-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ASvDj+LwzueFsywUOpD+O86f0h1jBvoGpV1+yBMx01LzTLz9RlNVv4Dpepi18mIz iDzyrfBNW5WTwl/gXsziAw== 0000950133-98-000973.txt : 19980327 0000950133-98-000973.hdr.sgml : 19980327 ACCESSION NUMBER: 0000950133-98-000973 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FPIC INSURANCE GROUP INC CENTRAL INDEX KEY: 0001010247 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 593359111 STATE OF INCORPORATION: FL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11983 FILM NUMBER: 98574457 BUSINESS ADDRESS: STREET 1: 1000 RIVERSIDE AVE STREET 2: STE 800 CITY: JACKSONVILLE STATE: FL ZIP: 32204 BUSINESS PHONE: 9043545910 MAIL ADDRESS: STREET 1: P O BOX 44033 CITY: JACKSONVILLE STATE: FL ZIP: 32231 10-K405 1 FORM 10-K RE: FPIC INSURANCE GROUP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) [X] ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _______ to ________ Commission file number __________ FPIC INSURANCE GROUP, INC. (Exact name of registrant as specified in its charter) FLORIDA 59-3359111 (State or other jurisdiction of (I.R.S.) Employer incorporation or organization) Identification No.) 1000 RIVERSIDE AVENUE, SUITE 800 32204 (Address of principal executive offices) (zip code)
(Registrant's telephone number, including area code): (904) 354-5910 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 (Title of Class) 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 the 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 13, 1998 was approximately $277,249,000. As of March 13, 1998, there were 9,204,031 shares of the Registrant's Common Stock, $.10 Par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 1998 Annual Shareholders' Meeting are incorporated by reference into Part III, Items 10, 11, 12 and 13 of this Report. Such Proxy Statement, except for the parts therein which have been specifically incorporated by reference, shall not be deemed "filed" for the purposes of this Report on Form 10-K. 2 FPIC INSURANCE GROUP, INC. 1997 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
Page ---- PART I Item 1. Business 1 Item 2. Properties 11 Item 3. Legal Proceedings 11 Item 4. Submission of Matters to a Vote of Security Holders 11 PART II Item 5. Market for the Registrants' Common Stock and Related Stockholder Matters 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III Item 10. Directors and Executive Officers of the Registrant 22 Item 11. Executive Compensation 23 Item 12. Security Ownership of Certain Beneficial Owners and Management 23 Item 13. Certain Relationships and Related Transactions 23 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 23
3 PART I Item 1. Business General FPIC Insurance Group, Inc. (the Company) was formed in 1996. On June 11, 1996, the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved the formation of a holding company structure (the Reorganization) that resulted in FPIC becoming a subsidiary of the Company. In connection with the Reorganization, FPIC's shareholders became the shareholders of the Company and received five shares of the Company's common stock for each of their shares of FPIC's common stock. The purposes of the Reorganization included providing a more flexible operating structure, increasing financial flexibility and satisfying the liquidity needs of the Company's shareholders. The Company has three wholly-owned subsidiaries: FPIC, FPIC Insurance Agency, Inc. (the Agency) and McCreary Corporation (McCreary). Overview The Company is the largest provider of medical professional liability (MPL) insurance in Florida, based on the number of physicians and dentists insured. For more than 20 years, the Company and its predecessors have provided MPL insurance to Florida's medical community. MPL insures the physician, dentist, hospital or other healthcare provider against liabilities arising from the rendering of or failure to render professional healthcare services. Under the typical MPL insurance policy, the insurer also pays the legal costs of defending the claim. The Company has the exclusive endorsement of both the Florida Medical Association (FMA) and the Florida Dental Association (FDA). The MPL premium in Florida accounts for approximately 93% of the Company's total premiums written. As of December 31, 1997, the Company was also licensed in Alabama, Georgia, Kentucky, Ohio, Pennsylvania, Texas and West Virginia, and will begin marketing in each such states when it determines that an opportunity exists to write profitable business. Insurance is the Company's only significant industry segment. For financial information relating to the Company's operations, see Management's Discussion and Analysis and the notes to the Consolidated Financial Statements, which are incorporated herein by reference. Insurance Products The Company has developed a variety of insurance products for participants in the healthcare industry. These products include: MPL insurance for medical professionals, managed care liability insurance, professional and comprehensive general liability insurance for healthcare facilities, AHCA/OSHA insurance coverage, provider stop loss insurance, third party administration and group accident and health coverage. The following table summarizes by product the premium for the periods indicated. 1 4
FOR THE YEAR ENDED DECEMBER 31, 1997 1996 1995 ---- ---- ---- (IN THOUSANDS) Medical professional liability for physicians $71,056 $58,860 $52,134 Medical professional liability for dentists 3,726 3,539 3,190 Managed care 130 330 215 Professional and comprehensive general liability 814 627 317 AHCA/OSHA 1,056 936 785 Group accident and health 989 0 0 ------- ------- ------- Totals $77,771 $64,292 $56,641 ======= ======= =======
Medical Professional Liability. The principal product offered by the Company is MPL insurance for physicians and dentists. The Company's MPL insurance is offered to physicians and dentists in all types of settings including solo practices, group practices and hospitals. MPL insurance provides coverage against the legal liability of an insured for such things as injury caused by or as a result of treatment of a patient, failure to treat a patient and failure to diagnose a patient. MPL policies are issued on a "claims-made" basis. Coverage is provided for claims reported to the Company during the policy period arising from incidents that occurred at any time the insured was covered by the policy. The Company also offers "tail coverage" for claims reported after the expiration of the policy for occurrences during the coverage period. The price of tail coverage is based on the length of time the insured has been covered under the Company's claims-made form. The Company provides free tail coverage for insured physicians who die or become disabled during the coverage period of the policy and those who have been insured by the Company for at least five consecutive years and retire completely from the practice of medicine. MPL insurance policies offered by the Company are issued with liability limits up to $5.0 million per incident and $7.0 million in annual aggregate for physicians and $1.0 million per incident and $3.0 million in annual aggregate for dentists. At December 31, 1997, the Company had 4,872 physician insureds and 1,772 dentist insureds. For the year ended December 31, 1997, the Company has $74.8 million in direct premium written from MPL insurance, representing 96% of the Company's total direct premium written. Managed Care. Managed care liability insurance provides coverage for liability arising from the errors and omissions of a managed care organization, the vicarious liability of a managed care organization for acts or omissions by contracted and employed providers ("E&O") and the liability of directors and officers of a managed care organization ("D&O"). These policies are issued on a claims-made basis. The typical limits of coverage offered by the Company for E&O policies is $1.0 million per incident and $1.0 million in annual aggregate and for D&O policies is $3.0 million per incident and $3.0 million in annual aggregate. Professional and Comprehensive General Liability. The Company also offers professional and comprehensive general liability insurance to healthcare facilities, such as ambulatory surgery centers and walk-in medical care clinics. The policy issued to healthcare facilities provides protection for professional liability related to the operation of a healthcare facility and its various staff committees, together with comprehensive general liability. Professional liability insurance is offered by the Company to healthcare facilities on a claims-made basis. Commercial general liability is available on a claims-made or occurrence basis, although all policies issued as of December 31, 1997 were on a claims-made basis. The limits of coverage for these policies available to non-hospital healthcare facilities is $1.0 million per incident and $3.0 million in annual aggregate and to hospitals is $10.0 million per incident and $10.0 million in annual aggregate. Higher liability limits are placed through facultative reinsurance arrangements. As of December 31, 1997, the Company had 17 facility insureds. 2 5 AHCA/OSHA. The Company also offers defense coverage to physicians and dentists for costs associated with investigations initiated by Florida's Agency for Healthcare Administration ("AHCA") as well as the Occupational Safety and Health Administration ("OSHA"). This coverage is offered to the Company's insureds for investigations that are not related to an MPL claim; investigations related to an MPL claim are provided to the Company's insureds as part of their policy coverage. AHCA/OSHA coverage is also offered to physicians and dentists not otherwise insured by the Company. Policy limits for this coverage are $25,000 per incident and $75,000 in annual aggregate. For the year ended December 31, 1997, the Company had $1.1 million in direct premium written from AHCA/OSHA insurance, representing 1.4% of the Company's total direct premium written. Group Accident and Health. The Company began writing and assuming group accident and health (A&H) premium in 1997. Through its relationship with the Florida Dental Association (FDA), the Company will underwrite a small employer, limited risk, accident and health program for dentists. The A&H insurance provides comprehensive coverage for preventive care and medically necessary expenses at various deductible, co-insurance and stop loss limits. Third Party Services. Through McCreary and its subsidiary, Employers Mutual, Inc. (EMI), the Company offers third party administration services. McCreary specializes in the administration of self insurance plans for large employers. The lines of insurance that McCreary primarily administers are group health, workers' compensation, general liability and property. The main product of EMI is the administration for emerging managed care organizations. The Company intends to offer these services to its existing and potential customer base of healthcare facilities and managed care organizations on both a self insured basis and a fully insured basis. For the year ended December 31, 1997, McCreary contributed $10.5 million to the Company's total revenue. Rates The Company establishes, through its own actuarial staff and independent actuaries, rates and rating classifications for its physician and dentist insureds based on the loss and loss adjustment expenses (LAE) experience it has developed over the past 20 years and upon rates charged by its competitors. The Company uses certain relative risk factors based on geographic location, medical specialty and policy limits. The Company has established its premium rates and rating classifications for healthcare facilities and managed care organizations utilizing data publicly filed by other insurers and guidelines provided by its reinsurers. All rates for liability insurance are subject to review by the relevant insurance regulatory authority. As part of its pricing strategy, the Company targets medical professionals with low levels of previous MPL claims. The Company offers such medical professionals a "claims-free" credit. Marketing and Policyholder Services The Company's insurance products are primarily marketed by independent agencies. In addition, insurance products are sold by the Company directly. As of December 31, 1997, the Company's products were sold through 111 independent agencies. During 1997, approximately 75% of the Company's MPL direct premium written was produced by independent agents, five of which accounted for approximately 53% of such premiums. The Company added 24 new independent agencies in 1997. The insurance products that are sold by the Company directly are a result of direct requests from physicians. 3 6 An integral part of the Company's marketing strategy is targeting segments of the MPL industry that it believes generate above average underwriting profits. The Company has identified certain medical specialties and "claims-free" physicians as segments in which it wishes to increase its market share. This marketing strategy includes sending targeted physicians personal mail solicitation packages, encouraging agents to refer targeted physicians and providing an expedited application process for those physicians. As a result of this strategy, approximately 50% of the increase in direct premium written in 1997 was received from physicians in the targeted specialties. The Company has also entered into endorsement and marketing agreements with local medical associations and other provider-supported organizations that provide rate credits and certain services for insureds of the programs. These endorsement and marketing agreements gain the Company access to meetings of these groups in order to make presentations and provide access to their respective publications for advertisements. In addition, several local associations have agreed to assist the Company in developing loss prevention programs, monitoring proposed legislation and administrative regulations and providing information on healthcare matters relating primarily to professional liability. The Company provides comprehensive risk management services designed to heighten its insureds' awareness of situations giving rise to potential loss exposures, to educate its insureds on ways to improve their medical practice procedures and to assist its insureds in implementing risk modification measures. In addition, the Company conducts surveys for hospitals and large medical groups both to review their practice procedures generally and to focus on specific areas in which there may be some concern. Complete reports that specify areas of the insured's medical practice that may need attention are provided to the policyholder. The Company presents and participates in periodic seminars with medical societies and other groups at which pertinent subjects are presented. These educational offerings are designed to increase risk awareness and the effectiveness of various medical professionals. Underwriting The underwriting of the Company's MPL insurance is performed internally by five underwriters with over 40 years of combined experience underwriting MPL insurance for the Company. The Company has given its internal underwriting department complete authority for all initial underwriting decisions. The Company's agents have no binding authority. As part of the underwriting process, the Company utilizes the State of Florida's database, which consolidates a record of all MPL claims-paid information that insurers are required to report to the State. When applications are received from physicians for MPL insurance, the Company reviews this database to verify the physician's claims-paid record. If a physician has an excessive claims-paid history, the application is denied. All other applicants are reviewed on the basis of the physician's educational background, residency experience, practice history and the comments received from personal references. Annually, the Company's underwriting department also reexamines each insured before coverage is renewed, including verifying that each insured's license is current and that any reported claims for the insured were within acceptable limits. The underwriting of the Company's other insurance products is conducted in conjunction with external underwriters. With respect to these products, the Company receives applications from prospective insureds. After a review of the information contained in such applications, the Company forwards them to an external underwriter. The external underwriter performs its 4 7 review procedures for each application and consults with the Company on the amount of premium to charge each insured. Claims The Company's claims department is responsible for the supervision of claims investigation, the establishment of case reserves, case management, development of the defense strategy and the coordination and control of attorneys engaged by the Company. The Company's claims department has 19 employees, including 4 supervisors and 5 field investigators who are located in Orlando, Tampa, Miami and Jacksonville in order to provide localized and timely attention to claims. Employees in the claims department with settlement authority have an average of 15 years of experience with the Company. The Company's claims department has complete settlement authority for most claims filed against the Company's insureds. The Company's policy is and has been to refuse settlement and to defend aggressively all claims that appear to have no merit. In those instances where claims may have merit, the claims department attempts to settle the case as expeditiously as possible. The Company believes that it has developed relationships with attorneys in Florida who have significant experience in the defense of MPL claims and who are able to defend in an aggressive, cost-efficient manner the claims against the Company's insureds. Reinsurance The Company follows customary industry practice by reinsuring a portion of its risks. The Company cedes to reinsurers a portion of its risks and pays a fee based upon premiums received on all policies subject to such reinsurance. Insurance is ceded principally to reduce net liability on individual risks and to provide protection against large losses. Although reinsurance does not legally discharge the ceding insurer from its primary liability for the full amount of the policies reinsured, it does make the reinsurer liable to the insurer to the extent of risk ceded. For MPL insurance and professional and comprehensive general liability insurance, the Company has established a policy of reinsuring risks in excess of $500,000 per loss. The Company reinsures risks associated with these policies under treaties pursuant to which reinsurers agree to assume those risks insured by the Company in excess of its individual risk retention level and up to its maximum individual policy limit offered. For managed care liability insurance the Company has entered into a separate quota share reinsurance treaty. Under this treaty, the reinsurers bear 90% of all losses and LAE incurred under these policies. Reinsurance is placed under reinsurance treaties and agreements with a number of individual companies and syndicates to mitigate concentration of credit risk. General Reinsurance Corporation is the Company's largest reinsurer of MPL insurance, with 25% of the ceded risks and for professional and comprehensive general liability insurance, with 50% of the ceded risks. The Company relies on reinsurance brokers and intermediaries to assist in the analysis of the credit quality of its reinsurers. The Company also requires reinsurers that are not authorized to do business in Florida to post an evergreen letter of credit to secure their reinsurance recoverables. 5 8 Reinsurance ceded is recorded on a gross basis. Ceding commissions, which are 25 percent of gross ceded premiums, are deducted from other operating expenses. Ceding commissions were $1.4 million in 1997 and $1.2 million in each of the years ended 1996 and 1995. In the event the Company has the opportunity to settle a claim within policy limits but fails to do so, and a judgment is rendered against a policyholder for an amount exceeding the policy limit, the Company may be charged with bad faith in failing to settle. The Company may be held responsible for the amount exceeding the policy limit or extra contractual damages. Beginning in 1996, the Company's primary reinsurance contract includes coverage for policies with limits greater than or equal to $1 million for which the claim exceeds policy limits or extra contractual damage. In the past five years, the Company has not paid a claim, including bad faith claims, in excess of $3.0 million. Loss and LAE Reserves The determination of loss reserves is a projection of ultimate losses through an actuarial analysis of the claims history of the Company and other MPL insurers, subject to adjustments deemed appropriate to the Company due to changing circumstances. Included in its claims history are losses and LAE paid by the Company in prior periods and case reserves for anticipated losses and LAE developed by the Company's claims department as claims are reported and investigated. The Company relies primarily on such historical loss experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss cost trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss and LAE reserves may be revised. Any increase in the amount of reserves, including reserves for insured events of prior years, could have an adverse effect on the Company's results for the period in which the adjustments are made. The uncertainties inherent in estimating ultimate losses on the basis of past experience have grown significantly in recent years principally as a result of judicial expansion of liability standards and expansive interpretations of insurance contracts. These uncertainties may be further affected by, among other factors, changes in the rate of inflation and changes in the propensities of individuals to file claims. The inherent uncertainty of establishing reserves is relatively greater for companies writing long-tail casualty insurance, including MPL insurance, due primarily to the long-term nature of the resolution of claims. The Company utilizes both its staff and independent actuaries in establishing its reserves. The Company's independent actuaries review the Company's loss and LAE reserves bi-annually and prepare a report that includes a recommended level of reserves. The Company considers this recommendation as well as other factors, such as known, anticipated or estimated changes in frequency and severity of losses, loss retention levels and premium rates, in establishing the amount of its loss and LAE reserves. The Company continually refines reserve estimates as experience develops and further claims are reported and settled. The Company reflects adjustments to reserves in the results of the periods in which such adjustments are made. MPL insurance is a long-tail line of business for which the initial loss and LAE estimates may be adversely impacted by events occurring long after the reporting of the claim, such as sudden severe inflation or adverse judicial or legislative decisions. 6 9 The following table sets forth the development of loss and LAE reserves of the Company for the 10-year period ended December 31, 1997:
Year Ended December 31 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 Balance Sheet Reserves(2) 188,086 172,738 164,506 152,268 138,745 126,651 118,995 119,031 97,302 79,893 63,088 Reestimated Liability (2) As Of: One year later 154,066 140,322 137,746 128,333 98,706 101,844 103,523 104,996 92,801 80,637 Two years later 130,137 113,682 111,028 89,182 80,716 86,133 89,427 96,179 97,259 Three years later 100,141 91,138 75,848 71,318 64,124 72,164 80,686 97,121 Four years later 82,049 67,535 66,276 56,127 56,695 77,714 90,617 Five years later 68,472 62,758 54,728 53,007 68,034 88,584 Six years later 61,993 53,826 52,714 66,199 83,195 Seven years later 52,619 52,412 65,894 83,144 Eight years later 51,451 66,776 82,768 Nine years later 65,783 82,887 Ten years later 82,550 Cumulative Paid (2) As Of: One year later 35,382 35,562 28,701 24,794 25,924 26,482 17,500 22,656 28,900 31,930 Two years later 60,450 52,321 44,882 42,401 44,542 37,283 34,656 47,038 64,280 Three years later 63,213 56,806 55,278 52,340 47,357 43,754 55,172 72,868 Four years later 61,825 59,538 56,633 49,655 49,298 61,111 76,213 Five years later 62,534 58,183 51,869 49,224 64,669 79,289 Six years later 58,497 51,504 50,407 63,810 81,434 Seven years later 51,593 50,493 64,830 81,646 Eight years later 50,528 64,857 82,043 Nine years later 64,860 82,061 Ten years later 82,094 Redundancy (Deficiency) (1) 18,672 34,369 52,127 56,696 58,179 57,002 66,412 45,851 14,110 (19,462) % Redundancy (Deficiency) 10.8% 20.9% 34.2% 40.9% 45.9% 47.9% 55.8% 47.1% 17.7% (30.8%)
(1) There may be a difference of 1 (,000) in the redundancies due to rounding. (2) Due to the adoption of SFAS No. 113 in 1993, amounts in the years 1993 through 1997 are presented on a gross basis. Amounts in the years 1987 through 1992 are presented net of reinsurance recoverables. Prior to the issuance of SFAS No. 113, the Company maintained its reinsurance records on a net basis. As detailed records on a gross basis are not available for years prior to 1993, the Company has not restated these years on a gross basis. 7 10 The following table sets forth an analysis of the Company's reserves for losses and LAE and provides a reconciliation of beginning and ending loss and LAE reserves, net of reinsurance for the periods presented:
Year Ended December 31, ----------------------- 1997 1996 1995 ---- ---- ---- (in thousands) Reserve liability, at beginning of period $161,124 $155,318 $143,415 -------- -------- -------- Provisions for losses and LAE occurring in the current period 69,126 61,617 58,868 Decrease in estimated losses and LAE for claims occurring in prior periods (15,115) (14,669) (14,029) --------- --------- --------- Total incurred during current period 54,011 46,948 44,839 -------- -------- --------- Losses and LAE payments for claims occurring during: The current period 8,061 5,253 4,320 Prior periods 33,103 35,889 28,616 -------- -------- -------- Total paid during current period 41,164 41,142 32,936 -------- -------- -------- Reserve liability, at end of period $173,971 $161,124 $155,318 ======== ======== ======== Gross liability at end of period $188,086 $172,738 $164,506 Reinsurance recoverable at end of period 14,115 11,614 9,188 -------- -------- -------- Net liability at end of period $173,971 $161,124 $155,318 ======== ======== ========
As shown above, as a result of the Company's bi-annual reserving review, which includes a reevaluation of the adequacy of reserve levels for prior years' claims, the Company reduced its reserves for claims occurring in prior periods by $15.1 million, $14.7 million and $14.0 million for the years ended December 31, 1997, 1996, and 1995, respectively. There can be no assurance concerning future adjustments or reserves, positive or negative, for prior years' claims. Investment Portfolio The Company's investment strategy is to maintain a diversified investment-grade fixed income portfolio, provide liquidity and maximize after-tax yield. As of December 31, 1997 the Company's portfolio was managed internally and the Company had $259.6 million of fixed income securities. All of the Company's fixed income securities are classified as available-for-sale. The Company believes that its focus on income generation rather than capital appreciation has reduced the portfolio's overall volatility. In addition, the Company has invested a greater portion of its portfolio in municipal bonds, which the Company believes generate a greater after-tax return than investments in taxable fixed income securities of comparable risk, duration, and other investment characteristics. The Company does not, and is not contemplating, investing in any off-balance sheet derivative financial investments including futures, options, forwards, interest rate swaps, floors or caps. All of the fixed maturity securities held in the investment portfolio are publicly traded securities. 8 11 Competition The MPL insurance market in Florida is highly competitive. Several companies in the state offer products at lower premium rates than the Company and more companies may enter the Florida market in the future. In addition, the Company believes that the number of healthcare entities that insure their affiliated physicians through self-insurance may begin to increase. Many of the MPL insurers are substantially larger and have considerably greater resources than the Company. Additionally, several of these insurers have received A.M. Best ratings that are higher than FPIC's rating of "A- (Excellent)." In addition, because a substantial portion of the Company's products are marketed through independent insurance agencies, all of which represent more than one company, the Company faces competition within each agency in its own agency system. However, the Company's name recognition, medical society endorsements, physician board of directors, agency force and program development have all contributed to helping the Company increase its number of insureds every year since 1985. The Company has been successful at target marketing groups and specialties that exhibit above average profitability. The Company believes that its marketing success has allowed it to improve the quality and profitability of its overall business. The Company believes that the principal competitive factors in its business in Florida are service, name recognition and price, and that it is competitive in Florida in all of these areas. The Company enjoys strong name recognition in Florida by virtue of having been organized by, and operated for the principal benefit of, Florida physicians. The services offered insureds of the Company as well as the healthcare community in general are intended to promote name recognition and to maintain and improve loyalty among the insureds of the Company. MPL insurance offered by the Company has the exclusive endorsement of both the FMA and the FDA. The Company's MPL insurance is also endorsed by various county medical societies and various state medical specialty societies. In general, the MPL market in other states is dominated by local carriers who have been able to maintain strong customer loyalty. The same targeted specialty and loss-free approach developed in Florida will be used in these other states. The Company will also recruit and develop an agency force to expand its market, provide service and develop name recognition. Insurance Ratings FPIC currently has a financial condition rating from A.M. Best of "A- (Excellent)". An A.M. Best rating is intended to provide an independent opinion of an insurer's ability to meet its obligations to policyholders and should not be considered an investment recommendation. A.M. Best's ratings are based upon a comprehensive review of a company's financial performance that is supplemented by certain data, including responses to A.M. Best's questionnaires, quarterly NAIC filings, state insurance department examination reports, loss reserve reports, annual reports and reports filed with the Securities and Exchange Commission. A.M. Best undertakes a quantitative evaluation based upon profitability, leverage and liquidity and a qualitative evaluation based upon the composition of an insurer's book of business or spread of risk, the amount, appropriateness and soundness of reinsurance, the quality, diversification and estimated market value of its assets, the adequacy of its loss reserves and policyholders' surplus and the experience and competency of its management. 9 12 Regulation FPIC and the Company are subject to extensive state regulatory oversight in Florida and in the other jurisdictions in which they conduct business. Florida insurance law regulates insurance holding company structures, including the Company and its subsidiaries, FPIC, the Agency and McCreary. Each insurance company in a holding company structure is required to register with the Florida Department of Insurance (the "Department of Insurance") and furnish information concerning the operations of companies within the holding company structure that may materially affect the operations, management or financial condition of the insurers within the structure. Pursuant to these laws, the Department of Insurance may examine the Company, and/or FPIC at any time and require disclosure of and/or approval of material transactions involving any insurance subsidiary of the Company, such as extraordinary dividends from FPIC. All transactions within the holding company structure affecting FPIC must be fair and reasonable. Florida insurance law provides that no person may acquire directly or indirectly five percent or more of the voting securities of a Florida domiciled insurance company unless such person has obtained the prior written approval of the Department of Insurance for such acquisition. Any purchaser of 5% or more of the Company's or FPIC's outstanding common stock will generally be presumed to have acquired control of FPIC. In lieu of obtaining such prior approval, a purchaser owning less than 10% of the outstanding shares of the Company or FPIC may file a disclaimer of affiliation and control with the Department of Insurance. Since FPIC is domiciled in Florida, the Department of Insurance is its principal supervisor and regulator. However, FPIC is also subject to supervision and regulation in the states in which it transacts business in relation to numerous aspects of FPIC's business and financial condition. The primary purpose of such supervision and regulation is to insure the financial stability of FPIC for the protection of policyholders. The laws of the various states establish insurance departments with broad regulatory powers relative to granting and revoking licenses to transact business, regulating trade practices, required statutory financial statements and prescribing the types and amount of investments permitted. Although premium rate regulations vary among states and lines of insurance, such regulations generally require approval by each state regulator of the rates and policies to be used in its state. Insurance companies are required to file detailed annual reports with the supervisory agencies in each state in which they do business, and their business and accounts are subject to examination by such agencies at any time. The NAIC annually calculates 12 financial ratios to assist state insurance departments in monitoring the financial condition of insurance companies. Results are compared against a "usual range" of results for each ratio, established by the NAIC. In 1997, two of the twelve ratios for the Company were slightly outside the range. Both of these were outside the range because of the effect of the expiration of a finite reinsurance contract in 1997. This contract affected the statutory financial statements in 1997 only and not the GAAP results of the Company. For the years 1996 and 1995, FPIC's results were within the usual range for each of the 12 ratios. FPIC is subject to assessment by the Financial Guaranty Associations in the states in which it conducts business for the provision of funds necessary for the settlement of covered claims under 10 13 certain policies of insolvent insurers. Generally, these associations can assess member insurers on the basis of net direct written premiums in their particular states. The insurance industry is under continuous review by Congress, state legislatures and state and federal regulatory agencies. From time to time various regulatory and legislative changes have been proposed for the insurance industry, some of which could have an effect on insurers or reinsurers. Among the proposals that have in the past been, or are at present being, considered are the possible introduction of state and federal limits on certain damages for MPL as well as federal regulation in addition to, or in lieu of, the current system of state regulation of insurers. The Company is unable to predict whether any of these proposals will be adopted, the form in which any such proposals would be adopted, or the impact, if any, such adoption would have on the Company, although such impact could be material. Employees At December 31, 1997, the Company employed 254 persons. None of these employees are covered by a collective bargaining agreement. Management considers the Company's relationships with its employees to be good. Item 2. Properties The Company's corporate headquarters are located in Jacksonville, Florida. The headquarters property is an 8-story, 70,000 sq. ft. office building owned by the Company where 26,600 sq. ft. of space is occupied for its offices and 8,500 sq. ft. is occupied by McCreary's subsidiary, EMI. The Company and its subsidiaries lease additional facilities that management believes are adequate for the Company's current needs. Item 3. Legal Proceedings There are no material pending legal proceedings against the Company or its subsidiaries other than litigation arising in connection with the settlement of insurance claims. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders in the fourth quarter of 1997. PART II Item 5. Market for the Registrants' Common Equity and Related Stockholder Matters The Company's Common Stock has been publicly traded on the Nasdaq National Market System since August 1, 1996 under the symbol FPIC. The following table sets forth for the periods indicated the high and low bid quotations as reported. Such quotations reflect inter-dealer bids and offers, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. 11 14
1997 High Bid Low Bid - ---- -------- ------- First quarter $19.13 $13.63 Second quarter $22.75 $17.38 Third quarter $29.50 $22.25 Fourth quarter $29.75 $26.50
As of March 5, 1998, the Company estimated that there are approximately 4,700 beneficial owners of the Company's common stock. During the fourth quarter of 1997, the Company issued 111,663 shares of its common stock to Frontier Insurance Company d/b/a/ Frontier Insurance Company of New York in connection with the Company's acquisition of Frontier's Florida physicians MPL business on a "best-efforts" renewal basis. The shares were not registered under the Securities Act of 1933 in reliance upon the exemption provided from registration by Section 4(2) of the Act and Regulation D. Prior to the formation of the Company, its subsidiary, FPIC, paid cash dividends on its common stock of $819,965 in 1996 and $775,986 in 1995. The Company presently intends to retain any future earnings for use in its business and does not anticipate paying any cash dividends in the foreseeable future. Item 6. Selected Financial Data The selected financial data presented below for the fiscal years ending December 31 should be read in conjunction with the Company's Consolidated Financial Statements and notes thereto, which are included elsewhere herein. All per share amounts have been stated giving retroactive effect for the stock split that occurred as a result of the reorganization in June 1996.
Income Statement Data: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands, except per share amounts) Direct written premiums $77,771 $64,292 $56,641 $52,454 $51,568 Total revenues 93,216 76,982 69,531 52,306 52,685 Net income 16,557 13,324 11,686 5,877 8,541 Basic earnings per share $1.83 $1.57 $1.47 $.76 $1.10 Diluted earnings per share $1.76 $1.53 $1.47 $.76 $1.10 Cash dividend declared per share $0 $.10 $.10 $.10 $0 Balance Sheet Data: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (in thousands) Total investments $268,300 $238,497 $221,604 $192,867 $180,721 Total assets 352,849 303,553 276,699 244,266 233,120 Loss and LAE reserves 188,086 172,738 164,506 152,268 138,745 Total liabilities 232,785 207,141 195,143 182,660 169,199 Shareholders' equity 120,064 96,411 81,556 61,606 63,921
12 15 Item 7. Management's Discussion & Analysis The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes appearing elsewhere in this report. The consolidated financial statements include the results of the Company's wholly-owned subsidiary, McCreary Corporation, since July 1, 1995. All amounts have been rounded to the nearest $100,000. GENERAL FPIC Insurance Group, Inc. ("FIG" or the "Company") is the largest provider of medical professional liability (MPL) insurance in Florida, based on the total number of physicians and dentists insured. On June 11, 1996, the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved the formation of a holding company, FPIC Insurance Group, Inc., to be the parent company for FPIC, the McCreary Corporation (McCreary) and FPIC Insurance Agency, Inc. (the Agency). McCreary also includes its wholly-owned subsidiary, Employers Mutual Inc. (EMI), acquired in January 1997. The Company's primary sources of revenue are dividends from subsidiaries. The dividends are the result of premium earned and investment income generated from the insurance operations of FPIC, and fee and commission income from McCreary and the Agency. FPIC specializes in liability insurance products and services for the healthcare community, with MPL insurance for physicians and dentists as its primary product. FPIC's MPL insurance is written 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 advantage of a claims-made policy is that it allows the insurer to accrue reserves in the year that the claim is reported. Consequently, the insurer is able to measure frequency of claims, and therefore estimate reserves, with greater accuracy. The Company's financial position and results of operations are subject to fluctuations due to a variety of factors. Unexpected changes in loss trends in any period could have a materially adverse effect on the Company. In addition, reevaluations of loss and loss adjustment expense (LAE) reserves could result in an increase or decrease in reserves and a corresponding adjustment to earnings. LAE are costs associated with the settlement of claims. The Company's historical results of operations are not necessarily indicative of future earnings. OVERVIEW During fiscal 1997, the Company had an exceptional year in almost every financial category, with most business segments growing revenues over 20%. In addition to the top-line growth, the Company's growth in net income exceeded 24% and, despite a competitive Florida medical professional liability market, FPIC was able to grow its direct premiums written 21%. The Company also continued to diversify its revenues in areas other than its physicians MPL core market. Excluding investment income, the amount of revenue generated from non-core market sources grew to 23.7% of total revenues at year-end 1997. As part of its expansion efforts, the Company completed three transactions in 1997: Employers Mutual, Inc., a third party administrator was purchased in January; a 20% interest in APS Insurance Services Inc., an Austin-based management company for a Texas MPL insurer, was acquired in July; and FPIC's acquisition of Frontier Insurance Company's Florida book of physician MPL business that began renewing in December. The positive impact of these three transactions should be fully realized in the 1998 fiscal year. 13 16 INSURANCE OPERATIONS Relative to FPIC's core MPL business, total insureds increased 14.8%, from 5,952 in 1996 to 6,831 in 1997. Physician insureds grew 15.2%, from 4,229 in 1996 to 4,872 in 1997. Dental insureds grew 5.9%, from 1,674 in 1996 to 1,772 in 1997. All other MPL insureds grew 281.6%, from 49 in 1996 to 187 in 1997. Net premiums earned on the company's MPL business grew 14.8%, from $55.3 million in 1996 to $63.5 million in 1997. Considerable growth was achieved in other product areas such as legal defense for healthcare provider licensure investigations, group accident and health insurance coverage and errors & omissions and directors & officers liability insurance for managed care organizations. Net premiums earned for these products increased 150%, from $0.8 million in 1996 to $2.0 million in 1997. FPIC experienced another solid year of underwriting results, with frequency of claims reported continuing its downward trend. In addition, loss experience on the 1995 and prior report years is developing as expected and, in some instances, better than expected. Report years 1996 and 1997 are not mature enough to accurately project at this time. The combined ratio for the fiscal year, calculated using generally accepted accounting principles (GAAP), declined 1.7% from 95.5% in 1996 to 93.8% in 1997. This positive trend was primarily the result of a 1.2% decrease in the loss ratio and a 0.5% decrease in the FPIC's company's overall expense ratio. For the year the total return in FPIC's fixed-income investment portfolio was 8.27%, equating to a 9.47% taxable equivalent yield when adjusted for the municipal bond allocation. While FPIC invests primarily in high grade fixed-income securities with an average duration of less than five years, the return on average investments dropped from 5.9% in 1996 to 5.8% in 1997 primarily due to a higher level of invested assets and a greater allocation to federally tax-exempt securities. The total amount of the portfolio invested in tax-free securities increased from 41% in 1996 to 50% in 1997. The current investment policy permits greater allocation to tax-free securities when the taxable equivalent yield exceeds that of taxable securities of comparable credit, maturity and structure. The benefit of this strategy is evidenced by the drop in the Company's effective tax rate from 31% in 1996 to 29% in 1997. On a consolidated basis, the Company's total investment portfolio grew $29.8 million, or 12.5%, from $238.5 million in 1996 to $268.3 million in 1997. The growth in investments exceeded expectations and consisted of a $5.6 million year-over-year increase in market value for securities held, the reinvestment of $15.7 million in net interest income and a net contribution of $8.5 million from operations and other sources. Net investment income earned increased $1.2 million from $13.6 million in 1996 to $14.8 million in 1997. ACQUISITIONS AND NEW PRODUCTS The Company continued to expand TPA operations during the year with McCreary Corporation's acquisition of EMI in January 1997. Combining these operations doubled McCreary's revenues, from $5.3 million in 1996 to $10.5 million in 1997, and increased net income 85.7%, from $0.7 million in 1996 to $1.3 million in 1997. 14 17 EMI's primary product, customized administration for emerging managed care organizations, also provides McCreary a new product niche. EMI, with its experienced staff of managed care professionals, will provide managed care related products and services that are specifically geared toward easing the burden that managed care has placed on all healthcare providers. To further enhance profitability, McCreary is focused on creating significant cost savings through investment in technology. As previously mentioned, on July 1, 1997 the Company acquired a 20% interest in APS Insurance Services, Inc. (APS) for $2,000,000. APS is the management company for American Physicians Insurance Exchange (APIE), which is a Texas MPL insurer with approximately $17 million in direct premiums written in 1997. As a result of this transaction, the Company now directly writes MPL business in Texas for those APIE insureds who require a strongly rated A.M. Best company. During 1997, there were approximately $2.5 million of direct premiums written by the Company under this arrangement. On December 1, 1997, the Company acquired Frontier Insurance Company's Florida physician MPL business. These policies were acquired on a "best efforts" renewal basis, with an estimate that only 50% of the $16 million in premium written would likely be renewed by FPIC. This led to establishment of an initial expected written premium target of $8 million and 40% of this amount was negotiated as the purchase price. At closing the $3.2 million purchase price was paid by issuing 111,663 shares of Company common stock at an average price of $28.66 each. The second condition of this transaction calls for an adjustment to the purchase price based on the above formula, to be paid in cash, at the end of the 12 month underwriting period which ends November 30, 1998. This cash payment will reflect any deviation from what develops as the actual renewal results of the book versus what the expected renewal results were at time of closing. Our current estimate now indicates FPIC will renew only 33% of the original $16 million book, a reflection of both the increased MPL competition in Florida and FPIC's more stringent underwriting and pricing policies. If correct, this difference will result in a cash payment back to the Company from Frontier of approximately $1.1 million in early 1999, reducing the purchase price. An additional benefit to FPIC in conjunction with this transaction was the assumption over time of Frontier's legal division in Florida. This entity acts as an in-house legal department which FPIC believes could lead to a more efficient way to litigate claims. While relationships with outside legal firms will always be an important, value-added component of the claims litigation process, FPIC will continually seek innovative ways to reduce costs and improve litigation results. In 1997, the Company made several unsolicited offers to negotiate with Physicians Protective Trust Fund (PPTF), a Florida trust fund providing MPL to physicians, for an amount up to $180,000,000 in Company common stock. After several meetings and numerous discussions with the advisors and senior management of PPTF, the Company was unable to negotiate a definitive agreement with PPTF and all discussions ceased in the fourth quarter of 1997. Although the proposal is still outstanding, it is our belief that the management of PPTF is committed to and is diligently pursuing a merger with PICOM Insurance Company (PICOM). At present the Company does not intend to make any other proposals to PPTF. Another component of FPIC's product diversification plan is the recent agreement to underwrite and administer the Florida Dental Association (FDA) group health plan. The FDA health plan is 15 18 a very unique cross-selling opportunity whereby FPIC will underwrite a small employer, limited risk, accident and health program for dentists. In addition, the Company's McCreary subsidiary will receive a fee for administering the program. The majority of the premium will begin rolling over in April of 1998. Based on the amount of premium currently in the plan, the Company anticipates $7 million to $8 million of net premiums will be earned in 1998. In summary, the Company will continue to seek accretive acquisitions, expand geographic territories and develop value-added products and services. As the Company grows, cross-selling opportunities will also be identified to distribute more efficiently these new products and services to our core market and growing base of new customers. OUTLOOK Our assessment of the current Florida MPL market indicates the growth prospects for 1998, without any acquisitions, appear to be slowing and may fall to a single digit rate. Some of the reasons we might experience slower MPL growth in the Florida market are: 1) Until the proposed business combination of PPTF and PICOM is either consummated or terminated, there could be a tendency for PPTF insureds not to change carriers during the year due to the potential payout to PPTF policyholders. In the past two years former PPTF insureds have been a consistent source of growth for FPIC. 2) The Company anticipates there will continue to be increasing competition in the Florida MPL market both from the large number of writers already present and new MPL writers entering the state. This competition conceivably could keep pressure on rates. 3) Effective January 1, 1998, FPIC instituted a rate increase averaging 5% overall, with certain diagnostic and primary care specialties increasing 30%. Within these specialties FPIC has continued to realize deteriorating loss experience with loss ratios reaching levels that, over time, could negatively impact earnings. The Company's strategy is to increase pricing on these negatively developing medical specialties to the level where, at a minimum, some contribution is being made toward covering related fixed expenses. These specialties make up less than 10% of FPIC's direct premiums written and a portion of this market could be lost in 1998. To date, however, a loss in these specialties is not evident based on early 1998 renewal results. Conversely, FPIC continues to remain very competitive in its target specialties and claims-free program, where applications for new business continue at a strong pace. Indications are the MPL industry has entered the early stages of a consolidation phase and, as a result of this trend, a number of MPL companies could either merge or be acquired. Management is committed to a disciplined acquisition strategy as a way to increase shareholder value and, in the normal course of business, will evaluate business combinations with other companies. Management believes ideal candidates should be as strong or stronger than the Company, on a relative basis, and that the combination be immediately accretive to earnings. There are a number of capital sources available to finance these transactions including internally generated funds, bank credit facilities and newly issued debt and/or equity securities. While management continues to closely monitor the growth in core MPL business, the Company is committed to adding new products and services that should result in revenue and profitability 16 19 growth rates consistent with 1996 and 1997. Any acquisitions, mergers or business combinations that might occur should further enhance these expectations. Results of Operations - Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Premiums Direct premiums written and assumed increased $13.5 million, or 21%, from $64.3 million in 1996 to $77.8 million in 1997. This increase was primarily attributable to growth in the number of insureds and a rate increase of 2.4% on physician MPL premiums effective January 1, 1997. In addition, the Company added $2.5 million of direct premium written in Texas and assumed $1.0 million in group accident and health coverage in 1997. Reinsurance premium ceded increased $1.8 million, or 32%, from $5.7 million in 1996 to $7.5 million in 1997 due to the increase in premium written in Texas. Net premiums earned increased $9.4 million, or 17%, from $56.1 million in 1996 to $65.5 million in 1997 due to the increase in direct premiums written and the assumed premium. Net Investment Income Net investment income increased $1.2 million, or 9%, from $13.6 million in 1996 to $14.8 million in 1997. The increase was primarily attributable to a higher level of invested assets. The increase was achieved despite a shift in the portfolio from 41% of tax free securities in 1996 to 50% of tax-free securities in 1997. The Company's investment policy is to acquire investment grade fixed income securities with an average duration of approximately five years. Due to the falling interest rate environment, maturities in the portfolio were extended and the average duration of the portfolio was increased from 4.2 years in 1996 to 5.0 years in 1997. Claims Administration Fees and Commission Income This income is generated by McCreary and its subsidiary, EMI. Claims administration fees are revenues generated by McCreary's core business, which is the administration of self-insured programs for large employers, primarily in the health and workers compensation areas. Neither McCreary nor the Company assumes any risk on these products; the risk is assumed by each employer and any excess coverage desired is placed by McCreary with various insurers and reinsurers. All the commission income was generated from the placement of this excess coverage by McCreary. Claims administration fees and commission income nearly doubled, from $5.2 million in 1996 to $10.2 million in 1997. This increase is attributable to the addition of new contracts and the inclusion of EMI, which was purchased in 1997 and added revenue of $4.6 million. Losses and LAE Losses and LAE increased $7.0 million, or 15%, from $47.0 million in 1996 to $54.0 million in 1997 reflecting, in part, the increase in insureds. The GAAP loss ratios of 82.5% in 1997 and 83.7% in 1996 reflect the stability the Company has experienced in its loss trends in recent years. In connection with the Company's bi-annual reserving review, which includes a reevaluation of the adequacy of reserve levels for prior years' claims, the Company reduced its reserves for claims occurring in prior periods by $15.1 million in 1997 and $14.7 million in 1996. There is no 17 20 assurance that reserve adequacy reevaluations will produce similar reserve reductions in the future. Factors that could adversely affect the loss and LAE reserve estimate and future redundancies include, but are not limited to, inflation, changes in frequency and severity trends or changes in the judicial or legislative environment. The Company cannot predict whether similar redundancies will be experienced in future years. The Company believes that its favorable loss and LAE reserve development has primarily resulted from the following factors: (i) tort reform; (ii) the Company's approach to establishing reserves; (iii) the Company's targeting of medical specialties in which it believes it has developed substantial knowledge and experience; and (iv) the Company's targeting of "claims-free" business. Other Underwriting Expenses Other underwriting expenses increased $0.8 million, or 12%, from $6.6 million in 1996 to $7.4 million in 1997. This increase was primarily attributable to acquisition costs relating to the increase of insureds and the related premium written, and the expansion into other product lines. Other Operating Expenses Other operating expenses more than doubled from $4.1 million in 1996 to $8.5 million in 1997. These expenses are for MCC and this increase was primarily attributed to the inclusion of the EMI operations in the 1997 financial statements. Income Tax Income taxes increased $0.8 million, or 13%, from $6.0 million in 1996 to $6.8 million in 1997. This increase was lower than the percentage change in income before tax, which increased 21% to $23.3 million, due to the shift in the investment policy from taxable to tax-free securities. Net Income For the reasons stated above, net income increased $3.3 million, or 25%, from $13.3 million in 1996 to $16.6 million in 1997. Results of Operations - Year Ended December 31, 1996 Compared to Year Ended December 31, 1995 Premiums Direct premium written increased $7.7 million, or 14%, from $56.6 million in 1995 to $64.3 million in 1996. This increase was despite a 2.4% decrease in rates. This increase was primarily attributable to growth in the number of insureds. Reinsurance premium ceded increased $3.4 million, or 148%, from $2.3 million in 1995 to $5.7 million in 1996 due to a return of ceded premium of $3.4 million upon the expiration of a reinsurance contract in 1995 which was recorded as a decrease to ceded premium. Excluding this transaction, reinsurance premium ceded would have decreased $0.1 million. Net premium earned increased $3.4 million, or 6%, from $52.7 million in 1995 to $56.1 million in 1996 due to the increase in direct premium written and the decrease in ceded premium. Excluding the one time effect of the return of ceded premium received in conjunction with the above-mentioned reinsurance contract, net premium earned increased $6.8 million from $49.3 million to $56.1 million. 18 21 Net Investment Income Net investment income increased $1.6 million, or 13%, from $12.0 million in 1995 to $13.6 million in 1996. Investment income in 1995 is net of a $0.5 million writedown of the Company's home office building. The increase was primarily attributable to a higher level of invested assets. The increase was achieved despite a shift in the portfolio to a higher concentration of tax-free securities. The Company's investment policy is to acquire investment grade fixed income securities with an average duration of approximately four years. The average duration of the portfolio increased from 3.6 years in 1995 to 4.2 years in 1996. Net Realized Investment Gains (Losses) Net realized investment losses in 1996 were $0.1 million as compared to net realized investment gains of $0.2 million in 1995. With the buy and hold approach described earlier, net realized investment gains or losses are expected to be minimal. Claims Administration Fees and Commission Income Claims administration fees and commission income increased from $2.6 million in 1995 to $5.2 million in 1996. This increase is attributable to the inclusion of a full year of income form McCreary. Losses and LAE Losses and LAE increased $2.2 million, or 5%, from $44.8 million in 1995 to $47.0 million in 1996 reflecting, in part, the increase in insureds. The GAAP loss ratios of 83.7% in 1996 and 85.1% in 1995 reflect the stability the Company has experienced in its loss trends in recent years. In connection with the Company's bi-annual reserving review, which includes a reevaluation of the adequacy of reserve levels for prior years' claims, the Company reduced its reserves for claims occurring in prior periods by $14.7 million in 1996 and $14.0 million in 1995. There is no assurance that reserve adequacy reevaluations will produce similar reserve reductions in the future. Factors that could adversely affect the loss and LAE reserve estimate and future redundancies include, but are not limited to, inflation, changes in frequency and severity trends or changes in the judicial or legislative environment. The Company cannot predict whether similar redundancies will be experienced in future years. The Company believes that its favorable loss and LAE reserve development has primarily resulted from the following factors: (i) tort reform; (ii) the Company's approach to establishing reserves; (iii) the Company's targeting of medical specialties in which it believes it has developed substantial knowledge and experience; and (iv) the Company's targeting of "claims-free" business. Other Underwriting Expenses Other underwriting expenses increased $1.5 million, or 29%, from $5.1 million in 1995 to $6.6 million in 1996. This increase was primarily attributable to acquisition costs relating to the increase of insureds and the related premium written. 19 22 Other Operating Expenses Other operating expenses more than doubled from $2.0 million in 1995 to $4.1 million in 1996. These expenses are for McCreary and this increase was primarily attributed to the inclusion of a full year of McCreary operations in the 1996 financial statements. Income Tax Income taxes increased $0.1 million, or 2%, from $5.9 million in 1995 to $6.0 million in 1996. Income tax expense was flat even though net income before tax increased by $1.7 million, from $17.6 million in 1995 to $19.3 million in 1996, due to the shift in the investment policy from taxable to tax-free securities. Net Income For the reasons stated above, net income increased $1.6 million, or 14%, from $11.7 million in 1995 to $13.3 million in 1996. Liquidity and Capital Resources The payment of losses and LAE, and operating expenses in the ordinary course of business is the principal need for the Company's liquid funds. Cash used to pay these items has been provided by operating activities. Cash provided from these activities was sufficient during 1997 to meet the Company's 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, increasing use of managed care and adverse legislative changes. In order to compensate for such risk, the Company: (i) maintains what its management considers to be adequate reinsurance; (ii) conducts regular actuarial reviews of loss reserves every six months; and (iii) maintains adequate asset liquidity (by managing its cash flow from operations coupled with its fixed income maturities). On September 30, 1997, the Company secured a $10 million revolving credit facility with a Florida lending institution to meet certain non-operating cash needs as they may arise. The credit facility terminates May 31, 1999 and bears interest at various rates at the option of the Company at the time of borrowing. The interest rates range from LIBOR plus 0.50% to Prime less 0.50%. The Company is not charged a fee nor is it required to maintain compensating balances in connection with this credit facility. As of December 31, 1997, the Company had borrowed $2 million against the credit facility for non-operating purposes, at a rate of approximately 6.26%. The Company will continue to evaluate its need to obtain financing sources to meet future non-operating needs. At December 31, 1997, the Company held approximately $11.2 million in investments scheduled to mature during the next twelve months, which combined with net cash flows from operating activities, are expected to provide the Company with sufficient liquidity and working capital. As highlighted in the accompanying Consolidated Statements of Cash Flows, the Company generated positive net cash from operations of $29.1 million in 1997. Shareholder dividends payable by the Company's insurance subsidiary, FPIC, are subject to certain limitations imposed by Florida law. In 1998, FPIC is permitted, within insurance 20 23 regulatory guidelines, to pay dividends of approximately $12.4 million without prior regulatory approval. In recent years the National Association of Insurance Commissioners (NAIC) has developed risk-based capital ("RBC") measurements for insurers. The measurements provide state regulators with varying levels of authority based on the adequacy of an insurer's RBC. At December 31, 1997, FPIC's statutory annual statement reported a total adjusted surplus to policyholders of $87.9 million, which is $77.7 million more than the NAIC's authorized RBC control level of $10.2 million. The authorized control level permits an insurance regulator to take whatever regulatory actions are considered necessary to protect the best interests of the policyholders and creditors of the insurer, which may include placing the insurer under regulatory control (i.e., rehabilitation or liquidation). The Florida Department of Insurance has not adopted the NAIC's RBC standards, although it does use the standard to identify companies that may need regulatory attention. Guaranty Fund Assessments FPIC is subject to assessment by the Florida Insurance Guaranty Association, Inc. (FIGA) as well as similar associations in other states where it is licensed, for the provision of funds necessary for the settlement of covered claims under certain policies of insolvent insurers. Standard assessments levied annually by these associations on an "as needed" basis are expensed as paid. In addition to the standard FIGA assessments, the Florida Legislature may levy special assessments to settle claims caused by certain catastrophic losses. FPIC would be assessed on a basis of premium written. No provision for special assessments was made in the 1997 financial statements. However, damages caused by future catastrophes, such as hurricanes, could subject the Company to additional assessments. Year 2000 The advent of the year 2000 will pose significant issues for organizations across the country and will require consideration of converting or replacing millions of lines of code. The year 2000 issue exists due to program developers creating databases and programs to store and process a year as a two-digit field. The Company addressed the year 2000 issue when it converted its database and reprogrammed its system software in 1994. Forward-Looking Statements The statements which are not historical facts contained in this report are forward-looking statements that involve certain risks and uncertainties. These forward-looking statements include the plans, objectives and expectations of management for future operations relating to the products and future economic performance of the Company. The forward-looking statements are based on assumptions that the Company will continue to: (i) price and market its insurance products competitively; (ii) reserve appropriately for losses and LAE; (iii) maintain its successful handling of claims; and (iv) retain existing agents and key management personnel. The forward-looking statements are also based upon assumptions that (i) competitive conditions within the MPL insurance business will not change materially or adversely; (ii) demand for MPL insurance will remain strong; (iii) the market will accept the Company's new products and services; and (iv) the Company's reinsurers will remain solvent. In addition, if the Company 21 24 does acquire one or more businesses, management's ability to identify suitable businesses to acquire and to effectively integrate the combined operations of such businesses with the Company may cause the Company's actual results to differ materially from the results anticipated in these forward-looking statements. Assumptions relating to the foregoing are difficult or impossible to predict accurately and many are beyond the control of the Company. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. Item 8. Financial Statements and Supplementary Data The financial statements and schedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Page 29. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant Information required hereunder with respect to directors and the five highest compensated officers will appear under the heading Executive Compensation in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which information is incorporated herein by reference. Information regarding the Company's other executive officers is as follows:
Name Age Capacity ---- --- -------- R. Jeannie Whitter 47 Vice President Charles W. Emanuel 47 Vice President and Secretary Ray A. Carey 59 Vice President Kurt F. Driscoll 47 Vice President Paul T. Luckman 41 Vice President Donald J. Sabia 39 Vice President and Controller
R. Jeannie Whitter has served as Vice President of the Company since its formation in 1996 and as Vice President of FPIC since 1988. She has been involved in the Company's underwriting since 1976. Charles W. Emanuel has served as Vice President and Secretary of the Company since its formation in 1996 and as Vice President and Assistant Secretary of FPIC since 1988. Since 1982, Mr. Emanuel has been responsible for the Company's management information systems. Ray A. Carey has served as Vice President of the Company since its formation in 1996 and as Vice President of FPIC since 1992. Since 1978, Mr. Carey has been responsible for the Company's claims administration. 22 25 Kurt F. Driscoll has served as Vice President of the Company since its formation in 1996 and as Vice President of FPIC since 1992 and has been responsible for the Company's risk management since 1988. Paul T. Luckman has served as Vice President of the Company since its formation in 1996 and as Vice President of FPIC since March 1996 and is responsible for the Company's marketing. Mr. Luckman served as Director of Hospitals and Managed Care programs for MAG Mutual Insurance Company from 1993 to 1996. He served as Director of Insurance and Risk Management for Crozar-Keytone Health System from 1992 to 1993. Mr. Luckman served as Associate Director of Risk Management for Franciscan Health System from 1991 to 1992. Donald J. Sabia has served as Vice President and Controller of the Company since its formation in 1996 and as Controller of FPIC since 1995 and has been employed by the Company since 1993. From 1986 to 1993, Mr. Sabia was an audit supervisor for Coopers & Lybrand. Mr. Sabia is a Certified Public Accountant. Item 11. Executive Compensation The information required herein will appear under the heading Executive Compensation in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which information is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required herein will appear under the heading Principal Shareholders and Securities Ownership of Management in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which information is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required herein will appear under the heading Certain Relationships and Related Transactions in the Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, which information is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1. Financial Statements and Schedules ---------------------------------- FPIC Insurance Group, Inc.: Independent Auditors' Report Consolidated Balance Sheets at December 31, 1997 and 1996 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 2. Notes to the Consolidated Financial Statements ----------------------------------------------
23 26 (Schedules other than those listed are omitted for the reason that they are not required or are not applicable or the required information is shown in the financial statements or notes thereto) I - Summary of Investments - Other than Related Party Investments II - Condensed Financial Information of Registrant III - Supplemental Insurance Information IV - Reinsurance V - Valuation and Qualifying Accounts 3. Exhibits --------- Exhibit No. ----------- 3.1 Articles of Incorporation of FPIC Insurance Group, Inc., incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 3.2 Bylaws of FPIC Insurance Group, Inc., incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333- 02040) first filed on March 7, 1996. 10(a) Reinsurance Agreement with Cologne Reinsurance Company (Dublin) Ltd, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 10(b) Casualty Excess of Loss Treaty Agreement No. AR-4373(97) Final Placement Slip (Practitioner Liability Reinsurance) with Various Subscribing Reinsurers. 10(c) Casualty First Excess Cession Treaty Agreement No. AR-4374(97) Final Placement Slip (Healthcare Facilities Liability Reinsurance) with Various Subscribing Reinsurers. 10(d) Form of Employment Agreements dated December 30, 1992, amended November 4, 1995, and amended February 28, 1996, between FPIC and William R. Russell and Steven R. Smith, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333- 02040) first filed on March 7, 1996. 10(e) Form of Severance Agreements dated February 28, 1996, between FPIC and William R. Russell, Steven R. Smith, Steven M. Rosenbloom, and Robert B. Finch, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 10(f) Form of Indemnity Agreement dated February 28, 1996 between the Registrant and Drs. Acosta-Rua, Gause, Shapiro, Selander, White, Bagby, Baratta, Murray, Bridges, Hagen, Van Eldik, Yonge, Messrs. Russell, Smith, Rosenbloom, Finch, Sabia, Emanuel, Carey, Driscoll and Ms. Whitter, incorporated by reference to the Company's Registration
24 27 Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996). 10(g) Omnibus Incentive Plan, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 10(h) Director Stock Option Plan, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 10(i) Supplemental Executive Retirement Plan, as amended, incorporated by reference to the Company's Third Quarter Statement on Form 10-Q (Registration No. 0-28730) filed on November 14, 1996. 10(j) Excess Benefit Plan, incorporated by reference to the Company's Registration Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996. 10(k) Deferred Compensation Plan, incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-04585) first filed on May 24, 1996. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule.
(b) Reports on Form 8-K ------------------- None. 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 14th day of March , 1998. FPIC Insurance Group, Inc. By /s/ William R. Russell ------------------------------- William R. Russell, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 25 28
Signature Title Date /s/ William R. Russell President, Chief Executive March 14, 1998 - ---------------------------------- Officer and Director William R. Russell (Principal Executive Officer) /s/ Robert B. Finch Senior Vice President March 14, 1998 - ---------------------------------- and Chief Financial Officer Robert B. Finch (Principal Financial Officer) /s/ Donald J. Sabia Vice President and March 14, 1998 - ----------------------------------- Controller Donald J. Sabia (Principal Accounting Officer) /s/ James G. White Chairman of the Board March 14, 1998 - ----------------------------------- James G. White, M.D. /s/ Guy T. Selander Vice Chairman March 14, 1998 - ------------------------------------ Guy T. Selander, M.D. /s/ Gaston J. Acosta-Rua Director March 14, 1998 - ------------------------------------ Gaston J. Acosta-Rua, M.D. /s/ Richard J. Bagby Director March 14, 1998 - ------------------------------------ Richard J. Bagby, M.D. /s/ Robert O. Baratta Director March 14, 1998 - ------------------------------------ Robert O. Baratta, M.D. /s/ James W. Bridges Director March 14, 1998 - -------------------------------------- James W. Bridges, M.D. /s/ Curtis E. Gause Director March 14, 1998 - --------------------------------------- Curtis E. Gause, D.D.S.
26 29 /s/ J. Stewart Hagen Director March 14, 1998 - ---------------------------------------- J. Stewart Hagen, M.D. /s/ Louis C. Murray Director March 14, 1998 - ---------------------------------------- Louis C. Murray, M.D. /s/ David M. Shapiro Director March 14, 1998 - ----------------------------------------- David M. Shapiro, M.D. /s/ Dick L. Van Eldik Director March 14, 1998 - ------------------------------------------ Dick L. Van Eldik, M.D. /s/ Henry M. Yonge Director March 14, 1998 - ------------------------------------------- Henry M. Yonge, M.D.
27 30 Independent Auditors' Report The Board of Directors FPIC Insurance Group, Inc. We have audited the consolidated financial statements of FPIC Insurance Group, Inc. as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FPIC Insurance Group, Inc. as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. KPMG Peat Marwick LLP Jacksonville, Florida March 6, 1998 28 31 FPIC Insurance Group, Inc. Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996
12/31/97 12/31/96 -------------- -------------- ASSETS Bonds and U.S. Government securities: Available-for-sale, at fair value $259,574,210 $234,650,172 Other invested assets 2,000,000 0 Common stocks, at fair value 2,540,735 185,000 Real estate investments 4,184,768 3,661,726 -------------- -------------- TOTAL INVESTMENTS 268,299,713 238,496,898 -------------- -------------- Cash and cash equivalents 7,679,822 5,463,096 Premiums receivable, net of allowance for doubtful accounts of $681,175 in 1997 and $383,580 in 1996 17,924,658 12,551,992 Accrued investment income 3,740,979 3,641,391 Reinsurance recoverable on paid losses 866,149 73,873 Due from reinsurers on unpaid losses and advance premiums 14,115,000 12,020,239 Deposits with reinsurers 18,070,341 16,419,179 Property and equipment, net of accumulated depreciation 2,369,595 1,617,750 Deferred policy acquisition costs 1,411,420 1,212,035 Deferred income taxes 8,937,094 8,913,225 Finance charge receivable 281,217 230,443 Prepaid expenses 423,328 409,718 Intangible assets 7,173,841 1,989,113 Other assets 1,556,594 513,566 -------------- -------------- TOTAL ASSETS $352,849,751 $303,552,518 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Loss and loss adjustment expense reserves $188,086,000 $172,738,000 Unearned premiums 28,217,537 23,458,641 Paid in advance and unprocessed 4,782,835 5,250,755 Short term debt 2,000,000 0 FIGA accrual 0 1,345,244 Federal income taxes payable 2,735,527 520,585 Accrued expenses and other liabilities 6,963,432 3,827,903 -------------- -------------- TOTAL LIABILITIES 232,785,331 207,141,128 -------------- -------------- Commitments and contingencies (note 15) SHAREHOLDERS' EQUITY Common stock, $.10 par value: 25,000,000 shares authorized; 9,179,581 and 9,021,670 shares issued and outstanding in 1997 and 1996, respectively 917,958 902,167 Additional paid-in capital 25,789,144 22,444,711 Net unrealized gain on investments 3,634,299 80,169 Retained earnings 89,723,019 73,166,334 -------------- -------------- 120,064,420 96,593,381 Less Treasury Stock 0 (181,991) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 120,064,420 96,411,390 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $352,849,751 $303,552,518 ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 29 32 FPIC Insurance Group, Inc. Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 -------------- -------------- -------------- REVENUES Net premiums earned $65,503,675 $56,074,436 $52,674,850 Net investment income 14,820,373 13,611,373 11,987,414 Net realized investment gains (losses) 32,065 (71,288) 238,275 Claims administration and management fees 8,758,651 4,071,460 1,904,324 Commission income 1,465,282 1,120,455 652,848 Finance charge and other income 2,635,985 2,175,079 2,072,811 -------------- -------------- -------------- TOTAL REVENUES 93,216,031 76,981,515 69,530,522 -------------- -------------- -------------- EXPENSES Net losses and loss adjustment expenses 54,010,515 46,947,946 44,839,234 Other underwriting expenses 7,400,029 6,589,743 5,134,525 Other operating expenses 8,461,264 4,124,404 1,960,755 -------------- -------------- -------------- TOTAL EXPENSES 69,871,808 57,662,093 51,934,514 -------------- -------------- -------------- Income before income taxes 23,344,223 19,319,422 17,596,008 Income taxes 6,787,538 5,995,697 5,909,835 -------------- -------------- -------------- NET INCOME $16,556,685 $13,323,725 $11,686,173 ============== ============== ============== BASIC EARNINGS PER COMMON SHARE $1.83 $1.57 $1.47 ============== ============== ============== DILUTED EARNINGS PER COMMON SHARE $1.76 $1.53 $1.47 ============== ============== ============== WEIGHTED AVERAGE SHARES OUTSTANDING 9,407,093 8,723,967 7,949,750 ============== ============== ==============
The accompanying notes are an integral part of the consolidated financial statements. 30 33 FPIC Insurance Group, Inc. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995
ADDITIONAL NET UNREALIZED COMMON PAID-IN GAIN (LOSS) STOCK CAPITAL ON INVESTMENTS ----------------------------------------------------- BALANCES, DECEMBER 31, 1994 $775,986 $18,492,687 ($7,414,848) Net income Issuance of shares, net 37,978 (37,978) Payment of cash dividend Net unrealized gain on debt securities 9,040,023 ----------------------------------------------------- BALANCES, DECEMBER 31, 1995 813,964 18,454,709 1,625,175 Net income Payment of cash dividend Payment of prior year dividend Net unrealized loss on debt securities (1,545,006) Purchase of shares outstanding Issuance of shares, net 38,203 (38,203) Shares issued and net proceeds received from IPO 50,000 4,028,205 ----------------------------------------------------- BALANCES, DECEMBER 31, 1996 902,167 22,444,711 80,169 Net income Net unrealized gain on debt and equity securities 3,554,130 Retirement of treasury shares (1,957) (180,034) Issuance of shares, net 17,748 3,524,467 ----------------------------------------------------- BALANCES, DECEMBER 31, 1997 $917,958 $25,789,144 $3,634,299 ===================================================== RETAINED TREASURY EARNINGS STOCK TOTAL ------------------------------------------------ BALANCES, DECEMBER 31, 1994 $49,752,387 $0 $61,606,212 Net income 11,686,173 11,686,173 Issuance of shares, net 0 Payment of cash dividend (775,986) (775,986) Net unrealized gain on debt securities 9,040,023 ------------------------------------------------ BALANCES, DECEMBER 31, 1995 60,662,574 0 81,556,422 Net income 13,323,725 13,323,725 Payment of cash dividend (813,965) (813,965) Payment of prior year dividend (6,000) (6,000) Net unrealized loss on debt securities (1,545,006) Purchase of shares outstanding (181,991) (181,991) Issuance of shares, net 0 Shares issued and net proceeds received from IPO 4,078,205 ------------------------------------------------ BALANCES, DECEMBER 31, 1996 73,166,334 (181,991) 96,411,390 Net income 16,556,685 16,556,685 Net unrealized gain on debt and equity securities 3,554,130 Retirement of treasury shares 181,991 0 Issuance of shares, net 3,542,215 ------------------------------------------------ BALANCES, DECEMBER 31, 1997 $89,723,019 $0 $120,064,420 ================================================
The accompanying notes are an integral part of the consolidated financial statements. 31 34 FPIC Insurance Group, Inc. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995
1997 1996 1995 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $16,556,685 $13,323,725 $11,686,173 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 2,108,350 1,757,526 1,687,038 Realized (gains) losses on investments (32,065) 71,288 (238,275) Realized loss on sale of equipment 7,275 0 0 Bad debt expense 297,595 147,422 153,498 Loss on write down of real estate investment 0 0 500,000 Deferred income taxes (1,939,499) 1,355,093 909,805 Changes in assets and liabilities: Premiums receivable (5,670,261) (1,853,407) (1,082,670) Accrued investment income (99,588) (576,525) 227,653 Reinsurance recoverable on paid losses (792,276) 735,027 (754,849) Due from reinsurers on unpaid losses and advance premiums (2,094,761) (2,539,962) 17,439 Deposits with reinsurers (1,651,162) (1,576,227) (4,619,072) Deferred policy acquisition costs (199,385) (393,723) (222,840) Federal income tax receivable 0 1,665,764 (401,722) Other assets (784,846) 38,465 (520,935) Prepaid expenses and finance charge receivable (64,385) (88,142) (48,371) Loss and loss adjustment expense reserves 15,348,000 8,232,000 12,238,000 Unearned premiums 4,758,896 2,510,756 1,641,082 Paid in advance and unprocessed (467,920) 1,268,612 (519,493) FIGA accrual (1,345,244) (1,686,990) (730,295) Federal income tax payable 2,214,942 520,585 0 Accrued expenses and other liabilities 2,973,378 1,153,818 (146,383) -------------- -------------- -------------- Net cash provided by operating activities 29,123,729 24,065,105 19,775,783 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of short-term investments 0 500,000 4,148,996 Purchase of short-term investments 0 0 (803,760) Proceeds from sale or maturity of securities available-for-sale 81,416,058 80,865,600 162,579,137 Purchase of securities available-for-sale (102,081,907) (101,186,056) (182,116,512) Purchase of goodwill (5,407,588) (1,000,000) (1,144,879) Proceeds from sale of real estate investments 281,060 0 0 Purchase of real estate investments (864,224) (1,021,392) (225,000) Purchase of other invested assets (2,000,000) 0 0 Purchase of common stock (2,331,950) (60,000) (60,000) Purchase of subsidiary's net other assets and stock (285,726) 0 (855,121) Purchase of property and equipment, net (1,174,941) (270,505) (41,232) -------------- -------------- -------------- Net cash (used in) investing activities (32,449,218) (22,172,353) (18,518,371) CASH FLOWS FROM FINANCING ACTIVITIES Receipt of short term debt 2,000,000 0 0 Issuance of common stock 3,542,215 4,078,205 0 Purchase of common stock-treasury 0 (181,991) 0 Dividends paid on common stock 0 (819,965) (775,986) -------------- -------------- -------------- Net cash provided by (used in) financing activities 5,542,215 3,076,249 (775,986) -------------- -------------- -------------- Net increase in cash and cash equivalents 2,216,726 4,969,001 481,426 Cash and cash equivalents, beginning of year 5,463,096 494,095 12,669 -------------- -------------- -------------- CASH AND CASH EQUIVALENTS, END OF YEAR $7,679,822 $5,463,096 $494,095 ============== ============== ============== Supplemental disclosure of cash flow information: Federal income taxes paid $6,071,204 $2,599,703 $6,071,000 Exchange of mortgage note for deed on real estate investment $0 $0 $2,200,000 Retirement of treasury stock $181,991 $0 $0
The accompanying notes are an integral part of the consolidated financial statements. 32 35 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1997, 1996 and 1995 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES FPIC Insurance Group, Inc. (the Company) is an insurance holding company comprised of three wholly-owned subsidiaries: Florida Physicians Insurance Company, Inc. (FPIC), FPIC Insurance Agency (the Agency), and McCreary Corporation and its subsidiary (MCC). On June 11, 1996, the shareholders of FPIC approved the formation of a holding company structure that resulted in FPIC becoming a subsidiary of the Company. In connection with the reorganization, FPIC's shareholders became the shareholders of the Company and received five shares of the Company's common stock for each of their shares of FPIC's common stock. FPIC is a licensed casualty insurance carrier and writes professional liability insurance for physicians, dentists, hospitals and other healthcare providers, primarily in the state of Florida. MCC is a third-party administrator of various lines of business in the insurance segment, operating in Florida. The Agency conducts various insurance agency activities. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles (GAAP). These financial statements include the accounts of FPIC, the Agency, and MCC. Less than majority-owned entities in which the company has at least a 20% interest are reported on the equity basis. All significant intercompany transactions and balances have been eliminated in consolidation. NATURE OF OPERATIONS The Company operates in the property and casualty insurance industry, is licensed to write insurance in several states, and is subject to regulation by the Departments of Insurance in these states. Following is a description of the most significant risks facing property and casualty insurers and how the Company mitigates those risks: Legal/Regulatory Risk is the risk that changes in the legal or regulatory environment in which an insurer operates will change and create additional loss costs or expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits or new legal theories may create costs for the insurer beyond those currently recorded in the financial statements. This risk is concentrated in Florida, where the Company writes most of its business, but may expand to other states as it begins writing in those states. Credit Risk is the risk that issuers of securities owned by the Company will default, or other parties, including reinsurers which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment and reinsurance strategy. Financial instruments which potentially expose the Company to concentrations of credit risk consist primarily of premiums receivable and deposits with reinsurers. The Company has not experienced significant losses related to premiums receivable from individual policyholders or groups of policyholders in a particular industry or geographic area. Management believes no additional credit risk beyond amounts provided for collection losses is inherent in the Company's premiums receivable. The Company typically requires that deposits with reinsurers be held in trust and, as a result, has not experienced significant losses related to such deposits. Interest Rate Risk is the risk that interest rates will change and cause a decrease in the value of insurer's investments. The Company mitigates this risk by following a conservative investment strategy. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and recognize a gain or loss. Given the Company's liquidity position and prior history, it is unlikely that it would need to liquidate its investment portfolio prior to its scheduled maturity. Use of Estimates. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and revenues and expenses for the period. Actual results could differ from these estimates. The estimates most susceptible to change are those used in determining the reserve for losses and loss adjustment expenses. Although considerable variability is inherent in these estimates, management believes that these reserves are adequate. The estimates are continually reviewed and adjusted as necessary in current operations. INVESTMENTS The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS No. 115). Under the provisions of SFAS No. 115, the Company is required 33 36 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to classify investments in debt securities (bonds, redeemable preferred stocks and mortgage-backed securities) into one of three categories: held-to-maturity, available-for-sale, or trading. Market values for debt and equity securities were based on quoted market prices or dealer quotations. Where a quoted market price was not available, fair value was measured utilizing quoted market prices for similar securities or by using discounted cash flow methods. Other invested assets include an investment in a limited partnership. The partnership invests in the stock of publicly held companies operating in the insurance industry. Investments in common stocks include common stock of affiliates and nonaffiliates and are recorded at market value. Income on investments is net of amortization of premium and accretion of discount on the yield-to-maturity method relating to debt securities acquired at other than par value. Realized investment gains and losses were determined on the specific identification basis. Declines in the fair value of securities considered to be other than temporary, if any, would be recorded as realized losses in the consolidated statements of income. REAL ESTATE INVESTMENTS Real estate investments consist of a building, which includes the Company's home office, various rental units and vacant lots. Depreciation is computed over the estimated useful lives of the property, using the straight-line method. Estimated useful lives range from 27.5 to 39 years. Rental income and expenses are included in net investment income. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Company considers all demand deposits, overnight investments and instruments with a maturity of three months or less to be cash equivalents. REINSURANCE In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. The Company retains a maximum of $500,000 per occurrence. Amounts recoverable from reinsurers were estimated in a manner consistent with the claim liability associated with the reinsured policy. The Company evaluates the financial condition of reinsurers since failure of reinsurers to honor their obligations could result in losses to the Company. The Company generally obtains collateral in the form of letters of credit for amounts recoverable from reinsurers that are not designated as authorized reinsurers by the Florida Department of Insurance. Reinsurance assumed is not material. The Company records its reinsurance contracts under the provisions of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" (SFAS No. 113). PROPERTY AND EQUIPMENT Property and equipment are depreciated on a straight-line basis with estimated useful lives ranging from five to fifteen years. DEFERRED POLICY ACQUISITION COSTS Deferred policy acquisition costs, principally commissions, are amortized over the estimated life of the insurance contracts. INCOME TAXES Income taxes were accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. 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. 34 37 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INTANGIBLE ASSETS In general, the excess of cost over net assets purchased relating to business acquisitions and the cost of insurance and renewal rights purchased is being amortized into income over periods not exceeding forty years using the straight-line method. The carrying value of the intangible assets is reviewed regularly by management by determining whether the amortization of the intangible assets can be recovered through undiscounted future operating cash flows of the acquired operation. RECOGNITION OF REVENUES Premiums are recognized as revenues on a monthly pro rata basis over the terms of the policies. Policy terms generally do not exceed one year. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES As more fully described in Note 9, loss and loss adjustment expense reserves are based on actuarial projections of the best estimate of ultimate losses and loss adjustment expenses as interpreted by the Company's independent consulting actuary. The estimated liability is continually reviewed and any adjustments which become necessary are included in current operations. PER SHARE DATA Net income per common share is based upon the weighted average number of common shares outstanding during each year. Earnings per share data for all years have been stated giving retroactive effect for the stock split that occurred as a result of the reorganization in June 1996 (see Note 14). In February 1997, SFAS No. 128, "Earnings per Share" was issued. This statement requires specific computations, presentations and disclosures for earnings per share (EPS) amounts in order to make EPS amounts more compatible with international accounting standards. The Company adopted SFAS No. 128 for the period ended December 31, 1997. This statement requires that any prior-period EPS amounts be restated. The adoption of SFAS No. 128 had no effect on diluted EPS amounts reported in prior periods. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, SFAS No. 123, "Accounting for Stock-based Compensation" was issued. This statement requires the fair value of stock options and other stock-based compensation issued to employees to either be recognized as compensation expense in the income statement, or be disclosed as a pro forma effect on net income and earnings per share in the footnotes to the Company's financial statements. Effective January 1, 1996, the Company elected to adopt SFAS No.123 on a disclosure basis only. Accordingly, implementation of SFAS No. 123 did not have an effect on the Company's consolidated balance sheet or income statement. PENSION AND OTHER POSTRETIREMENT PLANS The Company has a defined benefit plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the years of service (maximum 15 years). The cost of this program is being funded currently. 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. REPORTING COMPREHENSIVE INCOME In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued. The statement requires that all items that meet the definition of components of comprehensive income be reported in the financial statements for the period in which they are recognized. Effective for fiscal years beginning after December 15, 1997, the Company will present the additional disclosures required under SFAS No. 130. 35 38 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS The amortized cost and estimated fair value of investments in debt and equity securities as of December 31, 1997 and 1996 were as follows:
1997 ---- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ----- Securities Available-for-Sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 56,716,848 $ 997,833 $ 45,395 $ 57,669,286 Debt securities issued by states and political subdivisions 102,786,576 2,921,699 30,109 105,678,166 Corporate securities 28,830,440 246,408 75,670 29,001,178 Mortgage-backed securities 65,672,904 1,903,177 350,501 67,225,580 ------------- ---------- -------- ------------- Total debt securities 254,006,768 6,069,117 501,675 259,574,210 Equity securities 2,516,949 23,786 0 2,540,735 ------------- ---------- ------- ------------- Total Securities Available-for-Sale $ 256,523,717 $ 6,092,903 $501,675 $ 262,114,945 ============= =========== ======== =============
1996 ---- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------------- Securities Available-for-Sale: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 59,509,013 $ 133,548 $ 317,843 $ 59,324,718 Debt securities issued by states and political subdivisions 54,042,865 379,025 182,499 54,239,391 Corporate securities 35,603,548 234,194 444,137 35,393,605 Mortgage-backed securities 85,373,279 1,163,925 844,746 85,692,458 ------------- ----------- ---------- ------------ Total debt securities 234,528,705 1,910,692 1,789,225 234,650,172 Equity securities 185,000 0 0 185,000 ------------- ----------- ---------- ------------ Total Securities Available-for-Sale $ 234,713,705 $ 1,910,692 $1,789,225 $234,835,172 ============= =========== ========== ============
The Company's other invested assets include an investment in a limited partnership. The asset is recorded at cost of $2,000,000 and the market value at December 31, 1997 was $2,091,538. 36 39 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The amortized cost and estimated fair value of debt and equity securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities, because borrowers have the right to call or prepay these obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED COST FAIR VALUE ---- ---------- Securities Available-for-Sale: Due in one year or less $ 11,217,698 $ 11,200,274 Due after one year through five years 30,085,215 30,454,597 Due after five years through ten years 48,654,909 49,593,000 Due after ten years, primarily U.S. Government and mortgage-backed securities 164,048,946 168,326,339 Equity securities 2,516,949 2,540,735 ------------- ------------- Totals $ 256,523,717 $ 262,114,945 ============= =============
Treasury notes with a carrying value of $2,500,000 and a market value of $2,533,600 were on deposit with the Insurance Department of the State of Florida as of December 31, 1997, as required by law. For the years ended December 31, 1997, 1996, and 1995, net investment income earned was as follows:
1997 1996 1995 ---- ----- ---- Investment income earned: Bonds and U.S. Government securities $15,470,451 $ 14,571,284 $ 13,072,522 Real estate investments 368,270 305,187 159,224 Mortgage receivable 0 0 (48,889) Other invested assets 176,877 88,362 34,777 Short-term investments 132,721 161,180 497,313 Cash on hand and on deposit 13,846 9,232 23,872 ----------- ------------ ------------ Total investment income earned 16,162,165 15,135,245 13,738,819 Investment expenses (1,341,792) (1,523,872) (1,251,405) Loss on write down of real estate 0 0 (500,000) ------------ ------------ ------------ Net investment income $14,820,373 $ 13,611,373 $ 11,987,414 =========== ============ ============
Gross realized gains and gross realized losses on sales of debt securities and real estate investments based on specific identification, were as follows:
1997 1996 1995 ---- ---- ---- Gross realized gains-available-for-sale $ 42,643 $ 59,804 $ 1,100,705 Gross realized losses-available-for-sale (89,057) (150,265) (862,430) Gross realized gains-real estate 78,479 19,173 0 ----------- ------------- ------------- Net realized gains (losses) $ 32 ,065 $ (71,288) $ 238,275 =========== ============= =============
The changes in net unrealized gains (losses) on available-for-sale investments were $5,469,762, $(2,340,918), and $13,697,004 in 1997, 1996, and 1995, respectively. 37 40 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. REAL ESTATE INVESTMENTS At December 31, 1997 and 1996, real estate investments consisted of the following:
1997 1996 ---- ---- Land and building $ 3,934,570 $ 3,070,659 Rental units 461,200 722,402 Other 37,670 37,670 ------------ ----------- 4,433,440 3,830,731 Accumulated depreciation (248,672) (169,005) ------------ ----------- Net real estate investments $ 4,184,768 $ 3,661,726 ============ ===========
Total depreciation expense of real estate investments was $138,598, $54,817, and $45,709 in 1997, 1996, and 1995, respectively. 4. PROPERTY AND EQUIPMENT At December 31, 1997, and 1996, property and equipment consisted of the following:
1997 1996 ---- ---- Leasehold improvements $ 1,096,737 $ 857,180 Data processing equipment, including software 1,074,972 871,720 Automobiles 231,647 227,218 Furniture, fixtures and equipment 1,824,844 914,721 --------- ------------ 4,228,200 2,870,839 Accumulated depreciation (1,858,605) (1,253,089) ------------ ------------ Net property and equipment $ 2,369,595 $ 1,617,750 ============ ============
Total depreciation expense of property and equipment was $605,516, $389,495, and $328,420, in 1997, 1996, and 1995, respectively. 5. DEFERRED POLICY ACQUISITION COSTS Changes in deferred policy acquisition costs for the years ended December 31, 1997, 1996, and 1995, were as follows:
1997 1996 1995 ---- ---- ---- Balance, beginning $ 1,212,035 $ 818,312 $ 595,472 Additions 4,194,981 3,236,689 2,243,056 Amortization expense (3,995,596) (2,842,966) (2,020,216) ------------- ----------- ------------ Balance, ending $ 1,411,420 $ 1,212,035 $ 818,312 ============ =========== ============
6. BUSINESS ACQUISITIONS On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a Florida third party administrator, for a cost of $2,000,000. The acquisition agreement specified annual payments to be made to the seller from 1996 through 2000. On January 17, 1997, MCC acquired all of the outstanding common stock of Employers Mutual, Inc. (EMI), a Florida third party administrator, for a cost of $1,250,000 plus certain additional payments based upon earnings. 38 41 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The earnings of EMI are not material to the consolidated results of the Company. The acquisition agreement specified additional payments, based upon earnings, to be made to the selling shareholders from 1998 through 2001. The remaining contingent payments and the year of payment for these two acquisitions are as follows:
McCreary EMI -------- --- 1998 800,000 250,000 1999 700,000 250,000 2000 600,000 250,000 2001 0 250,000
These payments are subject to adjustment in accordance with the agreements based on attainment of projected annual earnings from the date of acquisition through 2000. No individual annual payment will exceed the annual earnings, and may be reduced if the projected earnings are not attained for that year. The agreements allow for an additional final payment based on the aggregate earnings compared to the aggregate projected earnings during the earnout period. The effect of these subsequent payments is to increase the original purchase price and the recorded goodwill. In 1997, McCreary met its earnings target and made a $900,000 payment in accordance with the acquisition agreement. On July 1, 1997, the Company purchased 20% of the common stock of APS Insurance Services, Inc. (APS), a Texas insurance service corporation, for a cost of $2,000,000. The market value of APS approximates the book value at December 31, 1997. The purchase agreement provides an option to purchase an additional 35% of the common stock of APS after two years, allowing the Company 55% ownership. This investment is accounted for under the equity method. On September 22, 1997, the Company entered into an agreement with Frontier Insurance Group, Inc. (Frontier) to combine their medical professional liability businesses in Florida. Beginning December 1, 1997, the Company's subsidiary, FPIC, began underwriting Frontier's Florida book of business. The cost of the transaction was $3.2 million, payable in the Company's common stock, with a cash adjustment based on actual results. The excess of the purchase price over tangible assets is included in intangible assets and will be amortized over the expected life of this book of business, considering the Company's historical policy renewal rate. 7. INTANGIBLE ASSETS Intangible assets include goodwill associated with business acquisitions and at December 31, 1997 and 1996 was as follows:
1997 1996 1995 ---- ---- ---- Balance, beginning $ 1,989,113 $ 1,108,117 $ 0 Additions at cost 5,407,588 1,000,000 1,144,879 Amortization expense (222,860) (119,004) (36,762) ------------- ----------- ----------- Balance, ending $ 7,173,841 $ 1,989,113 $ 1,108,117 ============ =========== ===========
8. BORROWING ARRANGEMENTS The Company maintains a $10,000,000 revolving credit facility with SunTrust Bank which is payable on demand. The credit facility agreement terminates on May 31, 1999 and bears interest at various rates at the option of the Company at the time of borrowing. The interest rates range from LIBOR plus 0.50% to Prime less 0.50%. The Company is not required to maintain compensating balances in connection with this credit facility. As of December 31, 1997, $2,000,000 had been borrowed under this agreement at a rate of approximately 6.26% and $31,289 of interest expense was accrued. 9. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss and loss adjustment expense (LAE) reserves are generally determined on the basis of individual claims and actuarially determined estimates of future claims based upon the Company's actual experience, assumptions and projections as to claims frequency, severity and inflationary trends and settlement payments. Such estimates may vary significantly from the eventual outcome. The ranges of reasonably expected ultimate unpaid losses and LAE 39 42 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS are estimated by the Company's consulting actuary on an undiscounted basis. The assumptions used in making such estimates and for establishing the resulting reserves are continually reviewed and updated based upon current circumstances, and any adjustments resulting therefrom are reflected in current income. Activity in the reserves for losses and loss adjustment expenses was as follows:
YEARS ENDED DECEMBER 31, ------------------------------------------------- 1997 1996 1995 ---- ---- ---- Balance at January 1 $172,738,000 $164,506,000 $152,268,000 Less reinsurance recoverables 11,614,000 9,188,000 8,853,000 ------------- ------------ ------------ Net balance at January 1 161,124,000 155,318,000 143,415,000 ------------- ------------ ------------ Incurred related to: Current year 69,126,000 61,617,000 58,868,000 Prior year (15,115,000) (14,669,000) (14,029,000) ------------- ------------ ------------ Total incurred 54,011,000 46,948,000 44,839,000 ------------- ------------ ------------ Paid related to: Current year 8,061,000 5,253,000 4,320,000 Prior year 33,103,000 35,889,000 28,616,000 ------------- ------------ ------------ Total paid 41,164,000 41,142,000 32,936,000 ------------- ------------ ------------ Net balance at end of period 173,971,000 161,124,000 155,318,000 Plus reinsurance recoverables 14,115,000 11,614,000 9,188,000 ------------- ------------ ------------ Balance at December 31 $ 188,086,000 $172,738,000 $164,506,000 ============= ============ ============
The provision for losses and loss adjustment expenses for prior years (net of reinsurance recoveries of $5,834,000, $4,921,000, and $5,328,000, in 1997, 1996, and 1995, respectively) decreased because of lower-than-anticipated losses, caused by the Company's underwriting of certain target specialties and loss free business. 10. REINSURANCE The Company presently has excess of loss reinsurance contracts that serve to limit the Company's maximum loss to $500,000 per occurrence. To the extent that any reinsuring company might be unable to meet its obligations, the Company would be liable for such defaulted amounts not already covered by letters of credit. The amount of earned premiums ceded to reinsurers for the years ended December 31, 1997, 1996, and 1995 was $7,508,160, $5,707,095, and $2,325,634, respectively. On July 1, 1993, the Company entered into a contingent aggregate excess of loss reinsurance contract to cover the Company against certain risks, including extended reporting endorsement claims and extra contractual obligations and/or excess of policy limits claims. It was determined that the contract did not meet the risk transfer requirements of SFAS No. 113 and therefore, has been accounted for as a deposit. The amounts deposited under the term of this contract were $500,000 in 1997 and $500,000 in 1996 and $14 million in prior years. Under the provisions of this contract, 3.35 percent of the amount deposited was not available for return to the Company for profit commission purposes and was amortized over the life of the contract. This contract expired on December 31, 1997. The Company is not renewing the contract and plans to use the proceeds for investment purposes. 40 43 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The effect of reinsurance on premiums written and earned for the years ended December 31, 1997, 1996, and 1995 was as follows:
1997 1996 1995 ---- ---- ---- Written Earned Written Earned Written Earned Direct & assumed $77,770,733 $73,011,835 $64,292,287 $61,781,531 $56,641,565 $ 55,000,484 Ceded (7,485,436) (7,508,160) (5,552,785) (5,707,095) (2,335,577) (2,325,634) ----------- ----------- ---------- ---------- ------------ ----------- Net premiums $70,285,297 $65,503,675 $58,739,502 $56,074,436 $54,305,988 $52,674,850 =========== =========== =========== =========== =========== ===========
11. SHAREHOLDERS' EQUITY The Company has a stock option plan for officers and key employees (the employee plan) and a plan for non-employee directors (the director plan). Both plans became effective in 1996. Under the plans, both an incentive stock option and a nonqualified stock option may be granted to the same individual. The option price of an incentive stock option may not be less than 100% of the fair market value of such shares on the grant date. The option price of a non-qualified option shall not be less than 50% of the fair market value of such shares on the grant date. Under the terms of the director plan, 5,000 shares are granted to each director on the date that person becomes a director, and on a discretionary basis at future dates as approved by the Board, at a price not less than 100% of the fair market value on the grant date. During 1996, 320,000 incentive stock options and 335,000 nonqualified stock options were issued under both plans. During 1997, 120,000 nonqualified stock options were granted under the director plan, subject to shareholder approval, and 265,000 nonqualified stock options were issued under the employee plan. Options granted under the plans are exercisable at such dates as are determined in connection with their issue, but not later than ten years after the date of grant. A summary of the status of the Company's stock option plan as of December 31, 1997 is presented below:
WEIGHTED AVERAGE FIXED OPTIONS SHARES EXERCISE PRICE - ------------- ------ -------------- Outstanding at beginning of year 655,000 $9.11 Granted 385,000 $23.44 Exercised (48,500) $9.11 ------- Outstanding at end of year 991,500 ======= Options exercisable at year-end 202,167 $9.11 =======
At December 31, 1997, 340,000 shares of the Company's common stock were reserved for issuance in connection with the stock option plans. The Company maintains an Employee Stock Purchase Plan that allows employees to purchase the Company's common stock at 85% of the market value on the first or last day of the offering period, whichever was lower. 41 44 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Significant assumptions used to estimate the fair values of options using the Black-Sholes option-pricing model were as follows:
1997 1996 1996 NONQUALIFIED NONQUALIFIED INCENTIVE STOCK OPTION STOCK OPTION STOCK OPTION ------------ ------------ ------------ a. current price of underlying stock $29.13 $29.13 $29.13 b. exercise price of the option $23.625 $8.22 $10.00 c. expected life of the option 5 years 5 years 5 years d. expected volatility of underlying stock 26.74% 26.87% 26.87% e. expected dividends on the stock $0 $0 $0 f. risk-free interest rate during the expected option term 6.17% 5.37% 6.31%
Total compensation expense recognized in the income statement was $0. The weighted average fair value of options granted during the year was $23.44. The pro forma disclosures required under SFAS No.123 methodology were as follows:
1997 1996 ---- ---- Pro Forma Net Income $ 16,002,439 $ 12,672,186 Pro Forma Tax Expense $ 6,489,098 $ 5,660,055 Pro Forma Diluted Earnings Per Share $ 1.70 $ 1.45
12. INCOME TAXES The provision for income taxes consisted of the following:
1997 1996 1995 ---- ---- ---- Current income tax expense: Federal $ 7,230,181 $ 3,839,423 $ 4,199,925 State 1,496,856 801,181 800,105 ------------ ----------- ----------- Total 8,727,037 4,640,604 5,000,030 ------------ ----------- ----------- Deferred income tax (benefit) expense: Federal (1,695,163) 1,157,033 777,578 State (244,336) 198,060 132,227 ------------- ----------- ----------- Total (1,939,499) 1,355,093 909,805 ------------- ----------- ----------- Net income tax expense $ 6,787,538 $ 5,995,697 $ 5,909,835 ============ =========== ===========
The provision for income taxes differed from the statutory corporate tax rate of 35 percent for 1997, and 34 percent for 1996 and 1995, as follows:
1997 1996 1995 ---- ---- ---- Computed "expected" tax expense $ 8,170,478 $ 6,568,603 $ 5,982,643 Municipal bond interest (1,834,950) (1,316,743) (770,301) State income taxes, net of federal benefit 814,138 659,500 615,339 Compensation expense on exercised options (272,508) 0 0 Other, net (89,620) 84,337 82,154 ------------- ----------- ----------- Actual expense $ 6,787,538 $ 5,995,697 $ 5,909,835 ============ =========== ===========
42 45 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 1997 and 1996, the significant components of the net deferred tax asset were as follows:
1997 1996 ---- ---- Deferred tax assets arising from: Loss reserve discounting $ 9,166,279 $ 7,612,055 Unearned premium reserves 2,176,983 1,595,188 FIGA assessment 0 457,383 Other 814,250 586,154 ----------- ----------- Total deferred tax assets 12,157,512 10,250,780 ----------- ----------- Deferred tax liabilities arising from: Unrealized gains on securities 1,956,928 41,299 Deferred acquisition costs 544,455 412,092 Accrued interest on reinsurance deposits 0 817,676 Other 719,035 66,488 ----------- ----------- Total deferred tax liabilities 3,220,418 1,337,555 ----------- ----------- Net deferred tax asset $ 8,937,094 $ 8,913,225 =========== ===========
The Company has not recorded a valuation allowance, as the deferred tax assets were considered by management to be realizable based on the level of anticipated future taxable income. Net deferred tax assets and federal income tax expense in future years can be significantly affected by changes in enacted tax rates or by unexpected adverse events that would impact management's conclusions as to the ultimate realizability of deferred tax assets. 13. EMPLOYEE BENEFIT PLAN The Company's employees are covered by a qualified defined benefit plan and a defined contribution pension plan sponsored by the Company. The benefits of the defined benefit plan are based on years of service and the employee's compensation. The actuarially computed net periodic pension cost for December 31, 1997, 1996, and 1995 included the following:
1997 1996 1995 ---- ---- ---- Service cost - benefits earned during the period $ 94,015 $ 88,239 $ 72,802 Interest cost on projected benefit obligation 106,284 95,970 81,879 Actual return on plan assets (219,877) (75,464) (83,334) Net amortization and deferral 181,770 45,258 63,737 --------- ----------- ------------ Net periodic pension cost $ 162,192 $ 154,003 $ 135,084 ========= ========== ============ Actuarial present value of benefit obligation: Vested benefit obligation $ (1,121,303) $ (873,840) $ (795,082) Accumulated benefit obligation $ (1,156,683) $ (890,071) $ (811,070) Projected benefit obligation for service rendered to date $ (1,945,621) $ (1,477,290) $(1,383,634) Plan assets at fair value 1,139,563 854,139 748,937 ------------ ----------- ------------ Projected benefit obligation in excess of plan assets (806,058) (623,151) (634,697) Unrecognized net loss (gain) from past experience different from that assumed 117,581 (21,467) 32,513 Prior service cost not yet recognized in net periodic pension cost (48,679) (52,991) (57,303)
43 46 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Unrecognized net obligation at inception recognized over 15.29 years 314,672 345,252 375,832 ------------ ------------ ----------- Accrued pension cost $ (422,484) $ (352,357) $ (283,655) ============= ============= ============
Assumptions used in the accounting for net periodic pension cost at December 31, 1997, 1996, and 1995, were as follows:
1997 1996 1995 ---- ---- ---- Discount rates 6.50% 7.25% 7.00% Rate of increase in compensation levels 5.23% 5.23% 5.19% Expected long-term rate of return on assets 9.00% 7.25% 7.25%
The defined contribution plan has two parts. The first part is a profit-sharing plan. The second part allows employees to contribute, beginning in 1997, up to 5 percent of their annual compensation (2.5 percent in prior years), of which up to 2.5% is matched 100 percent by the Company. The Company's policy is to fully fund the liability at the end of each year. At December 31, 1997, the fair market value of plan assets was $5,594,506. The expense for this plan amounted to $426,291, $324,376, and $310,112 in 1997, 1996, and 1995, respectively. The Company also has a supplemental executive retirement plan (SERP) that provides certain executives with income at retirement equal to 60 percent of preretirement base compensation, less qualified pension plan benefits paid by the Company and all predecessor plans and Social Security benefits. The plan had a net periodic pension cost of $75,660 for 1997. The projected benefit obligation at December 31, 1997 was $363,923 and the accrued pension cost was $220,158, using a discount rate of 6.5 percent. The plan has no vesting prior to age 55. The Company accrued $95,000 to cover any liability under this plan in 1997 and 1996, and $20,000 for 1995. The total liability included in the financial statements for this plan amounted to $250,000 as of December 31, 1997. 14. STOCK TRANSACTIONS As part of the reorganization in June 1996, a stock split was transacted in which five shares of the Company's $.10 par value common stock were received for each share of FPIC's $1 par value common stock. The accompanying financial statements reflect the transaction retroactively in a manner similar to a stock split. In January 1996, a cash dividend of 10 cents per common share was declared amounting to $813,964. In addition, the Company paid $6,000 in retroactive dividends in 1996 to certain shareholders. In January 1995, a cash dividend of 10 cents per common share was declared amounting to $775,986. 15. COMMITMENTS AND CONTINGENCIES The future minimum annual rentals under noncancellable leases were as follows: 1998 $ 550,793 1999 487,644 2000 480,782 2001 335,509 Thereafter 324,630 ------------ $ 2,179,358 ============
Total rental expense was $386,016, $332,821, and $219,380 for 1997, 1996, and 1995, respectively. The Company is involved in numerous legal actions arising primarily from claims under insurance policies. The legal actions arising from claims under insurance policies have been considered by the Company in establishing its reserves. While the outcome of all legal actions is not presently determinable, the Company's management is of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 44 47 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As a Florida insurer, the Company is subject to assessment by the Florida Insurance Guaranty Association, Inc. (FIGA) for the provision of funds necessary for the settlement of covered claims under certain policies of insolvent insurers. Under the Florida Insurance Guaranty Association Act, FIGA can assess member insurers on the basis of net direct premiums written in the State of Florida at a level established by the Florida Legislature. FIGA may also levy special assessments to settle claims caused by certain catastrophic losses. No provision for special assessments was made in the 1997 financial statements. However, damages caused by future catastrophic losses, such as a hurricane, could subject the Company to additional FIGA assessments. 16. STATUTORY ACCOUNTING FPIC is required to file statutory financial statements with state insurance regulatory authorities. Shareholders' equity on a statutory basis was $87,875,717, $76,519,879, and $70,038,945 at December 31, 1997, 1996, and 1995, respectively. Statutory net income amounted to $12,404,838, $10,442,464, and $11,283,820 for the years ended December 31, 1997, 1996, and 1995, respectively. During 1996 and in connection with the reorganization, FPIC, by way of dividend, transferred its $2.5 million investment in MCC to the Company. This amount was charged directly to statutory surplus. FPIC is restricted under the Florida Insurance Code as to the amount of dividends it may pay without regulatory consent. In 1997, the Company can pay dividends up to approximately $12,400,000 without regulatory consent. 17. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE
1997 1996 1995 ---- ---- ---- Net income and income from continuing operations $16,556,685 $13,323,725 $11,686,173 =========== =========== =========== Basic weighted average shares outstanding 9,044,984 8,518,211 7,949,750 Common stock equivalents 362,109 205,756 0 ----------- ----------- ----------- Diluted weighted average shares outstanding 9,407,093 8,723,967 7,949,750 =========== =========== =========== Basic earnings per share $1.83 $1.56 $1.47 ===== ===== ===== Diluted earnings per share $1.76 $1.53 $1.47 ===== ===== =====
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of unaudited quarterly results of operations for 1997 and 1996:
Year Ended December 31, 1997 FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Premiums written and assumed $ 27,710,231 $ 17,806,822 $ 18,512,127 $ 13,741,553 Net investment income 3,823,088 3,653,959 3,757,665 3,585,661 Net income 3,790,566 3,910,210 4,278,310 4,577,599 Basic earnings per share $.42 $.43 $.47 $.50 Diluted earnings per share $.41 $.42 $.46 $.48 Year Ended December 31, 1996 FIRST SECOND THIRD FOURTH ----- ------ ----- ------ Premiums written and assumed $22,555,877 $15,616,746 $16,658,242 $ 9,461,422 Net investment income 3,148,582 3,376,768 3,495,433 3,590,590 Net income 2,075,288 3,883,565 3,628,299 3,736,573 Basic earnings per share $.25 $.48 $.44 $.44 Diluted earnings per share $.25 $.47 $.43 $.43
45 48 FPIC INSURANCE GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Quarterly earnings per share for 1997 and 1996 were stated after giving retroactive effect as if the stock split in June 1996 had occurred on January 1, 1996. 46 49 SCHEDULE I FPIC INSURANCE GROUP, INC. SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997
AMOUNT AT WHICH SHOWN IN Securities Available-for-Sale COST (1) VALUE BALANCE SHEET ------------- ------------- ------------- Fixed Maturities: U.S. Treasury securities and obligations of U.S. Government corporations and agencies $ 56,716,848 $ 57,669,286 $ 57,669,286 Debt securities issued by states and political subdivisions 102,786,576 105,678,166 105,678,166 Corporate securities 28,830,440 29,001,178 29,001,178 Mortgage-backed securities 65,672,904 67,225,580 67,225,580 ------------ ------------ ------------ Total fixed maturities 254,006,768 259,574,210 259,574,210 Equity Securities: Industrial, miscellaneous, and other 2,516,949 2,540,735 2,540,735 Real Estate 4,184,768 4,184,768 4,184,768 Other Invested Assets 2,000,000 2,091,538 2,000,000 ------------ ------------ ------------ Totals $262,708,485 $268,391,251 $268,299,713 ============ ============ ============
(1) Original cost of equity securities and real estate adjusted for any permanent write downs, and, as to fixed maturities, original cost reduced by repayments, write downs and adjusted for amortization of premiums or accrual of discounts. 50 Schedule II Condensed Financial Information of Registrant Condensed Balance Sheet FPIC Insurance Group, Inc. (Parent Only)
12/31/97 12/31/96 ============= ============= ASSETS Investments and cash: Investments in subsidiaries * $112,449,713 $92,456,266 Bonds 0 3,881,315 Common stocks 2,086,090 0 Other invested assets 2,000,000 0 Cash and cash equivalents (2,613) 4,300 ------------- ------------- Total Investments and Cash 116,533,190 96,341,881 Property and equipment, net 150,059 0 Due from subsidiaries * 5,938,784 0 Intangible assets 3,207,661 0 Prepaid expenses 263,245 0 Other assets 327,767 142,364 ------------- ------------- TOTAL ASSETS $126,420,706 $96,484,245 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Federal income taxes payable $2,620,083 $0 Short term debt 2,000,000 0 Other liabilities 1,736,203 72,855 ------------- ------------- TOTAL LIABILITIES 6,356,286 72,855 SHAREHOLDERS' EQUITY Common Stock, $.10 PAR VALUE: 25,000,000 shares authorized; 9,179,581 and 9,201,670 shares issued and outstanding in 1997 and 1996, respectively 917,958 902,167 Additional paid-in capital 25,789,144 22,444,711 Net unrealized gain on investments 3,634,299 80,169 Retained Earnings 89,723,019 73,166,334 ------------- ------------- 120,064,420 96,593,381 Less Treasury Stock 0 (181,991) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 120,064,420 96,411,390 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $126,420,706 $96,484,245 ============= =============
* Eliminated in consolidation See the accompanying Notes to Condensed Financial Statements. 51 Schedule II Condensed Financial Information of Registrant Condensed Statements of Earnings FPIC Insurance Group, Inc. (Parent Only)
YEARS ENDED DECEMBER 31 1997 1996 ----------- ----------- REVENUES Management fees from subsidiaries * $11,204,829 $0 Dividends from subsidiaries * 0 2,500,000 Net investment income 63,846 107,137 Other income 0 536 ----------- ----------- TOTAL REVENUES 11,268,675 2,607,673 EXPENSES Other operating expenses 9,057,547 18,416 ----------- ----------- TOTAL EXPENSES 9,057,547 18,416 Income before income taxes 2,211,128 2,589,257 Income taxes 843,660 30,347 ----------- ----------- EARNINGS BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES 1,367,468 2,558,910 Equity in undistributed earnings of subsidiaries 15,189,217 10,764,815 ----------- ----------- NET EARNINGS $16,556,685 $13,323,725 =========== ===========
* Eliminated in consolidation. See the accompanying Notes to Condensed Financial Statements. 52 Schedule II Condensed Financial Information of Registrant Condensed Statements of Cash Flows FPIC Insurance Group, Inc. (Parent Only)
YEARS ENDED DECEMBER 31 1997 1996 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 16,556,685 $ 13,323,725 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in undistributed earnings of (15,189,217) (10,764,815) subsidiaries Common stock dividend from subsidiary 0 (2,500,000) Depreciation 21,151 0 Changes in assets and liabilities: Due from subsidiaries (5,938,784) 0 Prepaid expenses (263,245) 0 Other assets (185,403) (142,364) Federal income taxes payable 2,620,083 0 Other liabilities 1,663,348 72,855 ------------ ------------ Net cash (used in) operating activities (715,382) (10,599) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of goodwill (3,207,661) 0 Purchase of common stocks (2,086,090) 0 Purchase of other invested assets (2,000,000) 0 Additional investment in subsidiaries (1,250,100) Proceeds from sale or maturity of securities 0 available for sale 3,881,315 0 Purchase of securities available for sale 0 (3,881,315) Purchase of property and equipment, net (171,210) 0 ------------ ------------ Net cash (used in) investing activities (4,833,746) (3,881,315) CASH FLOWS FROM FINANCING ACTIVITIES Receipt of short term debt 2,000,000 0 Issuance of common stock 3,542,215 4,078,205 Purchase of common stock-treasury 0 (181,991) ------------ ------------ Net cash provided by financing activities 5,542,215 3,896,214 Net (decrease) increase in cash and cash equivalents (6,913) 4,300 Cash and cash equivalents, beginning of year 4,300 0 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR ($2,613) $4,300 ============ ============ Supplemental disclosure of cash flow information: Federal income taxes paid $6,071,204 $2,599,703 Retirement of treasury stock $811,991 $0
See the accompanying Notes to Condensed Financial Statements. 53 Schedule II Condensed Financial Information of Registrant Notes to Condensed Financial Statements FPIC Insurance Group, Inc. (Parent Only) The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of FPIC Insurance Group and Subsidiaries (see Part II Item 8). 1. The Parent Company was formed on June 11, 1996. The shareholders of a subsidiary company approved the formation of a holding company structure. The shareholders of the subsidiary company became the shareholders of the Parent Company in a five for one exchange of common stock. Prior to the approval of the holding company structure, the Parent Company had no activity. 2. Investments See Investments in the consolidated financial statements Part II Item 8 and in Note 2 of the Notes to the Consolidated Financial Statements. 3. Intangible assets See Intangible Assets in the consolidated financial statements Part II Item 8 and in Note 7 of the Notes to the Consolidated Financial Statements. 4. Short term debt See Borrowing Arrangements in Note 8 of the Notes to the Consolidated Financial Statements. 5. Income Taxes The Company and its eligible subsidiaries file a consolidated U.S. federal income tax return. Income tax liabilities or benefits are recorded by each subsidiary based upon separate return calculations, and any difference between the consolidated provision and the aggregate amounts recorded by the subsidiaries is reflected in the Parent Company financial statements. For further information on income taxes, see Income Taxes in Note 12 of the Notes to the Consolidated Financial Statements. 6. Dividend Restrictions See Statutory Accounting in Note 17 of the Notes to the Consolidated Financial Statements. 7. Accounting Changes For information concerning new accounting standards adopted in 1997 and 1996, see Note 1 of the Notes to the Consolidated Financial Statements. 54 SCHEDULE III FPIC INSURANCE GROUP, INC. CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS) DECEMBER 31, 1997, 1996 AND 1995
Other Deferred Future Policy Policy Policy Benefits Claims & Net Acquisition Losses, Claims Unearned Benefits Premium Investment Segment Costs Loss Expenses Premiums Payable Revenue Income - ------- ----- ------------- -------- ------- ------- ------ 1997: Medical professional and other liabiltiy $1,411 $188,086 $ 28,218 $0 $ 65,504 $ 14,820 1996: Medical professional and other liability $1,212 $172,738 $ 23,459 $0 $ 56,074 $ 13,611 1995: Medical professional and other liabiltiy $ 818 $164,506 $ 20,948 $0 $ 52,675 $ 11,987 Amortization Benefits of Deferred Losses and Policy Net Loss Acquisition Other Premiums Segment Expenses Costs Expenses Written - ------- -------- ----- -------- ------- 1997: Medical professional and other liabiltiy $ 54,011 $ 3,996 $ 3,404 $ 70,285 1996: Medical professional and other liability $ 46,948 $ 2,843 $ 3,747 $ 58,740 1995: Medical professional and other liabiltiy $ 44,839 $ 2,020 $ 3,114 $ 54,306
55 SCHEDULE IV FPIC INSURANCE GROUP, INC. REINSURANCE FOR THE YEARS DECEMBER 31, 1997, 1996 AND 1995
PERCENTAGE CEDED TO ASSUMED OF AMOUNT PROPERTY AND GROSS OTHER FROM OTHER NET ASSUMED LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET - ------------------- ------ --------- --------- ------ ------ 1997 $71,277,054 $7,508,160 $ 1,734,781 $65,503,675 2.60% 1996 $61,628,450 $5,707,095 $ 153,081 $56,074,436 0.30% 1995 $54,948,908 $2,325,634 $ 51,576 $52,674,850 0.10%
56 SCHEDULE V FPIC INSURANCE GROUP, INC. VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD ----------- --------- -------- ---------- --------- Year-ended December 31, 1997 Allowance for Doubtful Accounts, net $383,580 $297,595 $ 0 $681,175 Year-ended December 31, 1996 Allowance for Doubtful Accounts, net $236,158 $147,422 $ 0 $383,580
EX-10.B 2 CASUALTY EXCESS OF LOSS TREATY AGREEMENT 1 EXHIBIT 10(b) PHYSICIANS, ALLIED MEDICAL PRACTITIONERS, DENTISTS, & CHIROPRACTORS CASUALTY FIRST THROUGH FOURTH AND CLASH EXCESS OF LOSS REINSURANCE AGREEMENT FINAL PLACEMENT SLIP COMPANY: FPIC Insurance Group a Florida corporation and/or Florida Physicians Insurance Company a Florida corporation and/or any company now or hereafter affiliated with FPIC Insurance Group INCEPTION: January 1, 1997 EFFECTIVE: Effective from 12:01 a.m., Eastern Standard Time, January 1, 1997, to 12:01 a.m., Eastern Standard Time, January 1, 2000, as respects: First, Second, Third, and Fourth Layers Claims made on and after 12:01 a.m., Eastern Standard Time, January 1, 1997 (including prior acts), on policies attaching from 12:01 a.m., Eastern Standard Time, January 1, 1997, to 12:01 a.m., Eastern Standard Time, January 1, 2000. Clash Layer: Claims made during the currency of this Agreement, regardless of the limits or effective dates of the Company's policies (but in the event of cancellation or expiration of this Agreement on a run-off basis, coverage will continue to apply in respect of all claims made during the runoff period arising from policies in effect at the cancellation or expiration date). The date of loss in respect to this Layer will be deemed to be the earliest date that any individual claim was first made against the Company under any of its policies. - 1 OF 21 - 2 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 CANCELLATION: At January 1, 1998, or January 1, 1999, by either party via 90 days prior notice by certified or registered mail. EXPIRATION AND CANCELLATION OPTIONS: At expiration or in the event of cancellation, the Reinsurers' liability for each policy in force at expiration or cancellation date will be run off until its cancellation, natural expiration, or next anniversary date, whichever first occurs. During the run-off period, the Company will continue to cede to the Reinsurers the appropriate earned premium (in the case of the Clash Layer, the runoff premium will be determined at the rates in effect at the cancellation date). Alternatively, the Company may elect to have the Reinsurers' liability terminate on a cut-off basis as of the date of expiration or cancellation, and the Reinsurers will not be liable for any claims made on or after the expiration or cancellation date. Regardless of the option chosen by the Company at expiration or cancellation, Reinsurers' liability will continue in the event any extended reporting period options are exercised in accordance with the Company's claims made policies and/or in the event the Company is bound by statute or regulation to continue coverage. BUSINESS COVERED: All business written and classified by the Company as Professional Liability, including Loss of Privileges coverage and Owners, Landlords, and Tenants coverage, issued to Physicians, Dentists, Nurse Anesthetists, Licensed Physicians' Assistants, Chiropractors and other Allied Medical Practitioners, Clinics, and Professional Associations (corporate policies) of Physicians, Dentists, and Chiropractors. The Company's policies will not exceed 12 months duration and will contain a warranty to the effect that there have been no known - 2 OF 21 - 3 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 incidents likely to give rise to a claim, other than those already reported to the Company. DEFINITIONS: "Agreement year" as used in this Agreement will mean a calendar year. "Claims made" as used in this Agreement will mean those claims first made against the insured during the policy period and occurring on or after the retroactive date, if any. The date on which a claim is made or reported will be understood to be the earlier of the date on which a written notice of claim is received by the Company, or a report by telephone is made to the Company by the insured or their representative. "Retroactive date" as used in this Agreement will mean the date prescribed in the Company's policy, which is the earliest date losses can actually occur for which an insured can claim coverage. "Extended reporting period" as used in this Agreement will mean a time period after a policy's termination date within which claims may be made with respect to occurrences happening between the original retroactive date, if any, and the original termination date of the policy. As regards deceased, disabled, and retired insureds and other withdrawing insureds, the extended reporting coverage will be understood to commence with: 1. The date the insured deceases as certified in their death certificate; or 2. The date the insured ceases to practice as a result of their permanent disability as certified by the insured's physician; or 3. The date the insured is retired as indicated in their written notification to the Company; or 4. The date that the Company's policy is terminated. EXCLUSIONS: As attached. - 3 OF 21 - 4 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 TERRITORY: To follow the Company's policies. RETENTION First Layer (all Insureds) AND LIMIT: $500,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $500,000 ultimate net loss each and every loss, each and every insured, each and every policy. Second Layer (all Insureds except Dentists) $500,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $1,000,000 ultimate net loss each and every loss, each and every insured, each and every policy. Third Layer (all Insureds except Dentists) $500,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $1,500,000 ultimate net loss each and every loss, each and every insured, each and every policy. Fourth Layer (Clinics and Corporation Policies only) - (Applicable to CNA International Reinsurance Company Limited only) $3,000,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $2,000,000 ultimate net loss each and every loss, each and every insured, each and every policy; - 4 OF 21 - 5 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 subject to a maximum recovery hereunder any one Agreement year of $3,000,000 in respect to each insured. Clash Layer (all Insureds) $750,000 ultimate net loss each and every loss excess of $750,000 ultimate net loss each and every loss; subject to a maximum recovery hereunder any one Agreement year of $1,500,000. Coverage applicable only when two or more insureds are involved in the same loss. Recoveries under the First through Fourth Layers will inure to the benefit of this Layer. LOSS Applying to the First, Second, and Clash Layers Combined CORRIDOR: In addition to the Company's retentions as shown above in respect to the captioned Layers, for each Agreement year that this Agreement remains in force the Company will retain the aggregate of ultimate net loss and loss expense otherwise collectable under the captioned Layers for the Agreement year in question which exceeds an amount equal to 100% of net reinsurance premium ceded under the captioned Layers; however, such retention will not exceed an amount equal to 25% of net reinsurance premium ceded under the First and Second Layers (but excluding net reinsurance premium in respect of Dentists) for the Agreement year in question. PREMIUM: First through Third Layers Annual deposit premium $3,000,000 payable quarterly in advance. - 5 OF 21 - 6 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 Adjustable at the end of each Agreement year, and quarterly thereafter, to net reinsurance premium (earned premium basis) as determined by the rates shown in Exhibit A attached hereto. Fourth Layer Net reinsurance premium (written premium basis) as determined by the rates shown in Exhibit A attached hereto, payable quarterly in arrears. Clash Layer Annual deposit premium $300,000 payable quarterly in advance, adjustable at: 1. .6% of the sum of the Company's gross earned premium; plus 2. 45.0% of the gross original written premium charged by the Company for the first $500,000 of limits on corporation policies. "Gross earned premium" is defined as the Company's premium for the first $500,000 of limits on all business the subject matter of this Agreement (but excluding premium for corporation policies), earned during the Agreement year (without regard to the original effective dates of the policies). - 6 OF 21 - 7 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 All Layers The Company's policies use rates loaded for unlimited discovery for deceased insureds, insureds who through disability are unable to practice, and insureds who retire from practice; however, the net reinsurance premium relating to the load for any such discovery extension will not be ceded hereunder until and unless such extension comes into effect. CREDIT As Respects the First through Third Layers Combined FUND: The Company has the option to maintain a Credit Fund equal to 15% of the net reinsurance premium which would have been ceded under the First through Third Layers, and the final disposition of such Fund will be at the sole discretion of the Company. The amounts used to constitute such Fund will be withheld by the Company prior to making payment of premium (other than deposit premiums) to Reinsurers, and regardless of the eventual disposition of the Fund, all amounts withheld by the Company will reduce the net reinsurance premium. CONTINGENT As Respects the First, Second, and Clash Layers Combined PROFIT COMMISSION: As attached. As Respects the Third and Fourth Layers Nil. OTHER REINSURANCE: Company permitted to purchase facultative reinsurance and to deduct the premium therefor; Company permitted to purchase other treaty reinsurance, and to deduct the premium therefor if it inures to the benefit of this Agreement. - 7 OF 21 - 8 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 FUNDING OF RESERVES: Letters of Credit required from unauthorized Reinsurers--full text as attached. LOSS EXPENSE: Pro rata in addition to the ultimate net loss. DECLARATORY JUDGMENT EXPENSE: Included hereunder, whether or not a loss is sustained as a result of the action, as per the definition attached. REPORTS: Reports within 60 days following the end of each quarter, to include all information required by Reinsurers for completion of their NAIC reports. OTHER PROVISIONS: Reinsurers will be subject to terms, conditions, interpretations, waivers, modifications, and alterations of the Company's policies that are the subject of this Agreement. Access to Records Clause Amendments Clause Aon Re Inc. Intermediary Clause (DOES NOT APPLY TO GENERAL RE) Arbitration Clause - as attached Claims Review Clause Correspondence and Payments Clause (APPLICABLE TO GENERAL RE ONLY) Delays, Errors, or Omissions Clause Excess of Original Policy Limits (90%)/Extra Contractual Obligations (90%) Clause - included within ultimate net loss; coverage exists as respects the First through Third Layers if any cession has been made to this Agreement; coverage exists as respects the Fourth Layer only if a cession has been made to that Layer in respect to the policy under which the EOPL/ECO loss arises. No EOPL/ECO coverage in respect to the Clash Layer. Insolvency Clause - 8 OF 21 - 9 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 Loss Notices and Settlements Clause - as attached Offset Clause - this Agreement only Net Retained Liability Clause Subrogation Clause Service of Suit Clause (NMA 1998) Ultimate Net Loss, Loss Expense, and Declaratory Judgment Expense Clause - as attached INFORMATION: Aon Fee for General Re: 5% of ceded premium - 9 OF 21 - 10 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 In accordance with your instructions, we have placed reinsurance with the Reinsurers listed hereon, subject to the terms and conditions hereinabove stated. We ask that you promptly advise us if the terms, conditions, or Reinsurers vary in any respect from your instructions. Aon Re Inc. will not be responsible for the financial or other obligations of any Reinsurer. Should you desire financial information regarding the Reinsurers listed hereon, please contact us and we will furnish it. The Reinsurers' obligations under this Agreement are several and not joint and are limited solely to the extent of their individual participation. The Reinsurers are not responsible for the participation of any co-subscribing Reinsurer that for any reason does not satisfy all or part of its obligations.
Domestic Reinsurers First Second Third Fourth Clash - ------------------- Layer Layer Layer Layer Layer ----- ----- ----- ----- ----- General Reinsurance Corporation 25.0000% 25.0000% 25.0000% 0.0000% 25.0000% TIG Reinsurance Company 16.3650% 16.3650% 16.3650% 0.0000% 16.3650% TOTAL DOMESTIC REINSURERS 41.3650% 41.3650% 41.3650% 0.0000% 41.3650%
LONDON MARKETS THROUGH DENIS M. CLAYTON AND COMPANY LIMITED
London Companies: - ----------------- CNA International Reinsurance Company Limited 13.7980% 13.798% 13.7980% 100.00% 13.7980% Hannover Ruckversicherungs- Aktiengesellschaft 5.17400% 5.1740% 5.17400% 0.0000% 5.17400% Terra Nova Insurance Company Limited 2.06900% 2.0690% 2.06900% 0.0000% 2.06900% Unionamerica Insurance Company Limited 15.1750% 15.1750% 15.1750% 0.0000% 15.1750% Zurich Re (UK) Limited 13.7960% 13.7960% 13.7960% 0.0000% 13.7960% TOTAL LONDON COMPANIES: 50.0120% 50.0120% 50.0120% 100.0000% 50.0120%
- 10 OF 21 - 11 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373
UNDERWRITERS AT LLOYD'S - ----------------------- Lloyd's Syndicate #0991 AEG 3.4490% 3.4490% 3.4490% 0.0000% 3.4490% Lloyd's Syndicate #1141 JEM 5.17400% 5.17400% 5.17400% 0.0000% 5.1740% Total Underwriters At Lloyd's 8.62300% 8.6230% 8.6230% 0.0000% 8.6230% Total Denis M. Clayton & Company Limited 58.6350% 58.6350% 58.6350% 100.0000% 58.6350% Total Non-Domestic Companies 58.6350% 58.6350% 58.6350% 100.0000% 58.6350% TOTAL ALL PARTICIPANTS: 100.0000% 100.0000% 100.0000% 100.0000% 100.0000%
Assuming that you find everything in order, please indicate your acceptance and approval by signing and returning this Final Placement Slip to Aon Re Inc., 201 California Street, Suite 900, San Francisco, California 94111. ACCEPTED AND APPROVED BY: DATED: --------------------------------- ------------------ REFERENCE NUMBER: --------------------- (For processing purposes it is important that you provide your Company's reference number for this program.) - 11 OF 21 - 12 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 EXCLUSION LIST No reinsurance indemnity will be afforded under this Agreement for: A. All liability of the Company arising, by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund, or other arrangement, howsoever denominated, established, or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, charge, fee, or other obligation in whole or in part. B. Reinsurance assumed by the Company other than inter-company reinsurance. C. Loss or liability excluded by the provisions of the Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. - attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. - 12 OF 21 - 13 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 LOSS NOTICES AND SETTLEMENTS The Company will advise the Reinsurers promptly of all losses reserved at: A. $100,000 from the ground up as respects the Clash Layer; or B. $100,000 from the ground up as respects the First through Third Layers, but reported to each Layer only if a cession has been made to that Layer; or C. $1,500,000 from the ground up as respects the Fourth Layer but only if a cession has been made to that Layer; or that, in the opinion of the Company, may involve the Reinsurers under this Agreement, and of all subsequent developments pertaining thereto that may materially affect them as well. Inadvertent omission in dispatching the aforementioned notices will in no way affect the obligation of the Reinsurers under this Agreement, provided the Company informs the Reinsurers of such omission promptly upon discovery. The Company will have the right to settle all claims under its policies. The settlements, provided they are within the terms of the Company's policies and of this Agreement, will be unconditionally binding on the Reinsurers in proportion to their participation in this Agreement. The Company will likewise, at its sole discretion, commence, continue, defend, or withdraw from actions, suits, or proceedings and generally handle all matters related to all claims and losses, and all payments made and costs and expenses incurred in connection therewith, or in taking legal advice therefor, will be shared by the Reinsurers. When so requested, however, the Company will afford the Reinsurers, at the Reinsurers' own expense, an opportunity to be associated with the Company in the defense of any claim, suit, or proceeding involving this Agreement, and the Company and the Reinsurers will cooperate in every respect in such defense. Amounts due the Company hereunder in the settlement of ultimate net loss and loss expense will be payable by the Reinsurers immediately upon being furnished by the Company with reasonable evidence of the amount paid or to be paid in excess of the Company's retention as set forth in the Retention and Limit Sections of the Agreement. - 13 OF 21 - 14 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 ULTIMATE NET LOSS, LOSS EXPENSE, AND DECLARATORY JUDGMENT EXPENSE "Ultimate net loss" as used in this Agreement will mean the amount of any settlement, award, or judgment paid by the Company or for which the Company has become liable to pay, including: plaintiff's attorney fees where applicable; interest accrued prior to final judgment if included as part of loss on reinsured policies; 90% of any claims-related extra contractual obligations where applicable; 90% of any claims-related excess limits liability where applicable; and declaratory judgment expense where the Company has not paid or has not become liable to pay any settlement, award, or judgment under its policy. Ultimate net loss will also include any coinsurance retention, deductible, or self-insured retention paid by the insured. Ultimate net loss will not include loss expense. All recoveries and subrogations which are actually recovered, and inuring reinsurance whether recovered or not, will be deducted from the amount of the ultimate net loss. Nothing, however, in this Agreement will be construed as meaning that losses are not recoverable hereunder until the actual loss to the Company has been ascertained. "Loss expense" as used in this Agreement will mean all expenses incurred by the Company in the investigation, appraisal, adjustment, litigation and/or defense of claims under policies reinsured hereunder, including court costs, interest accrued prior to judgment if included as part of expense on reinsured policies, and interest accrued after final judgment, but excluding internal office expenses, salaries, per diem, and other remuneration of regular Company employees. Loss expense will also include declaratory judgment expense incurred by the Company in an action that results in a loss to the Company (however, the maximum contribution to loss expense as respects declaratory judgment expense arising from any one declaratory judgment action will be $2,000,000). Loss expense where incurred in connection with claims involving this Agreement will be apportioned between the Company and the Reinsurers in proportion to their respective interests as finally determined. However, in the event a verdict or judgment is reduced by an appeal or a settlement, subsequent to the entry of the judgment, resulting in an ultimate saving on such verdict or judgment, or a judgment is reversed outright, the loss expense incurred in securing such final reduction or reversal will be prorated between the Reinsurers and the Company in the proportion that each benefits from such reduction or reversal, and the expenses incurred up to the time of the original verdict or judgment will be (a) prorated in proportion to each party's interest in such verdict or judgment, or (b) added to the Company's loss when the terms and conditions of the Company's policies reinsured hereunder include loss expense as part of the policy limit. - 14 OF 21 - 15 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 "Declaratory judgment expense" as used in this Agreement will mean all expenses incurred by the Company in connection with declaratory judgment actions brought to determine the Company's defense and/or indemnification obligations that are allocable to specific policies and claims subject to this Agreement. Declaratory judgment expense will be deemed to have been fully incurred by the Company on the date of the actual or alleged loss under the Company's policy giving rise to the action. CONTINGENT PROFIT COMMISSION (This Article applies only to the First, Second, and Clash Layers, on a combined basis.) The Reinsurers will allow the Company a contingent profit commission of 50% of the combined net profit of the First, Second, and Clash Layers under this Agreement. "Net profit" as used herein is the amount by which the earned reinsurance premium as in A. below, less reinsurance losses as in B. below, and less net expenses as in C. below, produces a positive balance: A. "Earned reinsurance premium" is the sum of the actual net reinsurance premiums ceded in respect of the adjustment period, less the Reinsurers' portion of the unearned premium reserve on those premiums at the time of the contingent profit commission computation (calculated on a monthly pro rata expiration basis). B. 1. As respects the First and Second Layers, "Reinsurance losses" are the Reinsurers' portion of payments (including loss expense) for claims made on policies written or renewed with effective dates during the period of this Agreement, plus the Company's estimate of the Reinsurers' portion of the reserve for outstanding losses (including loss expense) on policies written or renewed with effective dates during the period of this Agreement as such estimate stands at the time of the contingent profit commission computation. 2. As respects the Clash Layer, "Reinsurance losses" are the Reinsurers' portion of payments (including loss expense) for claims made during the period of this Agreement, plus the Company's estimate of the Reinsurers' portion of the reserve for outstanding losses (including loss expense) on claims made during the period of this Agreement as such estimate stands at the time of the contingent profit commission computation. - 15 OF 21 - 16 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 C. "Net expenses" are the Reinsurers' home office expenses of 20% of A. above, and federal excise tax paid by Reinsurers where applicable. The entire term of this Agreement will constitute a single adjustment period for all purposes of this Article. If the adjustment period becomes less than three years, whether due to cancellation of this Agreement, cancellation of an individual Reinsurer's participation, or inception of an individual Reinsurer's participation at a date when the adjustment period is already in progress, such shortened adjustment period will be subject to adjustment as if it were the complete adjustment period. The first computation of contingent profit commission as respects the adjustment period will include only the first year within the period, and will be computed and a statement forwarded to the Reinsurers 36 months after the inception of the adjustment period. Upon verification of amount due, the Reinsurers will immediately pay the Company. The first recomputation, including the first and second years within the adjustment period, and the second recomputation, including all three years within the adjustment period, will be computed 48 and 60 months after the inception of the adjustment period, respectively. Annual recomputations will continue to be made thereafter until all losses affecting this Agreement are fully settled and/or all liability is discharged and all premium is earned, when a final computation will be determined; cancellation of this Agreement will have no affect on the said annual recomputations. The debtor party will pay the other party whatever amount, if any, is due as a result of each recomputation. Should this Agreement be canceled on a cut-off basis, only the premium earned and the claims made during the period will be considered in the computations for the adjustment period; notwithstanding the foregoing, losses associated with extended reporting coverages in effect at the time of cancellation will continue to be taken into account in the computations, as will the premium therefor. - 16 OF 21 - 17 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 RESERVES AND LETTERS OF CREDIT As regards policies issued by the Company coming within the scope of this Agreement, the Company agrees that, when it files with the Insurance Department or sets up on its books statutory reserves, it will forward to the Reinsurers a statement showing the proportion of such reserves applicable to them. Such reserves will consist of: A. The difference between the deposit premiums and the earned premiums in respect to the First through Third and Clash Layers; and B. Losses, including: 1. Loss and loss expense paid by the Company, but not recovered from the Reinsurers, and 2. Loss and loss expense reserves (both case and bulk), as set out in Schedule F of the Company's annual statement. The Reinsurers hereby agree that they will apply for and secure delivery to the Company of a clean, irrevocable, and unconditional Letter of Credit, dated on or before December 31 of the year in which the request is made, issued by Citibank, N.A. (or another member of the Federal Reserve System or any other bank approved for use by the NAIC Securities Valuation Office), and containing provisions acceptable to the insurance regulatory authorities having jurisdiction over the Company's reserves in an amount equal to the Reinsurers' proportion of such reserves as shown in the statement prepared by the Company. The Letter of Credit will be issued for a period of not less than one year, and will be automatically extended for one year from its date of expiration or any future expiration date unless 30 days prior to any expiration date the issuing bank notifies the Company by registered mail that it elects not to consider the Letter of Credit extended for any additional period. An issuing bank, not a member of the Federal Reserve System or not chartered in the state of domicile of the Company, will provide 60 days notice to the Company prior to any expiration in the event of nonextension. Notwithstanding any other provisions of this Agreement, the Company or its court-appointed successor in interest may draw upon such credit at any time without diminution because of the insolvency of the Company or of any Reinsurer for one or more of the following purposes only: - 17 OF 21 - 18 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 A. To pay the Reinsurer's share or to reimburse the Company for the Reinsurer's share of any loss reinsured by this Agreement, which has not been otherwise paid. B. To make refund of any sum in excess of the actual amount required to pay the Reinsurer's share of any liability reinsured by this Agreement. C. To make refund of the difference between the deposit premiums and the earned premiums in respect to the First through Third and Clash Layers. D. To make refund of the unearned premium portion of premium ceded to the Fourth Layer. E. In the event of nonextension of the Letter of Credit as provided for above, to establish deposit of the Reinsurer's share of reserves under this Agreement. Such cash deposit will be held in an interest bearing account separate from the Company's other assets, and interest thereon at a rate at least equal to that paid by Citibank, N.A., in New York, will accrue to the benefit of the Reinsurer. The issuing bank will have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to ensure that withdrawals are made only upon the order of properly authorized representatives of the Company. At annual intervals, or more frequently as agreed but never more frequently than quarterly, the Company will prepare, for the sole purpose of amending the Letter of Credit, a specific statement of the Reinsurers' share of reserves. If the statement shows that the Reinsurers' share of such reserves exceeds the balance of credit as of the statement date, the Reinsurers will, within 30 days after receipt of notice of such excess, secure delivery to the Company of an amendment of the Letter of Credit, increasing the amount of credit by the amount of such difference. If, however, the statement shows that the Reinsurers' share of such reserves is less than the balance of credit as of the statement date, the Company will, within 30 days after receipt of written request from the Reinsurers, release such excess credit by agreeing to secure an amendment to the Letter of Credit, reducing the amount of credit available by the amount of such excess credit. - 18 OF 21 - 19 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 EXHIBIT A - RATING CHART The net reinsurance premium to be paid by the Company, as called for in the Premium Section of this Slip, will be determined by applying the rates in the following chart. For purposes of the chart, the following definitions will apply: Net Base Premium (NBP) = 75% of the gross premium charged by the Company for the first $500,000 of limits. Net Original Premium (NOP) = Gross premium charged by the Company for limits of $500,000 excess $500,000.
------------------------------------------------------------------------------------------------- PHYSICIANS, NURSE ANESTHETISTS, LICENSED PHYSICIANS' ASSISTANTS, CHIROPRACTORS, OTHER ALLIED MEDICAL PRACTITIONERS, AND DENTISTS CLINICS ------------------------------------------------------------------------------------------------- Clinics and Corporation All Types of Insureds within the Policies Only above-named ------------------------------------------------------------------------------------------------- 1st Layer 2nd Layer 3rd Layer 4th Layer* 1st Layer ------------------------------------------------------------------------------------------------- 500,000 500,000 500,000 3,000,000 500,000 excess of excess of excess of excess of excess of 500,000 1,000,000 1,500,000 2,000,000 500,000 - -------------------------------------------------------------------------------------------------------------- $1,000,000 $2,000,000 xs xs $2,000,000 $3,000,000 - -------------------------------------------------------------------------------------------------------------- CLASSES - -------------------------------------------------------------------------------------------------------------- 0 thru 2 21.25% 14.87% 10.41% 20.22% 20.22% (% of NBP) - -------------------------------------------------------------------------------------------------------------- 3 thru 8 27.62% 17.00% 11.90% 23.10% 23.10% (% of NBP) - -------------------------------------------------------------------------------------------------------------- all 75.00% (% of NOP) - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- DISCRETIONARY 10.00% 10.00% nil nil nil nil CREDIT - --------------------------------------------------------------------------------------------------------------
- ----------------------------- * Note that the Company, at its discretion, may allow a credit of up to 50% on the NBP against which these rates are to be applied. - 19 OF 21 - 20 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 ARBITRATION As a condition precedent to any right of action hereunder, any dispute that arises out of or in connection with this Agreement, including its formation or validity, will be submitted for decision to an arbitration panel composed of two arbitrators and an umpire. The arbitration will be conducted under the Federal Arbitration Act and will proceed as set forth below. All notices in connection with arbitration will be in writing and sent certified or registered mail, return receipt requested. The term "days" as used herein will mean calendar days. Notice requesting arbitration will reference this Article, will state issues to be resolved in the view of the claimant, and will appoint the arbitrator selected by the claimant. Within 30 days after receipt of such notice, the respondent will notify the claimant of any additional issues to be resolved and of the name of its appointed arbitrator. As time is of the essence, if the respondent fails to appoint its arbitrator within 30 days after receipt of notice requesting arbitration, the claimant is authorized to and will appoint the second arbitrator. Unless otherwise mutually agreed, each member of the arbitration panel will be an impartial active or former officer of an insurance or reinsurance company or an Underwriter at Lloyd's of London. Before instituting the hearing the two appointed arbitrators will choose an impartial umpire. If the two arbitrators fail to agree on the appointment of an umpire within 30 days after the appointment of the second arbitrator, within 10 days thereafter the two arbitrators will request the American Arbitration Association ("AAA") to appoint an umpire with the qualifications set forth above in this Article without regard to the AAA's Commercial Arbitration Rules. If the AAA fails to appoint an umpire within 30 days after its receipt of the arbitrators' request, either party may apply to a court of competent jurisdiction to appoint an umpire with the qualifications set forth above in this Article. The umpire will immediately notify each party of his selection. In the event of the resignation or death of any member of the arbitration panel, a replacement will be appointed in the same manner as the resigning or deceased member was appointed. Within 30 days after notice of appointment of the umpire, the claimant and respondent will each submit an initial brief to the panel. Within 45 days after notice of appointment of the umpire, the panel will meet and determine timely periods for the submission of reply briefs and amended briefs, procedures for discovery, and a scheduled date for the hearing. Arbitration will be held in the city of the Company's home office unless the parties mutually agree to another venue. - 20 OF 21 - 21 FPIC INSURANCE GROUP CASUALTY EXCESS OF LOSS AR 4373 The panel will be relieved of all judicial formality and the umpire will be the final judge of the panel's procedures, the rules of evidence, privilege, and production, and the excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. The panel will be authorized to issue interim orders and awards in the interest of fairness and the prompt and orderly resolution of issues in dispute. To the extent permitted by law, the umpire and the panel will be empowered to issue orders to enforce such decisions. Insofar as the panel looks to substantive law, it will consider the law of the State of Florida. The panel will make its award with regard to the terms expressed in this Agreement, the original intentions of the parties to the extent reasonably ascertainable, and the custom and practice of the insurance and reinsurance business. The panel will make its award within 30 days after the close of the hearing. Each award by the panel will be in writing and may state factual findings that served as a basis for the award. Each award by the panel will be by a majority of the panel's members and will be final and binding on all parties to the proceeding. Any party may apply to a court of competent jurisdiction for an order confirming the award, and a judgment of that court will thereupon be entered on the award. If such an order is issued, the attorneys' fees of the party so applying and court costs will be paid by the party against whom confirmation is sought. Each party will bear the expense of the arbitrator appointed on its behalf and all remaining costs of the arbitration will be finally allocated by the panel. Punitive damages will not be awarded; however, the panel may award interest, costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law, - 21 OF 21 - EX-10.C 3 CASUALTY FIRST EXCESS CESSION TREATY AGREEMENT 1 EXHIBIT 10(c) HEALTH CARE LIABILITY FACILITY CASUALTY FIRST THROUGH FOURTH CESSIONS EXCESS OF LOSS FINAL PLACEMENT SLIP COMPANY: FPIC Insurance Group a Florida corporation and/or Florida Physicians Insurance Company A Florida corporation and/or any company now or hereafter affiliated with FPIC Insurance Group PERIOD: Effective as to claims made, including prior acts, or losses occurring as respects General Liability only, on or after 12:01 a.m., Eastern Standard Time, January 1, 1997, on policies attaching from 12:01 a.m., Eastern Standard Time, January 1, 1997, to 12:01 a.m. Eastern Standard Time, January 1, 2000. CANCELLATION: At January 1, 1998, or January 1, 1999, by either party via 90 days notice by certified or registered mail. EXPIRATION AND CANCELLATION OPTIONS: At expiration or in the event of cancellation, each policy in force at the expiration or cancellation date will be run off until its cancellation, natural expiration, or next anniversary date, whichever first occurs. Alternatively, the Company may elect to have the Reinsurers' liability terminate on a cut-off basis as of the date of expiration or cancellation, and the Reinsurers will not be liable for any losses occurring and/or claims made on or after the expiration or cancellation date. - 1 OF 16 - 2 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 Regardless of the option chosen by the Company at expiration or cancellation, Reinsurers' liability will continue in the event any extended reporting period options are exercised in accordance with the Company's claims made policies and/or in the event the Company is bound by statute or regulation to continue coverage. BUSINESS COVERED: All business written and classified by the Company as Health Care Facility Liability Insurance, including General Liability written in conjunction with such business. The duration of the Company's policies will not exceed 12 months plus odd time not exceeding 18 moths in all, and will contain a warranty to the effect that there have been no known incidents likely to give rise to a claim, other than those already reported to the Company. DEFINITIONS: "Claims made" as used in this Agreement will mean those claims first made against the insured during the policy period and occurring on or after the retroactive date, if any. The date on which a claim is made or reported will be understood to be the earlier of the date on which a written notice of claim is received by the Company, or a report by telephone is made to the Company by the insured or their representative. "Retroactive date" as used in this Agreement will mean the date prescribed in the Company's policy, which is the earliest date losses can actually occur for which an insured can claim coverage. "Extended reporting period" as used in this Agreement will mean a time period after a policy's termination date within which claims may be made with respect to occurrences happening between the original retroactive date, if any, and the original termination date of the policy. EXCLUSIONS: As attached. TERRITORY: To follow the Company's policies. - 2 OF 16 - 3 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 RETENTION First Layer AND LIMIT: $500,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $500,000 ultimate net loss each and every loss, each and every insured, each and every policy. Second Layer $1,000,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $1,000,000 ultimate net loss each and every loss, each and every insured, each and every policy. Third Layer $4,000,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $2,000,000 ultimate net loss each and every loss, each and every insured, each and every policy. Fourth Layer $5,000,000 ultimate net loss each and every loss, each and every insured, each and every policy, excess of $6,000,000 ultimate net loss each and every loss, each and every insured, each and every policy. - 3 OF 16 - 4 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 PREMIUM AND CEDING COMMISSION: The Company will pay the Reinsurers the following percentages Of the gross written premium on all policies written or renewed with an effective date during the term of this Agreement: FIRST LAYER
------------------------------------------------------------------- Counties of Dade, Balance Location of Insured Broward, and of State Palm Beach ------------------------------------------------------------------- Rate applied to gross written premium charged by the Com- pany for the first $500,000 of 27% 18% limit -------------------------------------------------------------------
SECOND THROUGH FOURTH LAYERS
---------------------------------------------------------------------------- Counties of Dade, Balance Location of Insured Broward, and of State Palm Beach ---------------------------------------------------------------------------- Rate applied to gross written premium charged by the Com- Second:......25% .........15% pany for the first $1,000,000 Third:.......35% .........18% of limits or pro rata of these Fourth:......26% .........11% rates if the policy limit exposes only part of a layer. ----------------------------------------------------------------------------
ALL LAYERS 25% flat ceding commission on gross written premium ceded. OTHER REINSURANCE: Company permitted to purchase facultative reinsurance and to deduct the premium therefor; Company permitted to purchase - 4 OF 16 - 5 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 other treaty reinsurance, and to deduct the premium therefor if it inures to the benefit of this Agreement. FUNDING OF RESERVES: Letters of Credit required from unauthorized Reinsurers as respects outstanding case and bulk losses, expenses, recoverables, and unearned premium. LOSS EXPENSE: Pro rata in addition to the ultimate net loss. DECLARATORY JUDGMENT EXPENSE: Included hereunder, whether or not a loss is sustained as a result of the action, as per the definition attached. REPORTS AND REMITTANCES: Reports and remittances within 60 days following the end of each quarter, to include all information required by Reinsurers for completion of their NAIC reports. SPECIAL ACCEPTANCES: The Company may submit to the Reinsurers, for special acceptance hereunder, business not covered by this Agreement. The Company agrees to submit the following types of business for Special Acceptance hereunder (ALL FOUR AS RESPECTS GENERAL RE; 1, 3, AND 4 ONLY AS RESPECTS ZURICH RE (UK), UNIONAMERICA INSURANCE COMPANY AND CNA INTERNATIONAL REINSURANCE COMPANY LTD.): 1. Any SIR business or business with deductibles greater than $250,000. - 5 OF 16 - 6 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 2. All risks involving hospitals producing more than $500,000 in premiums. 3. Any risk with a reported loss greater than $1,000,000 in any one year or a combined incurred loss ratio of more than 95 % for the preceding three years. 4. Business attaching in excess of insurance written by other carriers. Furthermore, should the Company, by reason of an inadvertent act, error, or omission, be bound to afford coverage, or should an existing insured extend its operations to include coverage for any of the above types of business, and special acceptance has not been obtained from Reinsurers, the Reinsurers will waive the requirement for Special Acceptance. The duration of said waiver will not extend beyond the time that notice of such coverage has been received by the responsible underwriting authority of the Company plus: A. The minimum time period required thereafter for the Company to obtain special acceptance from the Reinsurers; or B. If special acceptance is not granted by the Reinsurers, the minimum time period required thereafter for the Company to terminate such coverage. If said business is accepted by the Reinsurers, it will be subject to the terms of this Agreement, except as such terms are modified by such acceptance. Any special acceptance business covered under the reinsurance agreement being replaced by this Agreement will be automatically covered hereunder. Further, should Reinsurers become a party to this Agreement subsequent to the acceptance of any business not normally covered hereunder, they will automatically accept same as being a part of this Agreement. - 6 OF 16 - 7 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 OTHER PROVISIONS: Reinsurers will be subject to terms, conditions, interpretations, waivers, modifications, and alterations of the Company's policies that are the subject of this Agreement. Access to Records Clause Amendments Clause Aon Re Inc. Intermediary Clause (NOT APPLICABLE TO GENERAL RE) Arbitration Clause - as attached Delays, Errors, or Omissions Clause Claims Review Clause Correspondence and Payments Clause (APPLICABLE TO GENERAL RE ONLY) Excess of Original Policy Limits (90%)/Extra Contractual Obligations (90%) Clause - as attached. Insolvency Clause Loss Notices and Settlements Clause - as attached Net Retained Liability Clause Offset Clause (all Agreements) Subrogation Clause Service of Suit Clause (NMA 1998) Ultimate Net Loss, Loss Expense, Declaratory Judgment Expense - as attached UNDERWRITING 1. The maximum schedule credit that the Company will allow in respect of the base premiums to which the above rates will be applied will be 15% except as otherwise agreed by lead reinsurer, General Re. 2. The Minimum Premium amounts are: $3,000 Acute Care Beds - 7 OF 16 - 8 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 $2,000 Clinics with no overnight beds and major surgery $2,000 Psychiatric Beds $2,000 Rehab Beds $ 750 Clinics with no overnight beds and minor surgery $ 750 Long Term Extended Care INFORMATION: Aon Fee for Gen Re: 5% ceded premium - 8 OF 16 - 9 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 In accordance with your instructions, we have placed reinsurance with the Reinsurers listed hereon, subject to the terms and conditions hereinabove stated. We ask that you promptly advise us if the terms, conditions, or Reinsurers vary in any respect from your instructions. Aon Re Inc. will not be responsible for the financial or other obligations of any Reinsurer. Should you desire financial information regarding the Reinsurers listed hereon, please contact us and we will furnish it. The Reinsurers' obligations under this Agreement are several and not joint and are limited solely to the extent of their individual participation. The Reinsurers are not responsible for the participation of any co-subscribing Reinsurer that for any reason does not satisfy all or part of its obligations.
DOMESTIC REINSURERS FIRST SECOND THIRD FOURTH - ------------------- LAYER LAYER LAYER LAYER ----- ----- ----- ----- General Reinsurance Corporation 50.0000% 50.0000% 50.0000% 50.0000% TIG Reinsurance Company 10.9100% 10.9100% 10.91000% 10.9100% Total Domestic Reinsurers: 60.9100% 60.9100% 60.91000% 60.91000% LONDON MARKETS THROUGH DENIS M. CLAYTON AND COMPANY LIMITED: - ------------------------------------------------------------ LONDON COMPANIES: - ----------------- CNA International Reinsurance Company Limited 5.4800% 5.4800% 10.0300% 12.7500% Hannover Ruckversicherungs-Aktiengesellschaft 5.4800% 5.4800% 5.0100% 6.3700% Terra Nova Insurance Company Limited 0.7300% 0.7300% 0.6700% 0.8500% Unionamerica Insurance Company Limited 5.4800% 5.4800% 10.0200% 6.3700% Zurich Re (UK) Limited 21.9200% 21.9200% 13.3600% 12.7500% TOTAL LONDON COMPANIES 39.0900% 39.0900% 39.0900% 39.0900% Total Denis M. Clayton & Company Limited 39.0900% 39.0900% 39.0900% 39,0900% Total Non-Domestic Companies 39.0900% 39.0900% 39.0900% 39.0900% TOTAL ALL PARTICIPANTS 100.0000% 100.0000% 100.0000% 100.0000%
- 9 OF 16 - 10 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 Assuming that you find everything in order, please indicate your acceptance and approval by signing and returning this Final Placement Slip to Aon Re Inc., 201 California Street, Suite 900, San Francisco, California 94111. ACCEPTED AND APPROVED BY: DATED: --------------------------------------- ----------------- REFERENCE NUMBER: ----------------------- (For processing purposes it is important that you provide your Company's reference number for this program.) - 10 OF 16 - 11 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 EXCLUSION LIST No reinsurance indemnity will be afforded under this Agreement for: A. All liability of the Company arising, by contract, operation of law, or otherwise from its participation or membership, whether voluntary or involuntary, in any insolvency fund. "Insolvency fund" includes any guaranty fund, insolvency fund, plan, pool, association, fund, or other arrangement, howsoever denominated, established, or governed, which provides for any assessment of or payment or assumption by the Company of part or all of any claim, debt, charge, fee, or other obligation of an insurer, or its successors or assigns, which has been declared by any competent authority to be insolvent or which is otherwise deemed unable to meet any claim, debt, fee, or other obligation in whole or in part. B. Reinsurance assumed by the Company other than inter-company reinsurance. C. Loss or liability excluded by the provisions of the Nuclear Incident Exclusion Clause - Liability - Reinsurance - U.S.A. - attached to this Agreement, or as may be revised hereafter by the Lloyd's Underwriters' Non-Marine Association. D. Managed Care Errors and Omissions insurance. - 11 OF 16 - 12 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 LOSS NOTICES AND SETTLEMENTS The Company will advise the Reinsurers promptly of all losses reserved at $100,000 from the ground up, or that, in the opinion of the Company, may involve the Reinsurers under this Agreement, and of all subsequent developments pertaining thereto that may materially affect them as well; however, such losses will be reported to the Second and higher Layers only if a cession has been made to the Layer in question. Inadvertent omission in dispatching the aforementioned notices will in no way affect the obligation of the Reinsurers under this Agreement, provided the Company informs the Reinsurers of such omission promptly upon discovery. The Company will have the right to settle all claims under its policies. The settlements, provided they are within the terms of the Company's policies and of this Agreement, will be unconditionally binding on the Reinsurers in proportion to their participation in this Agreement. The Company will likewise, at its sole discretion, commence, continue, defend, or withdraw from actions, suits, or proceedings and generally handle all matters related to all claims and losses, and all payments made and costs and expenses incurred in connection therewith, or in taking legal advice therefor, will be shared by the Reinsurers. When so requested, however, the Company will afford the Reinsurers, at the Reinsurers' own expense, an opportunity to be associated with the Company in the defense of any claim, suit, or proceeding involving this Agreement, and the Company and the Reinsurers will cooperate in every respect in such defense. Amounts due the Company hereunder in the settlement of ultimate net loss and loss expense will be payable by the Reinsurers immediately upon being furnished by the Company with reasonable evidence of the amount paid or to be paid in excess of the Company's retention as set forth in the Retention and Limit Sections of the Exhibits attached hereto. - 12 OF 16 - 13 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS LIMITS LIABILITY This Agreement will extend to cover any losses arising from claims-related extra contractual obligations and/or excess limits liability: A. In the case of the First and Second Layers, provided a cession has been made to this Agreement in respect of the policy under which the extra contractual obligations and/or excess limits liability loss arises; B. In the case of the Third and Fourth Layers, provided a cession has been made to the Layer in question in respect of the policy under which the extra contractual obligations and/or excess limits liability loss arises. "Extra contractual obligations" as used in this Agreement will mean those liabilities not covered under any other provision of this Agreement, which arise from the handling of any claim on business covered hereunder; such liabilities arising because of, but not limited to, the following: failure to settle within the policy limit, by reason of alleged or actual negligence, fraud, or bad faith in rejecting an offer of settlement, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. "Excess limits liability" as used in this Agreement will mean damages payable in excess of the policy limit as a result of alleged or actual negligence, fraud, or bad faith in failing to settle and/or rejecting a settlement within the policy limit, in the preparation of the defense, in the trial of any action against the insured or reinsured, or in the preparation or prosecution of an appeal consequent upon such action. Excess limits liability is any amount for which the Company would have been contractually liable to pay had it not been for the limits of the reinsured policy. There will be no recovery hereunder where the extra contractual obligation or excess limits liability has been incurred due to fraud committed by a member of the board of directors or a corporate officer of the Company, acting individually, collectively, or in collusion with a member of the board of directors, a corporate officer, or a partner of any other corporation, partnership, or organization involved in the defense or settlement of a claim on behalf of the Company. - 13 OF 16 - 14 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 The date on which any extra contractual obligation and/or excess limits liability is incurred by the Company will be deemed, in all circumstances, to be the date of the original loss (as respects occurrence-basis policies), or the first claim made against the Company's policy (in the case of claims-made-basis policies). Nothing in this Article will be construed to create a separate or distinct loss apart from the original covered loss that gave rise to the extra contractual obligations and/or excess limits liability discussed in the preceding paragraphs. In no event will the total liability of the Reinsurers exceed their applicable limit of liability as set forth in the Retention and Limit Sections of the Exhibits attached hereto. ULTIMATE NET LOSS, LOSS EXPENSE AND DECLARATORY JUDGMENT EXPENSE "Ultimate net loss" as used in this Agreement will mean the amount of any settlement, award, or judgment paid by the Company or for which the Company has become liable to pay, including: plaintiff's attorney fees where applicable; interest accrued prior to final judgment if included as part of loss on reinsured policies; 90% of any claims-related extra contractual obligations where applicable and/or 90% of any claims-related excess limits liability where applicable (however, the maximum contribution to ultimate net loss as respects any one extra contractual obligations and/or excess limits liability action will be $2,000,000); and declaratory judgment expense where the Company has not paid or has not become liable to pay any settlement, award, or judgment under its policy. Ultimate net loss will also include any coinsurance retention, deductible, or self-insured retention paid by the insured. Ultimate net loss will not include loss expense. All recoveries and subrogations which are actually recovered, and inuring reinsurance whether recovered or not, will be deducted from the amount of the ultimate net loss. Nothing, however, in this Agreement will be construed as meaning that losses are not recoverable hereunder until the actual loss to the Company has been ascertained. "Loss expense" as used in this Agreement will mean all expenses incurred by the Company in the investigation, appraisal, adjustment, litigation and/or defense of claims under policies reinsured hereunder, including court costs, interest accrued prior to judgment if included as part of expense on reinsured policies, and interest accrued after final judgment, but excluding internal office expenses, salaries, per diem, and other remuneration of regular Company employees. Loss expense will also include declaratory judgment expense incurred by the Company in an action that results in a loss to the Company (however, the maximum contribution to loss expense as respects declaratory judgment expense arising, from any one declaratory judgment action will be $2,000,000). Loss expense where incurred in connection - 14 OF 16 - 15 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 with claims involving this Agreement will be apportioned between the Company and the Reinsurers in proportion to their respective interests as finally determined. "Declaratory judgment expense" as used in this Agreement will mean all expenses incurred by the Company in connection with declaratory judgment actions brought to determine the Company's defense and/or indemnification obligations that are allocable to specific policies and claims subject to this Agreement. Declaratory judgment expense will be deemed to have been fully incurred by the Company on the date of the actual or alleged loss under the Company's policy giving rise to the action. ARBITRATION As a condition precedent to any right of action hereunder, any dispute that arises out of or in connection with this Agreement, including its formation or validity, will be submitted for decision to an arbitration panel composed of two arbitrators and an umpire. The arbitration will be conducted under the Federal Arbitration Act and will proceed as set forth below. All notices in connection with arbitration will be in writing and sent certified or registered mail, return receipt requested. The term "days" as used herein will mean calendar days. Notice requesting arbitration will reference this Article, will state issues to be resolved in the view of the claimant, and will appoint the arbitrator selected by the claimant. Within 30 days after receipt of such notice, the respondent will notify the claimant of any additional issues to be resolved and of the name of its appointed arbitrator. As time is of the essence, if the respondent fails to appoint its arbitrator within 30 days after receipt of notice requesting arbitration, the claimant is authorized to and will appoint the second arbitrator. Unless otherwise mutually agreed, each member of the arbitration panel will be an impartial active or former officer of an insurance or reinsurance company or an Underwriter at Lloyd's of London. Before instituting the hearing the two appointed arbitrators will choose an impartial umpire. If the two arbitrators fail to agree on the appointment of an umpire within 30 days after the appointment of the second arbitrator, within 10 days thereafter the two arbitrators will request the American Arbitration Association ("AAA") to appoint an umpire with the qualifications set forth above in this Article without regard to the AAA's Commercial Arbitration Rules. If the AAA fails to appoint an umpire within 30 days after its receipt of the arbitrators' request, either party may apply to a court of competent jurisdiction to appoint an umpire with the qualifications set forth above in this Article. The umpire will immediately notify each party of his selection. In the event of the resignation or death of any member of the arbitration panel, a replacement will be appointed in the same manner as the resigning or deceased member was appointed. - 15 OF 16 - 16 FPIC INSURANCE GROUP HEALTH CARE LIABILITY FACILITY CASUALTY CESSION EXCESS OF LOSS AR 4374 Within 30 days after notice of appointment of the umpire, the claimant and respondent will each submit an initial brief to the panel. Within 45 days after notice of appointment of the umpire, the panel will meet and determine timely periods for the submission of reply briefs and amended briefs, procedures for discovery, and a scheduled date for the hearing. Arbitration will be held in the city of the Company's home office unless the parties mutually agree to another venue. The panel will be relieved of all judicial formality and the umpire will be the final judge of the panel's procedures, the rules of evidence, privilege, and production, and the excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. The panel will be authorized to issue interim orders and awards in the interest of fairness and the prompt and orderly resolution of issues in dispute. To the extent permitted by law, the umpire and the panel will be empowered to issue orders to enforce such decisions. Insofar as the panel looks to substantive law, it will consider the law of the State of Florida. The panel will make its award with regard to the terms expressed in this Agreement, the original intentions of the parties to the extent reasonably ascertainable, and the custom and practice of the insurance and reinsurance business. The panel will make its award within 30 days after the close of the hearing. Each award by the panel will be in writing and may state factual findings that served as a basis for the award. Each award by the panel will be by a majority of the panel's members and will be final and binding on all parties to the proceeding. Any party may apply to a court of competent jurisdiction for an order confirming the award, and a judgment of that court will thereupon be entered on the award. If such an order is issued, the attorneys' fees of the party so applying and court costs will be paid by the party against whom confirmation is sought. Each party will bear the expense of the arbitrator appointed on its behalf and all remaining costs of the arbitration will be finally allocated by the panel. Punitive damages will not be awarded; however, the panel may award interest, costs and expenses as it deems appropriate, including but not limited to attorneys' fees, to the extent permitted by law. - 16 OF 16 - EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 The following is a list of subsidiaries of FPIC Insurance Group, Inc. as of December 31, 1997:
Name of Subsidiary State of Incorporation - ------------------ ---------------------- Florida Physicians Insurance Company Florida FPIC Insurance Agency Florida McCreary Corporation Florida Employers Mutual, Inc. Florida
EX-27 5 FINANCIAL DATA SCHEDULE
7 This schedule contains summary financial information extracted from the financial statements of FPIC Insurance Group, Inc. for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such financial statements. 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 259,574 0 0 2,541 0 4,185 268,300 7,680 866 1,411 352,850 188,086 28,218 4,783 0 2,000 0 0 918 115,512 352,850 65,504 14,820 32 12,860 54,011 0 7,400 23,344 6,788 16,556 0 0 0 16,556 1.83 1.76 172,738 69,126 (15,115) 8,061 33,103 188,086 22,319
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