10-Q 1 dkm191.txt FORM 10-Q F/Q/E SEPTEMBER 30, 2002 United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2002 or [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transaction period from ____________to ___________. Commission file number 1-11983 --------------------- FPIC Insurance Group, Inc. -------------------------- (Exact name of registrant as specified in its charter) Florida 59-3359111 -------------------------------------- ------------------------------------ (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 225 Water Street, Suite 1400, Jacksonville, Florida 32202 --------------------------------------------------------- ----------------- (Address of principal executive offices) (Zip Code) (904) 354-2482 ---------------------------------------------------- (Registrant's telephone number, including area code) 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ] As of November 6, 2002, there were 9,390,795 shares of the registrant's common stock outstanding. FPIC Insurance Group, Inc. Index to Quarterly Report on Form 10-Q Part I Financial Information Page -------------------------------------------------------------------------------- Item 1. Condensed Consolidated Financial Statements of FPIC Insurance Group, Inc. and Subsidiaries Condensed Consolidated Statements of Financial Position........... 3 Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss).................................. 4 Condensed Consolidated Statements of Changes in Shareholders' Equity....................................................... 5 Condensed Consolidated Statements of Cash Flows................... 6 Notes to the Condensed Consolidated Financial Statements.......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk........32 Item 4. Disclosure Controls and Procedures................................32 Part II Other Information Page -------------------------------------------------------------------------------- Item 1. Legal Proceedings.................................................33 Item 2. Changes in Securities and Use of Proceeds.........................33 Item 3. Defaults Upon Senior Securities...................................33 Item 4. Submission of Matters to a Vote of Security Holders...............33 Item 5. Other Information.................................................33 Item 6. Exhibits and Reports on Form 8-K..................................33 Signatures ..................................................................34 Certification of John R. Byers pursuant to 19 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002...............35 Certification of Kim D. Thorpe pursuant to 19 U.S.C. Section 1350 as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002...............36 FPIC Insurance Group, Inc. and Subsidiaries Condensed Consolidated Statements of Financial Position As of September 30, 2002 and December 31, 2001 (In Thousands, Except Common Share Data)

(unaudited) Sept 30, Dec 31, 2002 2001 -------------- ------------ Assets Cash and cash equivalents $ 76,418 75,220 Bonds and U.S. Government securities, available for sale 407,417 348,949 Equity securities, available for sale 5 8 Other invested assets, at equity 2,391 2,572 Other invested assets, at cost 10,650 10,962 Real estate 4,379 4,255 -------------- ------------ Total cash and investments 501,260 441,966 Premiums receivable, net 107,092 73,362 Accrued investment income 6,740 4,605 Reinsurance recoverable on paid losses 6,139 7,305 Due from reinsurers on unpaid losses and advance premiums 143,308 80,410 Ceded unearned premiums 95,098 40,794 Property and equipment, net 4,420 4,727 Deferred policy acquisition costs 4,756 9,001 Deferred income taxes 37,004 19,944 Prepaid expenses 932 1,664 Goodwill 18,870 67,232 Intangible assets 1,105 1,317 Federal income tax receivable 829 5,273 Other assets 18,772 13,222 -------------- ------------ Total assets $ 946,325 770,822 ============== ============ Liabilities and Shareholders' Equity Loss and loss adjustment expenses $ 403,130 318,483 Unearned premiums 190,687 146,761 Reinsurance payable 77,584 26,689 Paid in advance and unprocessed premiums 4,992 9,942 Revolving credit facility 37,000 37,000 Term loan 11,667 16,042 Deferred credit 9,064 10,007 Deferred ceding commission 5,632 -- Accrued expenses and other liabilities 48,788 31,324 -------------- ------------ Total liabilities 788,544 596,248 -------------- ------------ Commitments and contingencies (note 10) Common stock, $.10 par value, 50,000,000 shares authorized; 9,390,795 and 9,337,755 shares issued and outstanding at September 30, 2002 and December 31, 2001, respectively 939 934 Additional paid-in capital 38,270 37,837 Accumulated other comprehensive income (loss) 2,432 (26) Retained earnings 116,140 135,829 -------------- ------------ Total shareholders' equity 157,781 174,574 -------------- ------------ Total liabilities and shareholders' equity $ 946,325 770,822 ============== ============

See accompanying notes to the condensed consolidated financial statements. 3 FPIC Insurance Group, Inc. and Subsidiaries Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (In Thousands, Except Common Share Data)

(unaudited) ------------------------------------------------------------------ Three months ended Sept 30, Nine months ended Sept 30, 2002 2001 2002 2001 ---------------------------------- ----------------- ------------ Revenues Net premiums earned $ 30,435 29,686 117,337 96,005 Claims administration and management fees 9,640 9,690 25,561 24,584 Net investment income 5,241 5,817 15,942 18,473 Commission income 2,391 2,230 4,427 3,794 Net realized investment gains 1,969 673 2,113 293 Finance charges and other income 284 207 770 879 ---------------------------------- ----------------- ------------ Total revenues $ 49,960 48,303 166,150 144,028 ---------------------------------- ----------------- ------------ Expenses Net losses and loss adjustment expenses $ 30,549 27,301 105,733 90,042 Other underwriting expenses 2,286 6,825 15,772 16,833 Claims administration and management expenses 7,927 8,559 23,184 23,770 Interest expense 1,387 983 3,857 3,321 Other expenses 226 992 403 2,913 ---------------------------------- ----------------- ------------ Total expenses $ 42,375 44,660 148,949 136,879 ---------------------------------- ----------------- ------------ Income from operations before taxes and cumulative effect of accounting change $ 7,585 3,643 17,201 7,149 Less: Income taxes 3,170 544 7,312 894 ---------------------------------- ----------------- ------------ Income before cumulative effect of accounting change $ 4,415 3,099 9,889 6,255 Less: Cumulative effect of accounting change (net of an $18,784 income tax benefit) (note 3) -- -- 29,578 -- ---------------------------------- ----------------- ------------ Net income (loss) $ 4,415 3,099 (19,689) 6,255 ================================== ================= ============ Basic earnings (loss) per common share $ 0.47 0.33 (2.10) 0.67 ================================== ================= ============ Diluted earnings (loss) per common share $ 0.47 0.33 (2.08) 0.66 ================================== ================= ============ Basic weighted average common shares outstanding 9,391 9,405 9,385 9,400 ================================== ================= ============ Diluted weighted average common shares outstanding 9,404 9,521 9,476 9,473 ================================== ================= ============ Comprehensive Income (Loss) Net income (loss) $ 4,415 3,099 (19,689) 6,255 ---------------------------------- ----------------- ------------ Other comprehensive income: Cumulative effect of accounting change -- -- -- 124 Unrealized holding gains on debt and equity securities 3,274 5,934 4,335 9,182 Unrealized holding losses on derivative financial instruments (656) (2,094) (720) (3,393) Income tax expense related to unrealized gains and losses (982) (1,674) (1,357) (2,329) ---------------------------------- ----------------- ------------ Other comprehensive income $ 1,636 2,166 2,258 3,584 ---------------------------------- ----------------- ------------ Comprehensive income (loss) $ 6,051 5,265 (17,431) 9,839 ================================== ================= ============

See accompanying notes to the condensed consolidated financial statements. 4 FPIC Insurance Group, Inc. and Subsidiaries Condensed Consolidated Statements of Shareholders' Equity For the Nine Months Ended September 30, 2002 and the Year Ended December 31, 2001 (In Thousands)

Accumulated Additional Other Common Paid-in Unearned Comprehensive Retained Stock Capital Compensation Income (Loss) Earnings Total -------- ----------- ------------- -------------- ---------- ---------- Balances at December 31, 2000 $ 938 37,827 (105) 968 132,899 172,527 -------- ----------- ------------- -------------- ---------- ---------- Net income -- -- -- -- 2,930 2,930 Cumulative effect of accounting change -- -- -- 124 -- 124 Compensation earned on options -- -- 105 -- -- 105 Unrealized gain on debt and equity securities, net -- -- -- 778 -- 778 Unrealized loss on derivative financial instruments, net -- -- -- (1,896) -- (1,896) Repurchase of shares, net (4) 10 -- -- -- 6 -------- ----------- ------------- -------------- ---------- ---------- Balances at December 31, 2001 $ 934 37,837 -- (26) 135,829 174,574 -------- ----------- ------------- -------------- ---------- ---------- Net loss -- -- -- -- (19,689) (19,689) Unrealized gain on debt and equity securities, net -- -- -- 2,700 -- 2,700 Unrealized loss on derivative financial instruments, net -- -- -- (442) -- (442) Amortization of unrealized loss on derivative financial instruments -- -- -- 200 -- 200 Issuance of shares 5 433 -- -- -- 438 -------- ----------- ------------- -------------- ---------- ---------- Balances at September 30, 2002 (unaudited) $ 939 38,270 -- 2,432 116,140 157,781 ======== =========== ============= ============== ========== ==========

See accompanying notes to the condensed consolidated financial statements. 5 FPIC Insurance Group, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In Thousands)

(unaudited) ------------------------------------- Nine months ended Sept 30, 2002 2001 ----------------- ------------------ Cash flows from operating activities: Net (loss) income $ (19,689) 6,255 Adjustments to reconcile net (loss) income to cash provided by operating activities: Cumulative effect of accounting change 29,578 -- Depreciation, amortization and accretion 8,720 11,930 Realized gain on investments (2,113) (293) Realized loss on sale of property and equipment 12 8 Noncash compensation -- 95 Net loss from equity investments 180 516 Deferred income tax benefit 367 110 Changes in assets and liabilities: Premiums receivable, net (33,730) (24,223) Accrued investment income, net (2,135) 190 Reinsurance recoverable on paid losses 1,166 1,567 Due from reinsurers on unpaid losses and advance premiums (62,898) (13,203) Ceded unearned premiums (54,304) (24,967) Deferred policy acquisition costs (4,596) (9,798) Prepaid expenses 732 (146) Federal income tax receivable 4,444 2,738 Other assets (1,225) 1,909 Loss and loss adjustment expenses 84,647 17,680 Unearned premiums 43,926 37,371 Reinsurance payable 50,895 13,444 Paid in advance and unprocessed premiums (4,950) (2,915) Deferred ceding commission 8,446 -- Accrued expenses and other liabilities 4,572 5,267 ----------------- ------------------ Net cash provided by operating activities $ 52,045 23,535 ----------------- ------------------ Cash flows from investing activities: Proceeds from sale or maturity of bonds and U.S. Government securities 180,457 119,865 Purchase of bonds and U.S. Government securities (226,069) (62,986) Proceeds from the sale of equity securities -- 565 Purchase of equity securities -- (53) Proceeds from sale of other invested assets 366 51 Purchase of other invested assets (54) -- Purchase of real estate investments (336) (112) Purchase of property and equipment (1,274) (1,020) Proceeds from the sale of property and equipment -- 4 ----------------- ------------------ Net cash (used in) provided by investing activities $ (46,910) 56,314 ----------------- ------------------ Cash flows from financing activities: Receipt of revolving credit facility and term loan -- 54,500 Payment on revolving credit facility and term loan (4,375) (67,219) Repurchase of common stock -- (233) Issuance of common stock 438 215 ----------------- ------------------ Net cash used in financing activities $ (3,937) (12,737) ----------------- ------------------ Net increase in cash and cash equivalents 1,198 67,112 Cash and cash equivalents at beginning of period 75,220 18,967 ----------------- ------------------ Cash and cash equivalents at end of period $ 76,418 86,079 ================= ================== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,447 4,567 ================= ================== Federal income taxes $ 3,250 540 ================= ================== Supplemental disclosure of noncash investing activities: Due to broker on unsettled investment trades, net $ 7,848 -- ================= ==================

See accompanying notes to the condensed consolidated financial statements. 6 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) 1. Organization and Basis of Presentation The accompanying condensed, consolidated financial statements represent the consolidation of FPIC Insurance Group, Inc. and all majority owned and controlled subsidiaries (the "Company"). All significant transactions between the parent and consolidated subsidiaries have been eliminated. Reference is made to the Company's most recently filed Form 10-K, which includes information necessary for understanding the Company's businesses and financial statement presentations. In particular, the Company's significant accounting policies are presented in Note 2 to the consolidated financial statements included in that report. The condensed, consolidated quarterly financial statements are unaudited. These statements include all adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for the fair presentation of results for interim periods. Certain prior period data have been reclassified to conform to the current period presentation. The results reported in these condensed, consolidated quarterly financial statements should not be regarded as necessarily indicative of results that may be expected for the entire year. For example, the timing and magnitude of claim losses incurred by the Company's insurance subsidiaries due to the estimation process inherent in determining the liability for loss and loss adjustment expenses ("LAE") can be relatively more significant to results of interim periods than to results for a full year. In addition, variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net earnings as can the mix of taxable and non-taxable investment income. Effective January 1, 2002, the Company adopted Financial Accounting Standard No. ("FAS") 142, "Goodwill and Other Intangible Assets." FAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets." The standard provides that goodwill and other intangible assets with indefinite lives are no longer to be amortized. These assets are to be reviewed for impairment annually, or more frequently if impairment indicators are present. Separable intangible assets that have finite lives will continue to be amortized over their useful lives. During the quarter ended March 31, 2002, the Company completed the transitional impairment analysis, which resulted in an impairment charge of $29.6 million, net of an $18.8 million income tax benefit. See Note 3 for additional discussion of the impact of FAS 142 on the Company's financial position and results of operations. 2. Investments Data with respect to bonds, U.S. Government and equity securities, available for sale, are shown below.

Amortized cost of investments Proceeds in bonds, US from sales Gross Gross Government and realized realized and equity Nine Months Ended maturities gains losses securities --------------------------- ------------- ------------- ------------ ------------------ September 30, 2002 $ 180,457 5,662 3,549 As of September 30, 2002 $ 400,260 September 30, 2001 $ 120,430 2,029 1,680 As of December 31, 2001 $ 346,131

Realized investment gains and losses are recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required by generally accepted accounting principles ("GAAP"), when investments are marked-to-market with the corresponding gain or loss included in earnings. 7 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) 3. Goodwill The Company adopted FAS 142 effective January 1, 2002. In connection with the adoption of FAS 142, the Company discontinued the amortization of goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2002, are as follows:

Reciprocal Third Party Insurance Management Administration Total -------------- ---------------- -------------------- ----------- Balance as of December 31, 2001 $ 10,833 49,140 7,259 67,232 Impairment charge -- (41,103) (7,259) (48,362) -------------- ---------------- -------------------- ----------- Balance as of September 30, 2002 $ 10,833 8,037 -- 18,870 ============== ================ ==================== ===========

In connection with its adoption of FAS 142, the Company engaged independent valuation consultants to perform transitional impairment tests at each of its operating segments: insurance, reciprocal management and third party administration ("TPA"). These operating segments meet the reporting unit requirements as defined by FAS 142. The fair values for each of the reporting units were calculated using one or more of the following approaches: (i) market multiple approach; (ii) discounted cash flow ("DCF") approach; or (iii) asset approach. o Under the market multiple approach, the values of the reporting units were based on the market prices and performance fundamentals of similar public companies. o Under the DCF approach, the values of the reporting units were based on the present value of the projected future cash flows to be generated. o Under the asset approach, the value of a reporting unit is the difference in the fair value of total assets and the fair value of total liabilities. The fair value of each asset and liability may in turn be estimated using an income approach, market approach or cost approach. Based on the results of the impairment tests, goodwill was not deemed to be impaired at the insurance segment, since the fair value of the reporting unit exceeded its carrying value. Therefore, the second step of the goodwill impairment test was not performed. However, the carrying values of the reciprocal management and TPA segments exceeded their respective fair values, indicating a potential impairment of goodwill. Under step 2 of the test, the implied fair values of the reciprocal management and TPA goodwill were compared to their carrying values to measure the amount of impairment loss. As a result, a non-cash transitional impairment charge of $29.6 million (net of an income tax benefit of $18.8 million) was recognized and recorded as a cumulative effect of accounting change in the accompanying September 30, 2002 consolidated statements of income. In management's opinion, the transitional impairment charge at the reciprocal management segment primarily reflects certain intangibles and synergies, which are opportunistic in nature, carry a relatively higher degree of uncertainty, and therefore were treated conservatively in the valuation required by FAS 142. The transitional impairment charge at the TPA segment primarily reflects changes in market conditions and an increase in competition in recent years in the markets served by the Company's TPA segment. 8 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) The following table provides comparative disclosures of net income excluding the cumulative effect of accounting change and goodwill amortization, net of taxes, for the periods presented.

Three Months Ended Nine Months Ended ------------------------- -------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2002 2001 2002 2001 ----------- ----------- ------------ ------------ Net income (loss): Net income (loss), as reported $ 4,415 3,099 (19,689) 6,255 Cumulative effect of accounting change -- -- 29,578 -- ----------- ----------- ------------ ------------ Net income, adjusted 4,415 3,099 9,889 6,255 Goodwill amortization, net of tax -- 539 -- 1,618 ----------- ----------- ------------ ------------ Net income, comparative $ 4,415 3,638 9,889 7,873 =========== =========== ============ ============ Basic earnings (loss) per common share: Net income (loss), as reported $ 0.47 0.33 (2.10) 0.67 Cumulative effect of accounting change -- -- 3.15 -- ----------- ----------- ------------ ------------ Net income, adjusted 0.47 0.33 1.05 0.67 Goodwill amortization, net of tax -- 0.06 -- 0.17 ----------- ----------- ------------ ------------ Net income, comparative $ 0.47 0.39 1.05 0.84 =========== =========== ============ ============ Diluted earnings (loss) per common share: Net income (loss), as reported $ 0.47 0.33 (2.08) 0.66 Cumulative effect of accounting change -- -- 3.12 -- ----------- ----------- ------------ ------------ Net income, adjusted 0.47 0.33 1.04 0.66 Goodwill amortization, net of tax -- 0.06 -- 0.17 ----------- ----------- ------------ ------------ Net income, comparative $ 0.47 0.39 1.04 0.83 =========== =========== ============ ============

4. Intangible Assets The following table provides a detail of the Company's intangible assets and estimated amortization expense for the periods presented.

As of September 30, 2002 As of December 31, 2001 ------------------------------ ------------------------------ Gross Accumulated Gross Accumulated Balance Amortization Balance Amortization -------------- ------------------------------------------------ Trade secrets $ 1,500 637 1,500 525 Non-compete agreements 500 304 500 250 Other 305 259 305 213 -------------- --------------- ------------------------------ Total $ 2,305 1,200 2,305 988 ============== =============== ============================== Three Months Ended Nine Months Ended ------------------------------ ------------------------------ Sept 30, Sept 30, Sept 30, Sept 30, 2002 2001 2002 2001 -------------- --------------- ------------------------------ Aggregate amortization expense $ 70 70 212 212 ============== =============== ============================== For the year ended December 31, 2002 2003 2004 2005 2006 -------------- --------------- ------------------------------ --------------- Estimated amortization expense $ 282 252 221 186 150

5. Reinsurance Effective July 1, 2002, the Company's largest insurance subsidiary, First Professionals Insurance Company, Inc. ("First Professionals"), entered into a finite reinsurance agreement with two insurance companies of the Hannover Re group ("Hannover Re"). The agreement, which calls for First Professionals to cede quota share portions of its 2002 and 2003 written premiums, contains adjustable features, including a loss corridor, sliding scale ceding commissions, and a cap on the amount of 9 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) losses that may be ceded to the reinsurer. The effect of these features is to limit the reinsurers' aggregate exposure to loss and thereby reduce the ultimate cost to First Professionals as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by First Professionals. While First Professionals does not receive pro-rata protection relative to the amount of premiums ceded, the amount of such protection is significant, as determined in accordance with guidance under both statutory accounting practices and GAAP. In addition to ceding a significant portion of its risks to Hannover Re, the agreement also allows First Professionals to reduce its financial leverage and to realize immediate reimbursement for related up-front acquisition costs, thus adding to its financial capacity. The following table illustrates the pro forma effects of the agreement on selected consolidated financial information of the Company's insurance subsidiaries.

Proforma Amounts Excluding the Effects of the Reinsurance Agreement -------------------------- Nine Months Ended Nine Months Ended 09/30/2002 09/30/2002 ------------------------- -------------------------- Net Premiums Written $ 106,912 $ 174,479 Net Premiums Earned $ 117,337 $ 139,847 Loss and LAE Incurred $ 105,733 $ 123,966 Income from Operations Before Tax $ 10,598 $ 9,356 Statutory Surplus $ 119,048 $ 113,719 Ratio of Net Premiums Written to Statutory Surplus 0.9:1 1.5:1

First Professionals has the option to commute the agreement should the business perform such that the underlying protection proves to be unnecessary, in which case the reinsurance would cease, the underlying reinsurance assets and liabilities would unwind, and any net funds under the agreement, less a 4.2% risk charge to the reinsurers, would be retained by First Professionals. The decision of whether to commute the agreement and the timing of any such commutation will depend on the performance of the underlying business, the need for the agreement based on the Company's capital position and other relevant considerations. 6. Revolving Credit Facility and Term Loan On August 31, 2001, the Company entered into a Revolving Credit and Term Loan Agreement (the "credit facility") with five financial institutions. The initial aggregate principal amount of the credit facility was $55.0 million, including (i) a $37.5 million revolving credit facility, which matures on August 31, 2004, and (ii) a $17.5 million term loan facility, repayable in twelve equal quarterly installments of approximately $1.5 million each, which commenced December 31, 2001. Amounts outstanding under the credit facility bear interest at a variable rate, primarily based upon LIBOR plus a margin of 2.50 percentage points, which may be reduced to a minimum of 2.00 percentage points as the Company reduces its outstanding indebtedness. As of September 30, 2002 and December 31, 2001, the interest rates on the credit facility were 4.30% and 4.16%, respectively. In connection with the Company's credit facility, the Company also entered into two interest rate swap agreements (the "swap agreements"). See Note 7 for additional discussion of the Company's swap agreements. The Company is not required to maintain compensating balances in connection with the credit facility, but is charged a fee on the unused portion, which ranges from 30 to 40 basis points. Under the terms of the credit facility, the Company is required to meet certain financial covenants. Significant covenants are as follows: a) total debt to cash flow available for debt service may not exceed 3.50:1; b) combined net premiums written to combined statutory capital and surplus may not 10 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) exceed 2.00:1; c) the fixed charge coverage ratio may not be less than 2.00:1 at the end of each quarter through December 31, 2002, and thereafter the fixed charge coverage ratio may not be less than 2.25:1; and d) funded debt to total capital plus funded debt may not exceed 0.27:1. The credit facility also contains minimum equity and risk-based capital requirements and requires the Company's insurance subsidiaries to maintain at least an A- (Excellent) group rating from A.M. Best Company ("Best"). On October 23, 2002, Best announced its decision to change the Company's group rating from A- (Excellent) with a negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating change, the Company is in non-compliance with the credit facility. As a result of such non-compliance, the Company requested and received from its lenders an agreement of forbearance dated October 24, 2002 (the "Forbearance"), under which the lenders have agreed not to take any action with regard to this covenant violation for a 30-day period, until November 23, 2002, to allow adequate time for the Company and its lenders to agree on and finalize appropriate revisions to the credit facility. As of the date of this filing, the Company and its lenders have not completed negotiations on revisions to the credit facility to cure the potential event of default. In the event the Company and its lenders are unable to complete revisions to the credit facility within the 30-day forbearance period, which ends on or before November 23, 2002 (and assuming the Company is unable to secure additional forbearance), the lenders would be entitled under the terms of the credit facility to declare an event of default and demand immediate repayment of the outstanding loans under the credit facility. In the event repayment of its loans is accelerated, the Company would not have sufficient liquidity solely from immediate available operating funds and would be required to secure replacement financing, raise additional capital, restructure its operations and sell assets, or a combination of these, in order to raise the funds necessary to repay its loans. Any such circumstances would likely have a material detrimental impact on the Company's results of operations and financial condition. While there can be no absolute assurance of the successful completion of such revisions, based upon the status of the negotiations between the parties to date, the Company believes that suitable revisions will be completed within the 30- day forbearance period, on or before November 23, 2002, and that declaration by the lenders of an event of default is unlikely. The Company does expect certain changes to the terms of its loan agreement. Upon completion of its negotiations, management will publish the new terms. In accordance with the terms of the Forbearance, the Company has pledged cash collateral of $2 million to the lenders and has agreed to set aside an additional $1 million in cash collateral to be pledged to the lenders no later than January 31, 2003. In addition, the Company has paid forbearance fees to the lenders in the aggregate amount of $0.2 million. 7. Derivative Financial Instruments The Company uses its swap agreements to minimize fluctuations in cash flows caused by interest rate volatility and to effectively convert all of its floating-rate debt to fixed-rate debt. Such agreements involve the exchange of fixed and floating interest rate payments over the life of the agreement without the exchange of the underlying principal amounts. Accordingly, the impact of fluctuations in interest rates on these swap agreements is offset by the opposite impact on the related debt. Amounts paid or received under the swap agreements are recognized as increases or reductions in interest expense in the periods in which they accrue. The swap agreements are only entered into with creditworthy counterparties. 11 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) The swap agreements in effect as of September 30, 2002 are as follows: Notional Amount Maturities Receive Rate (1) Pay Rate --------------------------------------------------------------- $ 37,000 08/31/2004 1.80% 6.45% $ 11,667 08/31/2004 1.80% 5.97% (1) Based on three-month LIBOR 8. Segment Information The business segments presented in this document have been determined in accordance with the provisions of FAS 131, "Disclosures about Segments of an Enterprise and Related Information." The Company has three main operating segments as follows: insurance, reciprocal management and TPA. Holding company operations are included within the insurance segment due to the segment's size and prominence and the substantial attention devoted to the segment. Through its four insurance subsidiaries, the Company specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. The Company provides reciprocal management services, brokerage and administration services for reinsurance programs and brokerage services for the placement of annuities in structured settlements through its reciprocal management subsidiaries. In addition, the Company provides TPA services through its subsidiary that markets and administers self-insured plans for both large and small employers, including group accident and health insurance, workers' compensation and general liability and property insurance. The Company evaluates a segment's performance based on net income and accounts for intersegment sales and transfers as if the sales or transfers were to a third party. All segments are managed separately as each segment's business is different and distinct. Consolidating information by each segment is summarized in the tables below.

As of As of Identifiable Assets: Sept 30, 2002 Dec 31, 2001 -------------- ---------------- Insurance $ 910,288 706,290 Reciprocal management 35,769 61,468 Third party administration 6,712 14,788 Intersegment eliminations (6,444) (11,724) -------------- ---------------- Total assets $ 946,325 770,822 ============== ================ Three Months Ended Nine Months Ended --------------------------------- ------------------------------- Sept 30, 2002 Sept 30, 2001 Sept 30, 2002 Sept 30, 2001 -------------- ---------------- --------------------------------- Total Revenues: Insurance $ 38,546 36,429 137,946 115,484 Reciprocal management 9,432 8,475 21,852 19,938 Third party administration 4,157 4,440 11,208 12,220 Intersegment eliminations (2,175) (1,041) (4,856) (3,614) -------------- ---------------- -------------- -------------- Total revenues $ 49,960 48,303 166,150 144,028 ============== ================ ============== ============== Net Income (Loss): Insurance $ 1,373 1,093 5,180 2,878 Reciprocal management 2,635 1,602 (19,920) 3,031 Third party administration 407 404 (4,949) 346 -------------- ---------------- -------------- -------------- Net income (loss) $ 4,415 3,099 (19,689) 6,255 ============== ================ ============== ==============

12 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) 9. Reconciliation of Basic and Diluted Earnings Per Common Share Data with respect to the Company's basic and diluted earnings per common share are shown below.

Three Months Ended Nine Months Ended ------------------------- ---------------------------- Sept 30, Sept 30, Sept 30, Sept 30, 2002 2001 2002 2001 ------------------------- -------------- ------------- Net income (loss): Income before cumulative effect of accounting change $ 4,415 3,099 9,889 6,255 Cumulative effect of accounting change -- -- (29,578) -- ------------------------- -------------- ------------- Net income (loss) $ 4,415 3,099 (19,689) 6,255 ========================= ============== ============= Basic earnings (loss) per common share: Income before cumulative effect of accounting change $ 0.47 0.33 1.05 0.67 Cumulative effect of accounting change -- -- (3.15) -- ------------------------- -------------- ------------- Net income (loss) $ 0.47 0.33 (2.10) 0.67 ========================= ============== ============= Diluted earnings (loss) per common share: Income before cumulative effect of accounting change $ 0.47 0.33 1.04 0.66 Cumulative effect of accounting change -- -- (3.12) -- ------------------------- -------------- ------------- Net income (loss) $ 0.47 0.33 (2.08) 0.66 ========================= ============== ============= Basic weighted average shares outstanding 9,391 9,405 9,385 9,400 Common stock equivalents 13 116 91 73 ------------------------- -------------- ------------- Diluted weighted average shares outstanding 9,404 9,521 9,476 9,473 ========================= ============== =============

10. Commitments and Contingencies The Company's insurance subsidiaries from time to time become subject to claims for extra-contractual obligations or risks in excess of policy limits in connection with their insurance claims. These claims are sometimes referred to as "bad faith" actions as it is alleged that the insurance company acted in bad faith in the administration of a claim against an insured. Bad faith actions are infrequent and generally occur in instances where a jury verdict exceeds the insured's policy limits. Under such circumstances, it is routinely alleged that the insurance company failed to negotiate a settlement of a claim in good faith within the insured's policy limit. The Company has evaluated such exposures as of September 30, 2002, and believes its position and defenses are meritorious. However, there can be no absolute assurance as to the outcome of such exposures. The Company currently maintains insurance for such occurrences, which serves to limit exposure to such claims. However, in one such case, arising in 1993, no such coverage is available and an estimate of possible loss currently cannot be made. In addition, multiple claims for extra contractual obligations in a single year could result in potential exposures materially in excess of insurance coverage or in increased costs of insurance coverage. The Company may also become involved in legal actions not involving claims under its insurance policies from time to time. The Company has evaluated such exposures as of September 30, 2002, and in all cases, believes its position and defenses are meritorious. However, there can be no absolute assurance as to the outcome of such exposures. The Company is nearing completion of the examination of its 1998 and 1999 federal income tax returns by the Internal Revenue Service and in connection therewith, established a $1.0 million reserve in the second quarter of 2002 for potential tax contingencies. Management believes that its positions are meritorious on these and other potential issues raised in the examination and that the 13 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) accrual made is appropriate; however, there can be no assurance that the Company will ultimately prevail on such matters. 11. Related Party Transactions On July 1, 1998, First Professionals began assuming reinsurance from Physicians' Reciprocal Insurers ("PRI"), a writer of medical professional liability ("MPL") insurance in the state of New York. PRI is managed by it's attorney-in-fact, Administrators For The Professions, ("AFP"), which effective January 1, 1999 was acquired by and became a wholly owned subsidiary of the Company. Under one contract, which reinsures PRI for policies with limits of $1.0 million in excess of $1.0 million, First Professionals assumes losses only and pays PRI a ceding commission on the premium assumed. This contract has been renewed annually. Effective April 1, 2002, the contract was changed to reinsure PRI for policies with limits of $1.0 million in excess of $1.3 million. Under another contract, which First Professionals and PRI ceased to renew for periods subsequent to December 31, 2000, First Professionals reinsured PRI for losses of $0.25 million in excess of $0.5 million on each claim. During the first nine months of 2002 and 2001, the Company assumed written premiums of approximately $9.6 million and $10.6 million, respectively, under these contracts. The Company earned approximately $7.1 million and $13.5 million, during the first nine months of 2002 and 2001, respectively, under these contracts. The Company incurred commissions payable to PRI of approximately $1.8 million and $1.6 million during the first nine months of 2002 and 2001, respectively, under these contracts. The Company has incurred losses and LAE related to these contracts of approximately $2.6 million and $7.1 million for the first nine months of 2002 and 2001, respectively. Premiums on these contracts are paid by PRI on a quarterly basis. As of September 30, 2002 and December 31, 2001, the amount due from PRI under these contracts was approximately $5.8 million and $2.4 million, respectively. The excess of loss reinsurance treaty between First Professionals and PRI related to losses of $0.25 million in excess of $0.5 million and the reinsurance treaty in which First Professionals reinsures PRI for policies with limits of $1.0 million in excess of $1.3 million both contain clauses under which PRI has the option to commute each such agreement. During the first quarter of 2002, the 2000 treaty relating to losses of $0.25 million in excess of $0.5 million was commuted. The commutation eliminated all of First Professionals' present and future liabilities under the treaty in exchange for the return by First Professionals of all but the minimum contract premium to PRI. As a result of this commutation, First Professionals reported approximately $9.3 million of paid losses and LAE with a corresponding reduction in reserves. There was no net income effect from this commutation, due to the prior accrual of such charges. Effective January 1, 2000, First Professionals entered into a 100% quota share reinsurance agreement with PRI to assume PRI's death, disability and retirement risks under its claims-made insurance policies in exchange for cash and investments in the amount of $47.0 million. During 2000, a GAAP valuation of the underlying liability was completed and a deferred credit in the amount of $13.2 million was recognized in the statement of financial position. The deferred credit, which is being amortized into income over 20 years, represents the difference between the GAAP valuation of the liability and the initial premium received. The liability was calculated using benefit assumptions and elements of pension actuarial models (i.e. mortality, morbidity, retirement, interest and inflation rate assumptions). In connection with the agreement, First Professionals recognized a 5% ceding commission expense, which is being deferred and amortized as premiums are earned under the agreement. In accordance with a management agreement, AFP performs underwriting, administrative and investment functions on PRI's behalf for which it receives compensation. Compensation under the agreement as originally in effect was equal to 13% of PRI's direct premiums written, with an adjustment for expected return premiums, plus or minus 10% of PRI's statutory net income or loss. 14 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) In addition, the management agreement provides that AFP is to be reimbursed by PRI for certain expenses paid by AFP on PRI's behalf, namely salaries and related payroll costs of personnel in AFP's claims, legal and risk management departments. Such directly reimbursed expenses are not reported in the accompanying condensed, consolidated financial statements. During the third quarter, the agreement was amended by AFP and PRI to remove the sharing by AFP of 10% of the net income or net loss of PRI, effective January 1, 2002. With regard to profit sharing amounts already earned and collected, AFP has agreed to hold the years 1999, 2000 and 2001 open for re-determination and possible adjustment for a period of five years each (expiring 2004, 2005 and 2006, respectively.) Such adjustments would be based primarily on development of and related adjustments, if any, to loss and LAE reserves for those years. AFP has also agreed to pay 6% annual interest on amounts already earned and collected under the original agreement for the remaining open periods. AFP has earned and collected profit sharing amounts under the original agreement totaling $3.6 million for the three years ended December 31, 2001. In addition, AFP will be reimbursed for 50% of the costs of the risk management department it maintains for PRI insureds, for which it is not already reimbursed. The management agreement and amendments were reviewed and approved by the New York State Insurance Department. The Company's revenues and results of operations are financially sensitive to the revenues and results of operations of PRI. In addition PRI, as an MPL insurer, is subject to many of the same types of risks as those of the Company's insurance subsidiaries. Claims administration and management fees earned by AFP based on 13% of PRI's direct written premiums were $16.3 million and $15.1 million for the nine months ended September 30, 2002 and 2001, respectively. The income received by AFP related to PRI's statutory net income was $0 and $0.3 million for the nine months ended September 30, 2002 and 2001, respectively. Directly reimbursed expenses amounted to $10.3 million, and $8.2 million for the first nine months of 2002 and 2001, respectively. In addition, the Company has entered into guarantees on behalf of PRI related to two of its former ceded reinsurance contracts with unaffiliated carriers whereby such contracts have been commuted. Under the terms of these commutations, PRI was required to obtain such guarantees as further assurance to the reinsurer of their respective complete release from liability. Effective July 1, 2000, the Company entered into an agreement with PRI whereby the Company, through its 70% owned subsidiary, Professional Medical Administrators, LLC. ("PMA"), manages an MPL insurance program in Pennsylvania established primarily for the benefit of PRI whereby business is written on First Professionals' policy forms and ceded to PRI under a 90% quota share reinsurance agreement. The Company receives a ceding commission equal to 27% of premiums written under the program, in return for its services to PRI, which include underwriting, claims management and other administrative aspects of this program. PMA also pays all commissions and brokerage for the placement of business under the program. Effective January 1, 2002, the terms of this agreement were amended to cede 100% of the premiums written to PRI. The amendment has been filed and is pending approval by the New York State Insurance Department. During the nine months ended September 30, 2002 and 2001, premiums written and ceding commissions under this program were as follows: Nine Months Ended Sept 30, 2002 Sept 30, 2001 -------------------------------- Direct Premiums written $ 10,565 11,185 Ceded premiums written $ (10,480) (10,004) Ceding commissions $ 2,284 1,429 15 FPIC Insurance Group, Inc. and Subsidiaries Notes to the Condensed Consolidated Financial Statements - Unaudited (In Thousands, Except Common Share Data) On July 1, 1998, First Professionals and Anesthesiologists Professional Assurance Company ("APAC") entered into a quota share reinsurance agreement whereby these two subsidiaries cede a 25% quota share portion of all business written by them related to anesthesiologists and certain related specialties to American Professional Assurance Ltd, of which the Company is a 9.9% shareholder. These agreements were entered into in connection with and at the time of the Company's acquisition of APAC. During the first nine months of 2002 and 2001, the Company ceded premiums of approximately $7.1 million and $3.8 million, respectively, and received ceding commissions of approximately $1.4 million and $0.8 million, respectively. 12. Subsequent Events On October 23, 2002, Best announced its decision to change the Company's group rating from A- (Excellent) with a negative outlook to B++ (Very Good) with a stable outlook. Based on Best's published rating guidelines, a rating of B++ (Very Good) is a "Secure" rating assigned to companies that have, on balance, very good balance sheet strength, operating performance and business profile, when compared to standards established by Best. As a result of the rating change, the Company is in non-compliance with its credit facility. As a result of such non-compliance, the Company requested and received from its lenders a forbearance agreement dated October 24, 2002 under which the lenders have agreed not to take any action with regard to this non-compliance for a 30-day period, until November 23, 2002, to allow adequate time for the Company and its lenders to agree and finalize appropriate revisions to the credit facility. Further discussion regarding the status of such negotiations appears in Note 6. 13. New Accounting Pronouncements In June 2002, the Financial Accounting Standards Board ("FASB") issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146 is effective for exit or disposal activities initiated on or after December 31, 2002. The Company believes the adoption of FAS 146 will not have a significant impact on its consolidated financial statements. In October 2002, the FASB issued FAS 147, "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." FAS 147 requires acquisitions of financial institutions, except for transactions between two or more mutual enterprises, be accounted for in accordance with FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets." FAS 147, effective October 1, 2002, amends FAS 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. The Company believes the adoption of FAS 147 will not have a significant impact on its consolidated financial statements. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations For purposes of this management discussion and analysis, the term "Company" refers to FPIC Insurance Group, Inc. and subsidiaries. The following discussion and analysis of financial condition, results of operations, liquidity and capital resources and other matters should be read in conjunction with the accompanying condensed, consolidated financial statements for the three months and nine months ended September 30, 2002 and 2001, included in Part I, Item 1, as well as the audited, consolidated financial statements and notes included in the Company's Form 10-K for the year ended December 31, 2001, which was filed with the Securities and Exchange Commission on March 27, 2002. Safe Harbor Disclosure The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to: (i) Uncertainties relating to government and regulatory policies (such as subjecting the Company to insurance regulation or taxation in additional jurisdictions or amending, revoking or enacting any laws, regulations or treaties affecting the Company's current operations); (ii) The occurrence of insured or reinsured events with a frequency or severity exceeding the Company's estimates; (iii) Legal developments, including claims for extra-contractual obligations or in excess of policy limits in connection with the administration of insurance claims; (iv) Developments in global financial markets that could affect the Company's investment portfolio and financing plans; (v) Developments in reinsurance markets that could affect the Company's reinsurance program; (vi) The impact of mergers and acquisitions, including the ability to successfully integrate acquired businesses and achieve cost savings, competing demands for the Company's capital and the risk of undisclosed liabilities; (vii) Risk factors associated with financing and refinancing, including the willingness of credit institutions to provide financing and the availability of credit; (viii) The competitive environment in which the Company operates, including reliance on agents to place insurance, physicians electing to practice without insurance coverage, related trends and associated pricing pressures and developments; (ix) The actual amount of new and renewal business and market acceptance of expansion plans; (x) The impact of surplus constraints on growth; (xi) Rates, including rates on excess policies, being subject to or mandated by regulatory approval; (xii) The loss of the services of any of the Company's executive officers; (xiii) Changing rates of inflation and other economic conditions; (xiv) The uncertainties of the loss reserving process; (xv) The ability to collect reinsurance recoverables; and (xvi) Changes in the Company's financial ratings resulting from one or more of these uncertainties or other factors and the potential impact on agents' ability to place insurance business on behalf of the Company. The words "believe," "anticipate," "foresee," "estimate," "project," "plan," "expect," "intend," "hope," "should," "will," "will likely result" or "will continue" and variations thereof or similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 17 Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, management evaluates its estimates, including those related to income taxes, loss and loss adjustment expense ("LAE") reserves, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A discussion of the critical accounting policies believed by the Company to affect its more significant judgments and estimates used in preparation of the Company's consolidated financial statements is included in the Company's Form 10-K for the year ended December 31, 2001, which was filed with the Securities and Exchange Commission on March 27, 2002. In some cases, the estimates included in the Company's financial statements for interim periods are determined using abbreviated methods, which are less comprehensive than those used in preparation of its annual financial statements. Revenue Recognition. Management fees of the reciprocal management segment, determined as a percentage of Physicians' Reciprocal Insurers ("PRI") premiums, are recognized as billed and earned under the contract, which generally corresponds with the reported premiums written of PRI. Such management fees are estimated, billed and earned for quarterly reporting purposes based upon semi-annual estimates of the reported premiums written of PRI rather than actual written premiums for a quarter, which may vary significantly from quarter to quarter, in order that such management fees are recognized ratably over the period in relation to the services provided by the reciprocal management segment to PRI. Loss and Loss Adjustment Expenses. For the purposes of setting aside reserves on risks insured during the current year, including interim periods, for which very little experience is present, a forecasted loss ratio is determined that is applied to earned premiums during the period. This forecasted loss ratio is judgmentally determined taking into account the results of the most recent actuarial study performed, current pricing and underwriting, and expected loss and LAE trends and other pertinent considerations. In addition, management monitors and analyzes key loss and LAE indicators and trends throughout the year, including but not limited to paid losses, newly reported claims and incidents, closed claim activity, and other metrics in order to assess the reasonableness of its loss reserve estimates and the forecasted loss and LAE ratio being applied during the current period. The following accounting policy has changed with the Company's adoption, effective January 1, 2002, of Financial Accounting Standard No. ("FAS") 142, "Goodwill and Other Intangible Assets." Goodwill and Intangible Assets. The Company has made acquisitions in the past that included a significant amount of goodwill and other intangible assets. Under generally accepted accounting principles ("GAAP") in effect through December 31, 2001, these assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives. Effective January 1, 2002, the Company adopted FAS 142. In accordance with FAS 142, goodwill and indefinite lived intangible assets will no longer be amortized but will be subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Other intangible 18 assets that meet certain criteria will continue to be amortized over their useful lives and will also be subject to an impairment test based on estimated fair value. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. Therefore, additional impairment losses could be recorded in the future. The Company completed the transitional impairment analysis required by FAS 142 during the first quarter of 2002 and recorded an impairment charge of $29.6 million, net of an $18.8 million income tax benefit. See Notes 1 and 3 to the condensed, consolidated financial statements, which appear in Part I, Item 1, preceding, for a discussion of the new accounting policy for goodwill and intangible assets. Had the new standard been in effect in 2001, net income and diluted earnings per share for the nine months ended September 30, 2001 would have increased $1.6 million and $0.17, respectively, as a result of the elimination of goodwill amortization. Results of Operations: Three Months and Nine Months Ended September 30, 2002 Compared to Three Months and Nine Months Ended September 30, 2001 Total revenues for the third quarter 2002 increased 3% to $50.0 million from $48.3 million for the third quarter 2001. Total revenues for the nine months ended September 30, 2002 increased 15% to $166.2 million from $144.0 million for the nine months ended September 30, 2001. The increase in revenues is primarily the result of price improvements on the Company's core medical professional liability ("MPL") business and growth in the number of policyholders. Net premiums earned on the Company's MPL business increased 5% to $30.0 million for the three months ended September 30, 2002 from $28.7 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, net premiums earned on the Company's MPL business increased 33% to $115.5 million from $86.8 million for the nine months ended September 30, 2001. The difference in the increase in net premiums earned for the three months ended September 30, 2002 when compared to the nine months ended September 30, 2002 is the result of First Professionals Insurance Company, Inc. ("First Professionals") having entered into a finite quota share reinsurance agreement with two insurance companies of the Hannover Re group ("Hannover Re"), effective July 1, 2002, which resulted in an increase in ceded earned premiums of $22.5 million. Excluding the effects of the new reinsurance agreement, net premiums earned were $52.9 million for the three months ended September 30, 2002. The Company also had an increase in revenues earned by the Company's reciprocal management segment primarily as a result of an increase in brokerage commissions earned by FPIC Intermediaries, Inc. ("Intermediaries"). Total expenses for the third quarter 2002 decreased 5% to $42.4 million from $44.7 million for the third quarter 2001. Total expenses for the nine months ended September 30, 2002 increased 9% to $148.9 million from $136.9 million for the nine months ended September 30, 2001. Net losses and LAE incurred for the three months and nine months ended September 30, 2002 increased $3.2 million or 12% and $15.7 million or 17%, respectively, when compared with the three months and nine months ended September 30, 2001. Net losses and LAE incurred on the Company's MPL business increased 14% to $29.8 million for the three months ended September 30, 2002 from $26.2 million for the three months ended September 30, 2001. Net losses and LAE incurred in the third quarter of 2002 were reduced by an increase in ceded losses and LAE incurred under the Hannover Re reinsurance agreement of $18.2 million for the three months ended September 30, 2002. For the nine months ended September 30, 2002, net losses and LAE incurred on the Company's MPL business increased 30% to $103.9 million from $80.0 million for the nine months ended September 30, 2001. The increase in net losses and LAE incurred for the three months and nine months ended September 30, 2002, reflects growth in business, taking into consideration expected loss trends. The increases in reported loss ratios for the third quarter of 2002 relative to earlier quarters of 2002 reflect added conservatism in setting reserves aside on current business. The increases in net losses and LAE were offset by declines in other underwriting expenses and other expenses for the three months and nine months ended September 30, 2002, primarily as a result of increased ceding commissions related to the finite quota share agreement between First Professionals and Hannover Re and the Company's 19 adoption of FAS 142. The adoption of FAS 142 eliminated amortization expense of approximately $1.6 million after-tax for the nine months ended September 30, 2002. The Company reported net income of $4.4 million or $0.47 per diluted share for the third quarter of 2002, an increase of $1.3 million or $0.14 per diluted share, when compared with net income of $3.1 million or $0.33 per diluted share for the third quarter of 2001. The Company incurred a net loss of $19.7 million or $2.08 per diluted share for the nine months ended September 30, 2002 compared with net income of $6.3 million or $0.66 per diluted share for the nine months ended September 30, 2001. During the first quarter 2002, the adoption of FAS 142 resulted in a one-time, non-cash charge that reduced the carrying value of the Company's goodwill by $48.4 million. The goodwill impairments resulting from the adoption of FAS 142 were associated entirely with goodwill at the Company's non-insurance segments. Income before cumulative effect of accounting change was $9.9 million or $1.04 per diluted share for the nine months ended September 30, 2002, an increase of $3.6 million or $0.38 per diluted share when compared with net income of $6.3 million or $0.66 per diluted share for the nine months ended September 30, 2001. Insurance Segment The Company's insurance segment is made up of its four insurance subsidiaries, First Professionals, Anesthesiologists Professional Assurance Company ("APAC") and The Tenere Group, Inc. companies of Intermed Insurance Company ("Intermed") and Interlex Insurance Company ("Interlex"). Holding company operations are included within the insurance segment due to the segment's size and prominence and the substantial attention devoted to the segment. Effective October 3, 2002, the Company sold the renewal rights on Interlex's legal professional liability insurance business to a subsidiary of Professionals Direct, Inc. for $0.4 million. The sale of Interlex's renewal rights allows the Company to focus on its core MPL business. Unaudited data for the Company's insurance segment for the three months and nine months ended September 30, 2002 and 2001 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended Nine Months Ended ----------------------------------------- ------------------------------------------ Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30, 2002 Change 2001 2002 Change 2001 ----------------------------------------- ------------------------------------------ Direct and assumed premiums written $ 90,856 24% $ 73,005 $ 270,540 54% $ 175,120 ============= ============= ============== ============= Net premiums written $ (6,448) -115% $ 43,194 $ 106,912 -1% $ 108,410 ============= ============= ============== ============= Net premiums earned $ 30,435 3% $ 29,686 $ 117,337 22% $ 96,005 Net investment income 5,185 -9% 5,683 15,782 -13% 18,047 Commission income 1 -96% 27 8 -83% 47 Net realized investment gains 1,969 193% 673 2,113 621% 293 Finance charges and other income 263 49% 177 700 29% 543 Intersegment revenues 693 279% 183 2,006 265% 549 ------------- ------------- -------------- ------------- Total revenues 38,546 6% 36,429 137,946 19% 115,484 ------------- ------------- -------------- ------------- Net losses and LAE 30,549 12% 27,301 105,733 17% 90,042 Other underwriting expense 2,286 -67% 6,825 15,772 -6% 16,833 Interest expense 1,227 25% 983 3,697 11% 3,321 Other expenses 226 -13% 260 368 -51% 752 Intersegment expenses 1,482 83% 809 2,800 -4% 2,915 ------------- ------------- -------------- ------------- Total expenses 35,770 -1% 36,178 128,370 13% 113,863 ------------- ------------- -------------- ------------- Income from operations before taxes and cumulative effect of accounting change 2,776 1006% 251 9,576 491% 1,621 Less: Income tax expense (benefit) 1,403 267% (842) 4,396 450% (1,257) ------------- ------------- -------------- ------------- Income before cumulative effect of accounting change 1,373 26% 1,093 5,180 80% 2,878 ------------- ------------- -------------- ------------- Less: Cumulative effect of accounting change -- 0% -- -- 0% -- ------------- ------------- -------------- ------------- Net income $ 1,373 26% $ 1,093 $ 5,180 80% $ 2,878 ============= ============= ============== =============

20

Three Months Ended Nine Months Ended ----------------------------------------- ------------------------------------------ Selected Direct Professional Liability Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30, Claim Information 2002 Change 2001 2002 Change 2001 -------------------------------------------- ----------------------------------------- ------------------------------------------ Net paid losses and LAE on professional liability claims only $ 22,745 -4% $ 23,737 $ 71,784 2% $ 70,120 ============= ============= ============== ============= Average net paid loss per professional liability claim closed with indemnity payment $ 192 -6% $ 205 $ 192 6% $ 181 ============= ============= ============== ============= Total professional liability claims and incidents reported during the period 813 44% 564 2,456 63% 1,508 ============= ============= ============== ============= Total professional liability claims with indemnity payment 67 -9% 74 229 -8% 249 ============= ============= ============== ============= Total professional liability claims and incidents closed without indemnity payment 366 10% 334 1,298 29% 1,006 ============= ============= ============== ============= Sept 30, Percentage Sept 30, 2002 Change 2001 ------------------------------------------ Professional liability policyholders (Excludes policyholders under fronting arrangements of 5,104 and 3,767 as of September 30, 2002 and 2001, respectively) 17,447 33% ** 13,135 =============== =============

** Total retained professional liability policyholders have grown 25% since December 31, 2001 Direct and assumed premiums written increased 24% to $90.9 million for the three months ended September 30, 2002 from $73.0 million for the three months ended September 30, 2001. Direct and assumed premiums written increased 54% to $270.5 million for the nine months ended September 30, 2002 from $175.1 million for the nine months ended September 30, 2001. The increase in direct and assumed premiums written primarily results from an increase in direct premiums written on the Company's core MPL business related to rate increases realized by the Company's insurance subsidiaries and growth in the number of policyholders. First Professionals implemented rate increases in January and December 2001; APAC implemented rate increases in July 2001 and 2002; and Intermed implemented rate increases in November 2001 and July 2002. In addition, the Company experienced growth in direct premiums written under fronting arrangements for workers' compensation business of $15.6 million for the nine months ended September 30, 2002 when compared to the nine months ended September 30, 2001. The growth in direct premiums written was partially offset by a decline of $7.0 million in direct and assumed premiums written under group accident and health ("A&H") programs for the nine months ended September 30, 2002, which were discontinued in 2001. Net premiums written decreased 115% for the three months ended September 30, 2002 from $43.2 million for the three months ended September 30, 2001. Net premiums written decreased 1% to $106.9 million for the nine months ended September 30, 2002 from $108.4 million for the nine months ended September 30, 2001. The decline in net premiums written is related to the finite quota share reinsurance agreement effective July 1, 2002 between the Company's largest subsidiary, First Professionals, and Hannover Re. Under the terms of the Hannover Re agreement, First Professionals ceded approximately $51.7 million of its unearned premiums as of June 30, 2002, and $15.9 million of its direct written premiums, net of other reinsurance, during the three months ended September 30, 2002. The agreement, which calls for First Professionals to cede quota share portions of its 2002 and 2003 written premiums, contains adjustable features, including a loss corridor, sliding scale ceding commissions, and a cap on the amount of losses that may be ceded to the reinsurer. The effect of these features is to limit the reinsurers' aggregate exposure to loss and thereby reduce the ultimate costs to First Professionals as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by First Professionals. While First Professionals does not receive pro-rata protection relative to the amount of premiums ceded, the amount of such protection is significant, as determined in accordance with guidance under both statutory accounting practices and GAAP. In addition to ceding a significant portion of its risks to Hannover Re, the agreement also allows First Professionals to reduce its financial leverage and to realize immediate reimbursement for its related up-front acquisition costs, thus adding to its financial capacity. The consolidated statutory capital and 21 surplus of the Company's insurance subsidiaries was increased by approximately $5.3 million as of September 30, 2002, as a result of the Hannover Re agreement, and the consolidated statutory net premiums written to surplus ratio for the nine months ended September 30, 2002, was lowered from 1.5:1 to 0.9:1 by virtue of premiums ceded under the agreement in the third quarter. First Professionals has the option to commute the agreement should the business perform such that the underlying protection proves to be unnecessary, in which case the reinsurance would cease, the underlying reinsurance assets and liabilities would unwind, and any net funds under the agreement, less a 4.2% risk charge to Hannover Re, would be retained by First Professionals. The decision of whether to commute the agreement and the timing of any such commutation will depend on the performance of the underlying business, the need for the agreement based on the Company's capital position and other relevant considerations. Net premiums earned increased 3% to $30.4 million for the three months ended September 30, 2002 from $29.7 million for the three months ended September 30, 2001. Net premiums earned increased 22% to $117.3 million for the nine months ended September 30, 2002 from $96.0 million for the nine months ended September 30, 2001. The increase in net premiums earned is due to rate increases implemented by the Company's insurance subsidiaries and growth in the number of policyholders. Net premiums earned on the Company's MPL business increased 5% to $30.0 million for the three months ended September 30, 2002 from $28.7 million for the three months ended September 30, 2001. For the nine months ended September 30, 2002, net premiums earned on the Company's MPL business increased 33% to $115.5 million from $86.8 million for the nine months ended September 30, 2001. The difference in the increase in net premiums earned for the three months ended September 30, 2002 when compared to the nine months ended September 30, 2002 is the result of the finite quota share reinsurance agreement between First Professionals and Hannover Re effective July 1, 2002. As a result of the hardening markets and significant price improvements, the Company's insurance segment has already met and exceeded its growth targets for the year 2002. The insurance subsidiaries have ceased accepting applications for new business for the time being, but continue to renew existing core MPL policyholders, including taking new policyholders who join existing policyholder groups. The Company has also taken several steps to manage its recent growth, including adding significant reinsurance coverage, re-allocating available capital from other portions of the business to its core MPL insurance business and by managing the growth of its core professional liability policyholder base for calendar year 2002 to the low-20% range. Through September 30, 2002, total retained professional liability policyholders have grown 25% to 17,447, since December 31, 2002 and 33% since September 30, 2001; however, this growth trend is expected to decline going forward based upon implementation of one or more of the Company's growth management initiatives. As the Company takes these steps, it is also considering ways to expand its existing capacity. Ultimately, the Company will carefully consider any such opportunities based upon its strategic goals and objectives, including analysis of the highest and best use of its capital with a view towards building value for its shareholders. On August 2, 2002, Gerling Global Reinsurance Corporation of America ("Gerling"), one of the Company's current reinsurers, had its financial strength rating lowered by A.M. Best Company ("Best") from A- (Excellent) to B+ (Very Good). The rating action by Best follows an announcement by Gerling of its intention to exit the U.S. non-life reinsurance market. Gerling has participated in the Company's excess of loss reinsurance programs in 2000 at 15%, and in 2001 and 2002 at 20%. Gerling has also provided facultative reinsurance coverage for non-standard risks. It is presently expected that Gerling will fully meet its obligations to the Company. Management also anticipates that it will be able to successfully replace Gerling's participation at the next reinsurance renewal date, January 1, 2003. As of September 30, 2002, the aggregate amount of reinsurance recoverables from Gerling was $9.9 million. 22 Net investment income declined 9% to $5.2 million for the three months ended September 30, 2002 from $5.7 million for the three months ended September 30, 2001. Net investment income decreased 13% to $15.8 million for the nine months ended September 30, 2002 from $18.0 million for the nine months ended September 30, 2001. The decline in net investment income is primarily due to lower prevailing interest rates and reduced yields on fixed income investments, beginning in the second half of 2001. The Company has also held more funds in invested cash during 2002 as compared to 2001 in anticipation of possible improvements in fixed income rates in the near term. Net realized investment gains increased 193% to $2.0 million for the three months ended September 30, 2002 from $0.7 million for the three months ended September 30, 2001. Net realized investment gains increased 621% to $2.1 million for the nine months ended September 30, 2002 from $0.3 million for the nine months ended September 30, 2001. The Company engaged professional investment managers during the third quarter of 2001 to manage and reposition the Company's investment portfolio. The Company's investment strategy remains focused on high quality, fixed income securities; however, management of the investment portfolio may require that certain securities be liquidated to take advantage of current market and economic conditions. The increase in net realized investment gains is a reflection of this strategy. Net losses and LAE incurred for the three months and nine months ended September 30, 2002 increased $3.2 million or 12% and $15.7 million or 17%, respectively when compared with the three months and nine months ended September 30, 2001. Net losses and LAE incurred on the Company's MPL business increased 14% to $29.8 million for the three months ended September 30, 2002 from $26.2 million for the three months ended September 30, 2001. Net losses and LAE incurred in the third quarter of 2002 were reduced by an increase in ceded losses and LAE incurred under the Hannover Re reinsurance agreement of $18.2 million. For the nine months ended September 30, 2002, net losses and LAE incurred on the Company's MPL business increased 30% to $103.9 million from $80.0 million for the nine months ended September 30, 2001. The Company's loss ratios for the three months ended September 30, 2002 and 2001 were 100% and 92%, respectively. The Company's loss ratios for the nine months ended September 30, 2002 and 2001 were 90% and 94%, respectively. The increase in net losses and LAE incurred for the three months and nine months ended September 30, 2002 reflect growth in business, taking into consideration expected loss trends. A loss ratio is defined as the ratio of loss and LAE incurred to net premiums earned. The 4% decrease in the reported loss ratio for the nine months ended September 30, 2002 is due to the Company's exit from its former group A&H business (2%), loss expense reduction and productivity (3%), changes in the mix of assumed reinsurance (1%), and expected improvements in pricing (2%). These reductions were partially offset by increases due to the effects of the new Hannover Re agreement (1%) and additional conservatism in establishing reserves on 2002 business during the third quarter (3%). The increases in reported loss ratios for the third quarter of 2002 relative to earlier quarters of 2002 reflects added conservatism in setting reserves aside on current business. The liability for losses and LAE represents management's best estimate of the ultimate cost of all losses incurred but unpaid and considers historical loss experience, expected loss trends, the Company's loss retention levels and trends in the frequency and severity of claims. The process of establishing reserves for property and casualty claims is a complex process, requiring significant reliance upon estimates. The Company's estimates are revised as additional experience and other data become available and are reviewed periodically or as other significant events occur that may affect reserves. Any such revisions could result in future changes in the estimates of losses or reinsurance recoverables and would be reflected in the Company's results of operations when the change occurs. The Company believes its liability for loss and LAE continues to be within a reasonable range of adequacy. Based on analysis performed through the first nine months of 2002, increases in newly reported claims and incidents have been determined to be primarily attributable to growth and a modest increase in frequency. These trends have been comprehended in the Company's pricing and reserve estimates. Overall, paid losses and closed claims statistics for the first nine months of 2002 and estimates 23 of ultimate severity remain stable. Given the inherent uncertainty in reserve estimates, there can be no assurance that the ultimate amount of actual losses will not exceed the related amounts currently estimated. Any such differences, either positive or negative, could have a material effect on the Company's results of operations and financial position. Other underwriting expenses decreased 67% to $2.3 million for the three months ended September 30, 2002 from $6.8 million for the three months ended September 30, 2001. Other underwriting expenses decreased 6% to $15.8 million for the nine months ended September 30, 2002 from $16.8 million for the nine months ended September 30, 2001. The decline in other underwriting expenses is primarily attributable to ceding commissions recognized under the terms of the finite quota share reinsurance agreement between First Professionals and Hannover Re in the amount of $6.2 million. In addition, First Professionals, the Company's largest insurance subsidiary, performed a study of its 2001 expenses incurred in the administration of claims and based on the results of this study decreased the amount of expenses allocated to LAE in 2002. Other expenses decreased 13% to $0.2 million for the three months ended September 30, 2002 from $0.3 million for the three months ended September 30, 2001. Other expenses decreased 51% to $0.4 million for the nine months ended September 30, 2002 from $0.8 million for the nine months ended September 30, 2001. The decline in other expenses is due to the Company's adoption of FAS 142. In accordance with FAS 142, the Company ceased the amortization of goodwill and indefinite lived intangible assets during the first quarter 2002. Income tax expense increased to $1.4 million for the three months ended September 30, 2002 from an income tax benefit of $0.8 million for the three months ended September 30, 2001. Income tax expense increased to $4.4 million for the nine months ended September 30, 2002 from an income tax benefit of $1.3 million for the nine months ended September 30, 2001. In late 2001, the Company engaged outside investment managers and began repositioning investments in tax-exempt municipal securities to investments in taxable securities. The increase in income tax expense is partially associated with the resulting increase in the mix of investment income from taxable securities. In addition, the Company is nearing completion of the examination of its 1998 and 1999 federal income tax returns by the Internal Revenue Service and in connection therewith, established a $1.0 million reserve for potential tax contingencies during the second quarter of 2002, which accounted for the remainder of the increase in income tax expense. Management believes that its positions are meritorious on these and other potential issues raised in the examination and that the accrual made is appropriate; however, there can be no assurance that the Company will ultimately prevail on such matters. Reciprocal Management Segment The Company's reciprocal management segment is made up of Administrators For The Professions, Inc. ("AFP"), the Company's New York subsidiary, and its two wholly owned subsidiaries, Intermediaries and Group Data Corporation ("Group Data"). AFP acts as administrator and attorney-in-fact for PRI, the second largest medical professional liability insurer for physicians in the state of New York. Intermediaries acts as a reinsurance broker and intermediary in the placement of reinsurance. Group Data acts as a broker in the placement of annuities for structured settlements. The segment also includes the business of Professional Medical Administrators, LLC ("PMA"), a 70% owned subsidiary of the Company. PMA provides brokerage and administration services for professional liability insurance programs. 24 Unaudited data for the Company's reciprocal management segment for the three months and nine months ended September 30, 2002 and 2001 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended Nine Months Ended --------------------------------------- ------------------------------------- Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30, 2002 Change 2001 2002 Change 2001 --------------------------------------- ------------------------------------- Claims administration and management fees $ 6,571 0% $ 6,552 $ 16,314 8% $ 15,129 Net investment income 37 -64% 103 122 -57% 286 Commission income 1,321 27% 1,042 2,584 45% 1,782 Other income 21 -13% 24 62 -80% 314 Intersegment revenues 1,482 97% 754 2,770 14% 2,427 -------------- --------- --------------- --------- Total revenues 9,432 11% 8,475 21,852 10% 19,938 -------------- --------- --------------- --------- Claims administration and management expenses 4,511 -7% 4,833 13,171 3% 12,771 Interest expense 160 0% -- 160 0% -- Other expenses -- -100% 543 35 -98% 1,629 Intersegment expenses 399 259% 111 1,197 259% 333 -------------- --------- --------------- --------- Total expenses 5,070 -8% 5,487 14,563 -1% 14,733 -------------- --------- --------------- --------- Income from operations before taxes and cumulative effect of accounting change 4,362 46% 2,988 7,289 40% 5,205 Less: Income taxes 1,727 25% 1,386 2,846 31% 2,174 Income before cumulative effect of accounting change 2,635 64% 1,602 4,443 47% 3,031 -------------- --------- --------------- --------- Less: Cumulative effect of accounting change -- 0% -- 24,363 0% -- -------------- --------- --------------- --------- Net income (loss) $ 2,635 64% $ 1,602 $ (19,920) -757% $ 3,031 ============== ========= =============== ========= Three Months Ended Nine Months Ended -------------------------------------- -------------------------------------- Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30, 2002 Change 2001 2002 Change 2001 -------------------------------------- -------------------------------------- Reciprocal premiums written under management $ 79,828 -9% $ 87,292 $ 155,043 1% $ 153,537 ============== ========= =============== ========= As of As of Sept 30, Percentage Sept 30, 2002 Change 2001 -------------------------------------- Reciprocal statutory assets under management $ 831,218 -2% $ 852,142 ============== ========= Professional liability policyholders under management 10,474 8% 9,722 ============== =========

Claims administration and management fees for the three months ended September 30, 2002 were essentially level with those reported for the three months ended September 30, 2001. For the nine months ended September 30, 2002 claims administration and management fees increased 8% to $16.3 million from $15.1 million for the nine months ended September 30, 2001. The claims administration and management fees earned by AFP are comprised entirely of management fees from PRI and the increase is due to the growth in premiums written by PRI. In accordance with the management agreement between AFP and PRI, AFP receives a management fee equal to 13% of PRI's direct premiums written, with an adjustment for expected return premiums. As such, the Company's revenues and results of operations are financially sensitive to the revenues and financial condition of PRI. PRI, as an MPL insurer, is subject to many of the same types of risks as those of the Company's insurance subsidiaries and MPL companies generally. Growth at PRI is subject to surplus constraints, and as a reciprocal, PRI operates at higher leverage ratios. PRI's rates, including rates charged for policies in excess of $1.3 million, which have been reinsured to First Professionals (see Note 11 - Related Party Transactions), are 25 mandated by the New York State Insurance Department ("NYSID"). Further, as allowed under New York insurance laws, PRI has requested and received permission from the NYSID to follow the permitted practice of discounting its loss and LAE reserves. Commission income increased 27% to $1.3 million for the three months ended September 30, 2002 from $1.0 million for the three months ended September 30, 2001. Commission income increased 45% to $2.6 million for the nine months ended September 30, 2002 from $1.8 million for the nine months ended September 30, 2001. The increase in commission income is due to an increase in brokerage commissions earned by Intermediaries for the placement of reinsurance. Other income for the three months ended September 30, 2002 was relatively flat when compared to the three months ended September 30, 2001. Other income decreased 80% to $0.06 million for the nine months ended September 30, 2002 from $0.3 million for the nine months ended September 30, 2001. Effective January 1, 2002, AFP and PRI amended the management agreement eliminating the sharing by AFP of 10% of PRI's statutory net income or loss. The amendment was approved by the New York Department of Insurance. Claims administration and management expenses decreased 7% to $4.5 million for the three months ended September 30, 2002 from $4.8 million for the three months ended September 30, 2001. Claims administration and management expenses increased 3% to $13.2 million for the nine months ended September 30, 2002 from $12.8 million for the nine months ended September 30, 2001. The decline in claims administration and management expenses for the quarter ended September 30, 2002 is primarily attributable to the amendment of the management agreement between AFP and PRI. In accordance with the amended agreement, PRI is to reimburse AFP for 50% of risk management department expenses. The increase in claims administration and management expenses for the nine months ended September 30, 2002 is due to an increase in operating expenses incurred to manage the growth in business at PRI, offset by a decline in risk management department expenses reimbursed by PRI when compared to the nine months ended September 30, 2001. Interest expense increased to $0.2 million for the three months and nine months ended September 30, 2002. The increase in interest expense is the result of modifying the management agreement between AFP and PRI. In accordance with the modified agreement, AFP has agreed to pay 6% annual interest on amounts already earned and collected under the original agreement for 1999, 2000 and 2001, while those years remain open for possible future re-determination and adjustment, if any. Other expenses decreased 100% for the three months ended September 30, 2002 from $0.5 million for the three months ended September 30, 2001. Other expenses decreased 98% to $0.04 for the nine months ended September 30, 2002 from $1.6 million for the nine months ended September 30, 2001. The decline in other expenses is due to the effects of the Company's adoption of FAS 142. In accordance with FAS 142, the Company ceased the amortization of goodwill and indefinite lived intangible assets during the first quarter 2002. In connection with its adoption of FAS 142, the reciprocal management segment recorded a transitional impairment charge of $24.4 million, after-tax. In management's opinion, the non-cash transitional impairment charge, which represents the cumulative effect of the accounting change, primarily reflects certain intangibles and synergies, which are opportunistic in nature, carry a higher degree of uncertainty, and therefore were treated conservatively in the valuation required by FAS 142. 26 Third Party Administration Segment The Company's third party administration ("TPA") segment is made up of Employers Mutual, Inc. ("EMI"). Unaudited data for the Company's TPA segment for the three months and nine months ended September 30, 2002 and 2001 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended Nine Months Ended ----------------------------------------- ------------------------------------ Sept 30, Percentage Sept 30, Sept 30, Percentage Sept 30, 2002 Change 2001 2002 Change 2001 ----------------------------------------- ------------------------------------ Claims administration and management fees $ 3,069 -2% $ 3,138 $ 9,247 -2% $ 9,455 Net investment income 19 -39% 31 38 -73% 140 Commission income 1,069 -8% 1,161 1,835 -7% 1,965 Other income -- -100% 6 8 -64% 22 Intersegment revenues -- -100% 104 80 -87% 638 ------------ ------------ ----------- ---------- Total revenues 4,157 -6% 4,440 11,208 -8% 12,220 ------------ ------------ ----------- ---------- Claims administration and management expenses 3,416 -8% 3,726 10,013 -9% 10,999 Other expenses -- -100% 189 -- -100% 532 Intersegment expenses 294 143% 121 859 135% 366 ------------ ------------ ----------- ---------- Total expenses 3,710 -8% 4,036 10,872 -9% 11,897 ------------ ------------ ----------- ---------- Income from operations before taxes and cumulative effect of accounting change 447 11% 404 336 4% 323 Less: Income tax expense (benefit) 40 0% -- 70 404% (23) ------------ ------------ ----------- ---------- Income before cumulative effect of accounting change 407 1% 404 266 -23% 346 ------------ ------------ ----------- ---------- Less: Cumulative effect of accounting change -- 0% -- 5,215 0% -- ------------ ------------ ----------- ---------- Net income (loss) $ 407 1% $ 404 $ (4,949) -1530% $ 346 ============ ============ =========== ========== As of As of Sept 30, Percentage Sept 30, 2002 Change 2001 --------------------------------------- Covered lives under employee benefit programs 106,411 1% 105,558 ============ ============ Covered lives under workers compensation programs 38,100 1% 37,700 ============ ============

Claims administration and management fees for the three months ended September 30, 2002 were essentially level when compared with the three months ended September 30, 2001. Claims administration and management fees decreased 2% to $9.2 million for the nine months ended September 30, 2002 from $9.5 million for the nine months ended September 30, 2001. The Company's results of operations for the period ended September 30, 2001 include the Company's Albuquerque TPA division, which was disposed of in December 2001. Excluding the effect of the Albuquerque TPA division, claims administration and management fees increased $0.6 million and $1.7 million for the three months and nine months ended September 30, 2002, respectively, when compared with the three months and nine months ended September 30, 2001. The increase in claims administration and management fees reflects growth in new business. Commission income decreased 8% to $1.1 million for the three months ended September 30, 2002 from $1.2 million for the three months ended September 30, 2001. Commission income decreased 7% to $1.8 million for the nine months ended September 30, 2002 from $2.0 million for the nine months ended September 30, 2001. The decline in commission income is related to a decline in the number of clients utilizing EMI for the placement of reinsurance. 27 Claims administration and management expenses decreased 8% to $3.4 million for the three months ended September 30, 2002 from $3.7 million for the three months ended September 30, 2001. Claims administration and management expenses decreased 9% to $10.0 million for the nine months ended September 30, 2002 from $11.0 million for the nine months ended September 30, 2001. The decline in claims administration and management expenses is due to the disposition of the Company's Albuquerque division. Excluding the effect of the Albuquerque TPA division, claims administration and management expenses increased $0.5 million and $1.4 million for the three months and nine months ended September 30, 2002, respectively, when compared with the three months and nine months ended September 30, 2001. The increase in claims administration and management expenses is due to additional expenses incurred as the result of new business. Other expenses decreased 100% for the three months and nine months ended September 30, 2002 from $0.2 million and $0.5 million for the three and nine months ended September 30, 2001, respectively. The decline in other expenses is due to the Company's adoption of FAS 142. In accordance with FAS 142, the Company, including the TPA segment, ceased the amortization of goodwill and indefinite lived intangible assets during the first quarter 2002. In connection with the adoption of FAS 142, the TPA segment recorded a transitional impairment charge of $5.2 million, after-tax. In management's opinion, the non-cash transitional impairment charge, which represents the cumulative effect of the accounting change, primarily reflects changes in market conditions and an increase in competition in recent years in the markets served by the TPA segment. Statement of Financial Position: September 30, 2002 Compared to December 31, 2001 Cash and invested assets increased $59.3 million to $501.3 million as of September 30, 2002 from $442.0 million as of December 31, 2001. The increase in cash and invested assets is due primarily to the growth in premiums, which increased the amounts available for investment. Premiums receivable increased $33.7 million to $107.1 million as of September 30, 2002 from $73.4 million as of December 31, 2001. Approximately $26.9 million of the increase in premiums receivable is associated with growth in premiums written as a result of price improvements on the Company's core MPL insurance business and growth in the number of MPL policyholders. In addition, approximately $6.7 million of the increase in premiums receivable is associated with growth in premiums written under fronting arrangements for workers' compensation business whereby the Company cedes substantially all of the business to other insurance carriers. Due from reinsurers on unpaid losses and advance premiums increased $62.9 million to $143.3 million as of September 30, 2002 from $80.4 million as of December 31, 2001. Ceded unearned premiums increased $54.3 million to $95.1 million as of September 30, 2002 from $40.8 million as of December 31, 2001. The increases in these assets are the result of the increase in the underlying reserves and unearned premiums ceded to other insurance carriers under reinsurance arrangements associated with growth in premiums written and earned on the Company's core MPL insurance business. Effective July 1, 2002, First Professionals entered into a finite quota share reinsurance agreement with Hannover Re. Approximately $18.2 million of the growth in due from reinsurers on unpaid losses and advance premiums and $45.1 million of growth in ceded unearned premiums relates to the new reinsurance agreement. The Hannover Re agreement supplements the Company's existing reinsurance programs. Deferred policy acquisition costs decreased $4.2 million to $4.8 million as of September 30, 2002 from $9.0 million as of December 31, 2001. The decline in deferred policy acquisition costs is related to the finite quota share agreement between First Professionals and Hannover Re, whereby First Professionals has deferred the portion of its ceding commissions associated with unearned premiums ceded under the agreement as of September 30, 2002. 28 Deferred income taxes increased $17.1 million to $37.0 million as of September 30, 2002 from $19.9 million as of December 31, 2001. The increase in deferred income taxes is primarily due to the Company's adoption of FAS 142. As a result of the transitional impairment tests required by FAS 142, the Company recognized a one-time, non-cash after-tax charge of $29.6 million and recorded deferred tax assets for tax-deductible goodwill, in the amount of $18.8 million. Goodwill decreased $48.3 million to $18.9 million as of September 30, 2002 from $67.2 million as of December 31, 2001. The decrease in goodwill is due to the adoption of FAS 142. As a result of the transitional impairment tests required by FAS 142, the Company reduced the carrying value of goodwill at its reciprocal management and TPA segments. In management's opinion, the transitional impairment charge at the reciprocal management segment primarily reflects certain intangibles and synergies, which are opportunistic in nature, carry a relatively higher degree of uncertainty, and therefore was treated conservatively in the valuation required by FAS 142. The transitional impairment charge at the TPA segment primarily reflects changes in market conditions and an increase in competition in recent years in the markets served by the Company's TPA segment. Federal income tax receivable decreased $4.5 million to $0.8 million as of September 30, 2002 from $5.3 million as of December 31, 2001. The decline in the federal income tax receivable is primarily attributable to the recognition of tax expense related to current year earnings offset by a federal tax refund related to the overpayment of estimated taxes in 2001. In addition, the Company is nearing completion of the examination of its 1998 and 1999 federal income tax returns by the Internal Revenue Service and in connection therewith, established a $1.0 million reserve in the second quarter of 2002 for potential tax contingencies. Management believes that its positions are meritorious on these and other potential issues raised in the examination and that the accrual made is appropriate; however, there can be no assurance that the Company will ultimately prevail on such matters. Other assets increased $5.6 million to $18.8 million as of September 30, 2002 from $13.2 million as of December 31, 2001. Approximately $4.3 million of the increase in other assets is due to the sale of investments for which the proceeds from the sale had not been received at September 30, 2002 and a receivable from the broker was recorded. The increase in other assets is also attributable to receivables recorded during the third quarter for amounts due under the Company's fronting programs and an increase in amounts due AFP related to a change in the Company's management agreement between AFP and PRI. The increase in other assets was partially offset by the receipt of a state tax refund due to the overpayment of estimated taxes in 2001. The liability for loss and LAE increased $84.6 million to $403.1 million as of September 30, 2002 from $318.5 million as of December 31, 2001. Excluding the effect of the return of loss and LAE reserves of approximately $9.3 million, on business previously assumed under one of the First Professionals' reinsurance contracts with PRI, which was commuted in the first quarter of 2002, the increase in the Company's liability for loss and LAE for the first nine months of 2002 was approximately $93.9 million. The increase in the liability for loss and LAE is primarily attributable to increases in premiums earned on the Company's core MPL business and the establishment of reserves for this book of business, taking into consideration expected loss trends and other pertinent considerations. The liability for losses and LAE represents management's best estimate of the ultimate cost of all losses incurred but unpaid and considers historical loss experience, expected loss trends, the Company's loss retention levels and trends in the frequency and severity of claims. The process of establishing reserves for property and casualty claims is a complex process, requiring significant reliance upon estimates. The Company's estimates are revised as additional experience and other data become available and are reviewed periodically or as other significant events occur that may affect reserves. Any such revisions could result in future changes in the estimates of losses or reinsurance recoverables and would be reflected in the Company's results of operations when the change occurs. 29 For the purposes of setting aside reserves on risks insured during the current period, for which very little experience is present, a forecasted loss ratio is determined that is applied to earned premiums during the period. This forecasted loss ratio is judgmentally determined taking into account the results of the most recent actuarial study performed, current pricing and underwriting, and expected loss and LAE trends and other pertinent considerations. In addition, management monitors and analyzes key loss and LAE indicators and trends throughout the year, including but not limited to paid losses, newly reported claims and incidents, closed claim activity, and other metrics in order to assess the reasonableness of its loss reserve estimates and the forecasted loss and LAE ratio being applied during the current period. Unearned premiums increased $43.9 million to $190.7 million as of September 30, 2002 from $146.8 million as of December 31, 2001. The increase in unearned premiums is the result of the growth in premiums written at the Company's insurance subsidiaries. Reinsurance payable increased $50.9 million to $77.6 million as of September 30, 2002 from $26.7 million as of December 31, 2001. Approximately $60.3 of the increase in reinsurance payable is related to the finite quota share agreement between First Professionals and Hannover Re and to premiums written under a fronting arrangement for workers' compensation business. The increase in reinsurance premiums payable was partially offset by the payment of premiums due under the Company's primary reinsurance agreement. Premiums paid in advance and unprocessed premiums decreased $4.9 million to $5.0 million as of September 30, 2002 from $9.9 million as of December 31, 2001. The decrease in paid in advance and unprocessed premiums reflects the policy renewal cycle whereby policies are generally renewed with an effective date of December 1, January 1, or July 1 of each year, with a majority of the policies being renewed on January 1. Deferred ceding commissions increased to $5.6 million as of September 30, 2002. The increase in deferred ceding commissions is related to the finite quota share reinsurance agreement between First Professionals and Hannover Re and represents the unearned portion of acquisition and underwriting costs reimbursed by Hannover Re related to the reinsured portion of the Company's policies ceded in accordance with the agreement. Accrued expenses and other liabilities increased $17.5 million to $48.8 million as of September 30, 2002 from $31.3 million as of December 31, 2001. Approximately $11.7 million of the increase in accrued expenses and other liabilities is related to the purchase of investments for which the proceeds from the sale had not been paid at September 30, 2002 and a payable to broker was recorded. Approximately $4.8 million of the increase in accrued expenses and other liabilities is related to commissions payable associated with an increase in insurance business. Stock Repurchase Plans Under the Company's stock repurchase programs, shares may be repurchased at such times, and in such amounts, as management deems appropriate, and subject to the requirements of its credit facility under which the Company may repurchase shares up to an amount not to exceed 50% of net income of the immediately preceding year provided no default or event of default exists under the credit facility. A decision whether or not to make additional repurchases is based upon an analysis of the best use of the Company's capital. The Company did not repurchase any shares during the quarter ended September 30, 2002. Since the commencement of these repurchase programs, the Company has repurchased 875,000 of its shares at a cost of approximately $16.2 million. A total of 365,500 shares remain available to be repurchased under the programs. Liquidity and Capital Resources The payment of losses, LAE and operating expenses in the ordinary course of business is the principal need for the Company's liquid funds. Cash provided by operating activities has been used to pay these 30 items and was sufficient during the third quarter and first nine months of 2002 to meet these needs. As reported in the consolidated statement of cash flows, the Company generated positive net cash from operating activities of $52.0 million for the nine months ended September 30, 2002. In addition, at September 30, 2002, the Company held investments with a fair value of approximately $43.9 million scheduled to mature during the next twelve months. Management believes cash flows from operating activities, combined with scheduled maturities of investments, 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 unexpected changes in liquidity and capital resources available to the Company. For example, inflation, changes in medical procedures, increased use of managed care, and adverse legislative changes, among others, could cause increases in the dollar amounts paid for losses and LAE. Other potential risks to liquidity and capital resources include, but are not limited to, the same types of uncertainties and factors disclosed by the Company in its Safe Harbor Disclosure. Many, if not most of these types of uncertainties, could have a corresponding and materially negative affect on the Company's liquidity and capital resources, as well as its financial condition and results of operations. In order to compensate for such risk, the Company: (i) maintains what management considers to be adequate reinsurance; (ii) monitors its reserve positions and regularly performs actuarial reviews of loss and LAE reserves; and (iii) maintains adequate asset liquidity (by managing its cash flow from operations coupled with the maturities from its fixed income portfolio investments). As of September 30, 2002, the Company had an outstanding principle amount of $48.7 million under a credit facility with five banks. The credit facility is comprised of (i) a $37.5 million revolving credit facility (with a $15 million letter of credit sub-facility), which matures on August 31, 2004, and (ii) a $11.7 million term loan facility, repayable in quarterly installments of approximately $1.5 million. Amounts outstanding under the credit facility bear interest at a variable rate, primarily based upon LIBOR plus an initial margin of 2.50 percentage points, which may be reduced to a minimum of 2.00 percentage points as the Company reduces its outstanding indebtedness. In connection with the Company's credit facility, the Company also entered into two-interest rate swap agreements (the "swap agreements"). The Company uses the swap agreements to minimize fluctuations in cash flows caused by interest rate volatility and to effectively convert all of its floating-rate debt to fixed-rate debt. The Company is not required to maintain compensating balances in connection with its credit facility but is charged a fee on the unused portion, which ranges from 30 to 40 basis points. Under the terms of the credit facility, the Company is required to meet certain financial covenants. Significant covenants are as follows: a) total debt to cash flow available for debt service may not exceed 3.50:1; b) combined net premiums written to combined statutory capital and surplus may not exceed 2.00:1; c) the fixed charge coverage ratio may not be less than 2.00:1 at the end of each quarter through December 31, 2002, and thereafter the fixed charge coverage ratio may not be less than 2.25:1; and d) funded debt to total capital plus funded debt may not exceed 0.27:1. The credit facility also contains minimum equity and risk-based capital requirements and requires the Company's insurance subsidiaries to maintain at least an A- (Excellent) group rating from Best. On October 23, 2002, Best announced its decision to change the Company's group rating from A- (Excellent) with a negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating change, the Company is in non-compliance with the credit facility. As a result of such non-compliance, the Company requested and received from its lenders an agreement of forbearance dated October 24, 2002 (the "Forbearance"), under which the lenders have agreed not to take any action with regard to this covenant violation for a 30-day period, until November 23, 2002, to allow adequate time for the Company and its lenders to agree and finalize appropriate revisions to the credit facility. As of the date of this filing, the Company and its lenders have not completed negotiations on revisions to the credit facility to cure the potential event of default. In the event the Company and its lenders are unable to complete revisions to the credit facility within the 30-day forbearance period, which ends on or before November 23, 2002, (and assuming the Company is unable to secure additional forbearance), the 31 lenders would be entitled under the terms of the credit facility to declare an event of default and demand immediate repayment of the outstanding loans under the credit facility. In the event repayment of its loans is accelerated, the Company would not have sufficient liquidity solely from immediate available operating funds and would be required to secure replacement financing, raise additional capital, restructure its operations and sell assets, or a combination of these in order to raise the funds necessary to repay its loans. Any such circumstances would likely have a material detrimental impact on the Company's results of operations and financial condition. While there can be no absolute assurance of the successful completion of such revisions, based upon the status of the negotiations between the parties to date, the Company believes that suitable revisions will be completed within the 30-day forbearance period, on or before November 23, 2002, and that declaration by the lenders of an event of default is unlikely. The Company does expect certain changes to the terms of its loan agreement. Upon completion of its negotiations, management will publish the new terms. In accordance with the terms of the Forbearance, the Company has pledged cash collateral of $2 million to the lenders and has agreed to set aside an additional $1 million in cash collateral to be pledged to the lenders no later than January 31, 2003. The Company has paid forbearance fees to the lenders in the aggregate amount of $0.2 million. Dividends payable by the Company's insurance subsidiaries are subject to certain limitations imposed by Florida and Missouri laws. In 2002, these subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends of approximately $10.7 million without prior regulatory approval. Accounting Pronouncements In June 2002, the Financial Accounting Standards Board ("FASB") issued FAS 146, "Accounting for Costs Associated with Exit or Disposal Activities." FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." FAS 146 is effective for exit or disposal activities initiated on or after December 31, 2002. The Company believes the adoption of FAS 146 will not have a significant impact on its consolidated financial statements. In October 2002, the FASB issued FAS 147, "Acquisitions of Certain Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9." FAS 147 requires acquisitions of financial institutions, except for transactions between two or more mutual enterprises, be accounted for in accordance with FAS 141, "Business Combinations," and FAS 142, "Goodwill and Other Intangible Assets." FAS 147 also amends FAS 144 to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor and borrower relationship intangible assets and credit cardholder intangible assets. FAS 147 is effective on October 1, 2002. The Company believes the adoption of FAS 147 will not have a significant impact on its consolidated financial statements. Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the reported market risks, as described in the Company's 2001 annual report on Form 10K, since the end of the most recent fiscal year. Item 4. Disclosure Controls and Procedures An evaluation of the Company's disclosure controls and procedures (as defined by Rule 13a-14(c) of the Securities Exchange Act of 1934 (the "Act") was completed as of November 7, 2002, the "Evaluation Date" (as defined by Rule 13a-14(b)(4)(ii) of the Act), by the Company's Chief Executive Officer and Chief Financial Officer, as "Certifying Officers" (as defined by Rule 13a-14(a) of the Act. Based on such evaluation, the Company's disclosure controls and procedures were found to be effective in ensuring that material information, relating to the Company and its consolidated subsidiaries, as required to be disclosed by the Company in its periodic reports filed with the Securities and Exchange 32 Commission, is accumulated and made known to the Certifying Officers, and other management, as appropriate, to allow for timely decisions regarding required disclosure. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls subsequent to the Evaluation Date and up to and including the date of this report, and no corrective actions with regard to significant deficiencies or material weaknesses were required to be performed. Part II - Other Information Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information o On October 23, 2002, Best announced its decision to change the Company's group rating from A- (Excellent) with a negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating change, the Company is in non-compliance with the credit facility. As a result of such non- compliance, the Company requested and received from its lenders an agreement of forbearance dated October 24, 2002 (the "Forbearance"), under which the lenders have agreed not to take any action with regard to this covenant violation for a 30-day period, until November 23, 2002, to allow adequate time for the Company and its lenders to agree and finalize appropriate revisions to the credit facility. o In accordance with the requirements of the Federal Securities Laws, the Company recognizes blackout periods during which directors, officers and certain employees with an awareness of material, nonpublic information are prohibited from transacting in the Company's stock. The Company will maintain a blackout period for such persons until 48 hours after the resolution of the covenant default under the Company's credit facility resulting from the change in the Company's Best rating. o Item 6. Exhibits and Reports on Form 8-K o Exhibit 10(PP)-- Amendment of the Management Agreement between AFP and PRI. o Exhibit 10(QQ)-- Collateral Assignment of Certificate of Deposit. o Exhibit 99.1-- Certification of John R. Byers pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o Exhibit 99.2-- Certification of Kim D. Thorpe pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. o On August 7, 2002, the Company filed a Form 8-K notifying the Securities and Exchange Commission (the "SEC") that the Company had entered into a finite reinsurance agreement with Hannover Reinsurance (Ireland) Limited and E+S Reinsurance (Ireland) Ltd., two Hannover Re group companies, whereby the Company's largest insurance subsidiary, First Professionals, will cede approximately $48.5 million of its 2002 unearned premiums as of June 30, 2002, effective July 1, 2002, and fifty percent of its direct written premiums, net of other reinsurance, during the last six months of 2002 and the first six months of 2003. o On October 14, 2002, the Company filed a Form 8-K with the SEC announcing that the Company had entered into a consulting agreement with David L. Rader, whereby Mr. Rader will provide consulting services to the Company, effective November 1, 2002. Mr. Rader retired from his position as President and Chief Executive Office of First Professionals effective October 31, 2002. Mr. Robert E. White, Jr., who served as Executive Vice President and Chief Operating Officer of First Professionals, became President of First Professionals effective November 1, 2002. o On October 29, 2002, the Company filed a Form 8-K notifying the SEC that Best had announced its decision to change the Company's group rating from A- (Excellent) with a negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating change, the Company was in non- compliance with its loan agreement. As a result of such non-compliance, the Company requested and received from its Lenders a forbearance dated October 24, 2002 (the "Forbearance") under which the Lenders have agreed not to take any action with regard to this covenant violation for a 30-day period, until November 23, 2002, to allow adequate time for the Company and its Lenders to agree and finalize appropriate revisions to the Loan Agreement. 33 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 13, 2002 FPIC Insurance Group, Inc. /s/ Kim D. Thorpe ----------------------------------------- Kim D. Thorpe, Executive Vice President and Chief Financial Officer (Principal Financial Officer) 34 Certification Pursuant Section 302 of The Sarbanes-Oxley Act of 2002. I, John R. Byers, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FPIC Insurance Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/ John R. Byers ---------------------------------------- President and Chief Executive Officer 35 Certification Pursuant Section 302 of The Sarbanes-Oxley Act of 2002. I, Kim D. Thorpe, certify that: 1. I have reviewed this quarterly report on Form 10-Q of FPIC Insurance Group, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. November 13, 2002 /s/ Kim D. Thorpe ----------------------------------------- Executive Vice President and Chief Financial Officer 36