United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2001
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transaction period from ____________ to
___________.
Commission file number 1-11983
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FPIC Insurance Group, Inc.
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(Exact name of registrant as specified in its charter)
Florida 59-3359111
- -------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
225 Water Street, Suite 1400, Jacksonville, Florida 32202
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(Address of principal executive offices) (Zip Code)
(904) 354-2482
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of November 2, 2001, there were 9,384,755 shares of the registrant's common
stock outstanding.
FPIC Insurance Group, Inc.
Form 10-Q
Index
Page
----
Part I
Item 1. Unaudited Consolidated Financial Statements of FPIC
Insurance Group, Inc. and Subsidiaries
o Consolidated Balance Sheets................................ 3
o Consolidated Statements of Income.......................... 4
o Consolidated Statements of Comprehensive Income............ 5
o Consolidated Statements of Changes in Shareholders' Equity. 6
o Consolidated Statements of Cash Flows...................... 7
o Notes to the Unaudited Consolidated Financial Statements... 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 24
Part II
Item 1. Legal Proceedings............................................... 25
Item 2. Changes in Securities and Use of Proceeds....................... 25
Item 3. Defaults Upon Senior Securities................................. 25
Item 4. Submission of Matters to a Vote of Security Holders............. 25
Item 5. Other Information............................................... 25
Item 6. Exhibits and Reports on Form 8-K................................ 25
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets (in thousands, except common share data)
As of September 30, 2001 and December 31, 2000
(unaudited)
2001 2000
---------------- ----------------
Assets
Cash and cash equivalents $ 86,079 $ 18,967
Bonds and U.S. Government securities, available for sale 337,842 385,513
Equity securities, available for sale 8 555
Other invested assets, at equity 2,713 3,134
Other invested assets, at cost 11,182 11,388
Real estate investments 4,343 4,398
---------------- ----------------
Total cash and investments 442,167 423,955
Premiums receivable, net 60,523 36,300
Accrued investment income 5,742 5,932
Reinsurance recoverable on paid losses 6,352 7,919
Due from reinsurers on unpaid losses and advance premiums 70,901 57,698
Ceded unearned premiums 35,074 10,107
Property and equipment, net 4,015 4,295
Deferred policy acquisition costs 7,372 5,967
Deferred income taxes 16,047 18,271
Finance charge receivable 350 471
Prepaid expenses 1,808 1,662
Goodwill and intangible assets, net 59,124 60,869
Federal income tax receivable 5,781 8,519
Other assets 8,504 10,233
---------------- ----------------
Total assets $ 723,760 $ 652,198
================ ================
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 298,975 $ 281,295
Unearned premiums 137,437 100,066
Reinsurance payable 19,962 6,518
Paid in advance and unprocessed premiums 3,231 6,146
Revolving credit facility 37,000 67,219
Term loan 17,500 --
Accrued expenses and other liabilities 27,213 18,427
---------------- ----------------
Total liabilities 541,318 479,671
---------------- ----------------
Commitments and contingencies (Note 7)
Common stock, $.10 par value, 50,000,000 shares authorized;
9,384,755 and 9,380,353 shares issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 938 938
Additional paid-in capital 37,808 37,827
Unearned compensation (10) (105)
Accumulated other comprehensive income 4,428 968
Retained earnings 139,278 132,899
---------------- ----------------
Total shareholders' equity 182,442 172,527
---------------- ----------------
Total liabilities and shareholders' equity $ 723,760 $ 652,198
================ ================
See accompanying notes to the unaudited consolidated financial statements.
3
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income (in thousands, except per common share data)
(unaudited)
------------------------------------------------
Three months Nine months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
---------- ----------- ----------- ------------
Revenues
Net premiums earned $ 29,686 29,868 $ 96,005 92,420
Net investment income 5,803 6,490 18,431 18,703
Net realized investment gains (losses) 673 52 293 (58)
Claims administration and management fees 9,673 7,873 24,467 22,429
Commission income 2,247 1,839 3,912 2,996
Finance charge and other income 230 785 902 2,366
---------- ----------- ----------- ------------
Total revenues $ 48,312 46,907 $ 144,010 138,856
---------- ----------- ----------- ------------
Expenses
Net losses and loss adjustment expenses $ 27,301 23,138 $ 90,042 73,831
Other underwriting expenses 6,775 5,302 16,683 13,616
Claims administration and management expenses 8,610 8,129 23,877 22,616
Interest expense 983 935 3,321 3,189
Other expenses 1,000 2,723 2,938 5,190
---------- ----------- ----------- ------------
Total expenses $ 44,669 40,227 $ 136,861 118,442
---------- ----------- ----------- ------------
Income before income taxes 3,643 6,680 7,149 20,414
Income taxes 544 1,754 894 5,633
---------- ----------- ----------- ------------
Net income $ 3,099 4,926 $ 6,255 14,781
========== =========== =========== ============
Basic earnings per common share $ 0.33 0.52 $ 0.67 1.56
========== =========== =========== ============
Diluted earnings per common share $ 0.33 0.51 $ 0.66 1.54
========== =========== =========== ============
Basic weighted average common shares outstanding 9,405 9,493 9,400 9,503
========== =========== =========== ============
Diluted weighted average common shares outstanding 9,521 9,572 9,473 9,616
========== =========== =========== ============
See accompanying notes to the unaudited consolidated financial statements.
4
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Comprehensive Income (in thousands)
(unaudited)
-------------------------------------------
Three months Nine months
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
--------- --------- ---------- ----------
Net income $ 3,099 4,926 $ 6,255 14,781
--------- --------- --------- ---------
Other comprehensive income
Unrealized holding gains on securities arising
during period 5,934 4,379 9,182 7,038
Unrealized holding losses on derivative financial
instruments arising during the period (2,094) -- (3,393) --
Income tax expense related to unrealized gains
and losses (1,674) (1,658) (2,329) (2,751)
--------- --------- --------- ---------
Other comprehensive income 2,166 2,721 3,460 4,287
--------- --------- --------- ---------
Comprehensive income $ 5,265 7,647 $ 9,715 19,068
========= ========= ========= =========
See accompanying notes to the unaudited consolidated financial statements.
5
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity (in thousands)
For the Nine Months Ended September 30, 2001 and Year Ended December 31, 2000
Accumulated
Additional Other
Common Paid-in Comprehensive Retained Unearned
Stock Capital Income (Loss) Earnings Compensation Total
-------- ---------- ------------- ---------- ------------ ----------
Balances at December 31, 1999 $ 962 41,858 (8,495) 132,285 (231) 166,379
Net income -- -- -- 614 -- 614
Compensation earned on options -- -- -- -- 126 126
Unrealized gain on debt and equity securities, net -- -- 9,463 -- -- 9,463
Repurchase of shares, net (24) (4,031) -- -- -- (4,055)
-------- ---------- ------------- ---------- ------------ ----------
Balances at December 31, 2000 $ 938 37,827 968 132,899 (105) 172,527
======== ========== ============= ========== ============ ==========
Net income -- -- -- 6,255 -- 6,255
Compensation earned on options -- -- -- -- 95 95
Cumulative effect of change in accounting
principle (Note 1) -- -- -- 124 -- 124
Unrealized loss on derivative financial
instruments, net -- -- (2,266) -- -- (2,266)
Unrealized gain on debt and equity
securities, net -- -- 5,726 -- -- 5,726
Repurchase of shares, net -- (19) -- -- -- (19)
-------- ---------- ------------- ---------- ------------ ----------
Balances at September 30, 2001 (unaudited) $ 938 37,808 4,428 139,278 (10) 182,442
======== ========== ============= ========== ============ ==========
See accompanying notes to the unaudited consolidated financial statements.
6
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
(unaudited)
---------------------------------
Nine months ended Sept. 30,
2001 2000
---------------- ---------------
Cash flows from operating activities:
Net income $ 6,255 $ 14,781
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,537 2,844
Realized (gain) loss on investments (293) 58
Realized loss on sale of property and equipment 8 --
Noncash compensation 95 95
Net loss from equity investments 516 180
Deferred income tax expense (benefit) 110 (1,320)
Changes in assets and liabilities:
Premiums receivable, net (24,223) (12,511)
Accrued investment income, net 190 (1,624)
Reinsurance recoverable on paid losses 1,567 7,433
Reinsurance recoverable on unpaid losses (13,203) (15,943)
Ceded unearned premium (24,967) 3,372
Reinsurance payable 13,444 2,402
Deferred policy acquisition costs (1,405) (3,902)
Prepaid expenses and finance charge receivable (25) (521)
Other assets and accrued expenses and other liabilities 7,055 (3,072)
Loss and loss adjustment expenses 17,680 6,812
Unearned premiums 37,371 10,445
Paid in advance and unprocessed premiums (2,915) (4,300)
Federal income tax receivable 2,738 4,039
---------------- ---------------
Net cash provided by operating activities 23,535 9,268
---------------- ---------------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 120,430 37,358
Purchase of bonds and U.S. Government securities (63,039) (42,189)
Purchase of goodwill and intangible assets -- (1,896)
Proceeds from sale of real estate investments -- 275
Purchase of real estate investments (112) --
Proceeds from sale of other invested assets 51 --
Purchase of other invested assets -- (889)
Purchase of property and equipment, net (1,016) (1,213)
Proceeds from sale of subsidiary -- 185
---------------- ---------------
Net cash provided by (used in) investing activities 56,314 (8,369)
---------------- ---------------
Cash flows from financing activities:
(Repayments) borrowings under revolving credit facility (12,719) 4,500
Repurchase of common stock, net (18) (3,023)
---------------- ---------------
Net cash (used in) provided by financing activities (12,737) 1,477
---------------- ---------------
Net increase in cash and cash equivalents 67,112 2,376
Cash and cash equivalents at beginning of period 18,967 6,830
---------------- ---------------
Cash and cash equivalents at end of period $ 86,079 $ 9,206
================ ===============
See accompanying notes to the unaudited consolidated financial statements.
Continued
7
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows (in thousands)
(unaudited)
---------------------------------
Nine months ended Sept. 30,
2001 2000
--------------- ----------------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4,567 $ 3,769
=============== ================
Federal Income Taxes $ 540 $ 2,950
=============== ================
Supplemental schedule of noncash investing and financing activities:
Effective January 1, 2000, the Company's insurance subsidiaries
entered into a 100% quota share reinsurance agreement to assume
the death, disability, and retirement ("DD&R") risks under Physicians'
Reciprocal Insurers' ("PRI") claims made insurance policies. The
Company received cash and bonds in exchange for business assumed
from PRI.
Assumed unearned premiums $ -- $ 33,749
Reduction in net goodwill and intangible assets -- 13,205
Receipt of bonds -- (44,194)
--------------- ----------------
Net cash received $ -- $ 2,760
=============== ================
See accompanying notes to the unaudited consolidated financial statements.
8
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements include the
accounts of FPIC Insurance Group, Inc. (the "Company") consolidated with
the accounts of all its subsidiaries. Reference is made to the Company's
most recently filed Form 10-K, which includes information necessary or
useful to understanding the Company's businesses and financial statement
presentations. In particular, the Company's significant accounting policies
and practices are presented in Note 1 to the consolidated financial
statements included in that report. Financial information in this report
reflects adjustments, consisting only of normal recurring accruals, that
are, in the opinion of management, necessary for a fair statement of
results for interim periods.
For a number of reasons, the Company's results for interim periods may not
be indicative of results to be expected for the year. The timing and
magnitude of losses incurred by insurance subsidiaries and the estimation
error inherent in the process of determining the liability for loss and
loss adjustment expenses can be relatively more significant to results of
interim periods than to results for a full year.
Effective January 1, 2001, the Company adopted Financial Accounting
Standard ("FAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities" and FAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment to FAS 133." FAS
133 requires all derivative financial instruments, such as interest rate
swaps, to be recognized in the financial statements and measured at fair
value regardless of the purpose or intent for holding them. Changes in the
fair market value of derivative financial instruments are either recognized
periodically in income or shareholders' equity (as a component of
accumulated other comprehensive income), depending on whether the
derivative is being used to hedge changes in fair value or cash flows. FAS
138 amended the accounting and reporting standards for certain derivative
instruments and hedging activities under FAS 133. The adoption of FAS 133
did not have a material effect on the Company's consolidated financial
statements, but did increase total shareholders' equity by $124 at January
1, 2001, as a cumulative effect of a change in accounting principle.
2. Investments
Data with respect to debt and equity securities, available for sale, are
shown below.
Sept 30, Dec 31,
2001 2000
--------------- --------------
Amortized cost of investments
in debt and equity securities $ 327,040 $ 384,440
Sept 30, Sept 30,
2001 2000
--------------- --------------
Proceeds from sales and maturities $ 120,430 $ 37,358
Gross realized gains $ 2,029 $ 133
Gross realized losses $ (1,680) $ (158)
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, when investments are
marked-to-market with the corresponding gain or loss included in earnings.
Variations in the amount and timing of realized investment gains and losses
could cause significant variations in periodic net earnings.
3. Revolving Credit Facility and Term Loan
On August 31, 2001, the Company entered into a Revolving Credit and Term
Loan Agreement (the "credit facility") with five financial institutions.
The initial aggregate principal amount of the new
9
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
credit facility is $55 million, including (i) a $37.5 million revolving
credit facility (with a $15 million letter of credit sub-facility), which
matures on August 31, 2004, and which the Company has the right to increase
up to $47.5 million by securing additional lenders to participate in the
facility; and (ii) a $17.5 million term loan facility, repayable in twelve
equal quarterly installments of approximately $1.5 million commencing on
December 31, 2001.
Amounts outstanding under the credit facility bear interest at a variable
rate, primarily based upon LIBOR plus an initial margin of 2.25 percentage
points, which may be reduced to a minimum of 1.75 percentage points as the
Company reduces its outstanding indebtedness. The credit facility replaced
a $75 million revolving credit facility that was entered into by the
Company in January 1999, which would have matured on January 4, 2002.
Approximately $67.2 million of principal was outstanding under the prior
facility. The Company used available funds to pay down the difference
between the outstanding principal amount of the prior facility and the
initial amount of the new facility. As of September 30, 2001 and
December 31, 2000, the interest rates on the new facility and the previous
facility were 5.83% and 7.78%, respectively.
The Company is not required to maintain compensating balances in connection
with these credit facilities 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) total debt to cash flow available
for debt service cannot be less than 4.25:1 initially; b) combined net
premiums written to combined statutory capital and surplus cannot exceed
2.0:1; c) the fixed charge coverage ratio cannot be less than 2.50:1 and d)
funded debt to total capital plus funded debt cannot exceed 0.27:1. The
credit facility, which contains minimum equity and risk-based capital
requirements, is guaranteed by, and collateralized by the common stock of,
certain subsidiaries.
4. Derivative Financial Instruments
In connection with the Company's credit facility entered into on August 31,
2001, the Company also replaced its interest rate swaps (the "previous
swaps"). Related to the previous swaps, the Company had recorded an
unrealized loss associated with changes in fair value, which is included in
accumulated other comprehensive income as a component of shareholders'
equity. The unrealized loss is being amortized into income over the term
of the previous swaps which would have expired January 2, 2004.
The Company uses interest rate swap agreements (the "swap agreements") to
minimize fluctuations in cash flows caused by interest rate volatility and
to effectively convert all of its floating-rate debt to fixed-rate debt.
Such agreements involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the
underlying principal amounts. Accordingly, the impact of fluctuations in
interest rates on these swap agreements is offset by the opposite impact on
the related debt. Amounts to be paid or received under the swap agreements
are recognized as increases or reductions in interest expense in the
periods in which they accrue. The swap agreements are only entered into
with creditworthy counterparties.
10
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
The swap agreements in effect at September 30, 2001 are as follows:
Notional Receive Pay
Amount Maturities Rate (1) Rate
------------ -------------- ------------ ------------
$ 55,000 08/31/2004 3.58% 6.45%
$ 17,500 08/31/2004 3.58% 5.97%
(1) Based on three-month LIBOR
The following is a summary of the Company's interest risk management
strategy and the effect of this strategy on the Company's consolidated
financial statements:
Under the swap agreements, the Company agrees to pay an amount equal to a
specified fixed-rate of interest times a notional principal amount and to
receive in return an amount equal to a specified variable-rate of interest
times the same notional principal amount. The notional amounts on the
contract are not exchanged. No other cash payments are made unless the
contract is terminated prior to maturity, in which case the amount paid or
received in settlement is established by agreement at the time of
termination, and usually represents the net present value, at current
interest rates, of the remaining obligations to exchange payments under the
terms of the contract.
The Company's swap agreements provide a hedge against changes in the amount
of cash flows associated with the Company's revolving credit facility.
Accordingly, the swap agreements are reflected at fair value in the
Company's consolidated balance sheet and the effective portion of the
related gains or losses on the agreements are recognized in shareholders'
equity (as a component of accumulated other comprehensive income). The net
effect of this accounting on the Company's operating results is that
interest expense on the variable debt being hedged is generally recorded
based on fixed interest rates.
The Company formally documents the relationships between the hedging
instruments and the revolving credit facility. The Company also assesses
the effectiveness of the hedging instruments on a quarterly basis. If it is
determined that the swap agreements are no longer highly effective, the
change in the fair value of the hedging instrument would be included in
earnings rather than comprehensive income. For the nine months ended
September 30, 2001, the net gain or loss on the ineffective portion of the
swap agreements was not material.
5. Reconciliation of Basic and Diluted Earnings Per Common Share
Data with respect to the Company's basic and diluted earnings per common
share are shown below.
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------
09/30/2001 09/30/2000 09/30/2001 09/30/2000
---------------- --------------- -------------- -------------
Net income and income from continuing
operations $ 3,099 4,926 $ 6,255 14,781
================ =============== ============== =============
Basic weighted average shares outstanding 9,405 9,493 9,400 9,503
Common stock equivalents 116 79 73 113
---------------- --------------- -------------- -------------
Diluted weighted average shares outstanding 9,521 9,572 9,473 9,616
================ =============== ============== =============
Basic earnings per common share $ 0.33 0.52 $ 0.67 1.56
================ =============== ============== =============
Diluted earnings per common share $ 0.33 0.51 $ 0.66 1.54
================ =============== ============== =============
11
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
6. Segment Information
The business segments presented in this document have been determined in
accordance with the provisions of FAS No. 131, " Disclosures about Segments
of an Enterprise and Related Information." The Company has three main
operating segments as follows: insurance, third party administration
("TPA"), and reciprocal management ("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.
Through its four insurance subsidiaries, 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 plans for both large and small employers, including group
accident and health insurance, workers' compensation and general liability
and property insurance. In addition, the Company provides reciprocal
management services, brokerage and administration services for reinsurance
programs and brokerage services for the placement of annuities in
structured settlements. The Company evaluates a segment's performance
based on net income. All segments are managed separately as each business
requires different technology and marketing strategies. Consolidating
information by segment is summarized in the tables below.
As of As of
Identifiable Assets 9/30/01 12/31/00
--------------- ---------------
Insurance $ 655,704 583,124
TPA 14,204 16,565
RM 64,550 62,864
Intersegment Eliminations (10,698) (10,355)
--------------- ---------------
Total Assets $ 723,760 652,198
=============== ===============
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
9/30/01 9/30/00 9/30/01 9/30/00
--------------- --------------- --------------- ---------------
Total Revenues
Insurance $ 36,429 36,609 $ 115,482 111,884
TPA 4,439 4,756 12,220 12,711
RM 8,498 7,388 19,962 20,104
Intersegment Eliminations (1,054) (1,846) (3,654) (5,843)
--------------- --------------- --------------- ---------------
Total Revenues $ 48,312 46,907 $ 144,010 138,856
=============== =============== =============== ===============
Net Income
Insurance $ 1,094 3,003 $ 2,878 10,308
TPA 403 383 346 263
RM 1,602 1,540 3,031 4,210
--------------- --------------- --------------- ---------------
Total Net Income $ 3,099 4,926 $ 6,255 14,781
=============== =============== =============== ===============
7. Commitments and Contingencies
The Company is involved in numerous legal actions arising primarily from
claims under insurance policies. The legal actions arising from claims under
insurance policies have been considered by the Company in establishing its
liability for loss and loss adjustment expenses. The Company has also been
involved in one or more legal actions not involving claims under its
insurance policies from time
12
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
to time. Management is not aware of any such actions that in their opinion
will have a material adverse effect on the Company's financial position or
results of operations.
8. New Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB") issued
FAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." FAS 140 replaces FAS 125 and revises the
standards of accounting for securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but it
carries over most of the prior statements provisions without reconsidera-
tion. Except as provided in paragraphs 20-25, FAS 140 is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Management believes the
adoption of FAS 140 will not have a significant impact on the Company's
consolidated financial statements.
In June 2001, the FASB issued FAS 141 "Business Combinations." FAS 141
addresses financial accounting and reporting for business combinations and
supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations," and FAS 38, "Accounting for Preacquisition Contingencies of
Purchased Enterprises." The standard eliminates the pooling of interests
method of accounting for business combinations except for qualifying
business combinations initiated prior to July 1, 2001 and requires that all
intangible assets be accounted for separately from goodwill, for
acquisitions after July 1, 2001. Management believes the adoption of FAS 141
will not have a significant impact on the Company's consolidated financial
statements.
In June 2001, the FASB issued FAS 142, "Goodwill and Other Intangible
Assets." FAS 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." The standard provides that goodwill and other
intangible assets with indefinite lives are no longer to be amortized. These
assets are to be reviewed for impairment annually, or more frequently if
impairment indicators are present. Separable intangible assets that have
finite lives will continue to be amortized over their useful lives. The
Company will adopt FAS 142 on January 1, 2002, after which the Company's
earnings will not be impacted by goodwill amortization. Impairment testing
is required during the first year of adoption and any impairment losses
resulting from such testing will be reported as a cumulative effect of a
change in accounting principle in the first quarter of 2002. While the
Company has determined that its goodwill and other intangible assets are not
impaired under current standards, the Company has not yet determined if the
impairment testing under FAS 142 will require a write-down of such assets.
In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." FAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. Although earlier application is
encouraged, FAS 143 is effective for financial statements issued for fiscal
years beginning after June 15, 2002. Management believes the adoption of FAS
143 will not have a significant impact on the Company's consolidated
financial statements.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The proposed standard provides a unified
model for all assets to be disposed of, including the disposal of segments
of a business currently accounted for under APB Opinion No. 30. FAS 144 also
resolves the implementation issues and inconsistencies in accounting for
assets to be disposed of raised by FAS 121 and covers the reporting of
discontinued operations. The standard supersedes FAS 121 while retaining the
recognition and measurement provisions of FAS 121 for long-lived assets to
be held and used and the measurement of long-lived assets to be disposed of
by sale.
13
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
Management believes the adoption of FAS 144 will not have a significant
impact on the Company's consolidated financial statements.
9. Reclassification
Certain amounts for 2000 have been reclassified to conform to the 2001
presentation.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For purposes of this management discussion and analysis, the term "Company"
refers to FPIC Insurance Group, Inc. and its subsidiaries. The following
discussion and analysis of financial condition and results of operations should
be read in conjunction with the audited, consolidated financial statements and
notes included in the Company's Form 10-K for the year ended December 31, 2000,
which was filed with the Securities and Exchange Commission on March 30, 2001.
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 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, (xi) developments
in global financial markets that could affect the Company's investment portfolio
and financing plans, (xii) risk factors associated with financing and
refinancing, including the willingness of credit institutions to provide
financing and the availability of credit generally and, (xiii) developments in
reinsurance markets that could affect the Company's reinsurance program.
The words "believe," "anticipate," "foresee," "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.
Overview
Net income for the third quarter 2001 totaled $3.1 million, or $0.33 per diluted
share, compared with net income of $4.9 million, or $0.51 per diluted share, for
the same period in 2000. Net income for the nine months ended September 30,
2001, totaled $6.3 million, or $0.66 per diluted share, compared with net income
of $14.8 million, or $1.54 per diluted share, for the nine months ended
September 30, 2000. While improved pricing and growth in policyholders, during
the first nine months of 2001, have generated consistent top-line growth, more
conservative reserving policies relative to expected loss trends instituted
during 2001 have, as anticipated, resulted in lower margins and a decline in net
income as compared to last year.
Total revenues for the third quarter 2001 increased 3%, to $48.3 million, from
$46.9 million for the third quarter 2000. Total revenues for the nine months
ended September 30, 2001 increased 4%, to $144.0 million, from $138.9 million
for the nine months ended September 30, 2000. Revenue growth was driven
primarily by price improvements and the addition of medical professional
liability ("MPL")
15
policyholders, primarily in Florida and Missouri. Commission income earned by
the Company's non-insurance subsidiaries in New York and Florida also
experienced growth.
Total expenses for the third quarter 2001 increased 11%, to $44.7 million, from
$40.2 million in the third quarter of 2000. Total expenses for the nine months
ended September 30, 2001 increased 16%, to $136.9 million, from $118.4 million
for the nine months ended September 30, 2000. Net losses and LAE incurred for
the nine months ended September 30, 2001, increased $16.2 million over the first
nine months of 2000. The increase reflects a more conservative reserving policy
instituted during the first nine months of 2001, taking into consideration
expected loss trends with minimal credit or reduction for improving prices.
Other underwriting expenses also contributed to the increase in total expenses,
primarily as a result of ongoing enhancements made to the Company's financial
and reporting systems and the recognition of additional administrative,
advertising and business development expenses.
Insurance Segment
The Company's insurance segment is made up of its four insurance subsidiaries,
First Professionals Insurance Company, Inc. ("First Professionals"),
Anesthesiologists Professional Assurance Company ("APAC") and The Tenere Group,
Inc. ("Tenere") companies of Intermed Insurance Company ("Intermed") and
Interlex Insurance Company ("Interlex"). 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. Unaudited financial data for the
Company's insurance segment for the three months and nine months ended September
30, 2001 and 2000 are summarized in the table below. Dollar amounts are in
thousands.
Three Months Ended Nine Months Ended
------------------------------------- ----------------------------------------
Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30,
2001 Change 2000 2001 Change 2000
------------------------------------- ----------------------------------------
Direct and Assumed
Premiums Written $ 73,005 34% $ 54,610 $ 175,120 6% $ 165,689
=========== =========== ========== ============
Net Premiums Written $ 43,194 10% $ 39,176 $ 108,410 -20% $ 136,149
=========== =========== ========== ============
Net Premiums Earned $ 29,686 -1% $ 29,868 $ 96,005 4% $ 92,420
Net Investment Income 5,669 -10% 6,329 18,005 -2% 18,372
Net Realized Investment Gains 673 1194% 52 293 262% 81
Commission Income 27 -31% 39 47 -58% 113
Finance Charge and Other
Income 178 -45% 321 543 -40% 898
Intersegment Revenue 196 100% -- 589 100% --
----------- ----------- ---------- ------------
Total Revenues $ 36,429 0% $ 36,609 $ 115,482 3% $ 111,884
----------- ----------- ---------- ------------
Net Losses and LAE $ 27,301 18% $ 23,138 $ 90,042 22% $ 73,831
Other Underwriting Expense 6,775 28% 5,302 16,683 23% 13,616
Interest Expense 983 5% 935 3,321 4% 3,189
Other Expense 260 -85% 1,765 751 -71% 2,548
Intersegment Expense 859 -53% 1,845 3,065 -48% 5,843
----------- ----------- ---------- ------------
Total Expenses $ 36,178 10% $ 32,985 $ 113,862 15% $ 99,027
----------- ----------- ---------- ------------
Income Before Taxes 251 -93% 3,624 1,620 -87% 12,857
----------- ----------- ---------- ------------
Net Income $ 1,094 -64% $ 3,003 $ 2,878 -72% $ 10,308
=========== =========== ========== ============
Direct and assumed premiums written increased 34%, to $73.0 million for the
three months ended September 30, 2001, from $54.6 million for the three months
ended September 30, 2000. The increase in direct and assumed premiums written is
primarily the result of an increase in the number of MPL
16
policyholders and the effect of rate increases on the Company's core MPL lines.
In addition to the rate increases taken by the Company's MPL insurers in late
2000 and early 2001, the Company's MPL insurers have taken or will take
significant additional rate increases in 2001. A portion of the increase in
direct premiums written was also attributable to fronting arrangements whereby
the Company cedes substantially all of the business to other insurance carriers.
The increase in premiums written was offset by declines in MPL assumed premiums
written and group A&H premiums written.
Direct and assumed premiums written increased 6%, to $175.1 million for the nine
months ended September 30, 2001, from $165.7 million for the nine months ended
September 30, 2000. Excluding the effects of the non-recurring portion of the
assumed premiums under the 100% quota share reinsurance agreement written in the
first quarter of 2000 between the Company's insurance subsidiaries and
Physicians' Reciprocal Insurers ("PRI") of approximately $34 million, direct and
assumed premiums written increased $43.4 million.
Net premiums earned was $29.7 million for the three months ended September 30,
2001 compared to $29.9 million for the three months ended September 30, 2000.
Net premiums earned increased 4%, to $96.0 million for the nine months ended
September 30, 2001, from $92.4 million for the nine months ended September 30,
2000. The increase in net premiums earned is less than the increase in direct
premiums written for the same period, due primarily to the inherent lag between
written and earned premiums. In addition, as noted above, direct premiums
written include premiums written under fronting agreements for which a
relatively small portion of business is retained and therefore only a small
portion of premium is ultimately earned.
Net investment income decreased 10%, to $5.7 million for the three months ended
September 30, 2001, from $6.3 million for the three months ended September 30,
2000. Net investment income decreased 2%, to $18.0 million for the nine months
ended September 30, 2001, from $18.4 million for the nine months ended September
30, 2000. The decrease in net investment income is primarily the result of lower
investment returns on the Company's investment portfolio as market yields have
declined during 2001. The effects of declining yields have been offset to some
degree by growth in cash and invested assets resulting from growth in insurance
revenues.
Net realized investment gains increased $0.7 million, to $0.7 million for the
three months ended September 30, 2001, from $0.05 million for the three months
ended September 30, 2000. Net realized investment gains increased $0.2 million,
to $0.3 million for the nine months ended September 30, 2001, from $0.08 million
for the nine months ended September 30, 2000. The Company engaged new
professional investment managers during the third quarter of 2001 as part of its
overall investment strategy. While the Company's investment strategy remains
focused on high quality, fixed income securities, it does plan some changes in
its present asset allocation to take advantage of changing market conditions.
The increase in net realized investment gains is attributable to the liquidation
of investments during the third quarter associated with the reallocation of the
Company's investment portfolio.
Finance charge and other income declined 45%, to $0.2 million for the three
months ended September 30, 2001, from $0.3 million for the three months ended
September 30, 2000. Finance charge and other income decreased 40%, to $0.5
million for the nine months ended September 30, 2001, from $0.9 million for the
nine months ended September 30, 2000. The decline in finance charge and other
income is due to the Company's decision to cease the separate assessment of
finance charges on its Florida MPL policies.
Net losses and LAE incurred increased 18%, to $27.3 million for the three months
ended September 30, 2001, from $23.1 million for the three months ended
September 30, 2000. The loss ratios for such periods were 92% and 77%,
respectively. Net losses and LAE incurred increased 22%, to $90.0 million for
the nine months ended September
17
30, 2001, from $73.8 million for the nine months ended September 30, 2000. The
loss ratios for such periods were 94% and 80%, respectively. The increase in net
losses and LAE incurred is the result of recognition of expected loss trends and
increases in net premiums earned. This was partially offset by a decline in the
Company's group A&H business corresponding with the withdrawal from its group
A&H programs.
Other underwriting expenses increased 28%, to $6.8 million for the three months
ended September 30, 2001, from $5.3 million for the three months ended September
30, 2000. Other underwriting expenses increased 23%, to $16.7 million for the
nine months ended September 30, 2001, from $13.6 million for the nine months
ended September 30, 2000. The increase in other underwriting expenses is
primarily attributable to an increase in advertising and business development
expenses and expenses incurred to improve the financial and reporting systems
used by the Company. The Company also recognized additional administrative
expenses and loan-related fees.
Other expenses declined 85%, to $0.3 million for the three months ended
September 30, 2001, from $1.8 million for the three months ended September 30,
2000. Other expenses declined 71%, to $0.8 million for the nine months ended
September 30, 2001, from $2.5 million for the nine months ended September 30,
2000. The decline in other expenses is due to a severance charge of $1.5 million
that the Company incurred during the third quarter of 2000, which did not recur
during the current year.
Reciprocal Management Segment
The Company's reciprocal management segment is made up of Administrators for the
Professions, Inc. ("AFP"), the Company's New York subsidiary, and its two wholly
owned subsidiaries, FPIC Intermediaries, Inc. ("Intermediaries") and Group Data
Corporation ("Group Data"). AFP acts as administrator and attorney-in-fact for
PRI, the second largest medical professional liability insurer for physicians in
the state of New York. Intermediaries acts as a reinsurance broker and
intermediary in the placement of reinsurance. Group Data acts as a broker in the
placement of annuities for structured settlements. The segment also includes
Professional Medical Administrators, LLC ("PMA"), a 70% owned subsidiary of the
Company. PMA provides brokerage and administration services for professional
liability insurance programs. Unaudited financial data for the Company's
reciprocal management segment for the three months and nine months ended
September 30, 2001 and 2000 are summarized in the table below. Dollar amounts
are in thousands.
Three Months Ended Nine Months Ended
------------------------------------ --------------------------------------
Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30,
2001 Change 2000 2001 Change 2000
------------------------------------ --------------------------------------
Net Investment Income $ 103 10% $ 94 $ 286 82% $ 157
Claims Administration and
Management Fees 6,553 45% 4,531 15,129 18% 12,814
Commission Income 1,042 30% 802 1,783 45% 1,226
Other Income 46 -89% 404 337 -72% 1,225
Intersegment Revenue 754 -52% 1,557 2,427 -48% 4,682
----------- ----------- ----------- ------------
Total Revenues $ 8,498 15% $ 7,388 $ 19,962 -1% $ 20,104
----------- ----------- ----------- ------------
Claims Administration and
Management Expenses $ 4,855 10% $ 4,415 $ 12,793 12% $ 11,379
Other Expense 543 0% 543 1,629 0% 1,629
Intersegment Expense 111 100% -- 333 100% --
----------- ----------- ----------- ------------
Total Expenses $ 5,509 11% $ 4,958 $ 14,755 13% $ 13,008
----------- ----------- ----------- ------------
Income Before Taxes 2,989 23% 2,430 5,207 -27% 7,096
----------- ----------- ----------- ------------
Net Income $ 1,602 4% $ 1,540 $ 3,031 -28% $ 4,210
=========== =========== ========== ============
18
Net investment income increased 10%, to $0.1 million for the three months ended
September 30, 2001, from $0.09 for the three months ended September 30, 2000.
Net investment income increased 82%, to $0.3 million for the nine months ended
September 30, 2001, from $0.2 million for the nine months ended September 30,
2000. The increase in net investment income is primarily due to growth in
operating cash flows available for investment.
Claims administration and management fees increased 45%, to $6.6 million for the
three months ended September 30, 2001, from $4.5 million for the three months
ended September 30, 2000. Claims administration and management fees increased
18%, to $15.1 million for the nine months ended September 30, 2001, from $12.8
million for the nine months ended September 30, 2000. The increase in claims
administration and management fees is due to an increase in the premiums written
by PRI. In accordance with the management agreement between AFP and PRI, AFP
receives a management fee equal to 13% of PRI's written premiums, with an
adjustment for expected return premiums, plus 10% of PRI's statutory income or
loss.
Commission income in the third quarter of 2001 increased 30%, to $1.0 million
for the three months ended September 30, 2001, from $0.8 million for the three
months ended September 30, 2000. Commission income increased 45%, to $1.8
million for the nine months ended September 30, 2001, from $1.2 million for the
nine months ended September 30, 2000. The increase in commission income is due
to commissions earned for brokerage services related to the placement of
reinsurance.
Other income decreased 89%, to $0.05 million for the three months ended
September 30, 2001, from $0.4 million for the three months ended September 30,
2000. Other income decreased 72%, to $0.3 million for the nine months ended
September 30, 2001, from $1.2 million for the nine months ended September 30,
2000. The decrease in other income is the result of lower statutory net income
at PRI compared to the prior year. As noted above, in accordance with the
management agreement between AFP and PRI, AFP receives 10% of PRI's statutory
net income or loss.
Claims administration and management expenses increased 10%, to $4.9 million for
the three months ended September 30, 2001, from $4.4 million for the three
months ended September 30, 2000. Claims administration and management expenses
increased 12%, to $12.8 million for the nine months ended September 30, 2001,
from $11.4 million for the nine months ended September 30, 2000. The increase in
claims administration and management expenses is primarily attributable to an
increase in commission expense incurred as a result of growth in brokerage and
administration business at PMA. The Company also incurred additional brokerage
expense related to the acquisition of a book of business for PRI. Under the
terms of the management agreement between AFP and PRI, AFP is responsible for
brokerage costs incurred by PRI.
Third Party Administration Segment
The Company's third party administration ("TPA") segment is made up of McCreary
Corporation and its subsidiary Employers Mutual, Inc. Unaudited financial data
for the Company's TPA segment for the three months and nine months ended
September 30, 2001 and 2000 are summarized in the table below. Dollar amounts
are in thousands.
19
Three Months Ended Nine Months Ended
------------------------------------ ----------------------------------------
Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30,
2001 Change 2000 2001 Change 2000
------------------------------------ ----------------------------------------
Net Investment Income $ 31 -54% $ 67 $ 140 -20% $ 174
Net Realized Investment Losses -- 0% -- -- 100% (139)
Claims Administration and
Management Fees 3,120 -7% 3,342 9,338 -3% 9,615
Commission Income 1,178 18% 998 2,082 26% 1,657
Other Income 6 -90% 60 22 -91% 243
Intersegment Revenue 104 -64% 289 638 -45% 1,161
---------- ---------- ------------- ------------
Total Revenues $ 4,439 -7% $ 4,756 $ 12,220 -4% $ 12,711
---------- ---------- ------------- ------------
Claims Administration and
Management Expenses $ 3,755 1% $ 3,714 $ 11,084 -1% $ 11,237
Other Expense 197 -53% 415 558 -45% 1,013
Intersegment Expense 85 100% -- 256 100% --
---------- ---------- ------------- ------------
Total Expenses $ 4,037 -2% $ 4,129 $ 11,898 -3% $ 12,250
---------- ---------- ------------- ------------
Income Before Taxes 402 -36% 627 322 -30% 461
---------- ---------- ------------- ------------
Net Income $ 403 5% $ 383 $ 346 32% $ 263
========== ========== ============= ============
Claims administration and management fees declined 7%, to $3.1 million for the
three months ended September 30, 2001, from $3.3 million for the three months
ended September 30, 2000. Claims administration and management fees declined 3%,
to $9.3 million for the nine months ended September 30, 2001, from $9.6 million
for the nine months ended September 30, 2000. The decline in claims
administration and management fees is due to the termination of non-profitable
contracts at the Company's Albuquerque division. Excluding the effects of the
terminated contracts, claims administration and management fees increased $0.4
million for the nine months ended September 30, 2001, as compared to the same
period in 2000.
Commission income for the third quarter increased 18%, to $1.2 million for the
three months ended September 30, 2001, from $1.0 million for the three months
ended September 30, 2000. Commission income increased 26%, to $2.1 million for
the nine months ended September 30, 2001, from $1.7 million for the nine months
ended September 30, 2000. The increase in commission income is due to increases
in the underlying rates paid by customers for reinsurance being placed in
alternative markets by the TPA segment.
Other expenses decreased 53%, to $0.2 million for the three months ended
September 30, 2001, from $0.4 million for the three months ended September 30,
2000. Other expenses decreased 45%, to $0.6 million for the nine months ended
September 30, 2001, from $1.0 million for the nine months ended September 30,
2000. The decrease in other expenses represents savings from the Company's
disposition of non-core businesses during 2000.
Selected Balance Sheet Items as of September 30, 2001
Cash and invested assets increased $18.2 million, to $442.2 million as of
September 30, 2001, from $424.0 million as of December 31, 2000. The increase in
cash and invested assets results primarily from the growth in premiums, which
increased the amounts available for investment, offset by a reduction in cash
associated with the pay down on the Company's credit facility.
Premiums receivable increased $24.2 million, to $60.5 million as of September
30, 2001, from $36.3 million as of December 31, 2000. The increase in premiums
receivable is the result of growth in premiums written as a result of price
improvements on core MPL business and the addition of MPL
20
policyholders in Florida and Missouri. In addition, premiums receivable are
normally lower in December due to a majority of the Company's insurance policies
renewing during the first and third quarters of each year.
Due from reinsurers on unpaid losses and advance premiums increased $13.2
million, to $70.9 million as of September 30, 2001, from $57.7 million as of
December 31, 2000. The Company uses reinsurance to control its exposure to
potential losses. The increase in due from reinsurers on unpaid losses and
advance premiums is related to an increase in reserves resulting from growth in
premiums earned and an increase in premiums written under fronting arrangements
whereby the Company cedes substantially all of the business to other insurance
carriers.
Ceded unearned premiums increased $25.0 million, to $35.1 million as of
September 30, 2001, from $10.1 million as of December 31, 2000. The increase in
ceded unearned premiums is primarily related to an increase in premiums written
for direct MPL business and business written under fronting arrangements whereby
the Company cedes substantially all of the business to other insurance carriers.
Deferred policy acquisition costs increased $1.4 million, to $7.4 million as of
September 30, 2001, from $6.0 million as of December 31, 2000. The increase in
deferred policy acquisition costs is due to growth in business development
expenses as a result of an increase in premiums written.
Deferred income taxes decreased $2.3 million, to $16.0 million as of September
30, 2001, from $18.3 million as of December 31, 2000. The decline in deferred
income taxes relates to an increase in deferred taxes associated with changes in
unrealized gains on financial instruments.
Goodwill and intangible assets decreased $1.8 million, to $59.1 as of September
30, 2001, from $60.9 million as of December 31, 2000. The decrease in goodwill
and intangible assets is due to amortization.
Federal income tax receivable decreased $2.7 million, to $5.8 million as of
September 30, 2001, from $8.5 million as of December 31, 2000. The decrease in
federal income tax receivable is primarily attributable to the receipt of a
federal tax refund related to the overpayment of estimated taxes for the year
2000.
Other assets decreased $1.7 million to $8.5 million as of September 30, 2001
from $10.2 million as of December 31, 2000. The decrease in other assets is
primarily due to the collection of payments for amounts due from the Florida
Dental Association and PRI, offset by deposits paid to a software vendor for
computer mainframe upgrades.
The liability for loss and LAE increased $17.7 million, to $299.0 million as of
September 30, 2001 from $281.3 million as of December 31, 2000. The increase in
the liability for loss and LAE is attributable to increases in premiums earned
and the establishment of reserves for the current book of business, taking into
consideration expected loss trends and an appropriately conservative loss ratio.
Unearned premiums increased $37.3 million, to $137.4 million as of September 30,
2001, from $100.1 million as of December 31, 2000. The increase in unearned
premiums is primarily related to growth in premiums written at the Company's
insurance subsidiaries.
Reinsurance payable increased $13.5 million, to $20.0 million as of September
30, 2001, from $6.5 million as of December 31, 2000. The increase in reinsurance
payable is related to an increase in premiums written for direct MPL business
and business written under fronting arrangements whereby the Company cedes
substantially all of the business to other insurance carriers.
21
Premiums paid in advance and unprocessed premiums declined $2.9 million, to $3.2
million as of September 30, 2001, from $6.1 million as of December 31, 2000. The
decline in paid in advance and unprocessed premiums at September 2001 reflects
the fact that policy renewals at the Company's largest insurance subsidiary peak
on January 1 and July 1 of each year.
The Company's revolving credit facility and term loan decreased $12.7 million,
to $54.5 million as of September 30, 2001, from $67.2 million as of December 31,
2000. On August 31, 2001, the Company entered into a Revolving Credit and Term
Loan Agreement (the "credit facility") with five financial institutions. The
initial aggregate principal amount of the new credit facility is $55 million,
including (i) a $37.5 million revolving credit facility (with a $15 million
letter of credit sub-facility), which matures on August 31, 2004, and (ii) a
$17.5 million term loan facility, repayable in twelve equal quarterly
installments of approximately $1.5 million commencing on December 31, 2001. The
credit facility replaced a $75 million revolving credit facility that was
entered into by the Company in January 1999, which would have matured on January
4, 2002. Approximately $67.2 million of principal was outstanding under the
prior facility. The Company used available funds to pay down the difference
between the outstanding principal amount of the prior facility and the initial
amount of the new facility.
Accrued expenses and other liabilities increased $8.8 million, to $27.2 million
as of September 30, 2001, from $18.4 million as of December 31, 2000. The
increase in accrued expenses and other liabilities is primarily attributable to
the receipt of funds by the Company's reciprocal management segment for
brokerage services that are payable to other insurance carriers. Approximately
$3.3 million of the increase in accrued expenses and other liabilities reflects
the recognition of a liability for the Company's derivative financial instrument
in accordance with generally accepted accounting principles.
Stock Repurchase Plans
During the third quarter 2001, the Company repurchased 21,500 shares of its
stock on the open market under its previously announced stock repurchase program
at an average price of $10.84. Under the Company's stock repurchase programs,
shares may be repurchased at such times, and in such amounts, as management
deems appropriate, and subject to certain requirements of its credit facility. A
decision whether or not to make additional repurchases is based upon an analysis
of the best use of the Company's capital. Since the commencement of these
repurchase programs, the Company has repurchased 875,000 of its shares at a cost
of approximately $16.2 million. A total of 365,500 shares remain available to be
repurchased under the programs.
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
the third quarter of 2001 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 $55 million credit facility with five banks. The credit
facility replaced a $75 million revolving credit facility ("prior facility")
that was entered into by the Company in January 1999, which would have matured
on January 4, 2002. Approximately $67.2 million of principal was outstanding
under the prior facility. The Company used available funds to pay down the
22
difference between the outstanding principal amount of the prior facility and
the initial amount of the new credit facility.
As of September 30, 2001, the Company had borrowed $54.5 million under the
credit facility. The credit facility is comprised of (i) a $37.5 million
revolving credit facility (with a $15 million letter of credit sub-facility),
which matures on August 31, 2004, and (ii) a $17.5 million term
loan facility, repayable in twelve equal quarterly installments of approximately
$1.5 million commencing on December 31, 2001. Amounts outstanding under the
credit facilities bear interest at a variable rate, primarily based upon LIBOR
plus an initial margin of 2.25 percentage points, which may be reduced to a
minimum of 1.75 percentage points as the Company reduces its outstanding
indebtedness.
The Company is not required to maintain compensating balances in connection with
these credit facilities 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) total debt to cash flow available for debt service cannot be less
than 4.25:1 initially; b) combined net premiums written to combined statutory
capital and surplus cannot exceed 2.0:1; c) the fixed charge coverage ratio
cannot be less than 2.50:1 and d) funded debt to total capital plus funded
debt cannot exceed 0.27:1. The credit facility also contains minimum equity and
risk-based capital requirements.
At September 30, 2001, the Company held approximately $16.4 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
consolidated statement of cash flows, the Company generated positive net cash
from operating activities of $23.5 million for the nine months ended September
30, 2001.
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 $11.3 million, without prior regulatory approval.
Accounting Pronouncements
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("FAS 133") and FASB Statement No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment to
FAS 133" ("FAS 138"). FAS 133 requires all derivative financial instruments,
such as interest rate swaps, to be recognized in the financial statements and
measured at fair value regardless of the purpose or intent for holding them.
Changes in the fair market value of derivative financial instruments are either
recognized periodically in income or shareholders' equity (as a component of
accumulated other comprehensive income), depending on whether the derivative is
being used to hedge changes in fair value or cash flows. FAS 138 amended the
accounting and reporting standards for certain derivative instruments and
hedging activities under FAS 133. The adoption of FAS 133 did not have a
material effect on the Company's consolidated financial statements, but did
increase total shareholders' equity by $124 thousand at January 1, 2001 as a
cumulative effect of a change in accounting principle.
In September 2000, the FASB issued Financial Accounting Standards ("FAS") No.
140 "Accounting for Transfers and Servicing of Financial Assets and Extinguish-
ments of Liabilities." FAS 140 replaces FAS 125 and revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but it carries over most of the
prior statements provisions without reconsideration. Except as provided in
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paragraphs 20-25, FAS 140 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after March 31, 2001.
Management believes the adoption of FAS 140 will not have a significant impact
on the Company's consolidated financial statements.
In June 2001, the FASB issued FAS 141 "Business Combinations." FAS 141 addresses
financial accounting and reporting for business combinations and supersedes
Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and
FAS 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises."
The standard eliminates the pooling of interests method of accounting for
business combinations except for qualifying business combinations initiated
prior to July 1, 2001 and requires that all intangible assets be accounted for
separately from goodwill, for acquisitions after July 1, 2001. Management
believes the adoption of FAS 141 will not have a significant impact on the
Company's consolidated financial statements.
In June 2001, the FASB issued FAS 142, "Goodwill and Other Intangible Assets."
FAS 142 addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets."
The standard provides that goodwill and other intangible assets with indefinite
lives are no longer to be amortized. These assets are to be reviewed for
impairment annually, or more frequently if impairment indicators are present.
Separable intangible assets that have finite lives will continue to be amortized
over their useful lives. The Company will adopt FAS 142 on January 1, 2002,
after which the Company's earnings will not be impacted by goodwill
amortization. Impairment testing is required during the first year of adoption
and any impairment losses resulting from such testing will be reported as a
cumulative effect of a change in accounting principle in the first quarter of
2002. While the Company has determined that its goodwill and other intangible
assets are not impaired under current standards, the Company has not yet
determined if the impairment testing under FAS 142 will require a write-down of
such assets.
In June 2001, the FASB issued FAS 143, "Accounting for Asset Retirement
Obligations." FAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. Although earlier application is encouraged,
FAS 143 is effective for financial statements issued for fiscal years beginning
after June 15, 2002. Management believes the adoption of FAS 143 will not have a
significant impact on the Company's consolidated financial statements.
In August 2001, the FASB issued FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." The proposed standard provides a unified model
for all assets to be disposed of, including the disposal of segments of a
business currently accounted for under APB Opinion No. 30. FAS 144 also resolves
the implementation issues and inconsistencies in accounting for assets to be
disposed of raised by FAS 121 and covers the reporting of discontinued
operations. The standard supersedes FAS 121 while retaining the recognition and
measurement provisions of FAS 121 for long-lived assets to be held and used and
the measurement of long-lived assets to be disposed of by sale. Management
believes the adoption of FAS 144 will not have a significant impact on the
Company's consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is primarily related to changes in interest rates.
Quantitative and qualitative disclosures about our market risk resulting from
changes in interest rates are included in Item 3 of Management's Discussion and
Analysis in our 2000 Annual Report to Shareholders. The Company continuously
evaluates its exposure to market risk. The Company has noted a decline in
investment yields of approximately 40 basis points during the past twelve
months, which has contributed to lower net investment income. In order to manage
these risks, the Company implemented an integrated investment management
program, which included engaging outside professional investment managers to
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manage the Company's investment portfolio. In addition, see Note 4 of the
unaudited consolidated financial statements for information about derivative
financial instrument activity during 2001 and related FAS 133 disclosures.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
On September 6, 2001, the Company filed a Form 8-K notifying the
Securities and Exchange Commission that the Company entered into a
Revolving Credit and Term Loan Agreement with five financial
institutions on August 31, 2001. In connection with the Credit
Facility and Term Loan Agreement, the Company also entered into
interest rate swap agreements covering borrowings under the new
facility.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FPIC Insurance Group, Inc.
/s/ Kim D. Thorpe
-----------------------------------------
November 13, 2001 Kim D. Thorpe, Executive Vice President
and Chief Financial Officer (a duly
authorized officer and the principal
financial officer of the registrant)
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