10-K405/A 1 dkm144.txt AMENDMENT TO FORM 10-K FYE DECEMBER 31, 2001 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Mark One) [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ____________to ___________ Commission file number 1-11983 FPIC Insurance Group, Inc. (Exact Name of Registrant as Specified in its Charter) Florida 59-3359111 (State or Other Jurisdiction of (IRS Employer Identification No.) Incorporation or Organization) 225 Water Street, Suite 1400, Jacksonville, Florida 32202 (Address of Principal Executive Offices) (Zip Code) (904) 354-2482 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.10 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------------- ------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the Registrant's Common Stock (its only voting stock) held by non-affiliates of the Registrant as of March 30, 2002 was approximately $113,959,643. As of March 20, 2002, there were 9,389,462 shares of the Registrant's Common Stock, $.10 Par Value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Document Incorporated in ------------------------------- ----------------------------------- Proxy Statement for Registrant's Part III Annual Shareholders' Meeting to be held on June 5, 2002 Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations is amended as follows for typographical changes in the last paragraph of the discussion regarding Loss and Loss Adjustment Expenses included in the Company's Form 10-K filed with the Securities and Exchange Commission on March 27, 2002. Item 7. Management's Discussion & Analysis of Financial Condition and Results of Operations ------------------------------------------------------------------------------ The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this report. The consolidated financial statements include the results of all of the Company's wholly owned and majority owned subsidiaries. Safe Harbor Disclosure ---------------------- The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in documents filed by the Company with the Securities and Exchange Commission) include, but are not limited to, (i) uncertainties relating to government and regulatory policies (such as subjecting the Company to insurance regulation or taxation in additional jurisdictions or amending, 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. 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. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and 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 expenses ("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. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements: 2 Reinsurance. Reinsurance recoverables include the balances due from reinsurance companies for paid and unpaid losses and LAE that will be recovered from reinsurers, based on contracts in force. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance contracts do not relieve the Company from its primary obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk with respect to the individual reinsurers, which participate in its ceded programs to minimize its exposure to significant losses from reinsurer insolvencies. The Company holds collateral in the form of letters of credit or trust accounts for amounts recoverable from reinsurers that are not designated as authorized reinsurers by the domiciliary Departments of Insurance. Income Taxes. The Company accounts for income taxes in accordance with Financial Accounting Standard ("FAS") No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not, that all or some portion of the benefits related to the deferred tax assets will not be realized. Valuation allowances are based on estimates of taxable income and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or these estimates are adjusted in future periods, the Company may need to establish a valuation allowance, which would impact our financial position and results of operations. No such valuation allowance has been established to date as the Company believes it is more likely than not that its deferred tax assets will be fully realized. Goodwill and Intangible Assets. Goodwill represents the aggregate cost of companies acquired over the fair value of net assets at the date of acquisition and is being amortized into income using the straight-line method over periods ranging from ten to twenty-five years. Management regularly reviews the carrying value of goodwill by determining whether the unamortized value of the goodwill can be recovered through undiscounted future operating cash flows of the acquired operation. Intangible assets represent trade secrets acquired and non-compete agreements entered into in connection with business combinations. These assets are being amortized into income over periods corresponding with their terms or useful lives that range from three to ten years using the straight-line method. Management regularly reviews the carrying value of intangible assets by determining whether the amortization of the intangible assets can be recovered through undiscounted future operating cash flows of the acquired operation. In the event goodwill or another intangible asset is impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the respective asset. Fair value is determined primarily using anticipated cash flows at a rate commensurate with the risk involved. Losses on assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Loss and Loss Adjustment Expenses. The Company estimates its liability for loss and LAE using actuarial projections of ultimate losses and LAE and other quantitative and qualitative analyses of conditions expected to effect the future development of claims and related expenses. The estimated liability for losses is based upon paid and case reserve estimates for losses reported, adjusted through formula calculations to develop ultimate loss expectations; related estimates of incurred but not reported losses and expected cash reserve developments based on past experience and projected future trends; deduction of amounts for reinsurance placed with reinsurers; and estimates received related to assumed reinsurance. Amounts attributable to ceded reinsurance derived in estimating the liability for loss and LAE are reclassified as assets in the consolidated balance sheets as required by FAS No. 113. The liability for LAE is provided by estimating future expenses to be incurred in settlement of claims provided for in the liability for losses and is estimated using similar actuarial techniques. 3 The liabilities for losses and LAE and the related estimation methods are continually reviewed and revised to reflect current conditions and trends. The resulting adjustments are reflected in the operating results of the current year. While management believes the liabilities for losses and LAE are adequate to cover the ultimate liability, the actual ultimate loss costs may vary from the amounts presently provided and such differences may be material. The Company also has direct and assumed liabilities under covered extended reporting endorsements associated with claims-made MPL policy forms, which generally provide, at no additional charge, continuing MPL coverage for claims-made insureds in the event of death, disability or retirement. These liabilities are carried within unearned premium reserves and are estimated using techniques, which possess elements of both loss reserves and pension liabilities, and thus, include additional assumptions for mortality, morbidity, retirement, interest and inflation. In performing its tests of the liability for losses and LAE as of December 31, 2001, the Company's independent actuarial firm utilized multiple methods and developed a range of reasonable estimates. The Company's liability for losses and LAE, net of reinsurance, as of December 31, 2001 is $238.1 million, which corresponds with the point estimate of its independent actuarial firm's consolidated range of estimates of $223.2 million (minus $14.9 million, or 6%) to $255.5 million (plus $17.4 million, or 7%). For each 1% increase or decrease in the Company's estimated liability for losses and LAE as of December 31, 2001, that could occur in one or more future periods, a corresponding charge or credit to income in the amount of approximately $2.4 million ($1.8 million, after tax effects) would occur. Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties, and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. General ------- FPIC Insurance Group, Inc. (the "Company") was formed in 1996 in connection with a reorganization (the "Reorganization") pursuant to which it became the parent company of Florida Physicians Insurance Company, Inc. ("Florida Physicians") and McCreary Corporation ("McCreary"), a third party administrator. In connection with the Reorganization, Florida Physicians shareholders became the shareholders of the Company and received five shares of the Company's common stock for each of their shares of Florida Physicians common stock. In May 2001, the Company changed the name of Florida Physicians to First Professionals Insurance Company, Inc. ("First Professionals"). Effective January 1, 2002, McCreary and its subsidiary, Employers Mutual, Inc. ("EMI") were consolidated by legal entity merger, with EMI continuing as the surviving entity. The Company has three main operating segments as follows: insurance, reciprocal management and third party administration ("TPA"). The Company's primary sources of revenue are management fees and dividends received from its subsidiaries. The primary sources of revenue for these amounts are premiums earned and investment income derived from the insurance segment and fee and commission income from the reciprocal management and TPA segments. Through the insurance segment, the Company specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. The Company's medical professional liability ("MPL") insurance is written substantially on a "claims-made" basis (as opposed to an "occurrence" basis) providing protection to the insured only for those claims that arise out of incidents occurring, and of which notice to the insurer is given, while coverage is in effect. The Company also offers "tail coverage" for claims reported after the expiration of the policy for occurrences during the coverage period. The price of tail coverage is based on the length of time the insured has been covered under the Company's claims-made form. The Company provides free tail coverage for insured physicians who die or become disabled during the coverage period of the policy and for those who have been insured by the Company for at least five consecutive years and retire completely from the practice of medicine. Through the reciprocal management segment, the Company provides brokerage and administration services for reinsurance programs and brokerage services for the placement of 4 annuities in structured settlements. The Company's TPA markets and administers self-insured and fully insured plans for both large and small employers, including group accident and health, workers' compensation and general liability and property insurance. The Company's financial position and results of operations are subject to fluctuations due to a variety of factors. Unexpected high frequency or severity of losses for the Company's insurance subsidiaries in any period, particularly in the Company's prior three policy years, could have a material adverse effect on the Company. In addition, reevaluations of the liability for loss and LAE could result in an increase or decrease in liabilities and a corresponding adjustment to earnings. The Company's historical results of operations are not necessarily indicative of future earnings. Overview -------- Overall, 2001 was a successful year for the Company. Improving market conditions laid the foundation for strategic opportunities that allowed the Company to build its business and strengthen its market position. In addition, the Company took initiatives to improve its operations as soft market conditions subsided. During the year, competitors that had previously competed heavily on price either raised their prices, reduced writings or in some cases exited the market. As a specialized carrier, the Company was positioned to take advantage of increasing demand and the improved pricing environment that resulted. Top-line growth, from both price improvements and increased policyholder counts, resulted. Strong results from our reciprocal management segment also resulted in significant growth in programs managed. The Company also accomplished a number of significant strategic initiatives during 2001, including: a) its 2002 reinsurance program at acceptable rates; b) completion of a new credit facility with a syndicate of banks, reducing outstanding debt by approximately $14 million, or 21%; c) completion of the Company's exit from the small group accident and health ("A&H") business; d) consolidation of the Company's third party administration operations; and e) implementation of an integrated investment program engaging outside professional investment managers. Net income for the year ended December 31, 2001, totaled $2.9 million, or $0.31 per diluted share, compared with net income of $0.6 million, or $0.06 per diluted share, for the year ended December 31, 2000. The 2001 results include the after-tax effects of $5.4 million for an adjustment made to increase reserves on prior years' business and $0.4 million in restructuring charges associated with the Company's TPA operations. Improved pricing and growth in policyholders during 2001 generated significant top-line growth. Total revenues for the year ended December 31, 2001 increased 8%, to $197.5 million, from $182.3 million for the year ended December 31, 2000. Annual revenue growth was driven primarily by growth in earned premiums, which contributed $10.6 million to such growth. Strong improvements in pricing and the addition of MPL policyholders, primarily in Florida and Missouri, were the primary source of premium growth. Commission income and claims administration and management fees earned by the Company's non-insurance subsidiaries in New York and Florida also grew, contributing $7.1 million to the growth in total revenues. The growth in total revenues during 2001 was offset by a $1.7 million decline in investment income as a result of lower market yields. Total expenses for the year ended December 31, 2001 increased 6%, to $196.4 million, from $185.2 million for the year ended December 31, 2000. Net losses and LAE incurred for the year ended December 31, 2001 increased $5.6 million or 5%, over the prior year. Excluding the pre-tax reserve strengthening in 2001 and 2000 of $8.8 million and $21.0 million, respectively, net losses and LAE incurred increased $17.7 million, or 17% during the year 2001. The increase reflects growth and the continuation of the Company's policy to maintain its reserves at a conservative level. Other underwriting expenses also contributed to the increase in total expenses, primarily as a result of enhancements made to the Company's financial and reporting systems and an increase in operating expenses related to growth in business. Offsetting the increases in expenses was a reduction in the allowance for bad debts of $1.0 million. 5 Insurance Segment ----------------- The Company's insurance segment is made up of its four insurance subsidiaries, 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 its size and prominence and the substantial attention devoted to the segment. Financial data for the Company's insurance segment for the years ended December 31, 2001, 2000 and 1999 are summarized in the table below. Dollar amounts are in thousands.

Percentage Percentage 2001 Change 2000 Change 1999 ---------------- ------------- --------------- ------------- ------------- Direct and Assumed Premiums Written $ 245,403 24% $ 197,280 33% $ 148,216 ================ =============== ============= Net Premiums Written $ 147,084 -9% $ 161,931 32% $ 122,433 ================ =============== ============= Net Premiums Earned $ 131,058 9% $ 120,454 2% $ 118,072 Net Investment Income 22,819 -7% 24,505 30% 18,832 Net Realized Investment Gains 1,429 420% 275 -22% 351 Commission Income 62 -61% 157 145% 64 Finance Charge and Other Income 733 -52% 1,520 4% 1,467 Intersegment Revenue 2,112 95% 1,083 100% -- ---------------- --------------- ------------- Total Revenues $ 158,213 7% $ 147,994 7% $ 138,786 ---------------- --------------- ------------- Net Losses and LAE Incurred $ 128,346 5% $ 122,766 52% $ 80,968 Other Underwriting Expense 25,684 24% 20,677 -2% 21,014 Interest Expense 4,566 6% 4,291 8% 3,981 Other Expenses 997 -64% 2,790 -1% 2,823 Intersegment Expense 3,852 -42% 6,675 154% 2,628 ---------------- --------------- ------------- Total Expenses $ 163,445 4% $ 157,199 41% $ 111,414 ---------------- --------------- ------------- (Loss) Income Before Taxes (5,232) 43% (9,205) -134% 27,372 ---------------- --------------- ------------- Net (Loss) Income $ (847) 71% $ (2,925) -115% $ 19,776 ================ =============== =============

Total insureds, including insureds under fronting arrangements, were 18,794, 12,150 and 11,318 for the years ended December 31, 2001, 2001 and 1999, respectively. Direct and assumed premiums written increased 24%, to $245.4 million for the year ended December 31, 2001 from $197.3 million for the year ended December 31, 2000. Excluding the effects of the non-recurring portion of 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") whereby the Company assumed the death, disability and retirement ("DD&R") risks under PRI's claims-made insurance policies in exchange for cash and investments of approximately $34 million, and the effects of the decline in premiums under A&H programs, which were discontinued in 2001, of $16.7 million, direct and assumed premiums written increased approximately $99 million or 71%. The increase in direct and assumed premiums written is due to the effect of rate increases and growth in new business and premiums written under fronting arrangements. The growth in direct premiums written was partially offset by declines in MPL assumed premiums written and group A&H premiums written. Direct and assumed premiums written increased 33%, to $197.3 million for the year ended December 31, 2000 from $148.2 million for the year ended December 31, 1999. The increase in direct and assumed premiums written is primarily related to the 100% quota share reinsurance agreement written in the first quarter of 2000 between the Company's insurance subsidiaries and PRI, as noted above. In addition, the Company experienced growth in direct premiums written in Texas, Alabama, Missouri, Kansas, and Georgia complimented by the acquisition of Tenere on March 17, 1999, which was only included in operations after such date. The increases in direct and assumed premiums written were offset by experience adjustment accruals for business assumed from PRI. The 6 experience adjustments represent an estimate of the amount of premium the Company will return to PRI in future years. Net premiums earned increased 9%, to $131.1 million for the year ended December 31, 2001 from $120.5 million for the year ended December 31, 2000. The increase in net premiums earned is less than the increase in direct and assumed premiums written for the same period primarily due 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. The increase in net premiums earned is due to growth in the number of policyholders and the effects of rate increases instituted by the Company's insurance subsidiaries during 2001. Partially offsetting this increase was a decline in A&H premiums earned of 70%, to $7.2 million for the year ended December 31, 2001, from $24.1 million for the year ended December 31, 2000. Net premiums earned increased 2%, to $120.5 for the year ended December 31, 2000 from $118.1 million for the year ended December 31, 1999. The increase in net premiums earned is related to growth in assumed reinsurance, which contributed additional assumed premiums earned of $3.1 million, and growth in direct premiums written at APAC and Tenere during the year 2000. The Company increased premium rates at First Professionals, APAC, and Tenere in 2000. As a result of the rate increases taken by First Professionals, selective underwriting, and the competitive environment in Florida, net premiums earned decreased in First Professionals core MPL business, and First Professionals experienced a decline in its physician insureds. APAC and Tenere experienced more favorable market conditions, which allowed them to grow their earned premiums and policyholder counts. Such growth offset some of the decline in net premiums earned at First Professionals and resulted in overall increases in the Company's direct professional liability insureds. Net investment income decreased 7%, to $22.8 million for the year ended December 31, 2001 from $24.5 million for the year ended December 31, 2000. The decrease in net investment income is primarily the result of lower investment returns on the Company's investment portfolio during 2001 caused by lower prevailing interest rates in fixed income securities. The effects of lower yields have been offset to some degree by growth in cash and invested assets resulting from growth in insurance premiums. On a consolidated basis, the Company's total investment portfolio grew to $ 424.2 million in 2001, up $19.2 million or 5%, from $405.0 million in 2000. Net investment income increased 30%, to $24.5 for the year ended December 31, 2000 from $18.8 million for the year ended December 31, 1999. The increase is primarily due to the investments received in association with the 100% DD&R quota share reinsurance agreement between the Company's insurance subsidiaries and PRI. On a consolidated basis, the Company's total investment portfolio grew to $405.0 million in 2000, up $58.4 million or 17%, from $346.6 million in 1999. Net realized investment gains increased 420%, to $1.4 million for the year ended December 31, 2001 from $0.3 million for the year ended December 31, 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 coincides with the liquidation of investments associated with repositioning the Company's investment portfolio. Finance charge and other income decreased 52%, to $0.7 million for the year ended December 31, 2001 from $1.5 million for the year ended December 31, 2000. The decline in finance charge and other income is due to the Company's decision to include a provision for finance charges within its Florida MPL policy premiums, rather than assessing finance charges separately. The liability for losses and LAE represents management's best estimate of the ultimate cost of all losses incurred but unpaid and considers prior loss experience, loss trends, the Company's loss retention levels and changes in the frequency and severity of claims. The process of establishing reserves for property and casualty claims is a complex and uncertain process, requiring the use of informed estimates and judgments. The Company's estimates 7 and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in the estimates of losses or reinsurance recoverables, and would be reflected in the Company's results of operations when the change occurs. 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. Net losses and LAE incurred increased 5%, to $128.3 million for the year ended December 31, 2001 from $122.8 million for the year ended December 31, 2000. The loss ratios for such periods were 98% and 102%, respectively. A loss ratio is defined as the ratio of loss and LAE incurred to net premiums earned. During the fourth quarter of 2001, the Company made a decision to adjust reserves upward by $8.8 million, pre-tax. The Company's decision to increase reserves reflects the Company's policy to maintain its reserves at a conservative level. Excluding the pre-tax reserve strengthening in 2001 and 2000 of $8.8 million and $21.0 million, respectively, net losses and LAE incurred increased $17.7 million, or 17% during the year 2001. This increase is consistent with the strong growth in business during 2001 and continues to reflect the Company's stated objective of maintaining its reserves at a conservative level, taking into consideration expected loss trends and all other pertinent considerations. The increase in 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. Net losses and LAE incurred increased 52%, to $122.8 million for the year ended December 31, 2000 from $81.0 million for the year ended December 31, 1999. The loss ratios for such periods were 102% and 69%, respectively. The increase in net losses and LAE incurred is primarily due to an increase in the loss and LAE provision during 2000 resulting from a reserve strengthening of $21.0 million, pre-tax. In addition, the 1999 results included reserve releases of approximately $17.0 million resulting from favorable development in loss experience on business written in years prior to 1999, which did not recur during the year 2000. Other underwriting expenses increased 24%, to $25.7 million for the year ended December 31, 2001 from $20.7 million for the year ended December 31, 2000. The increase in other underwriting expenses is primarily attributable to additional operating expenses associated with the growth in business and expenses incurred to improve the information systems used by the Company. In addition, two of the Company's insurance subsidiaries, First Professionals and APAC, increased their accruals for guarantee fund assessments by approximately $0.9 million, combined. Offsetting these increases was a reduction in the allowance for bad debts of $1.0 million. Other underwriting expenses decreased 2%, to $20.7 million for the year December 31, 2000 from $21.0 million for the year ended December 31, 1999. The decline in other underwriting expenses is attributable to a decline in assumed reinsurance costs and the accretion of the deferred credit associated with the 100% DD&R quota share reinsurance agreement entered into during the first quarter of 2000. Other expenses declined 64%, to $1.0 million for the year ended December 31, 2001 from $2.8 million for the year ended December 31, 2000. Other expenses for the year 2000 included a non-recurring pre-tax severance charge of $1.8 million, which did not recur in 2001. Reciprocal Management --------------------- 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 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. 8 Financial data for the Company's reciprocal management segment for the years ended December 31, 2001, 2000 and 1999 are summarized in the table below. Dollar amounts are in thousands.

Percentage Percentage 2001 Change 2000 Change 1999 ------------- ------------- ------------- ------------ ------------- Net Investment Income $ 344 35% $ 254 440% $ 47 Claims Administration and Management Fees 22,959 35% 17,044 1% 16,955 Commission Income 2,484 107% 1,199 79% 671 Other Income 399 -76% 1,680 -4% 1,758 Intersegment Revenue 3,111 -39% 5,129 237% 1,522 ------------- ------------- ------------- Total Revenues $ 29,297 16% $ 25,306 21% $ 20,953 ------------- ------------- ------------- Claims Administration and Management Expenses $ 18,420 23% $ 15,023 4% $ 14,490 Other Expenses 2,173 0% 2,172 1% 2,152 Intersegment Expense 1,518 145% 619 100% -- ------------- ------------- ------------- Total Expenses $ 22,111 24% $ 17,814 7% $ 16,642 ------------- ------------- ------------- Income Before Taxes 7,186 -4% 7,492 74% 4,311 ------------- ------------- ------------- Net Income $ 4,348 0% $ 4,360 90% $ 2,298 ============= ============= =============

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 adjust- ment for expected return premiums. AFP's claims administration and management fees are entirely comprised of these fees. Claims administration and manage- ment fees increased 35%, to $23.0 million for the year ended December 31, 2001, from $17.0 million for the year ended December 31, 2000. The increase in claims administration and management fees is due to an increase in the premiums written by PRI. The Company's revenues and results of operations are financially sensitive to the revenues and results of operations 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, which are described throughout this document. Commission income increased 107%, to $2.5 million for the year ended December 31, 2001 from $1.2 million for the year ended December 31, 2000. The increase in commission income corresponds with the increase in the amount of reinsurance brokered by Intermediaries in 2001. Commission income increased 79%, to $1.2 million for the year ended December 31, 2000 from $0.7 million for the year ended December 31, 1999. The increase in commission income is attributable to a full year of brokerage income from Intermediaries, which was formed during the second quarter of 1999. Other income decreased 76%, to $0.4 million for the year ended December 31, 2001 from $1.7 million for the year ended December 31, 2000. The decrease in other income is the result of lower statutory net income at PRI compared to the year 2000. The income received by AFP related to PRI's statutory net income for the years ended December 31, 2001, 2000 and 1999 was $0.3 million, $1.6 million and $1.7 million, respectively. In accordance with the management agreement between AFP and PRI, AFP receives or pays an amount equal to 10% of PRI's statutory net income or loss. Claims administration and management expenses increased 23%, to $18.4 million for the year ended December 31, 2001 from $15.0 million for the year ended December 31, 2000. The increase in claims administration and management expense is primarily attributable to an increase in commission expense incurred as a result of growth in brokerage and administration business at AFP and PMA. Under terms of the management agreement between AFP and PRI, AFP is responsible for brokerage costs incurred by PRI. In addition, the Company incurred additional operating expenses related to the growth in direct business at PRI. 9 Third Party Administration -------------------------- The Company's TPA segment is made up of McCreary and its subsidiary EMI. Effective January 1, 2002, McCreary and EMI were consolidated by legal entity merger, with EMI continuing as the surviving entity. Financial data for the Company's TPA segment for the years ended December 31, 2001, 2000 and 1999 are summarized in the table below. Dollar amounts are in thousands.

Percentage Percentage 2001 Change 2000 Change 1999 ------------ ------------ ----------- ------------ ----------- Net Investment Income $ 159 -33% $ 239 26% $ 189 Net Realized Investment Losses -- 100% (366) 100% -- Claims Administration and Management Fees 12,545 -3% 12,982 32% 9,850 Commission Income 2,502 19% 2,108 21% 1,741 Other Income 36 -83% 213 -58% 507 Intersegment Revenue 742 -52% 1,547 40% 1,106 ------------ ----------- ----------- Total Revenues $ 15,984 -4% $ 16,723 25% $ 13,393 ------------ ----------- ----------- Claims Administration and Management Expenses $ 14,931 -5% $ 15,683 33% $ 11,807 Other Expenses 1,327 -28% 1,833 -11% 2,066 Intersegment Expense 594 28% 464 100% -- ------------ ----------- ----------- Total Expenses $ 16,852 -6% $ 17,980 30% $ 13,873 ------------ ----------- ----------- Loss Before Taxes (868) 31% (1,257) -162% (480) ------------ ----------- ----------- Net Loss $ (571) 30% $ (821) -300% $ (205) ============ =========== ===========

During the fourth quarter 2001, the Company incurred a pre-tax charge of approximately $0.6 million in connection with the disposition of the Brokerage Services, Inc. ("BSI") division of EMI in Albuquerque, New Mexico. Under the plan, the Company sold the division's assets and cancelled its service agreements with self-insured customers. Certain other contracts were retained and will be serviced by the Company's Jacksonville, Florida division. The 2001 restructuring activity was a continuation of the Company's consolidation of the TPA operations and brings to an end the restructuring activities of the Albuquerque division that began during the fourth quarter of 2000 when the Company incurred a pre-tax charge of $0.5 million. Excluding the effects of the restructuring charges, the TPA segment incurred a net loss of approximately $0.2 million and $0.5 million for the years 2001 and 2000, respectively. Net realized investment losses for the year ended December 31, 2000 were $0.4 million, largely due to the write down of the Company's investment in a joint venture, Bexar Credentials, Inc. ("Bexar") in the fourth quarter of 2000. The Company's stock in Bexar was redeemed for $70 thousand in cash and notes receivable in January 2001. All amounts receivable by the Company from the sale have been collected. Claims administration and management fees declined 3%, to $12.5 million for the year ended December 31, 2001 from $13.0 million for the year ended December 31, 2000. The decline in claims administration and management fees is due to the termination of certain non-profitable contracts at the Company's Albuquerque division. Excluding the effect of the terminated contracts, claims administra- tion and management fees increased $1.1 million for the year ended December 31, 2001, as compared to the same period in 2000. Claims administration and management fees increased 32%, to $13.0 million for the year ended December 31, 2000 from $9.9 million for the year ended December 31, 1999. The growth in claims administration and management fees is attributable to the acquisition of assets related to the BSI division, by EMI during the third quarter of 1999, and the resulting recognition of a full twelve months of revenue from the acquired operations during the current year. Commission income increased 19%, to $2.5 million for the year ended December 31, 2001 from $2.1 million for the year ended December 31, 2000. The increase in commission income corresponds with increases in the underlying rates paid by customers for reinsurance being placed by the TPA segment under alternative market arrangements. 10 Commission income increased 21%, to $2.1 million for the year ended December 31, 2000 from $1.7 million for the year ended December 31, 1999. The increase in commission income is the result of growth in the placement of insurance and reinsurance by McCreary with external parties on behalf of its self-insured customers during 2000. Claims administration and management expenses declined 5%, to $14.9 million for the year ended December 31, 2001 from $15.7 million for the year ended December 31, 2000. The decline in claims administration and management expenses is due to the termination of certain non-profitable contracts at the Company's Albuquerque division. Excluding the effect of the terminated contracts, claims administration and management expenses increased $1.0 million for the year ended December 31, 2001, as compared to the same period in 2000. Claims administration and management expenses increased 33%, to $15.7 million for the year ended December 31, 2000 from $11.8 million for the year ended December 31, 1999. The growth in claims administration and management expenses is primarily attributable to the acquisition of assets by EMI during the third quarter of 1999. For the year ended December 31, 2001, other expenses decreased 28%, to $1.3 million from $1.8 million for the year ended December 31, 2000. Excluding the restructuring charges taken during the fourth quarter of 2001 and 2000 mentioned above, other expenses declined 46%, to $0.7 million for the year ended December 31, 2001, from $1.3 million for the year ended December 31, 2000. The decrease in other expenses represents savings from the Company's disposition of non-core businesses during 2000. Other expenses decreased 11%, to $1.8 million for the year ended December 31, 2000 from $2.1 million for the year ended December 31, 1999. Excluding the restructure charge taken during the fourth quarter of 2000 mentioned above, other expenses declined 36%, to $1.3 million for the year ended December 31, 2000. The decrease in other expenses represents savings from the disposition of non-core businesses during 2000. Selected Balance Sheet Items - Years Ended December 31, 2001 and 2000 --------------------------------------------------------------------- Cash and invested assets increased $18.0 million, to $442.0 million as of December 31, 2001 from $424.0 million as of December 31, 2000. The increase in cash and invested assets is due primarily to the growth in premiums, which increased the amounts available for investment, offset by a reduction in cash associated with the pay down and refinancing of the Company's credit facility. Accrued investment income decreased $1.3 million, to $4.6 million as of December 31, 2001 from $5.9 million as of December 31, 2000. The decrease in accrued investment income is due to lower investment returns on the Company's investment portfolio associated with lower interest rates on fixed income securities. Premiums receivable increased $37.1 million, to $73.4 million as of December 31, 2001 from $36.3 million as of December 31, 2000. The increase in premiums receivable is due to the growth in premiums written, resulting from rate increases realized by the Company's insurance subsidiaries on core MPL lines and an increase in new and renewal MPL business. Due from reinsurers on unpaid losses and advance premiums increased $22.7 million, to $80.4 million as of December 31, 2001 from $57.7 million as of December 31, 2000. Ceded unearned premiums increased $30.7 million, to $40.8 million as of December 31, 2001, from $10.1 million as of December 31, 2000. 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 and the increase in premiums written under fronting arrangements whereby the Company cedes substantially all of the business to other insurance carriers. Deferred policy acquisition costs increased $3.0 million, to $9.0 million as of December 31, 2001 from $6.0 million as of December 31, 2000. The increase in deferred policy acquisition costs is due to an increase in underwriting expenses as a result of the growth in premiums written. 11 Deferred income taxes increased $1.6 million, to $19.9 million as of December 31, 2001 from $18.3 million as of December 31, 2000. The increase in deferred income taxes relates to an increase in deferred taxes associated with changes in unrealized gains on financial instruments and growth in the Company's insurance business. Goodwill and intangible assets decreased $2.4 million, to $58.5 as of December 31, 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 $3.2 million, to $5.3 million as of December 31, 2001 from $8.5 million as of December 31, 2000. The decrease in federal income tax receivable corresponds with the related decrease in the current benefit recognized in 2001, and the receipt of a federal tax refund related to the overpayment of estimated taxes for the year 2000. The Company's liability for loss and LAE increased $37.2 million, to $318.5 million as of December 31, 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. In addition, the Company recorded a pre-tax reserve adjustment of $8.8 million in the fourth quarter of 2001 to strengthen reserves established for prior coverage years. The adjustment to reserves reflects the soft market conditions that prevailed for coverage years 2000 and prior. Unearned premiums increased $46.7 million, to $146.8 million as of December 31, 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 $20.2 million, to $26.7 million as of December 31, 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. Premiums paid in advance and unprocessed premiums increased $3.8 million, to $9.9 million as of December 31, 2001 from $6.1 million as of December 31, 2000. The increase 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. In addition, the Company instituted a rate increase at its largest insurance subsidiary in December 2001. The Company's revolving credit facility and term loan decreased $14.2 million, to $53.0 million as of December 31, 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 was $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 each commencing on December 31, 2001. The credit facility replaced a $75 million revolving credit facility (the "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 difference between the outstanding principal amount of the prior facility and the initial amount of the new facility. Accrued expenses and other liabilities increased $10.4 million, to $28.8 million as of December 31, 2001 from $18.4 million as of December 31, 2000. The increase in accrued expenses and other liabilities is primarily attributable to the increase in operating expenses associated with the growth in business. Approximately $2.9 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 FAS No. 133. 12 Investments ----------- The Company's investment strategy is to maintain a diversified investment portfolio that is focused on high grade, fixed income securities. The majority of these securities are held as invested assets by the various insurance subsidiaries. At the close of 2001, approximately 27% of the fixed-income portfolio was invested in tax-exempt securities and approximately 73% in taxable securities. Realized investment gains and losses are recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required by generally accepted accounting principles, 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. Stock Repurchase Plans ---------------------- During 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 per share. 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. 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 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) 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). The Company maintains a $55 million credit facility with five banks. The credit facility replaced a $75 million 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 difference between the outstanding principal amount of the prior facility and the initial amount of the new credit facility. As of December 31, 2001, the Company had $53.0 million outstanding 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 each that commenced December 31, 2001. Amounts outstanding under the credit facility bear interest at a variable rate, primarily based upon LIBOR plus an applicable 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 as of December 31, 2001, are as follows: a) total debt to cash flow available for debt service cannot be greater than 4.00:1 for the quarter ending December 31, 2001 and 3:50:1 thereafter; b) combined net premiums written to combined statutory capital and surplus cannot exceed 2.00:1; c) the fixed charge coverage ratio cannot 13 be less than 2.00:1 at the end of each quarter through December 31, 2002, there- after the fixed charge coverage ratio cannot be less than 2:25:1 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 and requires the Company's insurance subsidiaries to maintain at least an A- (Excellent) rating from A.M. Best. Should the Company fail to meet one or more of its loan covenants, such occurrence would be considered an event of default. In the event the Company was unable to provide an allowable remedy for such event of default, the Company's lenders would be entitled to certain remedies, including the ability to demand immediate repayment, including payment in full. Were the Company's lenders to demand immediate payment in full, the Company could not make such payment from existing funds and would have to seek replacement financing. Under such circumstances, the Company's ability to secure such replacement financing could not be assured, and if obtained, such financing would likely carry higher costs. At December 31, 2001, the Company did not meet its fixed charge coverage ratio loan covenant, primarily as a result of the reserve strengthening charge in the fourth quarter described above. The Company's lenders have waived this violation bringing the Company into compliance with its loan covenants. In addition, the Company and its lenders have re-negotiated a modification to the fixed charge coverage ratio loan covenant from 2.5:1, to 2.0:1 for the year 2002; and to 2.25:1 beginning in the first quarter of 2003. In connection with the waiver and modification, the applicable margin charged by the lenders as part of interest costs will increase 25 basis points, or 1/4 of 1 percent beginning in 2002. At December 31, 2001, the Company held investments with a fair value of approximately $55.2 million scheduled to mature during the next twelve months, which when combined with net cash flows from operating activities, are expected to provide the Company with sufficient liquidity and working capital. As reported in the accompanying consolidated statements of cash flows, the Company has generated positive net cash from operations of $33.2 million, $14.8 million and $14.3 million in 2001, 2000 and 1999, respectively. Shareholder dividends payable by the Company's insurance subsidiaries are subject to certain limitations imposed by Florida and Missouri laws. During 2002, these subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends of approximately $10.7 million, without prior regulatory approval. The National Association of Insurance Commissioners has developed risk-based capital ("RBC") measurements for insurers, which have been adopted by the Florida and Missouri Departments of Insurance. RBC measurements provide state regulators with varying levels of authority based on the adequacy of an insurer's adjusted surplus. At December 31, 2001, the Company's insurance subsidiaries maintained adjusted surplus in excess of their required RBC thresholds. The Company's insurance subsidiaries are subject to assessment by the financial guaranty associations in the states in which they conduct business for the provision of funds necessary for the settlement of covered claims under certain policies of insolvent insurers. Generally, these associations can assess member insurers on the basis of written premiums in their particular states. In addition to standard assessments, the Florida and Missouri Legislatures may also levy special assessments to settle claims caused by certain catastrophic losses. The Company would be assessed on a basis of premium written. During 2001, a special assessment was levied on First Professionals and APAC that totaled $0.9 million. No special assessments were made in 2000 and 1999. In addition, the Company could be subject to additional assessments in the future as a result of damages caused by catastrophic losses, such as a hurricane. Accounting Pronouncements ------------------------- Effective January 1, 2001, the Company adopted 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 No. 133". FAS No. 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 14 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 No. 138 amended the accounting and reporting standards for certain derivative instruments and hedging activities under FAS No. 133. The adoption of FAS No. 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 June 2001, the Financial Accounting Standards Board ("FASB") issued FAS No. 141 "Business Combinations." FAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," and FAS No. 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 No. 141 will not have a significant impact on the Company's consolidated financial statements. In June 2001, the FASB issued FAS No. 142, "Goodwill and Other Intangible Assets." FAS No. 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. 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. Upon its adoption in the first quarter of 2002, the Company will cease the amortization of goodwill, which will have the effect of increasing its reported income. Goodwill amortization for the year 2001 was $3.5 million. The Company is also in the process of obtaining independent valuations of its reporting units as required by the transitional impairment provisions of FAS No. 142. It is possible that upon completion of the valuations, the Company could be required under the new standards to recognize a transitional impairment charge. Should the valuations of the reporting units fall below the carrying values, the related goodwill could partially or totally be impaired and the Company could recognize an impairment charge up to the carrying amount of goodwill or $67.2 million. However, as the Company has not yet completed its valuations, it is too early to tell whether any charge will be required. In June 2001, the FASB issued FAS No. 143, "Accounting for Asset Retirement Obligations." FAS No. 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 No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management believes the adoption of FAS No. 143 will not have a significant impact on the Company's consolidated financial statements. In August 2001, the FASB issued FAS No. 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 No. 144 also resolves the implementation issues and inconsistencies in accounting for assets to be disposed of raised by FAS No. 121 and covers the reporting of discontinued operations. The standard supersedes FAS No. 121, while retaining the recognition and measurement provisions of FAS No. 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 No. 144 will not have a significant impact on the Company's consolidated financial statements. 15 SIGNATURES Pursuant to the requirements of Sections 13 or 15(d) 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, on this the 27th day of March, 2002. FPIC Insurance Group, Inc. By /s/ Kim D. Thorpe --------------------------------------- Kim D. Thorpe, Executive Vice President and Chief Financial Officer 16