EXHIBIT 99.1
ADVOCATE, MD FINANCIAL GROUP INC. AND SUBSIDIARIESCONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
ADVOCATE, MD FINANCIAL GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEET
| (in thousands, except shares authorized, issued and outstanding) | | As of | | | As of |
| | | September 30, 2009 | | | December 31, 2008 |
| Assets | | | | | |
| Cash and invested assets | | | | | |
| Bonds, available for sale, at fair value | | $ | 71,260 | | | | 61,711 |
| Common stock, at fair value | | | 1,497 | | | | 1,040 |
| Cash and cash equivalents | | | 5,957 | | | | 4,461 |
| Total cash and invested assets | | | 78,714 | | | | 67,212 |
| | | | | | | | |
| Federal income tax receivable | | | 754 | | | | 1,248 |
| Investment income due and accrued | | | 542 | | | | 626 |
| Ceded unearned premiums | | | 1,626 | | | | 1,069 |
| Reinsurance recoverable | | | 5,110 | | | | 4,869 |
| Premiums receivable | | | 4,219 | | | | 3,098 |
| Deferred policy acquisition costs | | | 4,430 | | | | 3,541 |
| Special deposits | | | 120 | | | | 118 |
| Deferred taxes, net of deferred tax valuation allowance | | | — | | | | 659 |
| Property and equipment, net | | | 605 | | | | 815 |
| Prepaid expenses and other assets | | | 444 | | | | 465 |
| Total assets | | $ | 96,564 | | | | 83,720 |
| | | | | | | | |
| Liabilities and Stockholders' Equity | | | | | | | |
| Liabilities | | | | | | | |
| Senior secured notes payable | | $ | 9,000 | | | | 9,000 |
| Losses and loss adjustment expenses | | | 39,458 | | | | 32,542 |
| Unearned premiums | | | 14,983 | | | | 13,638 |
| Advance premiums | | | 946 | | | | 910 |
| Other accrued expenses | | | 2,683 | | | | 342 |
| Commissions payable | | | 338 | | | | 317 |
| Ceded reinsurance payable | | | 1,801 | | | | 2,041 |
| Deferred taxes, net of deferred tax valuation allowance | | | 129 | | | | — |
| Premiums taxes payable | | | 56 | | | | 72 |
| Total liabilities | | | 69,394 | | | | 58,862 |
| | | | | | | | |
| Commitments and contingencies | | | | | | | |
| | | | | | | | |
| Stockholders' equity | | | | | | | |
| Series A convertible preferred stock, $0.005 par value; 6,000,000 shares authorized; 3,884,999 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively | | | 19 | | | | 19 |
| Series B convertible preferred stock $0.005 par value; 6,000,000 shares authorized, 3,634,643 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively | | | 18 | | | | 18 |
| Common stock, $0.005 par value; 100,000,000 shares authorized, 4,180,300 shares issued and outstanding as of September 30, 2009 and December 31, 2008, respectively | | | 22 | | | | 22 |
| Additional paid-in capital | | | 8,206 | | | | 8,206 |
| Accumulated other comprehensive income (loss), net of tax | | | 1,060 | | | | (345) |
| Retained earnings | | | 17,845 | | | | 16,938 |
| Total stockholders' equity | | | 27,170 | | | | 24,858 |
| Total liabilities and stockholders' equity | | $ | 96,564 | | | | 83,720 |
See the accompanying notes to the unaudited consolidated financial statements.
ADVOCATE, MD FINANCIAL GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
| (in thousands) | | For the Nine Months Ended |
| | | September 30, 2009 | | | September 30, 2008 |
| Underwriting income: | | | | | |
| Premiums earned | | $ | 18,069 | | | | 15,701 |
| | | | | | | | |
| Underwriting expenses: | | | | | | | |
| Losses incurred | | | 3,935 | | | | (128) |
| Loss expenses incurred | | | 8,873 | | | | 2,690 |
| Other underwriting expenses incurred | | | 6,852 | | | | 5,510 |
| Amortization of deferred policy acquisition costs | | | (889) | | | | (486) |
| Profit share from reinsurers | | | 268 | | | | — |
| Total underwriting expenses | | | 19,039 | | | | 7,586 |
| | | | | | | | |
| Net underwriting (loss) gain | | | (970) | | | | 8,115 |
| Net investment income earned | | | 2,941 | | | | 2,069 |
| Interest expense | | | (163) | | | | (306) |
| Realized gain from Mississippi Medical Availability Plan ("MMAP") assumption reinsurance | | | — | | | | 2,967 |
| Other expense | | | 6 | | | | (7) |
| Net income before federal income tax expense | | | 1,814 | | | | 12,838 |
| | | | | | | | |
| Federal income tax expense (benefit): | | | | | | | |
| Current | | | 924 | | | | 3,820 |
| Deferred | | | (17) | | | | — |
| Total federal income tax expense | | | 907 | | | | 3,820 |
| | | | | | | | |
| Net income | | $ | 907 | | | | 9,018 |
See the accompanying notes to the unaudited consolidated financial statements.
ADVOCATE, MD FINANCIAL GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
| | | (in thousands) |
| | | Preferred Stock | | | Common Stock | | | Additional Paid-in-Capital | | | Treasury Stock | | | Retained Earnings | | | Other Comprehensive Income (Loss) | | Total |
| Balance, December 31, 2008 | | $ | 37 | | | | 22 | | | | 8,206 | | | | — | | | | 16,938 | | | | (345) | | | 24,858 |
| Unrealized gain on bonds and stock, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,405 | | | 1,405 |
| Net income | | | — | | | | — | | | | — | | | | — | | | | 907 | | | | — | | | 907 |
| Balance, September 30, 2009 | | $ | 37 | | | | 22 | | | | 8,206 | | | | — | | | | 17,845 | | | | 1,060 | | | 27,170 |
See the accompanying notes to the unaudited consolidated financial statements.
ADVOCATE, MD FINANCIAL GROUP INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
| (in thousands) | | For the Nine Months Ended |
| | | September 30, 2009 | | | September 30, 2008 |
| Operating Activities | | | | | |
| Net income | | $ | 907 | | | | 9,018 |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation | | | 249 | | | | 250 |
| Gain on bond sales | | | (62) | | | | (180) |
| Stock compensation expense | | | — | | | | 6 |
| Deferred income taxes | | | 17 | | | | (1,172) |
| Changes in operating assets and liabilities | | | | | | | |
| Prepaid expenses and other assets | | | 21 | | | | (133) |
| Premiums receivable | | | (1,121) | | | | (1,164) |
| Deferred policy acquisition costs | | | (889) | | | | (486) |
| Federal income tax receivable | | | 494 | | | | — |
| Investment income due and accrued | | | 84 | | | | (93) |
| Reinsurance recoverable | | | (241) | | | | (3,399) |
| Profit share receivables | | | — | | | | 241 |
| Deposits and other non-current assets | | | (2) | | | | (49) |
| Ceded unearned premiums | | | (557) | | | | 1,178 |
| Other accrued expenses | | | 2,341 | | | | 670 |
| Unearned and advance premiums | | | 1,381 | | | | 2,885 |
| Losses and loss adjustment expenses | | | 6,916 | | | | 14,954 |
| Commissions payable | | | 21 | | | | 299 |
| Ceded reinsurance payable | | | (240) | | | | — |
| Federal income tax payable | | | — | | | | 851 |
| Premium taxes payable | | | (16) | | | | (51) |
| Net cash provided by operating activities | | | 9,303 | | | | 23,625 |
| | | | | | | | |
| Investing Activities | | | | | | | |
| Purchase of long-term investments, net of maturities | | | (34,415) | | | | (25,788) |
| Return of principle on long-term investment pools and sale of long-term investments | | | 26,675 | | | | 11,450 |
| Purchase of property and equipment, net of retirements | | | (55) | | | | (39) |
| Net cash used in investing activities | | | (7,795) | | | | (14,377) |
| | | | | | | | |
| Financing Activities | | | | | | | |
| Proceeds from issuance of senior debt | | | — | | | | 4,000 |
| Purchase of treasury stock | | | — | | | | (5,120) |
| Other | | | (12) | | | | (2) |
| Net cash used in financing activities | | | (12) | | | | (1,122) |
| | | | | | | | |
| Net increase in cash and cash equivalents | | | 1,496 | | | | 8,126 |
| Cash and cash equivalents at beginning of year | | | 4,461 | | | | 5,519 |
| Cash and cash equivalents at end of year | | $ | 5,957 | | | | 13,645 |
| | | | | | | | |
| Supplemental disclosures: | | | | | | | |
| Interest paid | | $ | 163 | | | | 306 |
| Income taxes paid | | $ | 430 | | | | 4,533 |
| Purchase net assets of MMAP | | $ | — | | | | 6,500 |
See the accompanying notes to the unaudited consolidated financial statements.
Advocate, MD Financial Group Inc. and Subsidiaries
Notes to the Unaudited Consolidated Financial Statements
| 1. | ORGANIZATION AND BASIS OF PRESENTATION |
Advocate, MD Financial Group Inc. (“Advocate, MD”) is a State of Nevada stock company formed to provide property/casualty insurance and other insurance services. Its wholly-owned subsidiary Advocate, MD Insurance of the Southwest, Inc. (the “Insurance Company”) received its Certificate of Authority from the Texas Department of Insurance and operations began in May 2004. In March 2008, Advocate, MD became a licensed insurer in Mississippi. The Insurance Company primarily underwrites professional liability coverage to physicians solely in the states of Texas and Mississippi. The Company also writes professional liability and general liability in Mississippi for hospitals. Its wholly-owned subsidiary Advocate Agency Services, Inc. is an inactive MGA insurance agency that generates commission income from the Insurance Company’s income protection product.
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Advocate, MD and its wholly-owned subsidiaries Advocate, MD Insurance of the Southwest, Inc. and Advocate Agency Services, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
DEFERRED POLICY ACQUISITION COSTS
The costs, to the extent recoverable, of acquiring and renewing business are capitalized and amortized over the effective period of the related insurance policies in-force.
PREMIUMS
Policies written are generally for a one-year term and are recorded as earned on a daily pro rata basis over the life of the policy. Policies are written on a claims-made basis with tail coverage provided upon termination. Unearned premiums are that portion of premiums written which are applicable to the unexpired terms of the policies in force.
ADVANCE PREMIUMS
Premiums received for policies not yet issued or effective are included in advance premiums on the liability section of the consolidated balance sheet.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Advocate, MD Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
USE OF ESTIMATES
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
The reserves for losses and loss adjustment expenses (LAE) represent management's estimate of the estimated ultimate net cost of all reported and unreported losses incurred. The reserves for unpaid losses and LAE were based on the best data available to management; however, because of the lack of historical experience, those estimates are subject to a significant degree of inherent variability. Although management believes that the estimate of the liability for loss and LAE expenses is reasonable in the circumstances, it is possible that Advocate, MD’s actual incurred losses and LAE will not conform to the assumptions inherent in the determination of the reserves; accordingly, the ultimate settlement of losses and the related LAE may vary significantly from the estimates included in the consolidated financial statements. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS
Advocate, MD reviews the carrying values of its long-lived and identifiable intangibles assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Any long-lived assets held for disposal are reported at the lower of their carrying amounts or fair value less cost to sell.
INCOME TAXES
Income taxes are accounted for in accordance with guidance established by the Financial Accounting Standards Board (“FASB”). Such guidance requires the recognition of deferred tax assets and liabilities to reflect the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns. Measurement of the deferred tax items are based on enacted laws at the time of preparation of the financial statements. To the extent a deferred tax asset is recognized, a valuation allowance is established when it is more likely than not that some or the entire deferred tax asset will not be realized.
REINSURANCE
Advocate, MD accounts for reinsurance in accordance with guidance established by the FASB. Such guidance establishes conditions required for a contract to be accounted for as reinsurance and prescribes accounting and reporting standards for reinsurance contracts. Additionally, it requires reinsurance recoverables (including amounts related to losses incurred but not reported) and prepaid reinsurance premiums to be reported as assets. Estimated reinsurance recoverables are to be recognized in a manner consistent with the liabilities relating to the underlying reinsured contracts. Reinsurance premiums, profit share distributions and commissions are recorded based on management’s best estimate of the ultimate amounts to be incurred.
Advocate, MD Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
INVESTMENTS
The FASB guidance on accounting for investments in debt and equity securities requires that certain securities be classified into one of three categories: held-to-maturity, available-for-sale, or trading securities. Investments in debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized costs on the consolidated balance sheets. Securities that are bought and held principally for the purpose of selling them in the near term (thus held for only a short period of time) are classified as trading securities and reported at fair value. Trading generally reflects active and frequent buying and selling, and trading securities are generally used to generate profit on short-term differences in price. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities and reported at fair value, with the unrealized gains and losses, net of deferred taxes, reported as a separate component of equity.
Advocate, MD has classified all its investments as available-for-sale.
Premiums and discounts paid are amortized or accreted over the life of the related investment security as an adjustment to yield using the effective interest method. Dividend and interest income are recognized when earned.
Realized investment gains and losses are reported in income using the specific identification method. When impairment of the value of an investment security is considered other than temporary, the decrease in value is reported in the statement of operations as a realized investment loss, and a new cost basis is established.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful life of three to five years. Maintenance and repairs are charged to expense when incurred. Significant renewals and betterments are capitalized. When assets are retired or otherwise disposed, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in other income (expense) in the consolidated statements of operations.
STOCK-BASED COMPENSATION
Advocate, MD accounts for stock-based compensation programs in accordance with the guidance established by the FASB. Such guidance requires Advocate, MD to recognize in its financial statements the cost of consultant services received in exchange for awards of equity instruments, based on the grant date fair value of those awards. To measure the fair value of stock options granted to consultants, Advocate, MD uses the Black-Scholes option-pricing model, which incorporates various assumptions, including expected volatility, expected life, and risk-free rates of return. The expected volatility assumptions we used are based on the volatilities of comparable companies.
Advocate, MD Financial Group Inc. and Subsidiaries
Notes to the Consolidated Financial Statements (unaudited)
ACQUISITION OF THE COMPANY
On November 13, 2009, First Professionals Insurance Company, Inc., which is wholly-owned by FPIC Insurance Group, Inc. (“FPIC”), purchased all of the outstanding stock of Advocate, MD under the terms of a stock purchase agreement. The total consideration for Advocate, MD was comprised of $33.6 million in cash at closing and up to $12.0 million in additional consideration contingent upon the performance of Advocate, MD during the two-year period following closing. In connection with the transaction, FPIC also retired all of Advocate, MD’s outstanding bank debt, totaling $9.0 million.
