service and
aggressive claims handling are the competitive factors affecting its business
and it is competitive in all of these areas. PRI was formed and is now currently
directed by a nine member Board of Governors of which six are physicians and
three are insurance executives.
MARKETING. AFP markets PRI's policies in New York to physicians, podiatrists,
chiropractors and dentists through AFP's in-house marketing representatives and
through independent brokers. As of December 31, 2000, PRI wrote 95% of its
business direct and 5% of its business through brokers. AFP also markets other
value added insurance coverages to its insureds foregoing any commissions. AFP
markets PRI's healthcare facilities professional liability business in New York
primarily through outside brokers and its healthcare facilities division offers
what it believes to be innovative risk finance and risk transfer programs.
PRI uses selective underwriting with a view towards insuring the highest quality
doctors and healthcare facilities. For MPL policies, all applications go through
the risk evaluation unit, which closely reviews the doctors and their specialty
to determine acceptance and premium rate. The risk evaluation unit is trained in
underwriting and risk management. AFP has also determined which specialties and
areas are the best risks to market. The marketing department sends targeted
mailings and advertising to those areas it has determined to be target sectors.
PRI has also entered into an exclusive endorsement agreement with one of New
York's largest and best-accredited preferred provider organization ("PPO")
networks. Through this endorsement, the PPO completes two mailings a year to its
credentialed members endorsing PRI. As of December 31, 2000, this program
generated over 1,200 insureds.
AFP also has a large risk management department dedicated to medical malpractice
and has developed multiple specialty related seminars for doctors. These
programs are designed to educate the insureds on ways to improve their medical
practice procedures and to assist them in implementing risk modification
measures. AFP also conducts on-site surveys for doctors and healthcare
facilities to review their practice procedures. All policyholders are provided
with a complete detailed report on the findings and the corrective actions to be
taken.
AFP introduced dental malpractice coverage to PRI's list of specialties using
economies of scale to control costs. This line of insurance will be primarily
marketed through local brokers. Additionally, AFP has also concluded
negotiations for the introduction of preferred banking products and services for
its insureds.
REGULATION. A reciprocal manager ("Attorney-in-fact") is subject to regulatory
oversight in the states in which the reciprocal insurer it manages is licensed.
As Attorney-in-fact for PRI, AFP must be authorized by the New York State
Department of Insurance to act in such capacity. In addition, AFP is subject to
examination by the regulatory authority and is required to file an annual
statement audited and certified by the same independent certified public
accountant that audits the reciprocal insurer. Additional requirements are
imposed upon the Attorney-in-fact by means of statutorily mandated provisions,
which must be included in the agreement between the reciprocal and its
subscribers.
INVESTMENT PORTFOLIO
- --------------------
The Company's investment strategy for its investment portfolio is to maintain a
diversified investment-grade fixed income portfolio, to provide liquidity and
maximize after-tax yield. The Company's portfolio is managed internally and the
Company had $385.5 million of fixed income securities at market value. The
Company's general policy is to hold its fixed maturity investments, which
comprise the substantial portion of its portfolio, until maturity. Exceptions to
this policy are infrequent and relate to decisions with regard to changes in the
allocation of investment securities in terms of asset classes held, quality,
duration, or the disposal of one or more securities for credit concerns. All of
the Company's fixed income and equity securities are classified as
available-for-sale.
The Company believes that its focus on income generation rather than capital
appreciation has reduced the portfolio's overall volatility. In addition, the
Company has invested a significant portion of its portfolio in
15
municipal bonds, which the Company believes generate a greater after-tax return
than investments in taxable fixed income securities of comparable risk,
duration, and other investment characteristics. All of the fixed maturity
securities held in the investment portfolio are publicly traded securities. In
addition to the fixed income portfolio, the Company invests in other securities
such as investment partnerships and certain strategic equity investments.
The Company generally does not invest in off-balance sheet derivative financial
investments. However, the Company has invested in interest rate swap contracts
in connection with its revolving credit facility. These contracts are
off-balance sheet instruments and serve to fix the Company's interest expense on
the revolving credit facility.
EMPLOYEES
- ---------
At December 31, 2000, the Company employed 556 persons. None of these employees
are covered by a collective bargaining agreement. Management considers the
Company's relationships with its employees to be good.
ADDITIONAL INFORMATION WITH RESPECT TO THE COMPANY'S BUSINESS
- -------------------------------------------------------------
The amounts of operating revenue and identifiable assets attributable to the
aforementioned business segments are included in Note 19 to the Company's
consolidated financial statements contained in Item 8, Financial Statements and
Supplementary Data. Additional information regarding the Company's investments
in fixed maturity and equity securities is included in Note 5 to the Company's
consolidated financial statements. Finally, information concerning the Company's
revolving credit facility is included in Note 10 to the Company's consolidated
financial statements.
ITEM 2. PROPERTIES
- -------------------
The physical properties used by the Company and its significant business
segments are summarized below:
TYPE OF OWNED APPROXIMATE
BUSINESS LOCATION PROPERTY OR LEASED SQUARE FOOTAGE
- ------------------------- -------------------- ----------- ------------- ------------------
Company headquarters Jacksonville, FL Offices Leased 8,900
FPIC Jacksonville, FL Offices Owned 26,600
APAC Coral Gables, FL Offices Leased 3,500
Tenere Springfield, MO Offices Leased 6,700
AFP Manhasset, NY Offices Leased 55,600
McCreary Stuart, FL Offices Leased 13,300
EMI Jacksonville, FL Offices Leased 12,500
BSI Albuquerque, NM Offices Leased 23,500
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
There are no material pending legal proceedings against the Company or its
subsidiaries other than litigation arising in connection with the settlement of
insurance claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
There were no matters submitted to a vote of security holders in the fourth
quarter of 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------------------
The Company's common equity has been publicly traded on the NASDAQ National
Market System since August 1, 1996 under the symbol, FPIC. The following table
sets forth for the periods indicated the high and low bid quotations as
reported. Such quotations reflect inter-dealer bids and offers, without retail
mark-up, mark-down, or commission and may not necessarily represent actual
transactions.
16
2000 1999
------------------- --------------------
HIGH BID LOW BID HIGH BID LOW BID
First Quarter.......................$ 19.94 15.00 49.13 37.88
Second Quarter......................$ 18.88 10.38 49.88 40.25
Third Quarter.......................$ 18.38 10.92 50.63 14.25
Fourth Quarter......................$ 16.88 8.44 22.38 14.88
As of March 15, 2001, the Company estimated that there were approximately 6,400
beneficial owners of the Company's common stock. The Company does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The selected financial data presented below for the fiscal years ending December
31 should be read in conjunction with the Company's consolidated financial
statements and the notes thereto, which are included elsewhere herein.
(in thousands, except per share amounts)
---------------------------------------------------------------------------------
INCOME STATEMENT DATA: 2000 1999 1998 1997 1996
- --------------------- ---- ---- ---- ---- ----
Direct and assumed
premiums written...........$ 197,280 148,216 116,989 77,771 64,292
Net premiums earned.............$ 120,454 118,189 89,562 65,504 56,074
Total revenues..................$ 182,037 170,505 120,321 93,216 76,982
Net income......................$ 614 21,869 20,693 16,557 13,324
Basic earnings per share........$ .06 2.24 2.22 1.83 1.57
Diluted earnings per share......$ .06 2.19 2.11 1.76 1.53
Cash dividend per share.........$ -- -- -- -- .10
(in thousands)
---------------------------------------------------------------------------------
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Total cash and investments......$ 423,955 353,419 345,004 268,300 238,497
Total assets....................$ 652,369 587,920 479,378 352,849 303,553
Loss and LAE liabilities........$ 281,295 273,092 242,377 188,086 172,738
Revolving credit facility.......$ 67,219 62,719 27,165 -- --
Total liabilities...............$ 479,842 421,541 328,448 232,785 207,141
Shareholders' equity............$ 172,527 166,379 150,931 120,064 96,411
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements and the notes to the consolidated
financial statements appearing elsewhere in this report. The consolidated
financial statements include the results of all of the Company's wholly owned
and majority owned subsidiaries.
SAFE HARBOR DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. Any written or oral statements made by or on
behalf of the Company may include forward-looking statements, which reflect the
Company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain uncertainties and other
factors that could cause actual results to differ materially from such
statements. These uncertainties and other factors (which are described in more
detail elsewhere herein and in documents filed by the Company with the
Securities and Exchange Commission) include, but are not limited to, (i)
uncertainties relating to government and regulatory policies (such as subjecting
the Company to insurance regulation or taxation in additional jurisdictions or
amending or revoking or enacting any laws, regulations or treaties affecting the
Company's current operations), (ii) the occurrence of insured or reinsured
events with a frequency or severity exceeding the Company's estimates, (iii)
legal developments, (iv) the uncertainties of the loss reserving process, (v)
the actual amount of new and renewal business and market acceptance of expansion
plans, (vi) the loss of the services of any of the Company's executive officers,
(vii)
17
changing rates of inflation and other economic conditions, (viii) the
ability to collect reinsurance recoverables, (ix) the competitive environment in
which the Company operates, related trends and associated pricing pressures and
developments, (x) the impact of mergers and acquisitions, including the ability
to successfully integrate acquired businesses and achieve cost savings,
competing demands for the company's capital and the risk of undisclosed
liabilities, and (xi) developments in global financial markets that could affect
the Company's investment portfolio and financing plans.
The words "believe", "anticipate", "estimate", "project", "plan", "expect",
"intend", "hope", "will likely result" or "will continue" and variations thereof
or similar expressions identify forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
GENERAL
- -------
FPIC Insurance Group, Inc. ("FIG" or the "Company") was formed in 1996 in
connection with a reorganization (the "Reorganization") pursuant to which it
became the parent company of Florida Physicians Insurance Company, Inc. ("FPIC")
and McCreary Corporation ("McCreary"), a third party administrator. In
connection with the Reorganization, FPIC's shareholders became the shareholders
of the Company and received five shares of the Company's common stock for each
of their shares of FPIC's common stock.
The Company has three main operating segments as follows: insurance, third party
administration ("TPA") and reciprocal management ("RM"). The Company's primary
sources of revenue are management fees and dividends received from its
subsidiaries. The primary sources of revenues for these amounts are premiums
earned and investment income derived from the insurance segment and fee and
commission income from the TPA and RM segments.
Through the insurance segment, the Company specializes in professional liability
insurance products and services for physicians, dentists, other healthcare
providers and attorneys. The Company's MPL insurance is written substantially on
a "claims-made" basis (as opposed to an "occurrence" basis) providing protection
to the insured only for those claims that arise out of incidents occurring, and
of which notice to the insurer is given, while coverage is in effect. The
Company also offers "tail coverage" for claims reported after the expiration of
the policy for occurrences during the coverage period. The price of tail
coverage is based on the length of time the insured has been covered under the
Company's claims-made form. The Company provides free tail coverage for insured
physicians who die or become disabled during the coverage period of the policy
and for those who have been insured by the Company for at least five consecutive
years and retire completely from the practice of medicine. The Company provides
TPA services through its subsidiaries that market and administer self-insured
and fully insured plans for both large and small employers, including group
accident and health insurance, workers' compensation and general liability and
property insurance. Through the RM segment, the Company provides management and
administrative services and acts as attorney-in-fact for Physicians' Reciprocal
Insurers ("PRI"), a New York medical professional liability insurance
reciprocal.
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpected high frequency or severity
of losses for the Company's insurance subsidiaries in any period, particularly
in the Company's prior three policy years, could have a material adverse effect
on the Company. In addition, reevaluations of the liability for loss and LAE
could result in an increase or decrease in liabilities and a corresponding
adjustment to earnings. The Company's historical results of operations are not
necessarily indicative of future earnings.
OVERVIEW
- --------
Fiscal year 2000 was a very challenging one for the Company and the entire
medical malpractice sector. Net income declined to $.6 million from $21.9
million reported in 1999, primarily due to increases in the provision for losses
and loss adjustment expenses ("LAE") reported in 2000, corresponding with rising
loss costs in both 2000 and in recent prior years. Fully diluted earnings per
share declined to $.06 per share from $2.19 per share in 1999.
18
Despite these challenges, the Company was able to grow both revenues and assets
significantly in 2000, benefiting in large part from its acquisitions in 1998
and 1999. Total revenues increased 7% to $182.0 million in 2000, from $170.5
million in 1999. Revenues grew 42% in 1999 over 1998.
Not only have the Company's recent acquisitions provided growth, but also
diversification; helping it to better withstand the risks associated with a
downturn in its core medical malpractice business such as that experienced in
2000. During 1996, the year the Company went public, medical malpractice
insurance comprised approximately 98% of the Company's direct premiums written,
with 99% of the Company's direct MPL business in the state of Florida. In the
year 2000, medical malpractice insurance comprised approximately 85% of the
Company's direct premiums written, with 60% of the Company's direct MPL business
in the state of Florida.
Management focused substantial efforts in 2000 towards the integration of its
recent acquisitions, exiting certain small and unprofitable businesses and
products, and other operating improvements, as the environment for strategic
acquisitions substantially declined in 2000. As a result of these actions, total
revenues are expected to decline slightly in 2001 from those reported in the
year 2000. However, management believes that these actions have helped position
the Company to more effectively compete, grow and remain profitable in the
future. Furthermore, there are preliminary signs that prices in the Company's
core medical professional liability business are beginning to increase in 2000
after several years of significant competition, particularly in Florida. It is,
therefore, expected that the Company's revenues will return to growth in 2002 as
market conditions improve for its core medical malpractice insurance business.
INSURANCE SEGMENT
- -----------------
The underwriting results, other significant financial data and income or loss
before taxes for the Company's insurance segment for the twelve months ended
December 31, 2000, 1999 and 1998 are summarized in the table below. Dollar
amounts are in thousands.
Percentage Percentage
2000 CHANGE 1999 CHANGE 1998
------------- ------------- ------------- ------------- --------------
Direct and assumed premiums written.........$ 197,280 33% 148,216 27% 116,989
============= ============= ============= ============= ==============
Net premiums earned......................... 120,454 2% 118,189 32% 89,562
Losses and LAE incurred..................... 122,766 52% 80,968 20% 67,362
Other underwriting expenses................. 20,514 (2)% 21,014 68% 12,513
Underwriting (loss) gain.................$ (22,826) (241)% 16,207 67% 9,687
============= ============= ============= ============= ==============
Net investment income.......................$ 24,505 30% 18,832 8% 17,385
============= ============= ============= ============ ==============
Net other expense...........................$ 185 (87)% 1,473 208% (1,359)
============= ============= ============= ============= ==============
(Loss) income before taxes..................$ (3,570) (112)% 30,000 8% 27,684
============= ============= ============= ============= ==============
The increase in direct premiums written in 2000 is related to an increase in
written premiums in Texas, Alabama, Missouri, Kansas, and Georgia complimented
by the acquisition of The Tenere Group, Inc. ("Tenere") on March 17, 1999 which
was only included after such date for 1999.
In fiscal year 2000, total insureds grew to 12,150 at December 31, 2000, an
increase of 832 or 7%, from 11,318 in 1999. Physician insureds increased to
8,195, an increase of 290 or 4%, from 7,905 in 1999. Dental insureds increased
to 2,252 in 2000, an increase of seventy-eight or 4%, from 2,174 in 1999.
Growth was also achieved during 2000 in other product areas such as legal
professional liability ("LPL") and accident and health ("A&H".)
Assumed premiums written for fiscal year 2000 were $ 64.3 million, an increase
of $30.3 million or 89%, from $34.0 million in fiscal year 1999. The increase in
assumed premiums is primarily related to the 100% quota share reinsurance
agreement written in the first quarter of 2000 between the Company's insurance
subsidiaries and PRI whereby the Company assumed the death, disability and
retirement ("DD&R") risks under PRI's claims made
19
insurance policies in exchange for cash and investments. Approximately $34
million of this amount represents the portion of the initial consideration
received corresponding with management's estimate of the reserves required for
future benefits at the inception of the contract, which were recorded as
unearned premium. This amount of assumed premiums written will, therefore, not
recur in the future. In addition, the increase in assumed premiums was offset by
experience adjustment accruals for business assumed from PRI. The experience
adjustments represent an estimate of the amount of premium the Company will
return to PRI in future years.
The increase in direct and assumed premiums written in 1999 was primarily due to
the acquisitions of Anesthesiologists Professional Assurance Company ("APAC")
and Tenere, which added $6.1 million and $6.2 million, respectively, and
additional assumed premiums written of $12.1 million associated with the
Company's participation as an assuming reinsurer of PRI.
In fiscal year 1999, total insureds grew to 11,318, an increase of 2,793 or 33%,
from 8,525 in 1998. Physician insureds grew 24%, to 7,905 in 1999, up from 6,383
in 1998. Dental insureds grew 18%, to 2,174 in 1999, up from 1,843 in 1998.
Growth was also achieved during 1999 in other product areas such as legal
defense for healthcare provider licensure investigations, group A&H insurance
coverage and errors and omissions and directors and officers liability insurance
for managed care organizations.
Net premiums earned increased $2.2 million to $120.4 for the twelve months ended
December 31, 2000 from $118.2 million for the twelve months ended December 31,
1999. The increase in net premiums earned is related to growth in assumed
reinsurance, which contributed additional assumed premiums earned of $3.1
million, and growth in direct premiums written at APAC and Tenere during the
year 2000. The Company increased premium rates at FPIC and APAC in Florida and
increased premium rates at Tenere in Missouri in 2000. As a result of the rate
increases taken by FPIC, selective underwriting, and the competitive environment
in Florida, net premiums earned have decreased in FPIC's core MPL business, and
FPIC has experienced a decline in its physician insureds since 1998. APAC and
Tenere have experienced relatively more favorable market conditions, which has
allowed them to grow their earned premiums and policyholder counts. Such growth
has offset some of the decline in net premiums earned at FPIC, and resulted in
the overall increases in the Company's direct professional liability insureds
since 1998.
Net premiums earned increased $28.6 million to $118.2 for the twelve months
ended December 31, 1999 from $89.6 million for the twelve months ended December
31, 1998. The increase in net premiums earned was primarily due to the
acquisition of Tenere and the recognition of a full year of premiums earned at
APAC. The Company also reported additional assumed MPL premiums of $13.4 million
and health premiums of $4.7 million.
Net losses and LAE incurred increased $41.8 million to $122.8 million for the
twelve months ended December 31, 2000 from $81.0 million for the twelve months
ended December 31, 1999. The loss ratios were 102% and 69% for the twelve months
ended December 31, 2000 and December 31, 1999, respectively. A loss ratio is
defined as the ratio of loss and LAE incurred to net premiums earned. The
increase in net loss and LAE incurred is primarily due to an increase in the
loss and LAE provision during 2000 resulting from a reserve strengthening of
$21.0 million, including an increase in the current year provision for MPL
business of $7.8 million. In addition, the 1999 results included reserve
releases of approximately $17.0 million resulting from favorable development in
loss experience on business written in years prior to 1999, which did not recur
during the year 2000.
Management closely monitors the adequacy of its liabilities for loss and LAE
incurred and underlying claims trends, including having the Company's outside
consulting actuaries perform calculations periodically. During 2000, the company
identified certain unfavorable trends in the underlying claims data with respect
to FPIC's core physicians' MPL business, including an increase in the rate of
claims closed with indemnity payment, a slow down in the overall closure rate of
pending claims, and an increase in the severity of indemnity payments made
during 2000 relating to prior periods. The Company and its outside consulting
actuary further analyzed these trends and determined that additional reserves
were required. As a result, the Company's reserve strengthening included an
increase in FPIC's liability for loss and LAE of approximately $15.0 million.
20
Net loss and LAE incurred increased $13.6 million to $81.0 million for the
twelve months ended December 31, 1999 from $67.4 million for twelve months ended
December 31, 1998. The loss ratios were 69% and 75% for the twelve months ended
December 31, 1999 and 1998 respectively. The positive trend in the Company's
loss ratio from 1998 to 1999 was primarily due to favorable loss and LAE
experience on the Company's core MPL business, the addition of assumed
reinsurance, which carries a lower loss ratio than the core MPL business, offset
to some extent by adverse results from the Company's group A&H business.
The Company previously reported its plan to exit the A&H business by the end of
2001. Despite some improvement during the second and third quarters of 2000, the
Company experienced a pre-tax loss of $3.5 million in the fourth quarter of
2000. The Company expects the business to continue to record pre-tax losses in
the range of $2.0 million to $3.0 million through the end of 2001, with
lessening impact after the non-renewal of the majority of FDA policies beginning
on April 1, 2001 and the non-renewal of the majority of FMA policies beginning
on July 1, 2001.
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 loss and LAE in 2000.
The process of establishing reserves for property and casualty claims is a
complex and uncertain process, requiring the use of informed estimates and
judgments. The Company's estimates and judgments may be revised as additional
experience and other data become available and are reviewed, as new or improved
methodologies are developed or as current laws change. Any such revisions could
result in future changes in the estimates of losses or reinsurance recoverables,
and would be reflected in the Company's results of operations when the change
occurs.
Other underwriting expenses decreased $0.5 million to $20.5 million for the
twelve months ended December 31, 2000 from $21.0 million for the twelve months
ended December 31, 1999. The decline in other underwriting expenses is
attributable to a decline in assumed reinsurance costs and the accretion of the
deferred credit associated with the 100% DD&R quota share reinsurance agreement
entered into during the first quarter of 2000.
Other underwriting expenses increased to $21.0 million in 1999, up $8.5 million
or 68%, from $12.5 million in 1998. The increase was primarily attributable to
an increase in expenses related to assumed premiums of $1.4 million, and the
inclusion of other underwriting expenses at APAC and Tenere, which combined,
added $6.0 million. In addition, general and administrative expenses increased
$2.3 million including a non-recurring severance charge of $1.9 million and the
Company's health insurance products, which grew significantly in 1999, have a
higher expense structure than the Company's MPL products.
Net investment income increased to $24.5 million for the year ended December 31,
2000, up $5.7 million or 30%, from $18.8 million in 1999. The increase is
primarily due to the investments received in association with the 100% DD&R
quota share reinsurance agreement between the Company's insurance subsidiaries
and PRI. On a consolidated basis, the Company's total investment portfolio grew
to $ 405.0 million in 2000, up $58.4 million or 17%, from $346.6 million in
1999.
Net investment income increased to $18.8 million in 1999, up $1.4 million, or
8%, from $17.4 million in 1998. The increase was primarily attributable to the
inclusion of Tenere, which added approximately $1.9 million of investment
income.
21
THIRD PARTY ADMINISTRATION ("TPA") SEGMENT
- ------------------------------------------
Significant financial data and income before taxes for the Company's TPA segment
for the twelve months ended December 31, 2000, 1999 and 1998 are summarized in
the table below. Dollar amounts are in thousands.
Percentage Percentage
2000 CHANGE 1999 CHANGE 1998
-------------- ------------- ---------------- -------- ---------
Claims administration and management
fees ....................................$ 12,854 31% 9,850 (0.1)% 9,861
Commission income........................... 2,179 25% 1,741 0.6% 1,731
Claims administration and management
expenses................................. 15,420 30% 11,823 19% 9,938
Net other expense........................... 2,289 48% 1,543 201% 512
(Loss) income before taxes..................$ (2,340) (47)% (1,588) (234)% 1,181
============= ============= ================ ======== =========
Claims administration and management fees increased $3.0 million to $12.9
million for the twelve months ended December 31, 2000 from $9.9 million for the
twelve months ended December 31, 1999. The growth in claims administration and
management fees is attributable to the asset acquisition of Brokerage Services,
Inc. ("BSI") and Group Brokerage, Inc. ("GBI"), by Employers Mutual, Inc. during
the third quarter of 1999, and the resulting recognition of a full twelve months
of revenue from the acquired operations during the current year.
During the fourth quarter of 2000, the Company began its consolidation of the
TPA operations and reorganization of BSI in order to improve operating
performance. The Company incurred a one-time pre tax charge of $0.5 million as a
result of the restructuring.
Commission income increased $0.5 million to $2.2 million for the twelve months
ended December 31, 2000 from $1.7 million for the twelve months ended December
31, 1999. The increase in commission income is the result of growth in the
placement of insurance and reinsurance by McCreary with external parties on
behalf of its self-insured customers during 2000.
Claims administration expense increased $3.6 million to $15.4 million for the
twelve months ended December 31, 2000 from $11.8 million for the twelve months
ended December 31, 1999. The growth in claims administration and management
expense is also primarily attributable to the acquisition of assets by Employers
Mutual, Inc. during the third quarter of 1999.
RECIPROCAL MANAGEMENT ("RM") SEGMENT
- ------------------------------------
Significant financial data and income before taxes for the Company's RM segment
for the twelve months ended December 31, 2000, 1999 and 1998 are summarized in
the table below. Dollar amounts are in thousands.
Percentage Percentage
2000 CHANGE 1999 CHANGE 1998
----------- ------------- ------------ ------------- --------------
Claims administration and management
fees ....................................$ 17,044 0.5% 16,955 -- --
Commission income........................... 991 48% 670 -- --
Claims administration and management
expenses................................. 14,537 2% 14,304 -- --
Net other expense........................... 932 167% 349 -- --
Income before taxes.........................$ 2,939 5% 2,790 -- --
=========== ============= ============= ============= ==============
Commission income increased $0.3 million to $1.0 million for the twelve months
ended December 31, 2000 from $0.7 million for the twelve months ended December
31, 1999. The increase in commission income is attributable to a full year of
brokerage income from FPIC Intermediaries, which was formed during the second
quarter of 1999.
22
SELECTED BALANCE SHEET ITEMS - YEARS ENDED DECEMBER 31, 2000 AND 1999
- ---------------------------------------------------------------------
Bonds and U.S. government securities increased $58.4 million to $385.5 million
at December 31, 2000 from $327.1 million at December 31, 1999. The increase is
attributable to securities received in conjunction with the 100% DD&R quota
share reinsurance agreement with PRI and growth in the invested assets at APAC
and Tenere as a result of an increase in business written.
Net premiums receivable decreased $3.4 million to $31.2 million for the twelve
months ended December 31, 2000 from $34.6 million for the twelve months ended
December 31, 1999. The reduction in net premiums receivable is mainly related to
an increase in the allowance for doubtful accounts by $1.0 million, of which $.6
million was for a specific hospital receivable.
Deferred policy acquisition costs increased $3.3 million to $6.1 million for the
twelve months ended December 31, 2000 from $2.8 million for the twelve months
ended December 31, 1999. The increase in deferred acquisition costs is
attributable to the 100% DD&R quota share reinsurance agreement with PRI.
Intangible assets and goodwill, net decreased $12.9 million to $61.0 million for
the twelve months ended December 31, 2000 from $73.9 million for the twelve
months ended December 31, 1999. The decrease is due to the recognition of a
deferred credit associated with the 100% DD&R quota share reinsurance agreement
with PRI and the amortization of goodwill and other intangibles.
The liability for loss and LAE increased $8.2 million to $281.3 million for the
twelve months ended December 31, 2000 from $273.1 million for the twelve months
ended December 31, 1999. The net increase in the liability for loss and LAE is
primarily attributable to the reserve strengthening recorded during the fourth
quarter of 2000 of $21.0 million. In addition, the Company also reduced the
amount of reserves released from prior report years, which accounted for
approximately $17.0 million of the net increase in net loss and LAE incurred
from 1999 to 2000. The difference between the increase in the provisions for
losses and LAE during 2000, and the net increase in the ending balance of
aggregate reserves is the result of the payment and settlement of claims during
2000, as compared with 1999.
Unearned premiums increased $39.2 million to $100.5 million for the twelve
months ended December 31, 2000 from $61.3 million for the twelve months ended
December 31, 1999. The increase in unearned premiums is primarily attributable
to the 100% DD&R quota share reinsurance agreement with PRI.
Other liabilities increased $4.6 million to $20.2 million for the twelve months
ended December 31, 2000 from $15.6 million for the twelve months ended December
31, 1999. The increase in other liabilities is attributable to changes in salary
assumptions used in the actuarial calculation of the Company's supplemental
executive retirement program and an increase in the amounts accrued for employee
benefits. Also, the Company recorded additional accruals in accordance with the
purchase agreements of McCreary and its subsidiaries and a restructuring charge
associated with the reorganization of the TPA operations during 2000.
INVESTMENTS
- -----------
The Company invests primarily in a diversified portfolio of high grade, taxable
and tax-exempt, fixed-income securities, with a targeted duration of
approximately five years. The majority of these securities are held as invested
assets by the various insurance subsidiaries. At the close of 2000,
approximately 46% of the fixed-income portfolio was invested in tax-exempt
securities and approximately 54% in taxable securities.
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.
Net investment income increased $5.7 million to $24.7 million for the twelve
months ended December 31, 2000 from $19.0 million for the twelve months ended
December 31, 1999. On a consolidated basis, the Company's
23
total investment portfolio grew $58.4 million to $405.0 million in 2000 from
$346.6 million in 1999. The increase in net investment income is directly
related to interest earned on securities received in connection with the 100%
DD&R quota share reinsurance agreement with PRI.
STOCK REPURCHASE PLANS
- ----------------------
On June 29, 1999 and September 11, 1999, the Company's Board of Directors (the
"Board") approved stock repurchase plans pursuant to which the Company was
authorized to repurchase, at management's discretion, up to 1,000,000 of its
shares on the open market. On September 11, 2000, the second plan expired with
259,500 shares left unpurchased. The Company's Board approved a third stock
repurchase plan on January 25, 2000 under which the Company could repurchase
500,000 additional shares prior to January 22, 2001. The Board subsequently
approved an extension of the plan to January 22, 2002. As of December 31, 2000,
the Company had repurchased approximately 853,500 shares at a cost of
approximately $16.0 million; leaving 387,000 shares available under the
Company's stock repurchase plans.
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 provided by
operating activities has been used to pay these items and was sufficient during
2000 to meet these needs. Management believes these sources will be sufficient
to meet the Company's cash needs for operating purposes for at least the next
twelve months. However, a number of factors could cause increases in the dollar
amount of losses and LAE and may therefore adversely affect future reserve
development and cash flow needs. Management believes these factors include,
among others, inflation, changes in medical procedures, increased use of managed
care and adverse legislative changes. In order to compensate for such risk, the
Company: (i) maintains what management considers to be adequate reinsurance;
(ii) conducts regular actuarial reviews of loss and LAE reserves; and (iii)
maintains adequate asset liquidity (by managing its cash flow from operations
coupled with the maturities from its fixed income portfolio investments).
The Company maintains a $75.0 million revolving credit facility with four banks
to meet certain non-operating cash needs as they may arise. As of December 31,
2000, $67.2 million had been borrowed under this facility at an interest rate of
approximately 7.46% per annum. The credit facility bears interest at various
rates ranging from LIBOR plus 0.75% to Prime plus 0.50%. The credit facility
terminates on January 4, 2002. The Company anticipates that before such time, it
will either replace the existing credit facility with a similar facility or
obtain alternative financing. 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. Under the
terms of the credit facility, the Company is required to meet certain financial
covenants. Significant covenants are as follows: a) the Company's funded debt to
total capital plus funded debt cannot exceed 0.35:1 and b) net premiums written
to statutory capital and surplus cannot exceed 2.0:1. Effective January 1, 2001,
the funded debt to total capital plus funded debt ratio cannot exceed 0.30:1. At
December 31, 2000, the Company was in violation of two of the loan covenants.
The Company has obtained a waiver for these violations bringing the Company into
compliance with its debt covenants. The credit facility is guaranteed by and
collateralized by the common stock of certain subsidiaries.
At December 31, 2000, the Company held approximately $15.2 million in
investments scheduled to mature during the next twelve months, which combined
with net cash flows from operating activities, are expected to provide the
Company with sufficient liquidity and working capital. As reported in the
accompanying consolidated statements of cash flows, the Company has generated
positive net cash from operations of $14.8 million, $14.3 million and $30.2
million in 2000, 1999 and 1998, respectively.
Shareholder dividends payable by the Company's insurance subsidiaries are
subject to certain limitations imposed by Florida and Missouri laws. In 2001,
these subsidiaries are permitted, within insurance regulatory guidelines, to pay
dividends of approximately $11.6 million, without prior regulatory approval.
The NAIC has developed risk-based capital ("RBC") measurements for insurers,
which have been adopted by the Florida and Missouri Departments of Insurance.
RBC measurements provide state regulators with varying levels
24
of authority based on the adequacy of an insurer's adjusted surplus. At December
31, 2000, the Company's insurance subsidiaries maintain adjusted surplus in
excess of their required RBC thresholds.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In December 1999, the Securities Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which outlines the basic criteria that must be met to recognize
revenue and provides guidance for presentation of revenue and for disclosure
related to revenue recognition policies in financial statements filed with the
SEC. In June 2000, the SEC issued SAB 101(B), which defers the implementation
date of SAB 101 to no later than the fourth fiscal quarter of fiscal years
commencing after December 15, 1999. The adoption of SAB 100 did not have a
significant impact on the Company's consolidated financial position of results
of operations.
Statement of Financial Accounting Standard ("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. The adoption of SFAS No. 133 did not
have a significant impact on the Company's consolidated financial position or
results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, " Accounting for Certain Transactions Involving Stock
Compensation: an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
establishes accounting guidance for stock option grants and modifications to
existing stock option awards and is effective for option grants made after June
30, 2000. The adoption of FIN 44 did not have a material effect on the
consolidated financial statements of the Company.
ITEM 7A. 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 December 31, 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
December 31, 2000 was approximately $386.0 million. Approximately 95% of the
investment portfolio was invested in fixed maturity securities. The fixed
maturity portfolio currently maintains an average credit quality of AA with
Moodys.
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 interest rate swaps to fix the interest rate in connection with its
revolving credit facility.
As of December 31, 2000, the Company's investments in collateral mortgage
obligations ("CMO's") and asset-backed securities represented less than 34% of
debt and equity investments. The CMO's held by the company were purchased to
improve Company projections of future cash flows and decrease prepayment risk.
The Company's investment portfolio is predominately fixed maturity with
approximately 46% allocated to the municipal sector. The balance is diversified
through investments in treasury, agency, corporate and mortgage-backed
securities. The four market risks that can most directly affect the investment
portfolio are changes in U.S. interest rates, credit risks, prepayment risks,
and legislative changes, including changes in tax laws that might affect the
taxation of the Company's invested securities.
25
From time to time discussion arises in the United States Congress relative to
changing or modifying the tax-exempt status of municipal securities. The Company
is diligent in its efforts to stay current on legislative acts that could
adversely affect the tax-exempt status of municipal securities. 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.
The Company manages the change in interest rate risk by attempting to manage the
duration of its investments in relation to the duration of its anticipated
liabilities (claim payments). The Company invests in securities with investment
grade credit ratings, thereby helping control credit risks. Approximately 60.1%
of the portfolio is AAA, 11.5% is AA, 9.3% is A, and 14.1% is BBB rated. A
standard measure of interest rate sensitivity is effective duration, which takes
into account, among other things, the effect that changing interest rates will
have on prepayments and the re-investment of these funds. The effective duration
of the Company's portfolio is 5.28 years. If interest rates were to increase 100
basis points, the fair value of the Company's fixed maturity securities would
decrease approximately $21.1 million.
There have been no significant changes to the Company's exposure to financial
market risks during the year nor does the Company currently anticipate any
significant changes in future reporting periods.
The amounts reported as cash flows in the table below for fixed maturities
represent par values at maturity date. The fair values of fixed maturities are
based upon quoted market prices or dealer quotes for comparable securities. The
fair value of the credit facility is based on the amount of cash flows
discounted over the applicable term at the Company's borrowing rate at December
31, 2000.
PROJECTED CASH FLOWS (IN THOUSANDS)
------------------------------------------------------------------------------------------------
December 31, 2000
2001 2002 2003 2004 2005 Thereafter Total Fair Value
----------- --------- --------- ---------- -------- ------------ ------- ------------------
ASSETS
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Fixed maturity securities,
Available for sale $ 15,109 7,705 21,224 15,711 44,725 279,413 383,887 385,513
LIABILITIES
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Credit facility $ -- 67,219 -- -- -- -- 67,219 63,181
WEIGHTED AVERAGE INT