10-Q 1 g10q-24592.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM TO . ---------- ---------- Commission file number 1-11983 ---------------- 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 [ ] As of May 4, 2001, there were 9,401,255 shares of the registrant's common stock outstanding. FPIC INSURANCE GROUP, INC. FORM 10-Q TABLE OF CONTENTS

PAGE ---- PART I Item 1. Unaudited Consolidated Financial Statements of FPIC Insurance Group, Inc. and Subsidiaries........................................................................ 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................... 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 18 PART II Item 1. Legal Proceedings....................................................................... 18 Item 2. Changes in Securities and Use of Proceeds............................................... 18 Item 3. Defaults Upon Senior Securities......................................................... 18 Item 4. Submission of Matters to a Vote of Security Holders..................................... 18 Item 5. Other Information....................................................................... 18 Item 6. Exhibits and Reports on Form 8-K........................................................ 18

FPIC INSURANCE GROUP, INC. Consolidated Balance Sheets (in thousands, except share data) As of March 31, 2001 and December 31, 2000

(unaudited) 2001 2000 --------- ------- ASSETS Cash and cash equivalents $ 39,922 18,967 Bonds and U.S. Government securities, available for sale 380,352 385,513 Equity securities, available for sale 122 555 Other invested assets, at equity 3,017 3,134 Other invested assets, at cost 11,297 11,388 Real estate investments 4,334 4,398 --------- ------- Total cash and investments 439,044 423,955 Premiums receivable, net 40,151 31,211 Accrued investment income 6,814 5,932 Reinsurance recoverable on paid losses 9,515 13,009 Due from reinsurers on unpaid losses and advance premiums 67,220 57,698 Ceded unearned premiums 18,747 10,107 Property and equipment, net 4,090 4,139 Deferred policy acquisition costs 6,277 6,136 Deferred income taxes 16,392 18,271 Finance charge receivable 369 471 Prepaid expenses 1,890 1,662 Goodwill and intangible assets, net 60,436 61,026 Federal income tax receivable 8,199 8,519 Other assets 7,801 10,233 --------- ------- Total assets $ 686,945 652,369 ========= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Loss and loss adjustment expenses $ 287,580 281,295 Unearned premiums 113,041 100,462 Reinsurance payable 14,107 6,518 Paid in advance and unprocessed premiums 2,190 4,146 Revolving credit facility 67,219 67,219 Accrued expenses and other liabilities 26,901 20,202 --------- ------- Total liabilities 511,038 479,842 --------- ------- Commitments and contingencies Common stock, $.10 par value, 50,000,000 shares authorized; 9,401,255, and 9,380,353 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 940 938 Additional paid-in capital 37,963 37,827 Unearned compensation (73) (105) Accumulated other comprehensive income 2,760 968 Retained earnings 134,317 132,899 --------- ------- Total shareholders' equity 175,907 172,527 --------- ------- Total liabilities and shareholders' equity $ 686,945 652,369 ========= =======

See accompanying notes to the unaudited consolidated financial statements. 3 FPIC INSURANCE GROUP, INC. Consolidated Statements of Income (in thousands, except per common share data)

(unaudited) --------------------------- Three months ended March 31 2001 2000 -------- -------- REVENUES Net premiums earned $ 31,517 29,119 Net investment income 6,069 6,038 Net realized investment losses (96) (21) Claims administration and management fees 7,163 7,121 Commission income 491 656 Finance charges and other income 669 1,264 -------- -------- Total revenues 45,813 44,177 -------- -------- EXPENSES Net losses and loss adjustment expenses 30,009 24,162 Other underwriting expenses 4,449 3,837 Claims administration and management expenses 7,593 7,087 Interest expense 1,153 1,242 Other expenses 979 1,193 -------- -------- Total expenses 44,183 37,521 -------- -------- Income before income taxes 1,630 6,656 Income taxes 336 1,944 -------- -------- Net income $ 1,294 4,712 ======== ======== Basic earnings per common share $ 0.14 0.49 ======== ======== Diluted earnings per common share $ 0.14 0.49 ======== ======== Basic weighted average common shares outstanding 9,393 9,564 ======== ======== Diluted weighted average common shares outstanding 9,436 9,678 ======== ========

See accompanying notes to the unaudited consolidated financial statements. 4 FPIC INSURANCE GROUP, INC. Consolidated Statements of Comprehensive Income (in thousands)

(unaudited) --------------------------- Three months ended March 31 2001 2000 ------- ------- Net income $ 1,294 4,712 ------- ------- Other comprehensive income Unrealized holding gains on securities arising during the period 5,193 2,322 Unrealized holding loss on derivative financial instruments arising during the period (1,186) Income tax expense related to unrealized gains and losses (2,215) (833) ------- ------- Other comprehensive income 1,792 1,489 ------- ------- Comprehensive income $ 3,086 6,201 ======= =======

See accompanying notes to the unaudited consolidated financial statements. 5 FPIC INSURANCE GROUP, INC. Consolidated Statements of Changes in Shareholders' Equity (in thousands) Three Months Ended March 31, 2001 and Year Ended December 31, 2000

Accumulated Additional Other Common Paid-in Comprehensive Retained Unearned Stock Capital Income (Loss) Earnings Compensation Total ------ ---------- ------------- -------- ------------ ----- Balances at December 31, 1999 $ 962 41,858 (8,495) 132,285 (231) 166,379 Net income -- -- -- 614 -- 614 Compensation earned on options -- -- -- -- 126 126 Unrealized gain on debt and equity securities -- -- 9,463 -- -- 9,463 Repurchase of shares, net (24) (4,031) -- -- -- (4,055) ------- ------ ------ ------- ---- ------- Balances at December 31, 2000 $ 938 37,827 968 132,899 (105) 172,527 ======= ====== ====== ======= ==== ======= Net income -- -- -- 1,294 -- 1,294 Compensation earned on options -- -- -- -- 32 32 Cummulative effect of change in accounting principle (Note 1) -- -- -- 124 -- 124 Unrealized loss on derivative financial instruments -- -- (1,186) -- -- (1,186) Unrealized gain on debt and equity securities -- -- 2,978 -- -- 2,978 Issuance of shares, net 2 136 -- -- -- 138 ------- ------ ------ ------- ---- ------- Balances at March 31, 2001 (unaudited) $ 940 37,963 2,760 134,317 (73) 175,907 ======= ====== ====== ======= ==== =======

See accompanying notes to the unaudited consolidated financial statements. 6 FPIC INSURANCE GROUP, INC. Consolidated Statements of Cash Flows (in thousands)

(unaudited) --------------------------------- Three months ended March 31 2001 2000 ---------------- --------------- Cash flows from operating activities: Net income $ 1,294 4,712 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 1,133 1,492 Realized loss on investments 96 21 Realized loss on sale of property and equipment 2 -- Noncash compensation 32 32 Net loss from equity investments 66 79 Bad debt expense 41 -- Deferred income tax benefit (274) (3,046) Changes in assets and liabilities: Premiums receivable, net (8,940) 2,279 Accrued investment income, net (882) (1,959) Due from reinsurers, net (7,079) 879 Deferred policy acquisition costs (141) (2,537) Prepaid expenses and finance charge receivable (126) (342) Other assets 392 (2,304) Loss and loss adjustment expenses 6,286 (2,667) Unearned premiums 12,579 7,460 Paid in advance and unprocessed premiums (1,956) (3,612) Federal income tax receivable 320 6,441 Accrued expenses and other liabilities 7,685 873 -------- -------- Net cash provided by operating activities 10,528 7,801 -------- -------- Cash flows from investing activities: Proceeds from sale or maturity of bonds and U.S. Government securities 21,612 4,108 Purchase of bonds and U.S. Government securities (11,489) (7,471) Proceeds from sale of equity securities 402 -- Purchase of goodwill and intangible assets -- (2,523) Purchase of real estate investments -- (92) Proceeds from sale of other invested assets 91 -- Purchase of other invested assets -- (161) Purchase of property and equipment, net (328) (163) -------- -------- Net cash provided by (used in) investing activities 10,288 (6,302) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit facility -- 4,500 Issuance (repurchase) of common stock 139 (3,532) -------- -------- Net cash provided by financing activities 139 968 -------- -------- Net increase in cash and cash equivalents 20,955 2,467 Cash and cash equivalents at beginning of period 18,967 6,830 -------- -------- Cash and cash equivalents at end of period $ 39,922 9,297 ======== ========

See accompanying notes to the unaudited consolidated financial statements. Continued 7 FPIC INSURANCE GROUP, INC. Consolidated Statements of Cash Flows (in thousands)

(unaudited) -------------------------------- Three months ended March 31 2001 2000 --------------- --------------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,108 149 =============== =============== Supplemental schedule of noncash investing and financing activities: Effective January 1, 2000, the Company's insurance subsidiaries entered into a 100% quota share reinsurance agreement to assume the death, disability, and retirement (DD&R) risks under Physicians' Reciprocal Insurers' (PRI) claims made insurance policies. The Company received cash and bonds in exchange for business assumed from PRI. Assumed unearned premiums $ -- 33,749 Deferred credit -- 13,205 Receipt of bonds -- (44,194) --------------- --------------- Net cash received $ -- 2,760 =============== ===============

See accompanying notes to the unaudited consolidated financial statements. 8 FPIC INSURANCE GROUP, INC. Unaudited Notes to the Consolidated Financial Statements (In Thousands, Except per Common Share Data and Elsewhere as Noted) 1. ORGANIZATION AND BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of FPIC Insurance Group, Inc. (the "Company") consolidated with the accounts of all its subsidiaries. Reference is made to the Company's most recently issued Form 10-K that includes information necessary or useful to understanding the Company's businesses and financial statement presentations. In particular, the Company's significant accounting policies and practices are presented in Note 1 to the consolidated financial statements included in that report. Financial information in this report reflects adjustments, consisting only of normal recurring accruals, that are, in the opinion of management, necessary for a fair statement of results for interim periods. For a number of reasons, the Company's results for interim periods may not be indicative of results to be expected for the year. The timing and magnitude of losses incurred by insurance subsidiaries and the estimation error inherent in the process of determining the liabilities for loss and loss adjustment expenses can be relatively more significant to results of interim periods than to results for a full year. Effective January 1, 2001, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") and FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FAS 133" ("FAS 138"). FAS 133 requires all derivative financial instruments, such as interest rate swaps, to be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair market value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of accumulated other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. FAS 138 amended the accounting and reporting standards for certain derivative instruments and hedging activities under FAS 133. The adoption of FAS 133 did not have a material effect on the Company's consolidated financial statements, but did increase total shareholders' equity by $124 at January 1, 2001 as a cumulative effect of a change in accounting principle. 2. INVESTMENTS Data with respect to debt and equity securities, available for sale, are shown below.

Mar 31, Dec 31, 2001 2000 ----------- --------- Amortized cost of investments in debt and equity securities..................... $ 373,653 $ 384,440

Mar 31 Mar 31, 2001 2000 ----------- --------- Proceeds from sales........................... $ 22,014 $ 4,108 Gross realized gains.......................... $ 235 $ -- Gross realized (losses)....................... $ (331) $ (21)

Realized investment gains and losses are recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required by generally accepted accounting principles, when investments are marked-to-market with the corresponding gain or loss included in earnings. Variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net earnings. 9 FPIC INSURANCE GROUP, INC. Unaudited Notes to the Consolidated Financial Statements (In Thousands, Except per Common Share Data and Elsewhere as Noted) 3. REVOLVING CREDIT FACILITY The Company maintains a $75.0 million revolving credit facility with four banks to meet certain non-operating cash needs as they may arise. As of March 31, 2001 and December 31, 2000, $67.2 million had been borrowed under this credit facility. The credit facility terminates on January 4, 2002 and bears interest at various rates, primarily based upon the LIBOR rate plus 1.25% to 1.50%. As of March 31, 2001 and December 31, 2000, the interest rate was 7.40% and 7.78%, respectively. 4. DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swap agreements (the "swap agreements") to minimize fluctuations in earnings 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 of the related debt. Amounts to be paid or received under the swap agreements are recognized as increases or reductions in interest expense in the periods in which they accrue. The swap agreements are only entered into with creditworthy counterparties. The swap agreements in effect are as follows:

Notional Receive Pay Amount Maturities Rate (1) Rate ------------ -------------- ------------ ------------ March 31, 2001..$ 60,000 01/02/2004 6.40% 5.27% $ 7,219 01/02/2004 6.40% 6.68%

(1) Based on three-month LIBOR The following is a summary of the Company's interest risk management strategy and the effect of this strategy on the Company's consolidated financial statements. Under the swap agreements (the "hedging instruments"), the Company agrees to pay an amount equal to a specified fixed-rate of interest times a notional principal amount and to receive in return an amount equal to a specified variable-rate of interest times the same notional principal amount. The notional amounts on the contract are not exchanged. No other cash payments are made unless the contract is terminated prior to maturity, in which case the amount paid or received in settlement is established by agreement at the time of termination, and usually represents the net present value, at current interest rates, of the remaining obligations to exchange payments under the terms of the contract. To date, the Company has not terminated the hedging instruments prior to maturity. The Company's swap agreements provide a hedge against changes in the amount of cash flows associated with the Company's revolving credit facility. Accordingly, the swap agreements are reflected at fair value in the Company's consolidated balance sheet and the effective portion of the related gains or losses on the agreements are recognized in shareholders' equity (as a component of accumulated other comprehensive income). To the extent that any of these contracts are not considered to be precisely effective in offsetting the changes in the cash flows associated with the interest payments being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized into income as other expense. The net effect of this accounting on the Company's operating results is that interest expense on the variable debt being hedged is generally recorded based on fixed interest rates. For the three months ended March 31, 2001, the net gain or loss on the ineffective portion of the swap agreements was not material. The Company formally documents the relationships between the hedging instruments and the revolving credit facility. The Company also assesses the effectiveness of the hedging instruments on 10 FPIC INSURANCE GROUP, INC. Unaudited Notes to the Consolidated Financial Statements (In Thousands, Except per Common Share Data and Elsewhere as Noted) a quarterly basis. If it is determined that the hedging instruments are no longer highly effective, the change in the fair value of the hedging instrument would be included in earnings rather than comprehensive income. 5. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER COMMON SHARE Data with respect to the Company's basic and diluted earnings per common share are shown below.

Three Months Ended --------------------------- 3/31/01 3/31/00 Net income and income from continuing operations............. $ 1,294 4,712 ============ =========== Basic weighted average shares outstanding.................... 9,393 9,564 Common stock equivalents..................................... 43 114 ------------ ----------- Diluted weighted average shares outstanding.................. 9,436 9,678 ============ =========== Basic earnings per common share.............................. $ .14 .49 ============ =========== Diluted earnings per common share............................ $ .14 .49 ============ ===========

6. SEGMENT INFORMATION The business segments presented in this document have been determined in accordance with the provisions of FASB Statement No. 131, " Disclosures about Segments of an Enterprise and Related Information." The Company has three main operating segments as follows: insurance, third party administration ("TPA"), and reciprocal management ("RM"). Holding company operations are included within the insurance segment due to the size and prominence of the segment and the substantial attention devoted to it. Through the insurance segment, the Company specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. The Company provides TPA services through its subsidiaries that market and administer self-insured and fully insured plans for both large and small employers, including group accident and health insurance, workers' compensation and general liability and property insurance. Through the RM segment, the Company provides management and administrative services and acts as attorney-in-fact for Physicians' Reciprocal Insurers ("PRI"), a New York medical professional liability insurance reciprocal. The Company evaluates a segment's performance based on net income. All segments are managed separately as each business requires different technology and marketing strategies. Information by industry segment follows:

MARCH 31, 2001 --------------------------------------------------------------------------------------- TOTAL INTERSEGMENT TOTAL INSURANCE TPA RM SEGMENT ELIMINATION CONSOLIDATED ----------- ----------- ---------- -------------- ---------------- --------------- Identifiable assets. $ 611,189 15,280 74,183 700,652 (13,707) 686,945 Operating revenue... $ 37,909 3,999 5,108 47,016 (1,203) 45,813 Net income.......... $ 980 70 244 1,294 -- 1,294

DECEMBER 31, 2000 --------------------------------------------------------------------------------------- TOTAL INTERSEGMENT TOTAL INSURANCE TPA RM SEGMENT ELIMINATION CONSOLIDATED ----------- ----------- ---------- -------------- ---------------- --------------- Identifiable assets. $ 599,051 789 62,864 662,704 (10,335) 652,369

11 FPIC INSURANCE GROUP, INC. Unaudited Notes to the Consolidated Financial Statements (In Thousands, Except per Common Share Data and Elsewhere as Noted)

MARCH 31, 2000 --------------------------------------------------------------------------------------- TOTAL INTERSEGMENT TOTAL INSURANCE TPA RM SEGMENT ELIMINATION CONSOLIDATED ----------- ----------- ---------- -------------- ---------------- --------------- Operating revenue... $ 35,641 4,142 7,641 47,424 (3,247) 44,177 Net income.......... $ 2,559 16 2,137 4,712 -- 4,712

7. COMMITMENTS AND CONTINGENCIES The Company's insurance subsidiaries are named as defendants in various legal actions primarily arising from claims made under insurance policies and contracts. These actions are considered by the Company's insurance subsidiaries in establishing the liability for loss and loss adjustment expense. While the outcomes of all legal actions are not presently determinable, management is of the opinion that the settlement of these actions will not have a material adverse effect on the Company's financial position or results of operations. 8. RECLASSIFICATION Certain amounts for 2000 have been reclassified to conform to the 2001 presentation. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For purposes of this management discussion and analysis, the term "Company" refers to FPIC Insurance Group, Inc. and its subsidiaries. The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited, consolidated financial statements and notes included in the Company's Form 10-K for the year ended December 31, 2000, which was filed with the Securities and Exchange Commission on March 30, 2001. SAFE HARBOR DISCLOSURE The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors include, but are not limited to, (i) uncertainties relating to government and regulatory policies (such as subjecting the Company to insurance regulation or taxation in additional jurisdictions or amending, revoking or enacting any laws, regulations or treaties affecting the Company's current operations), (ii) the occurrence of insured or reinsured events with a frequency or severity exceeding the Company's estimates, (iii) legal developments, (iv) the uncertainties of the loss reserving process, (v) the actual amount of new and renewal business and market acceptance of expansion plans, (vi) the loss of the services of any of the Company's executive officers, (vii) changing rates of inflation and other economic conditions, (viii) the ability to collect reinsurance recoverables, (ix) the competitive environment in which the Company operates, related trends and associated pricing pressures and developments, (x) the impact of mergers and acquisitions, including the ability to successfully integrate acquired businesses and achieve cost savings, competing demands for the Company's capital and the risk of undisclosed liabilities, (xi) developments in global financial markets that could affect the Company's investment portfolio and financing plans, and (xii) risk factors associated with financing and refinancing, including the willingness of credit institutions to provide financing and the availability of credit generally. The words "believe," "anticipate," "estimate," "project," "plan," "expect," "intend," "hope," "will likely result" or "will continue" and variations thereof or similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW Net income for the first quarter 2001 totaled $1.3 million, or $.14 per diluted share, compared with net income of $4.7 million, or $.49 per diluted share, for the same period in 2000. Included in first quarter 2001 net income is a $1.4 million pretax loss on the Company's group accident and health ("A&H") insurance business, which is not expected to recur at such a level as the Company exits this line of business during 2001. The Company will no longer write this business as of December 1, 2001. Total revenues for the first quarter 2001 increased 3.6% to $45.8 million from $44.2 million for the first quarter 2000. Revenue growth was driven primarily by increases in core medical professional liability ("MPL") policyholders in Florida and Missouri and the effects of price increases on core MPL business. Total expenses for the first quarter 2001 increased to $44.2 million from $37.5 million in the first quarter of 2000. Net losses and loss adjustment expenses ("LAE") incurred represent $5.8 million of the total expense increase. Of this amount, approximately $1.9 million reflects a net reduction in the amount of prior years' reserves released, which did not recur in the current year. The remaining $3.9 million of the 13 increase reflects the Company's decision to establish reserves for the current book of business at a more conservative loss ratio than that used in prior periods. Other underwriting expense also contributed to the increase in total expense, primarily as a result of expenses related to ongoing enhancements made to the Company's financial and reporting systems. INSURANCE SEGMENT Financial data for the Company's insurance segment for the three months ended March 31, 2001 and 2000 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended ---------------------------------------- Percentage 2001 Change 2000 ----------- ------------ ----------- Direct and assumed premiums written............ $ 55,173 (27)% $ 76,033 ============ =========== =========== Net premiums earned............................ $ 31,517 8% $ 29,119 Net investment income.......................... 5,941 (1)% 5,971 Net realized investment losses................. (96) (357)% (21) Commission income.............................. 13 (65)% 37 Other income................................... 338 (37)% 534 ------------ ----------- ----------- Total revenues............................. $ 37,713 6% $ 35,640 ------------ ----------- ----------- Net losses and LAE incurred.................... $ 30,009 24% $ 24,162 Other underwriting expenses.................... 4,449 16% 3,837 Interest expense............................... 1,153 (7)% 1,242 Other expense.................................. 246 4% 237 ------------ ----------- ----------- Total expense.............................. $ 35,857 22% $ 29,478 ------------ ----------- ----------- Income taxes........................... 66 (82)% 357 ------------ ----------- ----------- Net income ................................ $ 1,790 (69)% $ 5,805 ============ =========== ===========

Direct and assumed premiums written in the first quarter of 2001 were $55.2 million, down $20.8 million, from $76.0 million in 2000. The decrease is primarily due to the 100% quota share reinsurance agreement written in the first quarter of 2000 between the Company's insurance subsidiaries and PRI. Approximately $34.0 million of the written premium assumed was the initial consideration received that corresponded with management's estimate of the reserves required for future periods at the inception of the contract, which was recorded as unearned premium. Therefore, the Company did not expect a similar increase in assumed premiums written. Excluding these effects, direct and assumed premiums written in the first quarter of 2001 increased approximately $13.2 million due to a rate increase on the Company's core MPL lines at Florida Physicians Insurance Company ("Florida Physicians") effective January 1, 2001 and rate increases at both Anesthesiologists Professional Assurance Company ("APAC") and The Tenere Group, Inc. ("Tenere") taken in the latter half of 2000. A significant portion of the increase was also attributable to premiums written under fronting arrangements whereby the Company cedes substantially all of the business to other insurance carriers. Net premiums earned in the first quarter of 2001 totaled $31.5 million, an increase of $2.4 million, or 8.3%, from $29.1 million in 2000, primarily resulting from increases in core MPL business at Florida Physicians and Tenere. These increases were offset to some extent by a decline in assumed reinsurance at Florida Physicians and a decline in group A&H premiums. Net losses and LAE incurred increased $5.8 million to $30.0 million at March 31, 2001 from $24.2 million at March 31, 2000. The loss ratios were 95% and 83%, respectively. A loss ratio is defined as the ratio of losses and LAE incurred to net premiums earned. The increase in net loss and LAE incurred is the result of an increase in net premiums earned and the Company's decision to provide for the current 14 book of business at a more conservative loss ratio than that used in prior periods. These amounts were offset to some degree by a decrease in the provision for the Company's A&H business due to a decrease in the net earned premium resulting from the Company's withdrawal from its A&H programs. Other underwriting expenses during the first quarter of 2001 increased $0.6 million, or 16%, to $4.4 million at March 31, 2001 from $3.8 million at March 31, 2000. The increase in other underwriting expenses is primarily attributable to expenses related to enhancements made to improve the financial and reporting systems used by the Company. The Company also recognized additional administrative expenses and loan related fees. THIRD PARTY ADMINISTRATION ("TPA") SEGMENT Financial data for the Company's TPA segment for the three months ended March 31, 2001 and 2000 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended ---------------------------------------- Percentage 2001 Change 2000 ----------- ------------ ----------- Net investment income.......................... $ 67 46% $ 46 Claims administration and management fees...... 3,246 (1)% 3,267 Commission income.............................. 383 51% 253 Other income................................... 8 (95)% 176 ----------- ----------- ----------- Total revenues............................. $ 3,704 (1)% $ 3,742 ----------- ----------- ----------- Claims administration and management expenses................................... $ 3,603 (3)% $ 3,696 Other expense.................................. $ 190 (54)% 413 ----------- ----------- ----------- Total expenses............................. $ 3,793 (8)% $ 4,109 ----------- ----------- ----------- Income taxes........................... 50 178% 18 ----------- ----------- ----------- Net loss .................................. $ (139) 64% $ (385) =========== =========== ===========

A restructuring plan for TPA operations in Albuquerque, New Mexico was initiated in 2000 and continues in 2001 in order to reposition that operation to serve new accounts and to pursue other business opportunities in the Western United States. The Company has also approved a plan to consolidate its two TPA entities, McCreary Corporation and Employers Mutual, Inc. ("EMI"), with EMI emerging as the surviving corporation. Commission income in the first quarter of 2001 increased $0.1 million or 51%, to $0.4 million at March 31, 2001, from $0.3 million at March 31, 2000. The increase in commission income is due to the addition of new service contracts during the first quarter of 2001. 15 RECIPROCAL MANAGEMENT ("RM") SEGMENT Financial data for the Company's RM segment for the three months ended March 31, 2001 and 2000 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended ---------------------------------------- Percentage 2001 Change 2000 ----------- ------------ ----------- Net investment income.......................... $ 61 190% $ 21 Claims administration and management fees...... 3,917 2% 3,854 Commission income.............................. 95 (74)% 366 Other income................................... 323 (42)% 554 ------------ ------------ ----------- Total revenues............................. $ 4,396 (8)% $ 4,795 ------------ ------------ ----------- Claims administration and management expenses................................... $ 3,990 18% $ 3,391 Other expense.................................. $ 543 -- 543 ------------ ------------ ----------- Total expenses............................. $ 4,533 15% $ 3,934 ------------ ------------ ----------- Income taxes........................... 220 (86)% 1,569 ------------ ----------- ----------- Net loss .................................. $ (357) 50% $ (708) ============ ============ ===========

Commission income in the first quarter of 2001 declined $0.3 million or 74%, to $0.1 million at March 31, 2001, from $0.4 million at March 31, 2000. The decline in commission income is due to a reduction in brokerage income from the placement of reinsurance with external parties. Other income in the first quarter of 2001 declined $0.2 million, or 41%, to $0.3 million at March 31, 2001 from $0.5 million at March 31, 2000. The decline in other income is primarily due additional expenses incurred related to the placement of business with the Company's insurance subsidiaries for which the related brokerage income is eliminated in consolidation. SELECTED BALANCE SHEET ITEMS AS OF MARCH 31, 2001 Net premiums receivable increased $9.0 million to $40.2 million as of March 31, 2001 from $31.2 million as of December 31, 2000. The increase in net premiums receivable is related to rate increases on the Company's core MPL business at Florida Physicians and rate increases at APAC and Tenere taken in the latter half of 2000. In addition, the volume of the Company's insurance operations increased during the first quarter of 2001. Reinsurance recoverable on paid losses declined $3.5 million to $9.5 million as of March 31, 2001 from $13.0 million as of December 31, 2000. The decline in reinsurance recoverable on paid losses is due to collections from reinsurers on balances due at December 31, 2000, which exceeded amounts due from reinsurers during the first quarter of 2001. Due from reinsurers on unpaid losses and advance premiums increased $9.5 million to $67.2 million as of March 31, 2001 from $57.7 million as of December 31, 2000. The increase in due from reinsurers on unpaid losses and advance premiums is related to an increase in gross reserves for which reinsurance recoverables are established. Ceded unearned premiums increased $8.6 million to $18.7 million as of March 31, 2001 from $10.1 million as of December 31, 2000. The increase in ceded unearned premiums is primarily related to an increase in premiums written under fronting arrangements whereby the Company cedes substantially all of the business to other insurance carriers. Also contributing to the increase was a change in contract 16 terms on one of the Company's large reinsurance agreements from ceding premium on an earned basis to a written basis. Unearned premiums increased $12.5 million to $113.0 million as of March 31, 2001 from $100.5 million as of December 31, 2000. The increase in unearned premiums is related to growth in direct and assumed premiums written at the Company's insurance subsidiaries. Reinsurance payable increased $7.6 million to $14.1 million as of March 31, 2001 from $6.5 million as of December 31, 2000. The increase in reinsurance payable is related to an increase in premiums written under fronting arrangements whereby the Company cedes substantially all of the business to other insurance carriers. Also contributing to the increase was a change in contract terms on one of the Company's large reinsurance agreements from ceding premium on an earned basis to a written basis. Other liabilities increased $6.7 million to $26.9 million as of March 31, 2001 from $20.2 million as of December 31, 2000. The increase in other liabilities is primarily attributable to the receipt of funds by the Company's RM segment for brokerage services payable to other insurance carriers. 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. A decision whether or not to make additional repurchases will be based upon an analysis of the best use of the Company's capital and after consultation with the Company's lenders. Since the commencement of these repurchase programs, the Company has repurchased 853,500 shares at a cost of approximately $16 million. A total of 387,000 shares remain available to be repurchased under the programs. LIQUIDITY AND CAPITAL RESOURCES The payment of losses, LAE and operating expenses in the ordinary course of business is the principal need for the Company's liquid funds. Cash provided by operating activities has been used to pay these items and was sufficient during the first quarter of 2001 to meet these needs. Management believes these sources will be sufficient to meet the Company's cash needs for operating purposes for at least the next twelve months. However, a number of factors could cause increases in the dollar amount of losses and LAE and may therefore adversely affect future reserve development and cash flow needs. Management believes these factors include, among others, inflation, changes in medical procedures, increased use of managed care and adverse legislative changes. In order to compensate for such risk, the Company: (i) maintains what management considers to be adequate reinsurance; (ii) conducts regular actuarial reviews of loss and LAE reserves; and (iii) maintains adequate asset liquidity (by managing its cash flow from operations coupled with the maturities from its fixed income portfolio investments). The Company maintains a $75.0 million revolving credit facility with four banks to meet certain non-operating cash needs as they may arise. As of March 31, 2001, the Company had borrowed $67.2 million under this facility. The credit facility terminates on January 4, 2002 and bears interest at various rates, primarily based upon the LIBOR rate plus 1.25% to 1.50%. The Company anticipates that before such time, it will either replace the existing credit facility with a similar facility or obtain alternative financing. The Company is not required to maintain compensating balances in connection with this credit facility but is charged a fee on the unused portion, which ranges from 20 to 30 basis points. Under the terms of the credit facility, the Company is required to meet certain financial covenants. Significant covenants are as follows: a) the Company's funded debt to total capital plus funded debt cannot exceed 0.30:1 and b) net premiums written to statutory capital and surplus cannot exceed 2.0:1. 17 At March 31, 2001, the Company held approximately $19.7 million in investments scheduled to mature during the next twelve months, which combined with net cash flows from operating activities, are expected to provide the Company with sufficient liquidity and working capital. As reported in the consolidated statement of cash flows, the Company generated positive net cash from operating activities of $10.5 million at March 31, 2001. Dividends payable by the Company's insurance subsidiaries are subject to certain limitations imposed by Florida and Missouri laws. In 2001, these subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends of approximately $11.3 million, without prior regulatory approval. ACCOUNTING PRONOUNCEMENTS Effective January 1, 2001, the Company adopted Financial Accounting Standards Board ("FASB") Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133") and FASB Statement No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment to FAS 133" ("FAS 138"). FAS 133 requires all derivative financial instruments, such as interest rate swaps, to be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. Changes in the fair market value of derivative financial instruments are either recognized periodically in income or shareholders' equity (as a component of accumulated other comprehensive income), depending on whether the derivative is being used to hedge changes in fair value or cash flows. FAS 138 amended the accounting and reporting standards for certain derivative instruments and hedging activities under FAS 133. The adoption of FAS 133 did not have a material effect on the Company's consolidated financial statements, but did increase total shareholders' equity by $124 at January 1, 2001 as a cumulative effect of a change in accounting principle. 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 2000 annual report on Form 10-K, since the end of the most recent fiscal year. PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities and Use of Proceeds - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - None SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FPIC Insurance Group, Inc. /s/ Kim D. Thorpe ----------------------------------------- May 15, 2001 Kim D. Thorpe, Executive Vice President and Chief Financial Officer (a duly authorized officer and the principal financial officer of the registrant) 18