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 June 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 August 7, 2000, there were 9,493,353 shares of the registrant's common stock outstanding. Table of Contents Page Part I - Financial Information ---- Item 1. Consolidated Financial Statements (unaudited) 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 Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 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 16 Signatures 16 FPIC INSURANCE GROUP, INC. Consolidated Balance Sheets (in thousands, except share data) As of June 30, 2000 and December 31, 1999

(unaudited) 2000 1999 Assets --------- --------- Cash and cash equivalents $ 8,889 $ 6,830 Bonds and U.S. Government securities, available for sale 371,151 327,076 Equity securities, available for sale 8,891 8,823 Other invested assets 7,345 5,455 Real estate investments 5,051 5,235 Total cash and investments 401,327 353,419 --------- --------- Premiums receivable, net 46,235 45,012 Accrued investment income 6,078 5,426 Reinsurance recoverable on paid losses 8,662 3,081 Due from reinsurers on unpaid losses and advance premiums 66,144 60,356 Property and equipment, net 3,584 3,774 Deferred policy acquisition costs 4,620 2,789 Deferred income taxes 23,988 21,244 Finance charge receivable 368 379 Prepaid expenses 1,666 1,126 Goodwill and intangible assets, net 62,084 73,922 Federal income tax receivable -- 4,128 Other assets 5,847 7,567 --------- --------- Total assets $ 630,603 $ 582,223 ========= ========= Liabilities and Shareholders' Equity Loss and loss adjustment expenses $ 274,924 $ 273,092 Unearned premiums 90,764 55,759 Paid in advance and unprocessed premiums 3,211 5,459 Revolving credit facility 67,219 62,719 Federal income taxes payable 2,196 -- Accrued expenses and other liabilities 17,491 18,815 --------- -------- Total liabilities 455,805 415,844 --------- -------- Commitments and contingencies Common stock, $.10 par value, 50,000,000 shares authorized; 9,488,353 and 9,621,298 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively 949 962 Additional paid-in capital 38,806 41,858 Unearned compensation (168) (231) Accumulated other comprehensive loss (6,929) (8,495) Retained earnings 142,140 132,285 --------- --------- Total shareholders' equity 174,798 166,379 --------- --------- Total liabilities and shareholders' equity $ 630,603 $ 582,223 ========= =========

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

(unaudited) ---------------------------------------------------------- Three months ended June 30 Six months ended June 30 2000 1999 2000 1999 -------- ------ ------- ------- Revenues Net premiums earned $ 33,468 26,550 $ 62,616 54,133 Net investment income 6,133 4,881 12,150 9,333 Net realized investment (losses) gains (90) 9 (110) 313 Claims administration and management fees 7,435 6,237 14,556 12,471 Commission income 409 831 1,065 1,177 Finance charges and other income 458 850 1,823 1,939 -------- ------ -------- ------ Total revenues 47,813 39,358 92,100 79,366 -------- ------ -------- ------ Expenses Net losses and loss adjustment expenses 26,531 14,726 50,693 33,375 Other underwriting expenses 4,541 6,492 8,597 10,494 Claims administration and management expenses 7,213 6,160 14,191 12,078 Interest expense 1,013 912 2,254 1,755 Other expenses 1,438 1,044 2,631 2,134 -------- ------ -------- ------ Total expenses 40,736 29,334 78,366 59,836 -------- ------ -------- ------ Income before income taxes 7,077 10,024 13,734 19,530 Income taxes 1,934 2,622 3,879 4,893 -------- ------ -------- ------ Net income $ 5,143 7,402 $ 9,855 14,637 ======== ====== ======== ====== Basic earnings per common share $ 0.54 0.75 $ 1.04 1.50 ======== ====== ======== ====== Diluted earnings per common share $ 0.54 0.71 $ 1.02 1.41 ======== ====== ======== ====== Basic weighted average common shares outstanding 9,452 9,814 9,508 9,773 ======== ====== ======== ====== Diluted weighted average common shares outstanding 9,533 10,454 9,628 10,413 ======== ====== ======== ======

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

(unaudited) ----------------------------------------------------- Three months ended June 30 Six months ended June 30 2000 1999 2000 1999 -------- ------ -------- ------- Net income $ 5,143 7,402 $ 9,855 14,637 -------- ------ -------- ------ Other comprehensive income Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 216 (7,643) 2,660 (9,488) Less reclassification adjustment for (losses) gains included in net income (90) 9 (110) 313 Income tax (expense) benefit related to unrealized gains and losses on securities (49) 2,672 (984) 3,211 -------- ------ -------- ------ Other comprehensive income (loss) 77 (4,962) 1,566 (5,964) -------- ------ -------- ------ Comprehensive income $ 5,220 2,440 $ 11,421 8,673 ======== ====== ======== ======

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

Accumulated Other Common Additional Unearned Comprehensive Retained Stock Paid-in 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 -- -- -- -- 9,855 9,855 Compensation earned on options -- -- 63 -- -- 63 Net unrealized gain on debt and equity securities -- -- -- 1,566 -- 1,566 Repurchase of shares, net (13) (3,052) -- -- -- (3,065) -------- -------- ------- ------- ------- ------- Balances at June 30, 2000 (unaudited) $ 949 38,806 (168) (6,929) 142,140 174,798 ======== ======== ======= ======= ======= =======

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

(unaudited) ------------------------ Six months ended June 30 2000 1999 -------- -------- Cash flows from operating activities: Net income $ 9,855 $ 14,637 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,457 2,702 Realized loss (gain) on investments 110 (313) Realized loss on sale of property and equipment -- 16 Noncash compensation 63 63 Net (gain) loss from equity investments (11) 87 Deferred income taxes (2,996) (347) Changes in assets and liabilities: Premiums receivable, net (1,223) (6,826) Accrued investment income, net (652) 177 Reinsurance recoverable (5,581) 1,192 Due from reinsurers on unpaid losses and advance premiums (5,788) 833 Deferred policy acquisition costs (1,831) 35 Prepaid expenses and finance charge receivable (530) (60) Other assets and accrued expenses and other liabilities (588) (4,571) Loss and loss adjustment expenses 1,832 (12,688) Unearned premiums 4,016 9,852 Paid in advance and unprocessed premiums (2,247) (2,836) Federal income tax receivable 6,324 (89) -------- -------- Net cash provided by operating activities 3,210 1,864 -------- -------- Cash flows from investing activities: Proceeds from sale or maturity of bonds and U.S. Government securities 17,739 44,256 Purchase of bonds and U.S. Government securities (16,040) (32,162) Purchase of goodwill and intangible assets (2,523) (49,045) Proceeds from sale of real estate investments 160 -- Purchase of real estate investments (104) (651) Purchase of other invested assets (1,783) (410) Purchase of property and equipment, net (220) (214) Proceeds from sale of subsidiary 185 -- Purchase of subsidiary's net other assets and stock -- (919) -------- -------- Net cash used in investing activities (2,586) (39,145) -------- -------- Cash flows from financing activities: Net borrowings under revolving credit facility 4,500 31,013 (Repurchase) issuance of common stock, net (3,065) 1,124 -------- -------- Net cash provided by financing activities 1,435 32,137 -------- -------- Net increase (decrease) in cash and cash equivalents 2,059 (5,144) Cash and cash equivalents at beginning of period 6,830 7,062 -------- -------- Cash and cash equivalents at end of period $ 8,889 $ 1,918 ======== ========

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

(unaudited) ------------------------- Six months ended June 30 2000 1999 -------- -------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 2,409 $ 1,755 ======== ========= Federal income taxes $ 1,450 $ 4,200 ======== ========= 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 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 consolidated financial statements. 8 FPIC INSURANCE GROUP, INC. Unaudited Notes to the Consolidated Financial Statements (all dollar amounts in thousands, except per-share data) 1. Organization and Basis of Presentation The accompanying unaudited, consolidated financial statements include the accounts of FPIC Insurance Group, Inc. and subsidiaries ("the Company"), and have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. These unaudited, consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes included in the audited, consolidated financial statements of the Company for the year ended December 31, 1999, which were filed on Form 10-K with the Securities and Exchange Commission on March 30, 2000. The Company is an insurance holding company. The Company's principal direct and indirect subsidiaries include: Florida Physicians Insurance Company, Inc. ("FPIC"), Anesthesiologists' Professional Assurance Company, Inc. ("APAC"), Administrators For The Professions, Inc. ("AFP"), The Tenere Group, Inc. ("Tenere") and its two subsidiaries: Intermed Insurance Company ("Intermed") and Interlex Insurance Company ("Interlex"), and McCreary Corporation ("MCC") and its subsidiary Employer's Mutual, Inc. ("EMI"). The Company, through FPIC, APAC, Intermed, and Interlex, operates in the property and casualty insurance industry and is a provider of medical and legal professional liability insurance, primarily in Florida and Missouri. The Company's wholly owned insurance subsidiaries are licensed to write insurance in various states and are subject to regulation by the departments of insurance in these states. Through McCreary and its subsidiary, EMI, the Company offers third party administration services specializing in the administration of self-insured plans for large employers. The Company, through AFP, provides reciprocal management and administrative services to Physicians' Reciprocal Insurers ("PRI), a medical professional liability reciprocal insurer for physicians in the state of New York. 2. Investments Proceeds from sales of investments available-for-sale were $17,739 and $44,256 during the six months ended June 30, 2000 and 1999, respectively. Gross realized gains and (losses) from investments available-for-sale were $70 and $(180), and $346 and $(33) for the six months ended June 30, 2000 and 1999, respectively. The amortized cost of investments available-for-sale was $391,323 and $349,730 as of June 30, 2000 and December 31, 1999, respectively. 3. Reinsurance Effective January 1, 2000, the Company's insurance subsidiaries entered into a 100% quota share reinsurance agreement with 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 $13,205 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 4. Business Acquisitions The acquisition agreements for MCC and EMI specified additional contingent payments to be made to the sellers from the acquisition date through 2001. The effect of such payments is to increase the original purchase price and the recorded goodwill. Payments of $227 and $250 were made for the six months ended June 30, 2000 and 1999, respectively. During the first quarter of 2000, the remaining payments under these agreements were fixed and the recorded amounts of goodwill were increased, accordingly. The remaining payments, which have been recorded as liabilities, and the year of payment are as follows: MCC EMI -------- ------ 2000 $ 1,668 2001 $ 538 5. Borrowing Arrangements 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 ranging 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 June 30, 2000, the Company had borrowed approximately $67 million against the credit facility for non-operating purposes. 6. Reconciliation of Basic and Diluted Earnings Per Share

Three Months Ended Six Months Ended ------------------- ------------------- 6/30/00 6/30/99 6/30/00 6/30/99 ------- ------- ------- -------- Net income and income from continuing operations $5,143 7,402 9,855 14,637 ------ ------ ------ ------ Basic weighted average shares outstanding 9,452 9,814 9,508 9,773 Common stock equivalents 81 640 120 640 ------ ------ ------ ------ Diluted weighted average shares outstanding 9,533 10,454 9,628 10,413 ------ ------ ------ ------ Basic earnings per common share $ .54 .75 1.04 1.50 ====== ====== ====== ====== Diluted earnings per common share $ .54 .71 1.02 1.41 ====== ====== ====== ======

7. 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. The Company evaluates a segment's performance based on net income or loss after eliminating intersegment revenues and expenses. All segments are managed separately as each business requires different technology and marketing strategies. Information by industry segment follows: Three Months Ended Six Months Ended ------------------- -------------------- 6/30/00 6/30/99 6/30/00 6/30/99 ------- ------- ------- ------- Revenues: Insurance $39,736 31,595 75,428 64,489 TPA 3,281 2,738 7,081 5,281 RM 4,796 5,025 9,591 9,596 ------- ------- ------- ------- Total Revenues $47,813 39,358 92,100 79,366 ======= ======= ======= ======= 10 Three Months Ended Six Months Ended ------------------- -------------------- 6/30/00 6/30/99 6/30/00 6/30/99 --------- --------- --------- --------- Net income: Insurance $ 3,154 6,289 8,472 12,694 TPA 1,273 (108) 947 (517) RM 716 1,221 436 2,460 --------- --------- --------- --------- Total Net Income $ 5,143 7,402 9,855 14,637 ========= ========= ========= ========= Identifiable assets: Insurance $ 556,233 509,049 TPA 13,204 10,282 RM 61,166 56,739 --------- --------- Total Assets $ 630,603 576,070 ========= ========= 8. 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. 9. Reclassification Certain amounts for 1999 have been reclassified to conform to the 2000 presentation. 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. All dollar amounts in this discussion and analysis have been presented in millions. Forward-Looking Statements This discussion contains historical information, as well as forward-looking statements (identified by words such as, but not limited to, "believe," "expect," "intend," "anticipate," "estimate," and other analogous expressions) that 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. General The Company's primary source of revenue is dividends from its subsidiaries. The primary sources of revenues for these dividends are premiums earned and investment income derived from the insurance operations of FPIC, 11 APAC, Intermed and Interlex, and management and administrative fees, and commission income from McCreary and AFP. The Company concentrates on liability insurance products for medical and legal professionals, with medical professional liability insurance for physicians and dentists as its primary products. For information concerning the Company's acquisitions during 1999, 1998 and 1997, see the Company's report on Form 10-K for the year ended December 31, 1999. Selected Balance Sheet Items - June 30, 2000 compared to December 31, 1999 Investments. Investments increased $44.1 million, or 13%, to $380.0 million at June 30, 2000, from $335.9 million at December 31, 1999. The increase in investments is primarily related to amounts received under a reinsurance agreement whereby the Company's insurance subsidiaries assumed the death, disability, and retirement ("DD&R") risks under Physicians' Reciprocal Insurers' ("PRI") claims made insurance policies. Goodwill and intangible assets, net. These assets decreased $11.8 million, or 16%, to $62.1 million at June 30, 2000, from $73.9 million at December 31, 1999. The decline in net goodwill and intangible assets is primarily related to recognition and reclassification from unearned premiums of a deferred credit on the assumed DD&R reinsurance agreement between the Company's insurance subsidiaries and PRI. Unearned Premiums. Unearned premiums increased $35.0 million, or 63%, to $90.8 million at June 30, 2000, from $55.8 million at December 31, 1999. The increase in unearned premiums is primarily related to the DD&R reinsurance agreement between the Company's insurance subsidiaries and PRI. Results of Operations - Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Premiums. Premiums. Direct premiums written and assumed decreased $2.3 million, or 6%, to $35.9 million for the three months ended June 30, 2000, from $38.2 million for the three months ended June 30, 1999. The decrease in direct written and assumed premiums is primarily related to a decline in direct written premiums at APAC and an overall decline in assumed premiums written by PRI and other insurers. Net premiums earned increased $6.9 million, or 26%, to $33.5 million for the three months ended June 30, 2000, from $26.6 million for the three months ended June 30, 1999. The increase in net premiums earned is primarily related to an increase in assumed premiums earned from PRI resulting from growth that occurred in the underlying assumed premiums written in the second half of 1999. Net Investment Income. Net investment income increased $1.2 million, or 24%, to $6.1 million for the three months ended June 30, 2000, from $4.9 million for the three months ended June 30, 1999. The increase in net investment income is primarily related to additional interest on investments received in connection with the DD&R reinsurance agreement. Claims Administration and Management Fees. Claims administration and management fees increased $1.2 million, or 19%, to $7.4 million for the three months ended June 30, 2000, from $6.2 million for the three months ended June 30, 1999. The growth in claims administration and management fees is attributable to an acquisition made by McCreary's subsidiary, EMI, during the third quarter of 1999. Net Losses and Loss Adjustment Expense. Net losses and LAE increased $11.8 million, or 80%, to $26.5 million for the three months ended June 30, 2000, from $14.7 million for the three months ended June 30, 1999. The loss ratios were 79% and 55% for the three months ended June 30, 2000 and 1999, respectively. The loss ratio is defined as the ratio of losses and loss adjustment expenses to net premiums earned. The increase in the Company's loss ratio is primarily due to a reduction in the amount of prior years' reserves released offset by an increase in the current year provision for its medical professional liability business. The liability for losses and LAE represents management's 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. 12 Given competitive market conditions in recent years, which have lessened the Company's ability to underwrite and price its business at as favorable terms as in years prior, management anticipates more conservative reserve releases relative to 1999. Furthermore, given the inherent uncertainties in the estimation of the liability for loss and LAE, there can be no assurance concerning future adjustments, positive or negative, for prior years' claims. Other Underwriting Expenses. Other underwriting expenses decreased $2.0 million, or 31%, to $4.5 million for the three months ended June 30, 2000, from $6.5 million for the three months ended June 30, 1999. The decrease is primarily attributable to a decline in assumed reinsurance costs and the accretion, or negative amortization expense, associated with the assumed DD&R reinsurance agreement with PRI offset to a small extent by an increase in consulting expenses. Claims Administration and Management Expenses. Claims administration and management expenses increased $1.0 million, or 16%, to $7.2 million for the three months ended June 30, 2000, from $6.2 million for the three months ended June 30, 1999. The growth in claims administration and management expenses is attributable to an acquisition made by McCreary's subsidiary, EMI, during the third quarter of 1999. Results of Operations - Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999 Premiums. Direct premiums written and assumed increased $48.6 million, or 64%, to $124.3 million for the six months ended June 30, 2000, from $75.7 million for the six months ended June 30, 1999. The increase in written and assumed premiums is primarily related to the assumed DD&R reinsurance agreement between the Company's insurance subsidiaries and PRI. Net premiums earned increased $8.5 million, or 16%, to $62.6 million for the six months ended June 30, 2000 from $54.1 million for the six months ended June 30, 1999. The increase in net premiums earned is mainly related to growth in assumed reinsurance and the acquisition of Tenere on March 17, 1999. Net Investment Income. Net investment income increased $2.9 million, or 31%, to $12.2 million for the six months ended June 30, 2000, from $9.3 million for the six months ended June 30, 1999. The increase in net investment income is primarily related to additional interest on investments received in connection with the assumed DD&R reinsurance agreement and a full six months of interest earned at Tenere compared to less than four months of interest earned during 1999. Claims Administration and Management Fees. Claims administration and management fees increased $2.1 million, or 17%, to $14.6 million for the six months ended June 30, 2000, from $12.5 million for the six months ended June 30, 1999. The growth in claims administration and management fees is attributable to an acquisition made by McCreary's subsidiary, EMI, during the third quarter of 1999. Net Losses and Loss Adjustment Expense. Net losses and LAE increased $17.3 million, or 52%, to $50.7 million for the six months ended June 30, 2000, from $33.4 million for the six months ended June 30, 1999. The loss ratios were 81% and 62% for the six months ended June 30, 2000 and 1999, respectively. The loss ratio is defined as the ratio of losses and loss adjustment expenses to net premiums earned. The increase in the Company's loss ratio is primarily due to a reduction in the amount of prior years' reserves released offset by an increase in the current year provision for its medical professional liability business. The liability for losses and LAE represents management's 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. Given competitive market conditions in recent years, which have lessened the Company's ability to underwrite and price its business at as favorable terms as in years prior, management anticipates more conservative reserve releases relative to 1999. Furthermore, given the inherent uncertainties in the estimation of the liability for loss and LAE, there can be no assurance concerning future adjustments, positive or negative, for prior years' claims. Other Underwriting Expenses. Other underwriting expenses decreased $1.9 million, or 18%, to $8.6 million for the six months ended June 30, 2000, from $10.5 million for the six months ended June 30, 1999. The decrease is primarily attributable to a decline in assumed reinsurance costs and the accretion, or negative amortization expense, 13 associated with the assumed DD&R reinsurance agreement with PRI offset to a small extent by an increase in consulting expenses. Claims Administration and Management Expenses. Claims administration and management expenses increased $2.1 million, or 17%, to $14.2 million for the six months ended June 30, 2000, from $12.1 million for the six months ended June 30, 1999. The growth in claims administration and management expenses is attributable to an acquisition made by McCreary's subsidiary, EMI, during the third quarter of 1999. 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 used to pay these items has been provided by operating activities. Operating cash flows for the six months ended June 30, 2000 provided cash of approximately $3.2 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 could cause increases in the dollar amount of losses and LAE paid and may, therefore, adversely affect future reserve development and cash flow needs. These factors include, among others, loss trends, and changes in the frequency and severity of claims in the Company's book of business. In addition, factors such as inflation, changes in medical procedures, 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 June 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. 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 June 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 SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998, and 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. As issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," was issued in June 1999 and defers the effective date of SFAS No. 133. SFAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 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 generally accepted accounting principles 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. 14 Guaranty Fund Assessments The Company is subject to assessment by the Florida Insurance Guaranty Association, Inc. and the Missouri Property and Casualty Insurance Guaranty Association, as well as similar associations in other states where it is licensed, for the provision of funds necessary for the settlement of covered claims under certain policies of insolvent insurers. In addition to the standard assessments, the Florida and Missouri Legislatures may levy special assessments to settle claims caused by certain catastrophic losses. The Company would be assessed on a basis of premium written. No provision for special assessments was made in the 2000 financial statements. However, damages caused by future catastrophes could subject the Company to additional assessments. Item 3. Quantitative and Qualitative Disclosures About Market Risk: Market risk is the risk of loss arising from adverse changes in market conditions, such as changes in interest rates, spreads among various asset classes, foreign currency exchange rates, and other relevant market rate or price changes. Market risk is directly influenced by the volatility and liquidity in the markets in which the related underlying assets are traded. The following is a discussion of the Company's primary market risk exposures and how those exposures are currently managed as of June 30, 2000. The Company's market risk sensitive instruments are entered into for purposes other than trading. The fair value of the Company's debt and equity investment portfolio as of June 30, 2000 was approximately $380 million. Approximately 98% of the portfolio was invested in fixed maturity securities. The primary risks to the investment portfolio are interest rate risk and credit risk associated with investments in fixed maturity securities. The Company's exposure to equity risk is not significant. The Company obtains reinsurance in London, England and in other European markets. The Company does not believe it has any foreign currency exposure since all reinsurance obtained is denominated in U.S. dollars. The Company does not conduct any operations outside of the United States nor does the Company own any non-U.S. dollar denominated securities. Generally, the Company does not invest in derivatives and does not currently use hedging strategies in its investment portfolio. However, the Company has invested in one interest rate swap to fix the interest rate in connection with its revolving credit facility. As of June 30, 2000, the Company's investments in collateral mortgage obligations and asset-backed securities represented less than 7% of the investment portfolio. The Company's investment portfolio is predominately fixed-income with approximately 43% allocated to the municipal sector. The balance is diversified through investments in treasuries, agencies, corporates, and mortgage-backed securities. The three market risks that can most directly affect the investment portfolio are changes in U.S. interest rates, credit risks and legislative changes. Adverse impacts to the Company resulting from changes in interest rates are primarily controlled by limiting the duration, or average maturity, of the overall portfolio. The Company manages the duration of its portfolio relative to the duration of the anticipated liabilities of the Company. Credit risks are controlled by investing in securities with above average credit ratings. Approximately 65% of the portfolio is AAA, 13% is AA, 6% is A and 16% is BBB rated. From time to time discussion arises in the United States Congress relative to changing or modifying the tax-exempt status of municipal securities. While the Company is diligent in its efforts to stay current on legislative acts that could adversely impact the tax exempt status of municipal securities, and while it is uncertain as to whether these changes would ultimately affect valuation of municipal securities currently held in the portfolio, at present there are no hedging or other strategies being used to minimize this risk. If interest rates were to rise 100 basis points, the fair value of the Company's fixed maturity securities would decrease approximately $19.6 million. There have been no significant changes to the Company's exposure to financial market risks during the year nor does the Company anticipate any significant changes in future reporting periods. 15 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 The Company's Annual Meeting of Shareholders was held on June 7, 2000. At the meeting, the following items were passed by the vote shown. Abstentions and For Against Broker non-votes --- ------- ---------------- I. Election of Directors Richard J. Bagby, M.D. 6,338,506 -- 430,203 Robert O. Baratta, M.D. 6,392,950 -- 375,759 Louis C. Murray, M.D. 6,323,752 -- 444,957 William R. Russell. 6,382,181 -- 386,528 II. Approve Amendments to Director Stock Option Plan 5,534,742 1,145,170 88,797 III. Approve Amendments to Omnibus Incentive Plan 5,133,108 1,518,068 117,533 Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - None a) The following exhibits are included herewith: Exhibit 10(d)--Director Stock Option Plan, an amended, incorporated by reference to the Company's definitive proxy statement filed on May 5, 2000. Exhibit 10(e)--Omnibus Incentive Plan, as amended, incorporated by reference to the Company's definitive proxy statement filed on May 5, 2000. Exhibit 27 --Financial Data Schedule. b) Reports on Form 8-K: On April 28, 2000, the Company filed a Form 8-K notifying the Securities and Exchange Commission of a change in the Registrant's Certifying Accountant. 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. 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 August 14, 2000 --------------------------------------- Kim D. Thorpe, Executive Vice President and Chief Financial Officer (a duly authorized officer and the principal financial officer of the registrant) 16