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 March 31, 2002
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 April 30, 2002, there were 9,389,462 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 and Comprehensive Income.. 4
o Consolidated Statements of Changes in Shareholders' Equity.. 5
o Consolidated Statements of Cash Flows....................... 6
o Notes to the Unaudited Consolidated Financial Statements.... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 21
Part II
Item 1. Legal Proceedings................................................ 21
Item 2. Changes in Securities and Use of Proceeds........................ 21
Item 3. Defaults Upon Senior Securities.................................. 21
Item 4. Submission of Matters to a Vote of Security Holders.............. 21
Item 5. Other Information................................................ 21
Item 6. Exhibits and Reports on Form 8-K................................. 21
FPIC INSURANCE GROUP, INC.
Consolidated Balance Sheets
(in thousands, except share data)
(unaudited)
Mar 31, Dec 31,
2002 2001
---------------- ----------------
Assets
Cash and cash equivalents $ 71,090 75,220
Bonds and U.S. Government securities, available for sale 360,924 348,949
Equity securities, available for sale 7 8
Other invested assets, at equity 2,270 2,572
Other invested assets, at cost 10,758 10,962
Real estate 4,233 4,255
---------------- ----------------
Total cash and investments 449,282 441,966
Premiums receivable, net 94,109 73,362
Accrued investment income 5,501 4,605
Reinsurance recoverable on paid losses 5,879 7,305
Due from reinsurers on unpaid losses and advance premiums 95,317 80,410
Ceded unearned premiums 51,931 40,794
Property and equipment, net 4,501 4,727
Deferred policy acquisition costs 9,700 9,001
Deferred income taxes 40,927 19,944
Prepaid expenses 1,380 1,664
Goodwill 18,870 67,232
Intangible assets 1,246 1,317
Federal income tax receivable 2,086 5,273
Other assets 10,731 13,222
---------------- ----------------
Total assets $ 791,460 770,822
================ ================
Liabilities and Shareholders' Equity
Loss and loss adjustment expenses $ 337,182 318,483
Unearned premiums 174,770 146,761
Reinsurance payable 32,125 26,689
Paid in advance and unprocessed premiums 8,494 9,942
Revolving credit facility 37,000 37,000
Term loan 14,583 16,042
Deferred credit 9,692 10,007
Accrued expenses and other liabilities 32,532 31,324
---------------- ----------------
Total liabilities 646,378 596,248
---------------- ----------------
Commitments and contingencies (note 9)
Common stock, $.10 par value, 50,000,000 shares authorized;
9,389,462 and 9,337,755 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 939 934
Additional paid-in capital 38,256 37,837
Accumulated other comprehensive loss (3,229) (26)
Retained earnings 109,116 135,829
---------------- ----------------
Total shareholders' equity 145,082 174,574
---------------- ----------------
Total liabilities and shareholders' equity $ 791,460 770,822
================ ================
See accompanying notes to unaudited consolidated financial statements
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Income and Comprehensive Income
(in thousands, except per common share data)
(unaudited)
--------------------------------
Three months ended March 31,
2002 2001
--------------- ---------------
Revenues
Net premiums earned $ 39,342 31,517
Claims administration and management fees 7,630 7,218
Net investment income 4,939 6,702
Commission income 875 485
Net realized investment gains (losses) 468 (96)
Finance charge and other income 220 460
--------------- ---------------
Total revenues 53,474 46,286
--------------- ---------------
Expenses
Net losses and loss adjustment expenses 33,825 30,009
Other underwriting expenses 6,692 4,924
Claims administration and management expenses 7,461 7,601
Interest expense 1,216 1,152
Other expenses 70 970
--------------- ---------------
Total expenses 49,264 44,656
--------------- ---------------
Income from operations before taxes and cumulative effect
of accounting change 4,210 1,630
Less: Income taxes 1,345 336
--------------- ---------------
Income before cumulative effect of accounting change 2,865 1,294
Less: Cumulative effect of accounting change (net of
$18,784 income tax benefit) 29,578 --
--------------------------------
Net (loss) income (26,713) 1,294
--------------------------------
Other Comprehensive (Loss) Income
Cumulative effect of accounting change -- 124
Unrealized holding (losses) gains on debt and equity securities (5,396) 5,193
Unrealized holding gains (losses) on derivative financial instruments 81 (1,186)
Income tax benefit (expense) related to unrealized gains and losses 2,022 (2,215)
--------------- ---------------
Other comprehensive (loss) income (3,293) 1,916
Comprehensive (loss) income $ (30,006) 3,210
=============== ===============
Basic earnings per common share $ (2.85) 0.14
=============== ===============
Diluted earnings per common share $ (2.81) 0.14
=============== ===============
Basic weighted average common shares outstanding 9,375 9,393
=============== ===============
Diluted weighted average common shares outstanding 9,498 9,436
=============== ===============
See accompanying notes to the unaudited consolidated financial statements
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended March 31, 2002 and Year Ended December 31, 2001
(in thousands)
Accumulated
Additional Other
Common Paid-in Unearned Comprehensive Retained
Stock Capital Compensation Income (Loss) Earnings Total
---------- ---------- ------------ --------------- ----------- ---------
Balances at December 31, 2000 $ 938 37,827 (105) 968 132,899 172,527
---------- ---------- ---------- ------------ ----------- ---------
Net income -- -- -- -- 2,930 2,930
Cumulative effect of accounting
change -- -- -- 124 -- 124
Compensation earned on options -- -- 105 -- -- 105
Unrealized gain on debt and
equity securities, net -- -- -- 778 -- 778
Unrealized loss on derivative
financial instruments, net -- -- -- (1,896) -- (1,896)
Repurchase of shares, net (4) 10 -- -- -- 6
---------- ---------- ---------- ------------ ----------- ---------
Balances at December 31, 2001 $ 934 37,837 -- (26) 135,829 174,574
---------- ---------- ---------- ------------ ----------- ---------
Net loss -- -- -- -- (26,713) (26,713)
Unrealized loss on debt and
equity securities, net -- -- -- (3,343) -- (3,343)
Unrealized gain on derivative
financial instruments, net -- -- -- 50 -- 50
Amortization of unrealized loss on
derivative financial instruments -- -- -- 90 -- 90
Issuance of shares 5 419 -- -- -- 424
---------- ---------- ---------- ------------ ----------- ---------
Balances at March 31, 2002 (unaudited) $ 939 38,256 -- (3,229) 109,116 145,082
========== ========== ========== ============ =========== =========
See accompanying notes to the unaudited consolidated financial statements
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
---------------------------
Three months ended Mar 31,
2002 2001
------------- -------------
Cash flows from operating activities:
Net (loss) income $ (26,713) 1,294
Adjustments to reconcile net income to cash provided by
operating activities:
Cumulative effect of accounting change 29,578 --
Depreciation, amortization and accretion (485) 1,133
Realized (gain) loss on investments (468) 96
Realized loss on sale of property and equipment -- 2
Noncash compensation -- 32
Net loss from equity investments 301 66
Bad debt expense -- 41
Deferred income tax benefit (176) (274)
Changes in assets and liabilities:
Premiums receivable, net (20,747) (3,851)
Accrued investment income, net (896) (882)
Reinsurance recoverable on paid losses 1,426 (1,596)
Due from reinsurers on unpaid losses and advance premiums (14,907) (9,522)
Ceded unearned premiums (11,137) (8,640)
Deferred policy acquisition costs (699) (310)
Prepaid expenses 284 (228)
Federal income tax receivable 3,187 320
Other assets 2,491 139
Loss and loss adjustment expenses 18,699 6,285
Unearned premiums 28,009 12,975
Reinsurance payable 5,436 7,589
Paid in advance and unprocessed premiums (1,448) (3,956)
Accrued expenses and other liabilities 1,288 9,815
------------- -------------
Net cash provided by operating activities 13,023 10,528
------------- -------------
Cash flows from investing activities:
Proceeds from sale or maturity of bonds and U.S. Government securities 48,004 21,612
Purchase of bonds and U.S. Government securities (64,011) (11,489)
Proceeds from sale of equity securities -- 402
Proceeds from sale of other invested assets 204 91
Purchase of real estate investments (42) --
Proceeds from sale of property and equipment -- 2
Purchase of property and equipment (273) (330)
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Net cash (used in) provided by investing activities (16,118) 10,288
------------- -------------
Cash flows from financing activities:
Payment of term loan (1,459) --
Issuance of common stock 424 139
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Net cash (used in) provided by financing activities (1,035) 139
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Net (decrease) increase in cash and cash equivalents (4,130) 20,955
Cash and cash equivalents at beginning of period 75,220 18,967
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Cash and cash equivalents at end of period $ 71,090 39,922
============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,109 1,108
============= =============
Federal income taxes $ -- --
============= =============
See accompanying notes to the unaudited consolidated financial statements
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 2 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 the Company's 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, 2002, the Company adopted Financial Accounting
Standard ("FAS") No. 142, "Goodwill and Other Intangible Assets." FAS 142
addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board 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. During
the quarter ended March 31, 2002, the Company completed the transitional
impairment analysis, which resulted in an impairment charge of $29.6
million, net of $18.8 million in income taxes. See Note 3 for additional
discussion of the impact of FAS 142 on the Company's financial position and
results of operations.
2. Investments
Data with respect to debt and equity securities, available for sale, are
shown below.
As of As of
Mar 31, Dec 31,
2002 2001
-------------------- ---------------------
Amortized cost of investments in debt
and equity securities $ 363,502 346,131
Three Months Ended
-----------------------------------------------------
Mar 31, Mar 31,
2002 2001
-------------------- ---------------------
Proceeds from sales and maturities $ 48,004 22,014
Gross realized gains 901 235
Gross realized losses (433) (331)
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.
7
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
3. Goodwill
The Company adopted FAS 142 effective January 1, 2002. In connection with
the adoption of FAS 142, the Company discontinued the amortization of
goodwill. The changes in the carrying amount of goodwill for the three
months ended March 31, 2002, are as follows:
Reciprocal Third Party
Insurance Management Administration Total
------------ ---------------- ----------------- -------------
Balance as of December 31, 2001 $ 10,833 49,140 7,259 67,232
Impairment charge -- (41,103) (7,259) (48,362)
------------ ---------------- ----------------- -------------
Balance as of March 31, 2002 $ 10,833 8,037 -- 18,870
============ ================ ================= =============
In accordance with FAS 142, the Company engaged independent valuation
consultants to perform transitional impairment tests at each of its
operating segments, insurance, reciprocal management and third party
administration ("TPA"). These operating segments meet the reporting unit
requirements as defined by FAS 142.
The fair values for each of the reporting units were calculated using one
or more of the following approaches: (i) market multiple approach; (ii)
discounted cash flow ("DCF") approach; or (iii) asset approach.
o Under the market multiple approach, the values of the reporting units
were based on the market prices and performance fundamentals of
similar public companies.
o Under the DCF approach, the values of the reporting units were based on
the present value of the projected future cash flows to be generated.
o Under the asset approach, the value of a reporting unit is the
difference in the fair value of total assets and the fair value of
total liabilities. The fair value of each asset and liability may in
turn be estimated using an income or market approach or by using a cost
approach.
Based on the results of the impairment tests, goodwill was not deemed to be
impaired at the insurance segment, since the fair value of the reporting
unit exceeded its carrying value. Therefore, the second step of the
goodwill impairment test was not performed. However, the carrying values of
the reciprocal management and TPA segments exceeded their respective fair
values, indicating a potential impairment of goodwill. Under step 2 of the
test, the implied fair values of the reciprocal management and TPA goodwill
were compared to their carrying values to measure the amount of impairment
loss. As a result, a non-cash transitional impairment charge of $29.6
million (net of income taxes of $18.8 million) was recognized and recorded
as a cumulative effect of accounting change in the accompanying March 31,
2002 consolidated statements of income.
In management's opinion, the transitional impairment charge at the
reciprocal management segment primarily reflects certain intangibles and
synergies, which are opportunistic in nature, carry a relatively higher
degree of uncertainty, and therefore were treated conservatively in the
valuation required by FAS 142. The transitional impairment charge at the
TPA segment primarily reflects changes in market conditions and an increase
in competition in recent years in the markets served by the Company's TPA
segment.
8
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
The following table provides comparative disclosures of net income
excluding the cumulative effect of accounting change and goodwill
amortization, net of taxes, for the periods presented.
Three Months Ended
--------------------------
Mar 31, Mar 31,
2002 2001
-------------- ----------
Net (loss) income
-----------------
Net (loss) income, as reported $ (26,713) 1,294
Cumulative effect of accounting change 29,578 --
-------------- ----------
Net income, adjusted 2,865 1,294
Goodwill amortization, net of tax -- 539
-------------- ----------
Net income, comparative $ 2,865 1,833
============== ==========
Basic earnings per share:
------------------------
Net (loss) income, as reported $ (2.85) 0.14
Cumulative effect of accounting change 3.16 --
-------------- ----------
Net income, adjusted 0.31 0.14
Goodwill amortization, net of tax -- 0.06
-------------- ----------
Net income, comparative $ 0.31 0.20
============== ==========
Diluted earnings per share:
--------------------------
Net (loss) income, as reported $ (2.81) 0.14
Cumulative effect of accounting change 3.11 --
-------------- ----------
Net income, adjusted 0.30 0.14
Goodwill amortization, net of tax -- 0.06
-------------- ----------
Net income, comparative $ 0.30 0.20
============== ==========
4. Intangible Assets
The following table provides a detail of the Company's amortizable
intangible assets and estimated amortization expense for the periods
presented.
As of March 31, 2002 As of December 31, 2001
------------------------------- -------------------------------
Gross Accumulated Gross Accumulated
Balance Amortization Balance Amortization
-------------- ---------------- -------------- ----------------
Trade secrets $ 1,500 562 1,500 525
Non-compete agreements 500 268 500 250
Other 305 229 305 213
-------------- ---------------- -------------- ----------------
Total $ 2,305 1,059 2,305 988
============== ================ ============== ================
Three Months Ended
-------------------------------
Mar 31, Mar 31,
2002 2001
-------------- ----------------
Aggregate amortization expense $ 71 71
============== ================
Estimated amortization expense for the year ended:
--------------------------------------------------
12/31/2002 $ 282
12/31/2003 252
12/31/2004 221
12/31/2005 186
12/31/2006 150
9
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
5. 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 credit facility was $55
million, including (i) a $37.5 million revolving credit 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, which commenced December 31, 2001.
Amounts outstanding under the credit facility bear interest at a variable
rate, primarily based upon LIBOR plus a margin of 2.50 percentage points,
which may be reduced to a minimum of 2.00 percentage points as the Company
reduces its outstanding indebtedness. As of March 31, 2002 and December 31,
2001, the interest rates on the credit facility were 4.54% and 4.16%,
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 may not exceed 3:50:1; b) combined net premiums written to
combined statutory capital and surplus may not exceed 2.00:1; c) the fixed
charge coverage ratio may not be less than 2.00:1 at the end of each
quarter through December 31, 2002, and thereafter the fixed charge coverage
ratio may not be less than 2:25:1 and d) funded debt to total capital plus
funded debt may not exceed 0.27:1. The credit facility also contains
minimum equity and risk-based capital requirements and requires the
Company's insurance subsidiaries to maintain at least an A- (Excellent)
group rating from A.M. Best.
6. Derivative Financial Instruments
In connection with the Company's credit facility entered into on August 31,
2001, the Company also entered into two interest rate swap agreements (the
"swap agreements"). The Company uses 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.
The swap agreements in effect as of March 31, 2002 are as follows:
Notional Receive Pay
Amount Maturities Rate (1) Rate
------------ -------------- ------------ -----------
$ 37,000 08/31/2004 2.04% 6.45%
$ 14,583 08/31/2004 2.04% 5.97%
(1) Based on three-month LIBOR
10
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
7. 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
---------------------------------------
Mar 31, Mar 31,
2002 2001
------------- -------------
Net Income:
----------
Income before cumulative effect of
accounting change $ 2,865 1,294
Cumulative effect of accounting change (29,578) --
------------- -------------
Net (loss) income $ (26,713) 1,294
============= =============
Basic weighted average shares outstanding 9,375 9,393
Common stock equivalents 123 43
------------- -------------
Diluted weighted average shares outstanding 9,498 9,436
============= =============
Basic earnings per share:
-------------------------
Income before cumulative effect of
accounting change $ 0.31 0.14
Cumulative effect of accounting change (3.16) --
------------- -------------
Net (loss) income $ (2.85) 0.14
============= =============
Diluted earnings per share:
---------------------------
Income before cumulative effect of
accounting change $ 0.30 0.14
Cumulative effect of accounting change (3.11) --
------------- -------------
Net (loss) income $ (2.81) 0.14
============= =============
8. Segment Information
The business segments presented in this document have been determined in
accordance with the provisions of FAS 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has three main
operating segments as follows: insurance, reciprocal management and TPA.
Holding company operations are included within the insurance segment due to
the segment's size and prominence and the substantial attention devoted to
the segment.
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
reciprocal management services, brokerage and administration services for
reinsurance programs and brokerage services for the placement of annuities
in structured settlements. In addition, the Company provides TPA services
through its subsidiary that markets and administers self-insured plans for
both large and small employers, including group accident and health
insurance, workers' compensation and general liability and property
insurance. The Company evaluates a segment's performance based on net
income and accounts for intersegment sales and transfers as if the sales or
transfers were to a third party. All segments are managed separately as
each business requires different technology and marketing strategies.
Consolidating information by each segment is summarized in the tables
below.
As of As of
Identifiable Assets Mar 31, 2002 Dec 31, 2001
--------------------------------- --------------- ----------------
Insurance $ 753,166 706,290
Reciprocal management 39,032 61,468
Third party administration 9,384 14,788
Intersegment eliminations (10,122) (11,724)
--------------- ----------------
Total assets $ 791,460 770,822
=============== ================
11
FPIC INSURANCE GROUP, INC.
Notes to the Unaudited Consolidated Financial Statements
(In Thousands, Except per Common Share Data and Elsewhere as Noted)
Three Months Ended
--------------------------------
Mar 31, 2002 Mar 31, 2001
--------------- ----------------
Total Revenues
---------------------------------
Insurance $ 45,379 38,384
Reciprocal management 5,626 5,107
Third party administration 3,465 3,998
Intersegment eliminations (996) (1,203)
------------- --------------
Total revenues $ 53,474 46,286
============= ==============
Net (Loss) Income
---------------------------------
Insurance $ 2,227 980
Reciprocal management (23,624) 244
Third party administration (5,316) 70
------------- --------------
Net (loss) income $ (26,713) 1,294
============= ================
9. Commitments and Contingencies
The Company's insurance subsidiaries may become subject to claims for
extra-contractual obligations or risks in excess of policy limits in
connection with their administration of insurance claims. These claims may
be referred to as "bad faith" actions as it is alleged that the insurance
company acted in bad faith in the administration of a claim against an
insured. Bad faith actions are few in number and generally occur in
instances where a jury verdict exceeds the insured's policy limits. Under
such circumstances, it is routinely alleged that the insurance company
failed to negotiate a settlement of a claim in good faith within the
insured's policy limit. In such cases, the insured may assign his or her
rights under the policy to the plaintiff in settlement of the insured's
portion of the verdict. The plaintiff is then permitted to sue the insurer
on behalf of the defendant. The Company has evaluated such exposures as of
March 31, 2002, and in all such cases, believes its position and defenses
are meritorious, and that when all facts and circumstances are considered,
including its own insurance coverage against such risks, its potential
exposure to material losses from such exposures is immaterial.
The Company has also been involved in one or more legal actions not
involving claims under its insurance policies from time to time. The
Company's 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.
10. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board 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.
11. Reclassification
Certain amounts for 2001 have been reclassified to conform to the 2002
presentation.
12
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, 2001,
which was filed with the Securities and Exchange Commission on March 27, 2002.
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, (xiii) developments in
reinsurance markets that could affect the Company's reinsurance program; and
(xiv) changes in the Company's financial ratings resulting from one or more of
these uncertainties and other factors.
The words "believe," "anticipate," "foresee," "estimate," "project," "plan,"
"expect," "intend," "hope," "should," "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.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses, and related disclosures of
contingent assets and liabilities. On an on-going basis, management evaluates
its estimates, including those related to income taxes, loss and loss adjustment
expense ("LAE") reserves, contingencies and litigation. The Company bases its
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
13
A discussion of the critical accounting policies believed by management to
affect its more significant judgments and estimates used in preparation of the
Company's consolidated financial statements is included in Company's Form 10-K
for the year ended December 31, 2001, which was filed with the Securities and
Exchange Commission on March 27, 2002. In some cases, the estimates included in
the Company's financial statements for interim periods are determined using
abbreviated methods or updates, which are less comprehensive that those used in
preparation of its annual financial statements.
The following accounting policy has changed with the Company's adoption of
Financial Accounting Standard ("FAS") 142, "Goodwill and Other Intangible
Assets."
Goodwill and Intangible Assets.
The Company has made acquisitions in the past that included a significant amount
of goodwill and other intangible assets. Under generally accepted accounting
principles in effect through December 31, 2001, these assets were amortized over
their estimated useful lives, and were tested periodically to determine if they
were recoverable from operating earnings on an undiscounted basis over their
useful lives.
Effective January 1, 2002, the Company adopted FAS 142, "Goodwill and Other
Intangible Assets." In accordance with FAS 142, goodwill and indefinite lived
intangible assets will no longer be amortized but will be subject to an annual
(or under certain circumstances more frequent) impairment test based on its
estimated fair value. Other intangible assets that meet certain criteria will
continue to be amortized over their useful lives and will also be subject to an
impairment test based on estimated fair value. There are many assumptions and
estimates underlying the determination of an impairment loss. Another estimate
using different, but still reasonable, assumptions could produce a significantly
different result. Therefore, additional impairment losses could be recorded in
the future.
During the quarter ended March 31, 2002, the Company completed the transitional
impairment analysis required by FAS 142 and recorded an impairment charge of
$29.6 million, net of $18.8 million in income taxes. See Notes 1 and 3 to the
unaudited consolidated financial statements for a discussion of the new
accounting policy for goodwill and intangible assets. In 2001, had the new
standard been in effect, net income and basic and diluted earnings per share
would have increased $0.5 million and $0.06, respectively, as a result of
goodwill amortization recorded under the old standard.
Selected Balance Sheet Items: March 31, 2002 Compared to December 31, 2001
Cash and invested assets increased $7.3 million to $449.3 million as of March
31, 2002 from $442.0 million as of December 31, 2001. The increase in cash and
invested assets is the result of the growth in premiums, which increased the
amounts available for investment, and the receipt of federal and state tax
refunds related to the overpayment of estimated taxes in 2001.
Premiums receivable increased $20.7 million to $94.1 million as of March 31,
2002 from $73.4 million as of December 31, 2001. The increase in premiums
receivable is the result of growth in premiums written as a result of price
improvements on core medical professional liability ("MPL") business and the
addition of MPL policyholders. 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 $14.9
million to $95.3 million as of March 31, 2002 from $80.4 million as of December
31, 2001. Ceded unearned premiums increased $11.1 million to $51.9 million as of
March 31, 2002 from $40.8 million as of December 31, 2001. The increases in
these assets are related to the increase in the underlying reserves and unearned
premiums resulting from growth in premiums written and earned on the Company's
core MPL business.
14
Deferred income taxes increased $21.0 million to $40.9 million as of March 31,
2002 from $19.9 million as of December 31, 2001. The increase in deferred income
taxes relates to the Company's adoption of FAS 142. As a result of the
transitional impairment tests required by FAS 142, the Company recognized a
one-time, non-cash after-tax charge of $29.6 million. In connection with the
charge, the Company recognized deferred tax assets associated with
tax-deductible goodwill.
Goodwill decreased $48.3 million to $18.9 million as of March 31, 2002 from
$67.2 million as of December 31, 2001. The decrease in goodwill is due to the
adoption of FAS 142. As a result of the transitional impairment tests required
by FAS 142, the Company reduced the carrying value of goodwill at its reciprocal
management and TPA segments.
Federal income tax receivable decreased $3.2 million to $2.1 million as of March
31, 2002 from $5.3 million as of December 31, 2001. 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 in 2001.
Other assets decreased $2.5 million to $10.7 million as of March 31, 2002 from
$13.2 million as of December 31, 2001. The decrease in other assets is due to
the receipt of a state tax refund related to the overpayment of estimated taxes
in 2001.
The liability for loss and LAE increased $18.7 million to $337.2 million as of
March 31, 2002 from $318.5 million as of December 31, 2001. 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 $28.0 million to $174.8 million as of March 31, 2002
from $146.8 million as of December 31, 2001. The increase in unearned premiums
is primarily related to growth in premiums written at the Company's insurance
subsidiaries.
Reinsurance payable increased $5.4 million to $32.1 million as of March 31, 2002
from $26.7 million as of December 31, 2001. The increase in reinsurance payable
is related to an increase in premiums written for direct MPL business.
Premiums paid in advance and unprocessed premiums decreased $1.4 million to $8.5
million as of March 31, 2002 from $9.9 million as of December 31, 2001. The
decrease in paid in advance and unprocessed premiums reflects the policy renewal
cycle at the Company's largest insurance subsidiary whereby the majority of
policies are renewed with an effective date of January 1 or July 1 of each year.
Results of Operations: Three Months Ended March 31, 2002 Compared to Three
Months Ended March 31, 2001
Total revenues for the first quarter 2002 increased 16% to $53.5 million from
$46.3 million for the first quarter 2001. Revenue growth was driven primarily by
price improvements and growth of the Company's MPL policyholder base in Florida
and Missouri.
Total expenses for the first quarter 2002 increased 10% to $49.3 million from
$44.7 million for the first quarter 2001. Net losses and LAE incurred for the
three months ended March 31, 2002 increased $3.8 million or 13% compared with
the three months ended March 31, 2001. The increase reflects growth in business,
taking into consideration expected loss trends. Other underwriting expenses also
contributed to the increase in total expenses, primarily as a result of an
increase in expenses related to the growth in insurance business. These
increases were offset by the decline in other expenses due to the Company's
adoption of FAS 142. In accordance with FAS 142, the Company ceased the
amortization of goodwill
15
and indefinite lived intangible assets during the first quarter 2002. The
adoption of FAS 142 eliminated amortization expense of approximately $0.5
million after-tax in the first quarter 2002.
Before the cumulative effect of the adoption of FAS 142, the Company reported
income from operations of $2.9 million or $0.30 per diluted share for the first
quarter 2002, compared with net income of $1.3 million or $0.14 per diluted
share, for the same period in 2001. The first quarter 2002 adoption of FAS 142
resulted in a one-time, non-cash charge that reduced the carrying value of the
Company's goodwill by $48.4 million. After the accounting change and the effect
of the tax benefit associated with it, the Company incurred a net loss of $26.7
million, or $2.81 per diluted share, for the first quarter 2002. The goodwill
impairments recognized upon adoption of FAS 142 were associated entirely with
the Company's non-insurance segments.
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 and Interlex Insurance
Company. Holding company operations are included within the insurance segment
due to the segment's size and prominence and the substantial attention devoted
to the segment. Unaudited financial data for the Company's insurance segment for
the three months ended March 31, 2002 and 2001 are summarized in the table
below. Dollar amounts are in thousands.
Three Months Ended
-------------------------------------------------
Mar 31, Percentage Mar 31,
2002 Change 2001
-------------------------------------------------
Direct and assumed premiums written $ 89,259 62% $ 55,173
============ ============
Net premiums written $ 56,195 57% $ 35,898
============ ============
Net premiums earned $ 39,342 25% $ 31,517
Net investment income 4,893 -26% 6,574
Commission income 4 -67% 12
Net realized investment gains (losses) 468 588% (96)
Finance charge and other income 196 9% 180
Intersegment revenues 476 142% 197
------------ ------------
Total revenues 45,379 18% 38,384
------------ ------------
Net losses and LAE 33,825 13% 30,009
Other underwriting expense 6,692 36% 4,924
Interest expense 1,216 6% 1,152
Other expenses 70 -72% 246
Intersegment expenses 471 -53% 1,006
------------ ------------
Total expenses 42,274 13% 37,337
------------ ------------
Income from operations before taxes and cumulative
effect of accounting change 3,105 197% 1,047
Less: Income taxes 878 1210% 67
------------ ------------
Income before cumulative effect of
accounting change 2,227 127% 980
------------ ------------
Less: Cumulative effect of accounting
change (net of tax benefit) -- 0% --
------------ ------------
Net income $ 2,227 127% $ 980
============ ============
16
Direct and assumed premiums written increased 62% to $89.3 million for the three
months ended March 31, 2002 from $55.2 million for the three months ended March
31, 2001. The increase in direct premiums written is primarily due to the
effects of rate increases realized by the Company's insurance subsidiaries and
growth in policyholders. APAC, Tenere and First Professionals implemented rate
increases in July, November and December 2001, respectively. The growth in
direct premiums written was partially offset by a decline in direct and assumed
premiums written under group accident and health ("A&H") programs, which were
discontinued in 2001, and a decline in assumed professional liability premiums
written during the three months ended March 31, 2002.
Net premiums written increased 57% to $56.2 million for the three months ended
March 31, 2002 from $35.9 million for the three months ended March 31, 2001. The
increase in net premiums written is due to growth in direct premiums written
associated with rate increases at the Company's insurance subsidiaries and an
increase in policyholders, as noted above. The growth in direct professional
liability premiums was offset by a decline in group A&H and assumed professional
liability premiums written.
Net premiums earned increased 25% to $39.3 million for the three months ended
March 31, 2002 from $31.5 million for the three months ended March 31, 2001. The
increase in net premiums earned is due to rate increases implemented by the
Company's insurance subsidiaries in the second half of 2001 and growth in the
number of policyholders. Partially offsetting this increase was a decline in
group A&H premiums earned of approximately $4.4 million. The increase in net
premiums earned is less than the increase in premiums written for the same
period primarily due to the inherent lag between written and earned premiums. In
addition, direct premiums written includes 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 26% to $4.9 million for the three months ended
March 31, 2002 from $6.6 million for the three months ended March 31, 2001. The
decline in net investment income is primarily due to lower available interest
rates on fixed income investments, which have prevailed since the latter half of
2001. The Company also held more invested cash during the first quarter 2002 as
compared to the first quarter 2001 in anticipation of improvements in fixed
income rates in the near term.
Net losses and LAE incurred increased 13% to $33.8 million for the three months
ended March 31, 2002 from $30.0 million for the three months ended March 31,
2001. The increase in net losses and LAE is consistent with the growth in
business, taking into consideration expected loss trends and other pertinent
considerations. The increase in net losses and LAE incurred was partially offset
by a decline in the Company's group A&H business corresponding with the complete
withdrawal from its group A&H programs in 2001. The Company's loss ratios for
the three months ended March 31, 2002 and 2001 were 86% and 95%, respectively. A
loss ratio is defined as the ratio of loss and LAE incurred to net premiums
earned. The 9% decrease in the reported loss ratio is due to the Company's exit
from its former group A&H business (3%), loss expense reduction and productivity
(2%), changes in the mix of assumed reinsurance (1%), and expected improvements
in underwriting results associated with improvements in pricing (3%).
The liability for losses and LAE represents management's best estimate of the
ultimate cost of all losses incurred but unpaid and considers historical loss
experience, expected loss trends, the Company's loss retention levels and
changes in the frequency and severity of claims. The process of establishing
reserves for property and casualty claims is a complex and uncertain process,
requiring the use of significant reliance upon estimates. The Company's
estimates are revised as additional experience and other data become available
and are reviewed as new or improved methodologies are developed or other
significant events occur that may affect reserves. 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
17
the change occurs. The Company believes its liability for losses and LAE is
adequate; however, given the inherent uncertainty in reserve estimates, there
can be no assurance that the ultimate amount of actual losses will not exceed
the related amounts currently estimated. Furthermore, any such difference,
either positive or negative, could have a material effect on the Company's
results of operations and financial position.
Other underwriting expenses increased 36% to $6.7 million for the three months
ended March 31, 2002 from $4.9 million for the three months ended March 31,
2001. The increase in other underwriting expenses is primarily attributable to
additional operating expenses associated with the growth in insurance business.
In addition, as noted above, the Company's largest insurance subsidiary
performed a study in 2001 of expenses incurred in the administration of claims
and based on the results of this study decreased the amount of expenses
allocated to LAE in 2002.
Other expenses declined 72% to $0.07 million for the three months ended March
31, 2002 from $0.2 million for the three months ended March 31, 2001. In
accordance with FAS 142, the Company ceased the amortization of goodwill and
indefinite lived intangible assets during the first quarter 2002.
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
Physicians' Reciprocal Insurers ("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 the business of 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 ended March 31, 2002 and 2001 are summarized in the table below. Dollar
amounts are in thousands.
Three Months Ended
------------------------------------------------------------
Mar 31, Percentage Mar 31,
2002 Change 2001
------------------------------------------------------------
Claims administration and management fees $ 4,599 16% $ 3,972
Net investment income 40 -34% 61
Commission income 481 434% 90
Other income 21 -92% 272
Intersegment revenues 485 -32% 712
-------------- --------------
Total revenues 5,626 10% 5,107
-------------- --------------
Claims administration and management expenses 4,068 2% 3,990
Other expenses -- -100% 543
Intersegment expenses 372 235% 111
-------------- --------------
Total expenses 4,440 -4% 4,644
-------------- --------------
Income from operations before taxes and cumulative
effect of accounting change 1,186 156% 463
Less: Income taxes 447 104% 219
-------------- --------------
Income before cumulative effect of accounting change 739 203% 244
-------------- --------------
Less: Cumulative effect of accounting change (net of
tax benefit) 24,363 100% --
-------------- --------------
Net (loss) income $ (23,624) -9782% $ 244
============== ==============
18
Claims administration and management fees increased 16% to $4.6 million for the
three months ended March 31, 2002 from $4.0 million for the three months ended
March 31, 2001. The claims administration and management fees earned by AFP are
comprised entirely of management fees from PRI and the increase is due to the
growth in 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 direct
premiums written, with an adjustment for expected return premiums. As such, the
Company's revenues and results of operations are financially sensitive to the
revenues of PRI. In addition, PRI, as an MPL insurer, is subject to many of the
same types of risks as those of the Company's insurance subsidiaries.
Commission income increased to $0.5 million for the three months ended March 31,
2002 from $0.1 million for the three months ended March 31, 2001. The increase
in commission income is due to an increase in brokerage commission earned by
Intermediaries for the placement of reinsurance.
Other expenses declined to $0 for the three months ended March 31, 2002 from
$0.5 million for the three months ended March 31, 2001. The decline in other
expenses, which were comprised entirely of goodwill amortization, is due to the
Company's adoption of FAS 142. In accordance with FAS 142, the Company ceased
the amortization of goodwill and indefinite lived intangible assets during the
first quarter 2002.
In management's opinion, the non-cash transitional impairment charge, which
represents the cumulative effect of the accounting change, primarily reflects
certain intangibles and synergies, which are opportunistic in nature, carry a
higher degree of uncertainty, and therefore were treated conservatively in the
valuation required by FAS 142.
Third Party Administration Segment
The Company's third party administration ("TPA") segment is made up of Employers
Mutual, Inc. ("EMI"). Unaudited financial data for the Company's TPA segment for
the three months ended March 31, 2002 and 2001 are summarized in the table
below. Dollar amounts are in thousands.
Three Months Ended
--------------------------------------
Mar 31, Percentage Mar 31,
2002 Change 2001
--------------------------------------
Claims administration and management fees $ 3,031 -7% $ 3,246
Net investment income 6 -91% 67
Commission income 390 2% 383
Other income 3 -63% 8
Intersegment revenues 35 -88% 294
----------- ------------
Total revenues 3,465 -13% 3,998
----------- ------------
Claims administration and management expenses 3,393 -6% 3,611
Other expenses -- -100% 181
Intersegment expenses 153 78% 86
----------- ------------
Total expenses 3,546 -9% 3,878
----------- ------------
(Loss) income from operations before taxes and cumulative
effect of accounting change (81) -168% 120
Less: Income taxes 20 -60% 50
----------- ------------
(Loss) income before cumulative effect of accounting change (101) -244% 70
----------- ------------
Less: Cumulative effect of accounting change (net of
tax benefit) 5,215 100% --
----------- ------------
Net (loss) income $ (5,316) -7694% $ 70
=========== ============
Claims administration and management fees declined 7% to $3.0 million for the
three months ended March 31, 2002 from $3.2 million for the three months ended
March 31, 2001. The decline in claims
19
administration and management fees is due to the disposition of the Company's
Albuquerque division during the fourth quarter of 2001. Excluding the effect of
the Albuquerque TPA division, claims administration and management fees
increased $0.5 million or 21% for the three months ended March 31, 2002, as
compared to the same period in 2001, which reflects an increase in new business.
Claims administration and management expenses declined 6% to $3.4 million for
the three months ended March 31, 2002 from $3.6 million for the three months
ended March 31, 2001. The decline in claims administration and management
expenses is also due to the disposition of the Company's Albuquerque division.
Excluding the effect of the Albuquerque TPA division, claims administration and
management expenses increased $0.6 million or 21% when compared with the three
months ended March 31, 2001. The increase in claims administration and
management expenses is due to additional expenses incurred as a result of new
business.
Other expenses decreased to $0 for the three months ended March 31, 2002 from
$0.2 million for the three months ended March 31, 2001. The decline in other
expenses is due to the Company's adoption of FAS 142. In accordance with FAS
142, the Company ceased the amortization of goodwill and indefinite lived
intangible assets during the first quarter 2002.
The non-cash transitional impairment charge, which represents the cumulative
effect of the accounting change, primarily reflects changes in market conditions
and an increase in competition in recent years in the markets served by the
Company's TPA segment.
Stock Repurchase Plans
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 the
requirements of its credit facility under which the Company may repurchase
shares up to an amount not to exceed 50% of net income of the immediately
preceding year. A decision whether or not to make additional repurchases is
based upon an analysis of the best use of the Company's capital. The Company did
not repurchase any shares during the quarter ended March 31, 2002. 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 first quarter of 2002 to meet these needs. As reported in the consolidated
statement of cash flows, the Company generated positive net cash from operating
activities of $13.0 million for the three months ended March 31, 2002. In
addition, at March 31, 2002 the Company held approximately $14.7 million in
investments scheduled to mature during the next twelve months. Management
believes cash flows from operating activities, which combined with scheduled
maturities 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) monitors its reserve positions and
regularly performs 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).
20
As of March 31, 2002, the Company had borrowed $51.6 million under a credit
facility with five banks. 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 $14.6 million term
loan facility, repayable in twelve equal quarterly installments of approximately
$1.5 million. Amounts outstanding under the credit facilities bear interest at a
variable rate, primarily based upon LIBOR plus an initial margin of 2.50
percentage points, which may be reduced to a minimum of 2.00 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 may not exceed
3:50:1; b) combined net premiums written to combined statutory capital and
surplus may not exceed 2.00:1; c) the fixed charge coverage ratio may not be
less than 2.00:1 at the end of each quarter through December 31, 2002, and
thereafter the fixed charge coverage ratio may not be less than 2:25:1 and d)
funded debt to total capital plus funded debt may not exceed 0.27:1. The credit
facility also contains minimum equity and risk-based capital requirements and
requires the Company's insurance subsidiaries to maintain at least an A-
(Excellent) group rating from A.M. Best.
Dividends payable by the Company's insurance subsidiaries are subject to certain
limitations imposed by Florida and Missouri laws. In 2002 these subsidiaries are
permitted, within insurance regulatory guidelines, to pay dividends of
approximately $10.7 million without prior regulatory approval.
Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the reported market risks, as described
in the Company's 2001 annual report on Form 10K, since the end of the most
recent fiscal year.
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K -
On April 17, 2002, the Company filed a Form 8-K notifying the
Securities and Exchange Commission that the Company received
notification from A.M. Best Company ("Best") that Best affirmed it's
A- (Excellent) group rating. The rating applies to the Company's four
insurance subsidiaries, First Professionals Insurance Company, Inc.,
Anesthesiologists Professional Assurance Company, Intermed Insurance
Company and Interlex Insurance Company.
21
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
-----------------------------------------
May 14, 2002 Kim D. Thorpe, Executive Vice President
and Chief Financial Officer (a duly
authorized officer and the principal
financial officer of the registrant)
22