10-Q 1 0001.txt FORM 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 September 30, 2000 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 November 2, 2000, there were 9,493,353 shares of the registrant's common stock outstanding. Table of Contents Page ---- Part I - Financial Information Item 1. Unaudited Consolidated Financial Statements of FPIC Insurance Group, Inc. and Subsidiaries: o Consolidated Balance Sheets 3 o Consolidated Statements of Income 4 o Consolidated Statements of Comprehensive Income 5 o Consolidated Statements of Changes in Shareholders' Equity 6 o Consolidated Statements of Cash Flows 7 o Notes to the Unaudited Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Part II - Other Information Item 1. Legal Proceedings 16 Item 2. Changes in Securities and Use of Proceeds 16 Item 3. Defaults Upon Senior Securities 16 Item 4. Submission of Matters to a Vote of Security Holders 16 Item 5. Other Information 16 Item 6. Exhibits and Reports on Form 8-K 17 Signatures 17 FPIC INSURANCE GROUP, INC. Consolidated Balance Sheets (in thousands, except share data) As of September 30, 2000 and December 31, 1999

(unaudited) 2000 1999 --------- --------- Assets Cash and cash equivalents $ 9,206 $ 6,830 Bonds and U.S. Government securities, available for sale 382,073 327,076 Equity securities, available for sale 1,224 1,055 Other invested assets, at equity 3,360 3,549 Other invested assets, at cost 11,460 10,576 Real estate investments 3,982 4,333 --------- --------- Total cash and investments 411,305 353,419 Premiums receivable, net 47,120 44,909 Accrued investment income 7,051 5,426 Reinsurance recoverable on paid losses 7,316 4,450 Due from reinsurers on unpaid losses and advance premiums 74,344 58,400 Ceded unearned premiums 2,911 6,283 Property and equipment, net 3,961 3,774 Deferred policy acquisition costs 6,691 2,789 Deferred income taxes 20,565 21,244 Finance charge receivable 506 482 Prepaid expenses 1,623 1,126 Goodwill and intangible assets, net 61,555 73,922 Federal income tax receivable 90 4,128 Other assets 9,260 7,568 --------- --------- Total assets $ 654,298 $ 587,920 ========= ========= Liabilities and Shareholders' Equity Loss and loss adjustment expenses $ 279,904 $ 273,092 Unearned premiums 102,748 61,314 Reinsurance payable 5,741 3,339 Paid in advance and unprocessed premiums 1,159 5,459 Revolving credit facility 67,219 62,719 Accrued expenses and other liabilities 15,009 15,618 --------- --------- Total liabilities 471,780 421,541 --------- --------- Commitments and contingencies Common stock, $.10 par value, 50,000,000 shares authorized; 9,493,353, and 9,621,298 shares issued and outstanding at September 30, 2000 and December 31, 1999, respectively 949 962 Additional paid-in capital 38,847 41,858 Unearned compensation (136) (231) Accumulated other comprehensive loss (4,208) (8,495) Retained earnings 147,066 132,285 --------- --------- Total shareholders' equity 182,518 166,379 --------- --------- Total liabilities and shareholders' equity $ 654,298 $ 587,920 ========= =========

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

(unaudited) ------------------------------------------------------------------------- Three months ended September 30 Nine months ended September 30 2000 1999 2000 1999 ------- ------- --------- ------- Revenues Net premiums earned $29,868 33,171 $ 92,420 87,304 Net investment income 6,396 5,010 18,546 14,342 Net realized investment gains (losses) 52 (2) (58) 312 Claims administration and management fees 7,873 6,814 22,429 19,285 Commission income 1,930 1,198 2,995 2,375 Finance charges and other income 878 1,327 2,523 3,120 ------- ------- --------- ------- Total revenues 46,997 47,518 138,855 126,738 ------- ------- --------- ------- Expenses Net losses and loss adjustment expenses 23,138 26,066 73,831 59,440 Other underwriting expenses 5,438 5,957 13,793 16,305 Claims administration and management expenses 7,999 7,605 22,190 19,684 Interest expense 934 985 3,189 2,740 Other expenses 2,808 3,204 5,438 5,338 ------- ------- --------- ------- Total expenses 40,317 43,817 118,441 103,507 ------- ------- --------- ------- Income before income taxes 6,680 3,701 20,414 23,231 Income taxes 1,754 1,039 5,633 5,932 ------- ------- --------- ------- Net income $ 4,926 2,662 $ 14,781 17,299 ======= ======= ========= ======= Basic earnings per common share $ 0.52 0.27 $ 1.56 1.77 ======= ======= ========= ======= Diluted earnings per common share $ 0.51 0.26 $ 1.54 1.66 ======= ======= ========= ======= Basic weighted average common shares outstanding 9,493 9,760 9,503 9,775 ======= ======= ========= ======= Diluted weighted average common shares outstanding 9,572 10,417 9,616 10,433 ======= ======= ========= =======

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 September 30 Nine months ended September 30 2000 1999 2000 1999 ------- ------ -------- ------- Net income $ 4,926 2,662 $ 14,781 17,299 ------- ------ -------- ------- Other comprehensive income Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 4,379 (5,721) 7,038 (15,211) Less reclassification adjustment for gains (losses) included in net income 52 (2) (58) 312 Income tax (expense) benefit related to unrealized gains and losses on securities (1,710) 2,003 (2,693) 5,215 ------- ------ -------- ------- Other comprehensive income (loss) 2,721 (3,720) 4,287 (9,684) ------- ------ -------- ------- Comprehensive income (loss) $ 7,647 (1,058) $ 19,068 7,615 ======= ====== ======== =======

See accompanying notes to the unaudited consolidated financial statements. 5 FPIC INSURANCE GROUP, INC. Consolidated Statements of Changes in Shareholders' Equity (in thousands) Nine Months Ended September 30, 2000 and Year Ended December 31, 1999

Accumulated Additional Other Common Paid-in Unearned Comprehensive Retained Stock Capital Compensation Income (Loss) Earnings Total ------------------------------------------------------------------- Balances at December 31, 1998 $ 952 34,299 (357) 5,621 110,416 150,931 Net income -- -- -- -- 21,869 21,869 Compensation earned on options -- -- 126 -- -- 126 Net unrealized loss on debt and equity securities -- -- -- (14,116) -- (14,116) Issuance of shares, net 10 7,559 -- -- -- 7,569 ------------------------------------------------------------------- Balances at December 31, 1999 $ 962 41,858 (231) (8,495) 132,285 166,379 Net income -- -- -- -- 14,781 14,781 Compensation earned on options -- -- 95 -- -- 95 Net unrealized gain on debt and equity securities -- -- -- 4,287 -- 4,287 Repurchase of shares, net (13) (3,011) -- -- -- (3,024) ------------------------------------------------------------------- Balances at September 30, 2000 (unaudited) $ 949 38,847 (136) (4,208) 147,066 182,518 ===================================================================

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

(unaudited) ------------------------------ Nine months ended September 30 2000 1999 -------- -------- Cash flows from operating activities: Net income $ 14,781 $ 17,299 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 3,683 4,055 Realized loss (gain) on investments 58 (312) Realized loss on sale of property and equipment -- 16 Noncash compensation 95 94 Net loss from equity investments 180 261 Deferred income tax (benefit) provision (1,320) 73 Changes in assets and liabilities: Premiums receivable, net (2,211) (14,584) Accrued investment income, net (1,624) (681) Due from reinsurers (13,036) 1,999 Deferred policy acquisition costs (3,902) (444) Prepaid expenses and finance charge receivable (521) 298 Other assets and accrued expenses and other liabilities (3,285) 1,055 Loss and loss adjustment expenses 6,812 (7,311) Unearned premiums 10,446 15,035 Paid in advance and unprocessed premiums (4,300) (4,399) Federal income tax receivable 4,039 (2,882) -------- -------- Net cash provided by operating activities 9,895 9,572 -------- -------- Cash flows from investing activities: Proceeds from sale or maturity of bonds and U.S. Government securities 37,358 50,251 Purchase of bonds and U.S. Government securities (42,189) (39,538) Purchase of goodwill and intangible assets (2,523) (51,043) Proceeds from sale of real estate investments 275 -- Purchase of other invested assets (889) (1,317) Purchase of property and equipment, net (1,213) (389) Proceeds from sale of subsidiary 185 -- Purchase of subsidiary's net other assets and stock -- (507) -------- -------- Net cash used in investing activities (8,996) (42,543) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit facility 4,500 36,554 Repurchase of common stock, net (3,023) (3,444) -------- -------- Net cash provided by financing activities 1,477 33,110 -------- -------- Net increase in cash and cash equivalents 2,376 139 Cash and cash equivalents at beginning of period 6,830 7,063 -------- -------- Cash and cash equivalents at end of period $ 9,206 $ 7,202 ======== ========

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

(unaudited) Nine months ended September 30 ------------------------------ 2000 1999 -------- -------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,769 $ 1,796 ======== ======== Federal income taxes $ 2,950 $ 6,000 ======== ======== 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 $ -- Reduction in net goodwill and intangible assets 13,205 -- Receipt of bonds (44,194) -- -------- -------- Net cash received $ 2,760 $ -- ======== ======== Effective January 1, 1999, The Company purchased all of the capital stock of Administrators For The Professions, Inc. for $53,830 and a 70% equity interest in a limited liability company for $2,500. In conjunction with the acquisitions, common stock was issued as follows: Common stock issued and related additional paid-in capital $ -- $ 11,630 Goodwill and other tangible assets acquired -- (56,330) -------- -------- Net cash paid $ -- $(44,700) ======== ========

See accompanying notes to the unaudited consolidated financial statements. 8 FPIC Insurance Group, Inc. Notes to the Unaudited Consolidated Financial Statements (Dollars in Thousands) 1. Organization and Basis of Presentation The accompanying unaudited consolidated financial statements include the accounts of FPIC Insurance Group, Inc. ("FPIC" or "the Company") consolidated with the accounts of all its subsidiaries. Reference is made to FPIC's most recently issued Form 10-K that included information necessary or useful to understanding the Company's businesses and financial statement presentations. In particular, FPIC's significant accounting policies and practices were presented as 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 to a fair statement of results for interim periods. For a number of reasons, FPIC'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. Also, see the discussion of the Company's liabilities for loss and loss adjustment expenses in Item 2 of the Form 10-Q. 2. Investments Data with respect to available-for-sale investments in fixed maturities and equity securities are shown in the tabulation below (in thousands): Sept 30, Dec 31, 2000 1999 ----------- ---------- Amortized cost ............................. $ 389,765 $ 349,730 Sept 30, Sept 30, 2000 1999 ----------- ---------- Proceeds from sales ........................ $ 37,358 $ 50,251 Gross realized gains ....................... 133 345 Gross realized (losses) .................... (158) (34) 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. Variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net earnings. 3. Reinsurance Effective January 1, 2000, the Company's insurance subsidiaries entered into a 100% quota share reinsurance agreement with Physicians' Reciprocal Insurers ("PRI"), to assume the death, disability and retirement ("DD&R") risks under PRI's claims made insurance policies in exchange for cash and investments. Subsequent to recording the agreement, a GAAP valuation of the underlying liability was completed and a deferred credit in the amount of $13.2 million was recognized and reclassified from unearned premiums to goodwill and intangible assets. The deferred credit, which will be amortized into income over 20 years, represents the difference between the GAAP valuation of the underlying 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). 9 FPIC Insurance Group, Inc. Notes to the Unaudited Consolidated Financial Statements (Dollars in Thousands) 4. Revolving Credit Facility The Company maintains a $75 million revolving credit facility, in which four banks participate, to meet certain non-operating cash needs as they may arise. The credit facility terminates January 4, 2002, and bears interest at various rates from LIBOR plus .75% to Prime plus .50%. The Company is not required to maintain compensating balances in connection with this credit facility. As of September 30, 2000, the Company had borrowed approximately $67 million against the credit facility for non-operating purposes. 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 in the tabulation below (in thousands, except per-share data):

Three Months Ended Nine Months Ended 9/30/00 9/30/99 9/30/00 9/30/99 ------- ------- ------- ------- Net income and income from continuing operations ................... $4,926 2,662 $14,781 17,299 ====== ====== ======= ====== Basic weighted average shares outstanding .. 9,493 9,760 9,503 9,775 Common stock equivalents ................... 79 657 113 658 ------ ------ ------- ------ Diluted weighted average shares outstanding 9,572 10,417 9,616 10,433 ====== ====== ======= ====== Basic earnings per common share ............ $ .52 .27 $ 1.56 1.77 ====== ====== ======= ====== Diluted earnings per common share .......... $ .51 .26 $ 1.54 1.66 ====== ====== ======= ======

6. Segment Information Under the provisions of SFAS 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has three reportable operating segments as follows: insurance, third party administration ("TPA"), and reciprocal management ("RM"). The insurance segment primarily provides medical and legal professional liability insurance. The TPA segment provides management and third party administrative services such as the administration of self-insurance plans for large employers. The RM segment provides insurance management and administrative services to PRI, a reciprocal insurer. 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. Prior to September 2000, the Company evaluated a segment's performance based on net income or loss after eliminating intersegment revenues and expenses. The Company now evaluates a segment's performance based on net income and accounts for intersegment sales and transfers as if the sales and transfers were to third parties. All segments are managed separately as each business requires different technology and marketing strategies. Information by industry segment follows (in thousands): Three Months Ended Nine Months Ended 9/30/00 9/30/99 9/30/00 9/30/99 -------- ------- --------- -------- Revenues: Insurance ................ $ 36,698 38,964 $ 111,884 103,388 TPA ...................... 4,757 3,880 12,711 9,779 RM ....................... 7,387 4,918 20,104 14,514 Intersegment ............. (1,845) (244) (5,844) (943) -------- ------- --------- -------- Total Revenues ......... $ 46,997 47,518 $ 138,855 126,738 ======== ======= ========= ======== 10 FPIC Insurance Group, Inc. Notes to the Unaudited Consolidated Financial Statements (Dollars in Thousands)

Three Months Ended Nine Months Ended 9/30/00 9/30/99 9/30/00 9/30/99 -------- ------- -------- ------- Net income: Insurance .................... $ 3,004 2,144 $ 10,309 15,917 TPA .......................... 383 282 262 384 RM ........................... 1,539 236 4,210 998 -------- ------- -------- ------ Total Net Income ........... $ 4,926 2,662 $ 14,781 17,299 ======== ======= ======== ======

Identifiable assets: 9/30/00 12/31/99 -------- -------- Insurance .................... $576,280 519,252 TP ........................... 15,288 10,361 RM ........................... 62,730 58,307 -------- ------- Total Assets ............... $654,298 587,920 ======== =======

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 1999 have been reclassified to conform to the 2000 presentation. 11 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, 1999, which was filed with the Securities and Exchange Commission on March 30, 2000. Forward-Looking Statements Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of FPIC officials during presentations about the Company, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by words such as, but not limited to, "believe," "expect," "intend," "anticipate," "estimate," and other analogous expressions and are based upon the Company's estimates and anticipation of future events that are subject to certain risks and uncertainties that could cause actual results to vary materially from the expected results described in the forward-looking statements. The Company's expectations regarding earnings, losses, the retention of current business, expansion of product lines, and development of business in new geographical areas depend on a variety of factors, including economic, competitive and market conditions which may be beyond the Company's control and are thus difficult or impossible to predict. In view of the many uncertainties inherent in the forward-looking statements made in this document, the inclusion of such information should not be taken as a representation by the Company or any other person that the Company's objectives or plans will be realized. The assumptions underlying certain forward-looking statements are that the Company will continue to: (i) profitably price its insurance products; (ii) maintain its underwriting standards; (iii) market its insurance products competitively; (iv) maintain its successful handling of claims; (v) retain existing agents and key management personnel; and (vi) reserve adequately for losses and loss adjustment expenses ("LAE"). Additionally, the primary risk in maintaining adequate reserves is unexpected changes in the frequency or severity of reported claims, particularly adverse development that may occur during the last three report years. Insurance Segment The Company's pre-tax insurance segment underwriting results for the three months ended and nine months ended September 2000 and September 1999 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended Nine Months Ended ---------------------------------- ------------------------------ 2000 1999 2000 1999 --------------- ---------------- -------------- ------------- Amount % Amount % Amount % Amount % ------- ---- ------- ---- -------- ---- ------- ---- Direct & assumed premiums written $54,610 -- 45,698 -- $178,889 -- 121,380 -- ======= ======= ======== ======= Net premiums earned ............. $29,868 100 33,171 100 $ 92,420 100 87,304 100 Losses and LAE incurred ......... 23,138 77 26,066 79 73,831 80 59,440 68 Other underwriting expenses ..... 5,438 18 5,957 18 13,793 15 16,305 19 ------- ------- -------- ------- Underwriting gain ............... $ 1,292 1,148 $ 4,796 11,559 ======= ======= ======== ======= Net investment income ........... $ 6,329 -- 4,965 -- $ 18,372 -- 14,227 -- ======= ======= ======== =======

12 Direct and assumed premiums written in the third quarter of 2000 were $54.6 million, up 19% from $45.7 million in 1999. For the nine months ended September 30, 2000, direct and assumed premiums written were $178.9 million, up 47% from $121.4 million in 1999. The increase in direct and assumed premiums written is related to a 100% quota share reinsurance agreement written in the first quarter of 2000, an increase in written premiums in Texas (which are 100% reinsured), and the acquisition of The Tenere Group, Inc. ("Tenere") on March 17, 1999 which was not included for the entire nine month period in 1999. Net premiums earned in the third quarter of 2000 were $29.9 million, down 10% from $33.2 million in 1999. The decrease in net premiums earned is due to a decline in the number of policyholders in the physician's market in Florida and an increase in ceded premiums under new reinsurance terms. For the nine months ended September 30, 2000, net premiums earned were $92.4 million, up 6% from $87.3 million in 1999. The increase in net premiums earned for the nine-month period is related to growth in assumed reinsurance and the acquisition of Tenere on March 17, 1999 offset by the decline in the Florida physician's market. Net losses and LAE decreased $3.0 million, or 11%, to $23.1 million for the three months ended September 30, 2000, from $26.1 million for the three months ended September 30, 1999. The loss ratios were 77% and 79% for the three months ended September 30, 2000 and 1999, respectively. A loss ratio is defined as the ratio of losses and loss adjustment expenses to net premiums earned. The decline in net losses and LAE during the third quarter of 2000, as compared with the third quarter of 1999, was largely due to improvement in group accident and health ("A&H") results following a 40% rate increase with respect to the Florida Dental Association A&H program in the second quarter, and was otherwise in line with a corresponding decline in net premiums earned. Net losses and LAE increased $14.4 million, or 24%, to $73.8 million for the nine months ended September 30, 2000, from $59.4 million for the nine months ended September 30, 1999. The loss ratios were 80% and 68% for the nine months ended September 30, 2000 and 1999, respectively. The increase in the Company's loss ratio for the nine months ended September 30, 2000 is primarily due to a reduction in the amount of prior years' reserves released. The liability for losses and LAE represents management's best estimate of the ultimate cost of all losses incurred but unpaid and considers prior loss experience, loss trends, the Company's loss retention levels and changes in the frequency and severity of claims. Competitive market conditions in recent years have lessened the Company's ability to underwrite and price its business on as favorable terms as in prior years. Consequently, the Company has significantly increased it provisions for losses and LAE in 2000. Management closely monitors the adequacy of its reserves and underlying claims trends, including having the Company's outside consulting actuary perform calculations periodically. The Company's recorded amount of the liability for losses and LAE represents management's best estimate and falls within the range of reasonable values as determined by the actuary's calculation. In the course of calculating the liability for losses and LAE during the third quarter, certain potentially unfavorable claims trends were identified in the underlying data with respect to Florida Physicians Insurance Company's core physicians' medical professional liability business. These developments included an increase in the rate of claims closed with indemnity payment (as opposed to without payment), and a slow down in the overall closure rate of pending claims, resulting in an increase in the number of outstanding claims. An indicated increase in the severity of the average amount of 1999 report year cases closed with indemnity payment during 2000 thus far was also present. 13 Management has reviewed and analyzed these developments along with other related information and understandings as to their causes or potential causes, and believes that they are an aberration. Furthermore, the Company's outside consulting actuary has not advised the Company that additional incurred but not reported ("IBNR") claim liabilities are required. However, should one or more of these developments prove not to be aberrant, there is a possibility that recent actual claims experience could be indicative of an unfavorable trend that could require additional IBNR claim liabilities in the future. At this time, it is not possible to precisely estimate the potential amount of such an adjustment, if any. To do so would require speculation about future events and the ability to conclude on the meaning of these developments, which can only be done upon further analysis of a full year's data. However, based solely upon current data and with the benefit of the outside consulting actuary's calculations, assumptions, and potential outcomes, management believes such a potential adjustment, if any, would fall in the range of 0% to 6% of the Company's recorded amount of the liability for losses and LAE, or from $0 to $16 million, pre-tax. This range of possibility does not include any projection of experience, positive or negative, that might occur during the remainder of 2000, nor the possibility that a full year's development of data may vary significantly from the partial year data underlying the interim calculations. It also does not reflect other key qualitative matters that are normally considered by management, such as the degree or margin of conservatism that might be included. Furthermore, given the inherent uncertainties in the estimation of the liability for losses and LAE in general, there can be no assurance concerning future adjustments, positive or negative. Other underwriting expenses incurred during the third quarter of 2000 decreased $0.4 million from 1999. For the nine months ended September 2000, other underwriting expenses incurred were $13.8 million, down 15%, from $16.3 million for the nine months ended September 30, 1999. The decline in other underwriting expenses is attributable to a decline in assumed reinsurance costs and the accretion, or amortization, of the deferred credit associated with the 100% quota share reinsurance agreement entered into during the first quarter of 2000. Third Party Administration ("TPA") and Reciprocal Management ("RM") Segments Income before taxes for the Company's non-insurance segments for the three months ended and nine months ended September 2000 and September 1999 are summarized in the table below. Dollar amounts are in thousands.

Three Months Ended Nine Months Ended --------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ----------- ------------- ------------ Amount % Amount % Amount % Amount % ------ --- ------ --- ------- --- ------ --- Claims administration & management fees ..... $7,873 80 6,814 85 $22,429 88 19,285 89 Commission income ... 1,931 20 1,198 15 2,996 12 2,375 11 ------ --- ----- --- ------- --- ------ --- Total revenues ........ $9,804 100 8,012 100 $25,425 100 21,660 100 ====== === ===== === ======= === ====== === Claims administration & management expenses . $7,999 82 7,605 95 $22,190 87 19,684 91 Net other expense ..... 543 6 392 4 1,266 5 983 5 ------ --- ----- --- ------- --- ------ --- Total expenses ...... $8,542 88 7,997 99 $23,456 92 20,667 96 ====== === ===== === ======= === ====== ===

14 Claims administration and management fees in the third quarter of 2000 were $7.9 million, up 16% from $6.8 million in 1999. Claims administration and management fees increased $3.1 million, or 16%, to $22.4 million for the nine months ended September 30, 2000, from $19.3 million for the nine months ended September 30, 1999. The growth in claims administration and management fees is primarily attributable to an acquisition of assets by Employers Mutual, Inc. ("EMI") during the third quarter of 1999. Commission income in the third quarter of 2000 was $1.9 million, up 58% from $1.2 million in 1999. Commission income increased $0.6 million, or 25%, to $3.0 million for the nine months ended September 30, 2000, from $2.4 million for the nine months ended September 30, 1999. The increase in commission income is attributable to growth related to the placement of insurance and reinsurance with external parties during 2000. Claims administration and management expenses in the third quarter of 2000 were $8.0 million, up 5% from $7.6 million in 1999. Claims administration and management expenses increased $2.5 million, or 13%, to $22.2 million for the nine months ended September 30, 2000, from $19.7 million for the nine months ended September 30, 1999. The growth in claims administration and management expenses is attributable to an acquisition of assets by EMI during the third quarter of 1999. Liquidity and Capital Resources The payment of losses, LAE, and operating expenses, including interest and taxes, in the ordinary course of business is the principal need for the Company's liquid funds. Cash used to pay these items has been provided by operating activities. Operating cash flows for the nine months ended September 30, 2000 provided cash of approximately $9.9 million. 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 including future levels of premiums written, investment income and operating expenses could have direct affects on operating cash flows. For example, an increase in the dollar amount of losses and LAE paid may adversely affect future reserve development and cash flow needs. Additional factors including, among others, loss trends, and changes in the frequency and severity of claims in the Company's book of business could also affect cash flow needs. In addition, factors such as inflation, changes in medical procedures, and the influence of managed care and adverse legislative changes could influence the level of losses and LAE. The Company maintains a $75 million revolving credit facility with four banks to meet certain non-operating cash needs as they may arise. The credit facility terminates January 4, 2002. 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. As of September 30, 2000, the Company had borrowed approximately $67 million against the credit facility for non-operating purposes. Dividends payable by the Company's insurance subsidiaries are subject to certain statutory limitations imposed by the laws in the states in which they operate. In 2000, insurance subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends to the Company of approximately $19.7 million without regulatory approval. 15 Stock Repurchase Plans On June 29, 1999 and September 11, 1999, the Company's Board of Directors approved stock repurchase plans pursuant to which the Company is authorized to repurchase, at management's discretion, up to 1,000,000 of its shares on the open market. On January 25, 2000, the Company's Board approved a third stock repurchase plan for an additional 500,000 shares, under which the Company can repurchase shares upon completion of the first two plans. As of September 30, 2000, the Company has repurchased 740,500 shares, at a cost of approximately $14.8 million, leaving 759,500 shares available under the Company's stock repurchase plans. Accounting Pronouncements In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. In June 1999, the FASB issued SFAS No. 137, which delayed the effective date for implementing SFAS No. 133 until the beginning of 2001. In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133 with the objective of easing the implementation difficulties expected to arise. Management believes that SFAS No. 133 will not have a significant impact on the Company's consolidated financial position or results of operations. In December 1999, the staff of the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial Statements." SAB No. 101 summarizes the SEC staff's view in applying GAAP to the recognition of revenues. Management believes that SAB No. 101 will not have a significant impact on the Company's consolidated financial position or results of operations. In 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("the Codification"), which will replace the current Accounting Practices and Procedures Manual as the NAIC's primary guidance on statutory accounting effective January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas, e.g. deferred income taxes are recorded, and limitations will be imposed on goodwill and electronic data equipment. The Company has not estimated the potential effect of the Codification if adopted by the Florida Department of Insurance. 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 1999 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 16 Item 6. Exhibits and Reports on Form 8-K a) The following exhibits are included herewith: Exhibit 27 -- Financial Data Schedule. b) Reports on Form 8-K: On July 17, 2000, the Company filed a Form 8-K notifying the Securities and Exchange Commission that William R. Russell, the Registrant's President and Chief Executive Officer, and a director, tendered his resignation. The Registrant further reported that John R. Byers was elected interim President and Chief Executive Officer and a director of the Company. On September 21, 2000, the Company filed a Form 8-K notifying the Securities and Exchange Commission that John R. Byers had been elected as President and Chief Executive Officer of the Company on a permanent basis. Mr. Byers will also serve as a director of the Company. 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 ---------------------------- November 14, 2000 Kim D. Thorpe, Executive Vice President and and Chief Financial Officer (a duly authorized officer and the principal financial officer of the registrant) 17