|United StatesSECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549


FORM 10-K


(Mark One)
|-----------------------------------------------------------------------------------------------

|[x] | Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
               1934 For the fiscal year ended December 31, 2002 or
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|[_] | Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the
transition period from ____________to ___________
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|Commission file number
1-11983


FPIC Insurance Group,
Inc.(Exact Name of
Registrant as Specified in its Charter)
|-----------------------------------------------------------------------------------------------------------------

|Florida
(State or Other Jurisdiction of
Incorporation or Organization) | 59-3359111
IRS Employer
Identification No.)
|---------------------------------------------------------------------- | -------------------------------------------

|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)


www.fpic.com (Registrants
Internet Address)


Securities registered
pursuant to Section 12(b) of the Act:    NoneSecurities registered pursuant to Section
12(g) of the Act:    Common Stock, $.10 par value


Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes |X|    No |_|




Indicate by check mark if disclosure
of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|


Indicate by check mark whether the
Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes |X|    No |_|


The aggregate market value of the
Registrants voting and non-voting common equity held by non-affiliates computed by
reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of June 30, 2002 was $139,120,725.


As of March 20, 2003, there were
9,415,548 shares of the Registrants Common Stock, $.10 Par Value, outstanding.


DOCUMENTS INCORPORATED
BY REFERENCE
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Document
Proxy Statement for Registrants
Annual Shareholders Meeting to
be held on June 4, 2003 | Incorporated in

Part III
|----------------------------------------------------------------------------------------------------------- | -----------------------------------

|
|

|FPIC Insurance Group,
Inc. 2002 Annual Report on Form
10-K Index
|----------------------------------------------------------------

|               |  | Page                                                                 
|-------------- |  | ---------------------------------------------------------------------
|Part I        
|              
|Item 1.        |  | Business                                                             
|Item 2.        |  | Properties                                                           
|Item 3.        |  | Legal Proceedings                                                    
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                  
|              
|Part II       
|              
|Item 5.        |  | Market for Registrants Common Equity and Related Shareholder Matters
|Item 6.        |  | Selected Financial Data                                              
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and      
|               |  | Results of Operations                                                
|Item 7A.       |  | Quantitative and Qualitative Disclosures about Market Risk           
|Item 8.        |  | Financial Statements and Supplementary Data                          
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and      
|               |  | Financial Disclosure                                                 
|              
|Part III      
|              
|Item 10.       |  | Directors and Executive Officers of the Registrant                   
|Item 11.       |  | Executive Compensation                                               
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management       
|Item 13.       |  | Certain Relationships and Related Transactions                       
|Item 14.       |  | Controls and Procedures                                              
|              
|Part IV       
|              
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K      
|              
|Signatures     |  |                                                                      
|              
|Certifications |  |                                                                      

|
|

|Part I.


Item 1.   Business


Companies and Business
Segments


FPIC Insurance Group, Inc.
(FPIC) was formed in 1996 in a reorganization of First Professionals Insurance
Company, Inc. (First Professionals, formerly named Florida Physicians
Insurance Company, Inc.) and McCreary Corporation (McCreary). Under the
reorganization plan, First Professionals shareholders became the shareholders of
FPIC. They received five shares of FPIC common stock for each share of their First
Professionals common stock. McCreary also became a subsidiary of FPIC. Effective
January 1, 2002, McCreary was merged into its subsidiary, Employers Mutual, Inc.
(EMI), with EMI continuing as the surviving entity. FPIC and its subsidiaries
operate in three business segments: Insurance, Reciprocal Management and Third Party
Administration (TPA). The following table provides additional information
about FPIC, its business segments and subsidiaries.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Segment |  | Nature of Business, Products and Services and Companies
|------- |  | -------------------------------------------------------

|
|

| |  | Specializes  in  professional  liability  insurance  products and related
                                          risk  management  services  for  physicians,  dentists,  and  other  healthcare
                                          providers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries(1):
| | - | ---------------------

|Insurance |  |  | First Professionals
|--------- |  | - | -------------------

| |  |  |  | The Tenere Group, Inc. (Tenere)
| |  |  | - | ---------------------------------

| |  |  |  |  | Intermed Insurance Company (Intermed)
| |  |  |  | - | ---------------------------------------

| |  |  |  |  |  | Interlex Insurance Company (Interlex)
| |  |  |  |  | - | ---------------------------------------

| |  |  |  |  |  | Insurance Services, Inc. (Insurance Services)
| |  |  |  |  | - | -----------------------------------------------

| |  |  |  |  |  | Trout Insurance Services, Inc.
| |  |  |  |  | - | ------------------------------

| |  |  | Anesthesiologists Professional Assurance Company (APAC)
| |  | - | ---------------------------------------------------------

| |  |  | FPIC Insurance Agency, Inc. (FPIC Agency)
| |  | - | -------------------------------------------

| | (1) | FPIC, the holding company, is also grouped within the insurance segment.
| | --- | ------------------------------------------------------------------------

|
|

|Reciprocal Management |  | Provides   management,   administrative   and   brokerage   services   to
                                          Physicians  Reciprocal  Insurers (PRI), a professional  liability  insurance
                                          reciprocal  that  conducts  business  in the state of New  York.  (PRI is not a
                   subsidiary  of  FPIC.)   Reciprocal   Management   also  provides   reinsurance
                                          brokerage and administrative services to FPIC.
|--------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries:
| | - | ------------------

| |  |  | Administrators For The Professions, Inc. (AFP)
| |  | - | ------------------------------------------------

| |  |  |  | FPIC Intermediaries, Inc. (FPIC Intermediaries)
| |  |  | - | -------------------------------------------------

| |  |  |  | Group Data Corporation (Group Data)
| |  |  | - | -------------------------------------

| |  |  | Professional Medical Administrators, LLC (PMA) (70% owned by FPIC as
                                            of December 31, 2002; Effective January 1, 2003, FPIC has an 80% ownership
                                            interest in PMA.)
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|TPA |  | Provides administrative and claims management services to self-insured
                                          employer groups for group accident and health insurance, workers compensation
                                          insurance and general liability and property insurance plans.
|--- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries:
| | - | ------------------

| |  |  | EMI
| |  | - | ---

| |  |  |  | Professional Strategy Options, Inc.
| |  |  | - | -----------------------------------

| |  |  |  | FPIC Services, Inc.
| |  |  | - | -------------------

|
|

|1
|-

|The main sources of revenue for FPIC
are dividends and management fees from its subsidiaries. The main sources of revenue for
the subsidiaries are premiums earned and investment income (insurance segment) and claims
administration and management fees and commission income (reciprocal management and TPA
segments).


Growth Through
Acquisitions


Since 1995, FPIC has grown and
expanded its business interests and operations significantly. The following table presents
a chronological summary of businesses.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                
|----------------
|Acquisition Date
|                
|July 1, 1995    
|                
|January 17, 1997
|                
|July 1, 1998    
|                
|January 1, 1999 
|                
|March 17, 1999  
|                

|FPIC has also made a small number of
other acquisitions, which have since been disposed of or converted to an inactive status
and are not shown in the table above. FPIC has not made any acquisitions since 1999,
instead devoting its resources and efforts to managing and growing its current businesses.
2
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Insurance Segment


Principal Business.
First Professionals, APAC, and Intermed insure doctors, dentists and other healthcare
providers for professional liability claims and also offer coverage for their professional
corporations. On October 3, 2002, Interlex entered into an agreement with an unrelated
insurance organization to sell the renewal rights to all of its LPL policies. Prior to
December 1, 2002, Interlex provided lawyers with LPL insurance. The following table
summarizes (in thousands) direct and assumed premiums written subdivided by state for the
years ended December 31, 2002, 2001 and 2000:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             | Direct and Assumed Premiums Written by State
|------------ | --------------------------------------------
|
|Florida      |                                             
|Missouri     |                                             
|Texas        |                                             
|Tennessee    |                                             
|New York     |                                             
|Pennsylvania |                                             
|Georgia      |                                             
|Ohio         |                                             
|Kentucky     |                                             
|Arkansas     |                                             
|Kansas       |                                             
|Alabama      |                                             
|All other    |                                             
|             |                                             
|All states   |                                             
|             |                                             

|As of December 31, 2002, FPICs
insurance subsidiaries were also licensed in Arizona, Delaware, Illinois, Indiana, Maine,
Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, North Carolina, Oregon, South
Carolina, Utah, Virginia, Washington and West Virginia.


In 2002, 84.6% of our direct and
assumed insurance business was written in Florida, Missouri, Texas, Tennessee, New York
and Pennsylvania. Florida and Missouri represent the core states for direct insurance
business. New York represents assumed reinsurance from PRI. Insurance business in Texas,
Tennessee and Pennsylvania is conducted mainly under the fronting programs of First
Professionals and APAC. Under these fronting programs, the direct insurance is written on
First Professionals or APAC policy forms and reinsured to other insurance or reinsurance
carriers in exchange for fee income. These other insurance or reinsurance carriers assume
all or most of the insurance or underwriting risks.


Net premiums written are net of
reinsurance ceded, including premiums under fronting programs, and represent the direct
and assumed premiums we retain. The following table summarizes (in thousands) net premiums
written by state and presents a more representative picture of the insurance business and
underwriting risks we retain for our own account.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           | Net Premiums Written by State
|---------- | -----------------------------
|
|Florida    |                              
|Missouri   |                              
|New York   |                              
|Georgia    |                              
|Texas      |                              
|Kansas     |                              
|Ohio       |                              
|Arkansas   |                              
|All other  |                              
|           |                              
|All states |                              
|           |                              

|3
|-

|Our insurance subsidiaries offer a
variety of insurance products. The following table summarizes the premiums written by
product for the years ended December 31, 2002, 2001 and 2000.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Products | Description | Direct Premiums Written (DPW),
                                                                                     Assumed Premiums Written (APW), Ceded
                                                                                      Premiums Written (CPW), Net Premiums
                                                                                         Written(NPW)
                                                                                                  ($ Thousands)
|-------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | 2002 |  | 2001 |  | 2000 | 
| |  |  |  |  |  | ---- |  | ---- |  | ---- | 

|
|

|Direct MPL |  |  | Our principal product. | DPW |  | $  291,543 |  | 201,838 |  | 111,697 | 
|---------- |  | - | ---------------------- | --- |  | ---------- |  | ------- |  | ------- | 

|Insurance |  |  | Insurance
      policies covering doctors,
      dentists and other healthcare providers against professional liability claims
      and defense costs. Coverage for their professional corporations is also
      offered. | APW
      CPW
      NPW |  | $    17,093
      $ (171,169
      $  137,467 | ) | 18,195(83,170
        136,863 | ) | 55,733(32,668
        134,762 | )
|--------- |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- |  | --------------------------------------------- | - | ----------------------------- | - | ----------------------------- | -

| |  |  | Offered to individual practitioners or groups of individual practitioners. |  |  |  |  |  |  |  | 
| |  | - | -------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  | Policy limits are predominantly $250,000, $500,000,
                     and $1.0 million per claim and $500,000, $1.0 million and
                     $3.0 million in aggregate; higher limits are available. |  |  |  |  |  |  |  | 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  | Includes premiums written under fronting programs of
                     First Professionals and APAC.  For more information on our
                     fronting programs, see the discussion of Reinsurance
                     beginning on page 7. |  |  |  |  |  |  |  | 
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|Assumed MPLReinsurance |  |  | First Professionals assumes MPL reinsurance from PRI
          under three programs: |  |  |  |  |  |  |  | 
|---------------------- |  | - | ------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | An excess of loss treaty with limits of $1.0 million
                         in excess (XS) of $1.3 million per loss and $3.0
                         million in the aggregate covering certain PRI policies
                         issued to doctors and other health professionals. |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 

| |  |  |  | Under a 100% quota share agreement with PRI, First
                         Professionals assumes all of PRIs obligations under
                         covered extended reporting endorsements for death,
                         disability and retirement (DD&R) benefits of PRIs
                         claims-made MPL policyholders. |  |  |  |  |  |  | 
| |  |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 

| |  |  |  | A third program in which First Professionals assumed
                         reinsurance from PRI in the $250,000 XS $500,000 layer of
                         its main program was not renewed in 2001.  All
                         reinsurance assumed under this program has been commuted. |  |  |  |  |  |  | 
| |  |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 

|Ceded MPLReinsurance |  |  | See the discussion of Reinsurance beginning on page 7. |  |  |  |  |  |  |  | 
|-------------------- |  | - | ------------------------------------------------------ |  |  |  |  |  |  |  | 

|
|

|4
|-

|
|

|Products | Description | Direct Premiums Written (DPW),
                                                                                     Assumed Premiums Written (APW), Ceded
                                                                                      Premiums Written (CPW), Net Premiums
                                                                                         Written(NPW)
                                                                                                  ($ Thousands)
|-------- | ----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | 2002 |  | 2001 |  | 2000 | 
| |  |  |  |  |  | ---- |  | ---- |  | ---- | 

|
|

|LPL Insurance |  |  | Insurance
      policies covering lawyers, notary publics, arbitrators and mediators against
      professional liability | DPW
      APW |  | $        2,775
      $              |   | 2,659
       |   | 2,372
       |  
|------------- |  | - | ------------------------------------------------------------------------------------------------------------------------- | ------------- |  | ------------------------------------ | - | ------------- | - | ------------- | -
|              |  |   | claims
      and defense costs.                                                                                           | CPW           |  | $          (643                      | ) | (679          | ) | (609          | )
|              |  |   |                                                                                                                           |               |  |                                     

| |  |  | Policy
      limits up to $1.0 million per
      incident and $3.0 million in aggregate; with a single policy limit shared
      by all members of an insured firm. | NPW |  | $      2,132 |  | 1,980 |  | 1,763 | 
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- |  | ------------ |  | ----- |  | ----- | 
|

| |  |  | Effective October 3, 2002, Interlex sold the
                        renewal rights to all of its LPL policies to an unrelated
                        insurance organization. |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

|
|

|Group
      Accident and Health Insurance |  |  | Small
      group insurance policies offered
      to members of the Florida Medical Association and Florida Dental Association. | DPW
      APW
      CPW |  | $          (43
      $           96
      $             4 | ) | 3,306
      4,568
      (457 | ) | 15,879
      8,533
      (1,295 | )
|----------------------------------------- |  | - | -------------------------------------------------------------------------------------------------------------------------------- | ----------------------- |  | --------------------------------------------------------- | - | ---------------------------- | - | ------------------------------- | -
|                                          |  |   |                                                                                                                                  |                         |  |                                                          

| |  |  | Employer
      sponsored health plans covering medical costs and expenses of employees. | NPW |  | $     
          57 |  | 7,417 |  | 23,117 | 
| |  | - | --------------------------------------------------------------------------------------- | --- |  | ------------------- |  | ----- |  | ------ | 
|

| |  |  | These programs were terminated in 2001. |  |  |  |  |  |  |  | 
| |  | - | --------------------------------------- |  |  |  |  |  |  |  | 

|
|

|Workers                     |  |  | Substantially
      all fronting programs in                                | DPW |  | $     32,669   |   | 14,352  |   | 1,018 |  
|---------------------------- |  | - | --------------------------------------------------------------------------- | --- |  | -------------- | - | ------- | - | ----- | -
|Compensation
      Insurance |  |   | 2002
      and 2001. For more information on our fronting programs, see the | APW |  | $             |   |        |   |      |  
|                             |  |   | discussion
      of Reinsurance beginning on page 7.                        | CPW |  | $    (32,669   | ) | (13,679 | ) | (228  | )
|                             |  |   |                                                                             |     |  |               

| |  |  | Insures
      the liability of an employer for work-related injuries to employees, in
      accordance with the requirements of state law. | NPW |  | $     
           |  | 673 |  | 790 | 
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------ | --- |  | ------------------ |  | --- |  | --- | 
|

|
|

|Other - Principally |  |  | Offered in conjunction with MPLpolicies. | DPWAPW |  | $       
      594
      $           |  | 485 |  | 2,048 | 
|------------------- |  | - | ---------------------------------------- | ------ |  | ------------------------------------- |  | ---- |  | ------ | 

|Investigation
      Defense |  |  | Covers
      the costs of defending investigations involving medical                                       | CPW |  | $
               (2 | ) | (334 | ) | (549  | )
|--------------------------- |  | - | ---------------------------------------------------------------------------------------------------------- | --- |  | ------------------- | - | ---- | - | ----- | -
|Coverage                    |  |   | licensing,
      the Occupational Safety and                                                               |     |  |                    
|                            |  |   | Health Administration, the Equal Employment
      Opportunity Commission, and other governmental agencies. | NPW |  | $       
      592  |   | 151  |   | 1,499 |  
|                            |  |   |                                                                                                            |     |  |                    

| |  |  | Also covers defense costs for allegations of
                        Medicare and Medicaid fraud and abuse. |  |  |  |  |  |  |  | 
| |  | - | ----------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|Total
      Premiums |  |  |  | DPW
      APW
      CPW |  | $  327,538
      $    17,189
      $ (204,479 | ) | 222,640
      22,763
      (98,319 | ) | 133,014
      64,266
      (35,349 | )
|-------------------- |  |  |  | ----------------------- |  | --------------------------------------------- | - | ---------------------------------- | - | ---------------------------------- | -
|                     | 

| |  |  |  | NPW |  | $   140,248 |  | 147,084 |  | 161,931 | 
| |  |  |  | --- |  | ----------- |  | ------- |  | ------- | 
| | 

|
|

|5
|-

|Claims-Made Policy Forms. A
substantial majority of our MPL and LPL insurance policies are issued on a claims-made
basis. Under the claims-made policy form, only claims reported to us prior to the
expiration of the policy are covered. Claims made after the expiration of the policy are
not covered unless the underlying incident or act was reported before the
expiration of the policy. This is unlike most other property and casualty insurance policy
forms, which cover accidents or perils occurring during the policy period regardless of
whether they are reported before or after the end of the policy period.


We also offer prior acts coverage,
which covers reported claims that occur because of incidents or acts that happened before
the initial claims-made policy period. Prior acts coverage is offered to new claims-made
policyholders and is automatic when an existing claims-made policyholder renews his or her
policy. In the case of a renewing policyholder, prior acts coverage is cumulative with
each successive renewal.


We also offer tail coverage, which
covers claims reported after the expiration of our MPL and LPL policies regarding
incidents occurring within the policy period. The prices of successive renewals of
claims-made policies and tail coverage become higher as the length of time an insured has
been covered under the claims-made policy grows. Renewals are also subject to
re-underwriting and re-pricing except in the event of the death, disability or retirement
of the insured. The claims-made policy includes free tail coverage to protect the
insureds estate in the event of death, disability or retirement. To qualify for the
free retirement coverage, a claims-made policyholder must have been insured for at least
five consecutive years.


Insurance Cycles. Large
numbers of insurers and relative ease of entry and exit have historically had a
significant cyclical effect on property and casualty insurance markets. Soft market
conditions correspond with the down portion of the industry cycle. In the down cycle,
capital and capacity are relatively more abundant creating more competition and depressed
prices. At some point in the cycle, competition and depressed prices give way to rising
loss trends, the depletion of capital with an exit of capacity, and rising prices. This
hardening of the market is the beginning of an up-turn in the insurance cycle.


The cyclical nature of the insurance
business presents both risks and opportunities to property and casualty insurers. It is
more difficult for an insurance company to raise its prices to keep pace with loss costs
in a down cycle because competition is usually more intense. A prolonged down cycle
creates conditions that can potentially weaken a company, especially a smaller one. An up
cycle creates conditions that can improve a companys chances of maintaining or
growing profitable business. The risks and opportunities presented by the up and down
insurance cycles manifest themselves by magnifying or reducing other risks, including
competition, pricing and underwriting risks. The timing of strategic decisions within
these cycles can affect profitability and capital adequacy. The unpredictability of
changes in the cycle adds to these risks. We attempt to manage insurance cycle risks by
monitoring the cycles and taking steps to mitigate the extreme effects they can cause.
Conservative pricing and underwriting and avoiding rapid expansion are two strategies that
we believe have helped us mitigate the extreme effects of the changing cycles. For
example, we do not enter and exit markets aggressively. Instead, we focus mainly on our
core markets where we believe we can compete effectively based upon our name, reputation
and service rather than relying on having the lowest prices.


The MPL insurance markets across the
country began to harden in 2001 following a five to six year period of soft market
conditions. Consequently, we experienced unprecedented premium growth from new
policyholders, higher renewals and higher prices. Growth at our insurance companies was so
significant that we ceased accepting most applications for new policyholders in June 2002.
We have begun accepting applications from new policyholders once again in 2003, although
we intend to manage the number of our 2003 policyholders to approximate year-end 2002
levels.
6
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Reinsurance.              FPICs
insurance subsidiaries reinsure portions of their business. The           following table
summarizes our reinsurance programs for the years ended December           31, 2002, 2001
and 2000.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|ReinsurancePrograms | Description | Ceded Premiums Written(CPW),
                                                                                                  ($ Thousands)
|------------------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | 2002 |  | 2001 |  | 2000 | 
| |  |  |  |  |  | ---- |  | ---- |  | ---- | 

|
|

|Excess of Loss |  |  | Used primarily to limit the amounts atrisk for
                      individual and aggregate losses. | CPW |  | $  (47,540 | ) | (40,313 | ) | (16,475 | )
|-------------- |  | - | ----------------------------------------------------------------------------------------------------- | --- |  | ---------- | - | ------- | - | ------- | -

| |  |  | Business is ceded on an excess of loss basis and is
                      intended to protect us from larger losses and to reduce the
                      volatility of underwriting results. |  |  |  |  |  |  |  | 
| |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  | The terms of our excess of loss reinsurance agreements
                      are described below: |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | Covers individual MPL losses incurred in excess of our
                         retention level. Specified portions of loss adjustment
                         expenses are also covered. |  |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | For 2002, we reinsured our MPL losses incurred in
                         excess of $500,000 (our retention on First Professionals
                         and APACs anesthesiology programs was $375,000 per loss
                         because we already cede 25% of our retention of this
                         business to APAL, of which we own 9.9%). |  |  |  |  |  |  |  | 
| |  |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | For 2001 and 2000, we reinsured losses incurred in
                         excess of $250,000 (our retention on First Professionals
                         and APACs anesthesiology programs was $187,500 per loss
                         because of our 25% cession to APAL). |  |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | The 2001 and 2000 excess of loss programs included
                         annual aggregate deductibles (10.73% of subject written
                         premium or approximately $12.9 million in 2001; $9.0
                         million in 2000; all companies combined) for which we
                         received corresponding reductions in our reinsurance
                         costs. |  |  |  |  |  |  |  | 
| |  |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | Business is ceded to a group of large foreign and
                         domestic reinsurers and several Lloyds of London
                         syndicates. |  |  |  |  |  |  |  | 
| |  |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | This program is renewed annually as of January 1.  The
                         individual reinsurers that participate, their respective
                         levels of participation and other terms may change from
                         year to year. |  |  |  |  |  |  |  | 
| |  |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  |  | The 2002 excess of loss reinsurance program also
                         contains aggregate limits of up to $3.0 million per
                         policyholder for situations where a policyholder has more
                         than one loss. |  |  |  |  |  |  |  | 
| |  |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|7
|-

|
|

|ReinsurancePrograms | Description | Ceded Premiums Written(CPW),
                                                                                                  ($ Thousands)
|------------------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | 2002 |  | 2001 |  | 2000 | 
| |  |  |  |  |  | ---- |  | ---- |  | ---- | 

|
|

|Excess of Loss (Continued) |  |  | Extra contractual obligations (ECO)/Excess policy
          limit (XPL) losses can occur in certain situations and
                      represent individual losses in excess of the underlying
                      policy limit. |  |  |  |  |  |  |  | 
|-------------------------- |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  | The terms of the ECO/XPL supplement to our excess of
                      loss program are described below: |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | This reinsurance was first put into effect as of April
                         1, 2000 and is renewable annually. |  |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | The treaty covers ECO/XPL losses associated with
                         claims for which the awards are made during the coverage
                         period, regardless of when the actual claim or incident
                         occurred. |  |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | With certain exceptions, this reinsurance covers 90%
                         of an ECO/XPL individual loss in excess of $1.5 million up
                         to a maximum of $10.0 million. |  |  |  |  |  |  |  | 
| |  |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  |  | If a covered loss occurs, the contract allows for one
                         reinstatement of coverage during the policy period and
                         calls for the payment of a reinstatement premium equal to
                         the original premium for a second loss. |  |  |  |  |  |  |  | 
| |  |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|Finite Quota Share (Finite) Reinsurance |  |  | Effective July 1, 2002, First Professionals entered
      into a Finite reinsurance agreement with two insurance
         subsidiaries of Hannover Re. | CPW |  | $  (85,531 | ) |  |  |  | 
|----------------------------------------- |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------ | --- |  | ---------- | - | - |  | - | 

| |  |  | The agreement, which calls for First Professionals to
                      cede quota share portions of its 2002 and 2003 written
                      premiums, contains adjustable features, including a loss
                      corridor, sliding scale ceding commissions and a cap on the
                      amount of losses that may be ceded to the reinsurer. |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  | The effect of these features is to limit the
                      reinsurers aggregate exposure to loss and thereby reduce the
                      ultimate cost to First Professionals as the ceding company.
                      These features also have the effect of reducing the amount of
                      protection relative to the quota share amount of premiums
                      ceded by First Professionals. |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  | While First Professionals does not receive pro-rata
                      protection relative to the amount of premiums ceded, the
                      amount of such protection is significant, as determined in
                      accordance with guidance under both statutory accounting
                      practices and generally accepted accounting principles
                      (GAAP). |  |  |  |  |  |  |  | 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

| |  |  | In addition to ceding a significant portion of its
                      risks to Hannover Re, the agreement also allows First
                      Professionals to reduce its financial leverage and to realize
                      immediate reimbursement for related up-front acquisition
                      costs, thus adding to its financial capacity. |  |  |  |  |  |  |  | 
| |  | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|8
|-

|
|

|ReinsurancePrograms | Description | Ceded Premiums Written(CPW),
                                                                                                  ($ Thousands)
|------------------- | ----------- | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  |  |  |  |  | 2002 |  | 2001 |  | 2000 | 
| |  |  |  |  |  | ---- |  | ---- |  | ---- | 

|
|

|Finite Reinsurance (Continued) |  |  | First Professionals has the option to commute the
          agreement should the business perform such that the
           underlying protection proves to be unnecessary, in which case
                      the reinsurance would cease, the underlying reinsurance
                      assets and liabilities would unwind, and any net funds under
                      the agreement, less a 4.2% risk charge to the reinsurers,
                      would be retained by First Professionals.    At December 31,
                      2002, this charge would have been $3.6 million. |  |  |  |  |  |  |  | 
|------------------------------ |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|Fronting |  |  | Under various fronting programs, we write direct
                      business and cede most of or the entire premium to other
                      insurance or reinsurance carriers. | CPW |  | $  (71,408 | ) | (58,006 | ) | (18,874 | )
|-------- |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --- |  | ---------- | - | ------- | - | ------- | -

| |  |  | We retain little or no underwriting risk under these
                      programs. |  |  |  |  |  |  |  | 
| |  | - | ------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 

| |  |  | We receive ceding commissions and/or fronting fees as
                      compensation under these programs. |  |  |  |  |  |  |  | 
| |  | - | -------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  |  | 

|
|

|Total Ceded Premiums |  | See Exhibit 10(tt) for additional information on FPICs
2003 reinsurance program. | CPW |  | $ (204,479 | ) | (98,319 | ) | (35,349 | )
|-------------------- |  | --------------------------------------------------------------------------------- | --- |  | ---------- | - | ------- | - | ------- | -

|
|

|Although reinsurance does not legally
discharge our insurance subsidiaries from their obligations to policyholders as the
primary insurer, it does make the reinsurer liable to us to the extent of the risk ceded.
The placement of reinsurance with a number of individual companies and syndicates
mitigates the concentration of credit risk. We monitor the financial condition and
creditworthiness of our reinsurers periodically and use reinsurance brokers and
intermediaries to assist in the process of the placement of our reinsurance. Most of
FPICs reinsurers are rated A- or better by A.M. Best Company (A.M.
Best). Reinsurers that are neither authorized nor accredited are required to provide
collateral in the form of an irrevocable letter of credit or investment securities held in
a trust account to secure their respective balances due.


On August 2, 2002, Gerling Global
Reinsurance Corporation of America (Gerling), one of our reinsurers, had its
financial strength rating lowered by A.M. Best from A- (Excellent) to B+ (Very Good). On
December 20, 2002, Gerlings A.M. Best rating was further downgraded to B- (Fair).
These rating actions by A.M. Best followed an announcement by Gerling of its intention to
exit the U.S. non-life reinsurance market. Since then, Gerling has essentially placed
itself in voluntary run-off with respect to its U.S. non-life reinsurance business and
A.M. Best has withdrawn Gerlings financial strength rating and replaced it with the
designation NR-3, which means that A.M. Bests rating methodology no
longer applies. Gerling has participated in our excess of loss reinsurance programs in
2000 at 15%, and in 2001 and 2002 at 20%. Gerling has also provided facultative
reinsurance coverage for non-standard risks. We replaced Gerlings participation in
our reinsurance programs, effective with our renewal, as of January 1, 2003. As of
December 31, 2002, the estimated amount of net reinsurance recoverables from Gerling was
approximately $13 million, comprised of the gross recoverables from Gerling, less
reinsurance payables to Gerling of approximately $4 million. Gerling is an authorized
reinsurer in our markets; therefore, we do not hold collateral for these reinsurance
recoverables.


Gerlings actions, including
placing itself in run-off with respect to its U.S. non-life reinsurance business, have
been voluntary and as recently as March 10, 2003, it has publicly stated that it is paying
its outstanding claims. Consequently, we currently expect that Gerling will fully meet its
obligations to us. We will continue to monitor developments at Gerling and should its
financial condition worsen, we could, in-turn, recognize a charge for uncollectible
reinsurance recoverables.
9
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Competition.    
          The property and casualty insurance and reinsurance industries are very
          competitive. Results depend on a number of factors, such as underwriting and
          investment performance, direct costs associated with the delivery of insurance
          products, including the costs of regulation, the frequency and severity of
          claims, as well as inflation. Decisions we make about the risks we insure
          (pricing and risk selection), the way we operate and provide policyholder
          service and our financial condition and ratings can all affect our competitive
          position. The relative size and reputation of an insurer in comparison with
          others may also influence the purchasing decisions of agents and customers.


The MPL insurance markets in Florida
and Missouri, our two primary markets, are competitive in terms of pricing and, until
2002, the number of competitors. Although the number of companies offering MPL insurance
products in our core markets declined significantly in 2002, more competitors may enter
our markets in the future and affect our position in those markets. In addition, some of
our competitors are larger and have greater resources than we do and some have higher
ratings. The number of healthcare entities that allow or tolerate self-insurance for their
practicing physicians may also increase. In addition to external competitive pressures,
our insurance products are largely marketed through independent insurance agencies, all of
which represent more than one company, so we also face competition within our own agency
system.


We compete in this environment on the
basis of our leadership positions in Florida and Missouri and our relationships with the
medical and professional communities. In Florida, name recognition, service reputation,
medical society endorsements, physician involvement, healthcare activism, and agency force
and program development have all contributed to helping FPIC and First Professionals
maintain the leading market position. We believe our longstanding position in Florida is
an additional competitive advantage that has given us the means to more effectively
attract and retain groups and specialties that exhibit better than average risks and
maintain a relatively high-quality book of insured business. This helps us maintain
greater financial stability and staying power.


First Professionals and APAC are the
only stock MPL insurance companies domiciled in Florida. First Professionals has the
exclusive endorsements of both the Florida Medical Association and the Florida Dental
Association. First Professionals is also endorsed by a number of county medical and state
specialty societies.


In both Missouri and Kansas, Intermed
competes with regional and national companies. In 2001, the last year for which statistics
were available from the Missouri Department of Insurance, there were fifty companies
writing MPL insurance for physicians and surgeons in the state. The top four writers had
77% of the market. Intermed was the largest writer in the state in 2001 and had a market
share of 26%.


As noted above, FPIC has decided to
cease writing LPL insurance. This will allow the capital currently supporting the LPL
product to be re-dedicated to our core MPL insurance products.


Some hospitals in Missouri have
purchased fee-for-service medical practices and hired the physicians as employees. A
number of these physicians purchased professional liability insurance through smaller
insurance companies like Intermed. As a result of this consolidation, these same
physicians may now have access to self-insured plans offered by the hospitals or
professional liability insurance offered by larger insurers and at lower premiums.


Insurance Ratings. Insurance
specific ratings represent the opinion of rating agencies on the financial strength of a
company and its capacity to meet its insurance obligations. These ratings are based on
factors most relevant to policyholders, agents and intermediaries and are not specifically
directed toward the protection of investors. They are not recommendations to buy, sell or
hold a companys securities. The significance of individual agencies and their
ratings vary among different users. They can be significant to investors and lenders among
other factors as an indication of a companys suitability for investment or
creditworthiness. A.M. Best is the primary rating organization for FPIC and is the only
insurance rating agency FPIC uses on an interactive basis. Other organizations that rate
FPIC develop their ratings independently using publicly available data and without
consulting with us. These ratings are generally consumer oriented and involuntary on the
part of the company being rated.
10
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In October 2002, A.M. Best lowered
its rating of FPIC from A- (Excellent), with a negative outlook, to B++ (Very Good), with
a stable outlook. Among other things, A.M. Best attributed this rating action to our
recent significant growth in premiums in the face of its serious concerns about loss
trends and reserve adequacy in the MPL insurance sector. Additional information may be
found at the A.M. Best website at www.ambest.com.


An insurance companys rating,
and particularly its A.M. Best rating, is a potential source of competitive advantage or
disadvantage in the marketplace. In addition, some of the independent agents and brokers
who place business with our companies and other competitors have a minimum A.M. Best
rating standard of A-. The significance of the A.M. Best rating varies depending upon the
products involved, the customers and agents and the competition and market conditions.
Although any rating downgrade is a negative, the lowering of our A.M. Best rating to B++
(Very Good) has not had a material negative impact on our business to date. The B++ rating
reflects very good financial strength and remains within A.M. Bests Secure
Ratings range. We also believe that insurance ratings are generally not as
significant to MPL agents and policyholders as they are with regard to certain other
insurance products. The hardening markets have also substantially reduced the number of
MPL insurers and capacity in the MPL markets served by FPIC.


     Regulation.    
          Our insurance subsidiaries are regulated at the state level. The state insurance
          departments of Florida and Missouri, where our insurance companies are
          domiciled, are the primary regulators. Our insurance companies are also
          regulated in other states where they do business. State insurance laws also
          regulate FPIC as an insurance holding company. FPIC and all its subsidiaries are
          required to register and furnish information about our operations, management
          and financial condition to the Florida and Missouri insurance departments. The
          insurance departments perform financial and market conduct examinations of our
          insurance companies periodically and also require disclosure or approval of
          material transactions, such as dividends from our insurance subsidiaries to FPIC
          above certain levels. All transactions within the holding company structure
          involving our insurance companies must also be fair and reasonable.


Except as described below, Florida
insurance laws do not allow any person to acquire, directly or indirectly, five percent or
more of the voting securities of an insurance company without the prior written approval
of the Florida insurance department. Any purchaser of five percent or more of FPIC common
stock is presumed to have acquired a similar level of control of our insurance
subsidiaries. Instead of obtaining prior approval, a purchaser of more than five percent,
but less than ten percent, of an insurance company may file a disclaimer of affiliation
and control with the Florida insurance department. Similar laws exist in Missouri, except
that the approval threshold is ten percent or more of a companys voting securities.


The primary purpose or mission of
insurance regulation is the protection of policyholders. State insurance laws generally
delegate broad regulatory powers to insurance departments including granting and revoking
licenses, approving policy forms and premium rates, regulating trade practices,
establishing required statutory financial statements and prescribing the types and amounts
of investments permitted.


Insurance companies are required to
file detailed annual reports in each state in which they do business. The financial
statements contained in these reports are prepared using regulatory accounting principles,
or statutory-basis financial statements as they are referred to in the insurance industry.
Statutory accounting practices represent a comprehensive basis of accounting that is
different from GAAP and so the accounting practices used by the insurance subsidiaries in
their regulatory financial statements are different from the accounting policies used in
preparing the consolidated financial statements included in this Form 10-K.


The National Association of Insurance
Commissioners (NAIC) has adopted the Codification of Statutory Accounting
Principles (the NAIC Codification). The NAIC Codification became applicable to
all statutory-basis financial statements issued after January 1, 2001. While the NAIC
Codification represents the official guidance on the statutory basis of accounting, the
individual states and insurance departments continue to have the discretion to modify its
guidance or establish their own statutory accounting practices for insurance companies.
11
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Insurance companies are also subject
to assessments by state financial guaranty associations. The primary purpose of these
guaranty associations is to fund the unpaid claims and policyholder benefits of insolvent
insurers. Generally, these associations can assess member insurers on the basis of written
premiums in their states.


The Gramm-Leach-Bliley Act of 1999
(the Act) significantly changed the previous regulatory framework that
generally prevented affiliations among commercial banks, insurance companies, securities
firms and other financial service providers. The Act revised and expanded Federal banking
laws to permit a bank holding company to engage in other financial services, including
insurance, through a new entity known as a financial holding company.


The insurance industry is under
continuous scrutiny by Congress, state legislatures and state and federal regulatory
agencies. From time to time, regulatory and legislative changes are proposed that could
have a material effect, positive or negative, on individual insurers or reinsurers.
Current proposals address a wide range of topics and issues that could be material to
FPIC. These include tort reform, patient rights and Federal versus state regulation of
insurers to name a few. It is not possible to predict which, if any, of these proposals
will be adopted or the impact they may have on FPIC.


     Marketing.    
          FPIC markets its MPL policies primarily through independent agencies. We also
          sell insurance products directly through our subsidiary, FPIC Agency. An
          integral part of our marketing strategy is targeting sectors of the MPL
          insurance industry of which we are knowledgeable and that we believe can
          generate above average operating profits. We periodically identify and target
          selected medical specialties and claims-free physicians within those
          specialties. Pricing is also determined based upon specialties and geographic
          regions.


Risk Management. FPIC also
participates in comprehensive risk management services to policyholders. These services
are designed to help policyholders avoid potential liability by educating them on ways to
avoid or prevent risks to patients in their medical practices.Reports containing
recommendations about areas of the policyholders medical practice that may need
attention are provided. FPIC also participates in seminars on risk management with medical
societies and other groups. We believe our risk management services enhance risk awareness
and loss prevention.


     Underwriting.    
          The underwriting process determines whether or not to accept a new policyholder
          or renew an existing policyholder and on what terms. When FPIC receives
          applications for new or renewal MPL insurance, one of the most fundamental
          underwriting steps is to verify the physicians claims history. FPIC
          utilizes its own MPL claims data, as well as information collected by the states
          in which we operate when making these decisions. If a physician has an excessive
          claims history, the application is denied. Other information, including status
          of licensure, educational background, residency experience, practice history and
          personal references are also evaluated in reaching underwriting decisions. The
          underwriting departments re-examine each policyholder annually at renewal time
          before coverage is renewed.


Claims Administration.
FPICs claims departments are responsible for the investigation of claims, the
establishment of case reserves, case management and defense strategy and the coordination
and control of defense attorneys. FPIC has networks of defense attorneys who assist in the
defense of claims. Our policy is to aggressively defend against claims that do not have
merit. When a claim is believed to have merit, the claims department attempts to settle
the case expeditiously and as economically as possible. In the mid-1990s, the First
Professionals claims department shifted its focus towards settling cases more
quickly. It was believed that by getting cases settled more quickly, whether with or
without a loss payment, the resulting savings in defense costs would be significant.
During this same period, First Professionals also saw the ratio of the number of claims it
settles with a loss payment to all claims settled (the CWIP ratio) begin to
rise. Upon analyzing this trend, the rise in the CWIP ratio could not be attributed to
specific changes in loss trends or First Professionals policyholder base or
exposures. It was determined instead that the most likely cause was the focus on settling
claims faster, which, in turn, resulted in settling more claims with a loss payment.
12
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|In 2001, First Professionals
refocused on identifying non-meritorious claims and aggressively defending policyholders
once again. Several initiatives were undertaken, including the re-education and
re-training of claims personnel, increasing the number of claims personnel, restructuring
of the claims department, and enhancements to claims data and reporting. In addition, a
new claims management team has been put in place with significant MPL claims experience in
Florida. As a result of these initiatives, the ratio of claims closed with an incident
payment (CWIP) to all closed claims and the average amounts paid for losses
and loss adjustment expenses (LAE) per claim have begun to improve in 2001 and
2002. We believe that these trends are sustainable; however, losses and LAE are affected
by numerous other factors, many of which are outside our control. Given the broad range of
uncertainties that can affect MPL claims, there can be no assurance that these trends will
be sustained.


     Investments.FPICs investment strategy is to maintain a diversified investment
          portfolio that is focused on high grade, fixed-income securities. The majority
          of these securities are held as invested assets by the various insurance
          subsidiaries. At the close of 2002, approximately 20% of the fixed-income
          portfolio was invested in tax-exempt securities and approximately 80% in taxable
          securities.


Realized investment gains and losses
are recorded when investments are marked-to-market, sold, deemed other-than-temporarily
impaired, or in other situations as required by GAAP, 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.


Liability for Losses and LAE.
The liability for losses and LAE (loss and LAE reserves) represents our
aggregate best estimate of the amounts we expect to pay out in the future on account of
all insured unpaid claims and incidents as of the end of the period. This liability also
contains estimates for insured losses and LAE incurred but not yet reported to us
(IBNR) including losses under tail policies and covered extended reporting
endorsements issued following the death, disability or retirement of claims-made insureds.
IBNR reserves are also established for some occurrence MPL business issued in the recent
past and for assumed reinsurance, which is written on an occurrence basis. However,
substantially all of our core direct MPL business is written on the claims-made policy
form, which does not have significant IBNR losses. Loss and LAE reserve estimates are made
primarily by the application of actuarial techniques to historical claims information. The
techniques used differ depending upon what data is being used to make the projection.
However, most of these techniques have the common feature of producing mathematical
projections of all losses and LAE for a given period once all the claims have been
reported and settled. These estimates are usually referred to as the ultimate
loss and are the basis for estimation of the loss and LAE reserves. Despite the
sophistication of these mathematical techniques, considerable judgment is required both in
the selection of assumptions used and in determining which techniques best fit a
companys particular circumstances and trends. Furthermore, each of these techniques
contains biases, which can have a material bearing on the accuracy and reliability of the
estimate.


We set our loss and LAE reserves
taking into account the results of the actuarial techniques applied as well as other
assumptions, some of which are not strictly mathematical in nature. Multiple actuarial
techniques are applied and a range of projected values is produced from these methods. We
select our best estimates for each of our lines of business, compare them with our carried
reserves, and make adjustments where differences are significant.


Our actuarial techniques and those
used by other property and casualty insurers rely heavily on historical loss experience.
It is assumed and generally accepted that historical experience provides a reliable
starting point for estimating future loss experience even though uncertainties are always
present where future loss cost trends are concerned. MPL insurance is a long-tail line of
business meaning that it takes a long time to settle the average claim. A claim can be
adversely impacted by events occurring long after the claim occurs and is reported to the
insuring company, such as sudden severe inflation or adverse judicial decisions in similar
cases. As claims are settled and additional information becomes available, estimates of
the loss and LAE reserves may be revised. Because of the size and prominence of loss and
LAE reserves, any revision to these estimates could be material to operating results. All
changes in loss and LAE reserves, including adjustments to prior year loss and LAE
reserves, are accounted for as a charge (or credit) to income in the most recent period
presented.
13
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Beginning in 2002, our MPL insurance
companies began utilizing the in-house actuarial staff of First Professionals for support
in determining rates and estimating loss and LAE reserves. Our aggregate liability for
losses and LAE as of December 31, 2002, was recorded at our best estimate, which
was primarily determined based upon actuarial studies performed by our in-house actuarial
staff. In establishing the best estimates of our loss and LAE reserves for various lines
of business and in aggregate as of December 31, 2002, we calculated and selected point
estimates and our in-house actuarial staff did not develop formal ranges of reasonable
values. By recording our loss and LAE reserves at our best point estimate rather than at
the midpoint or best point within a range, we are not representing that our
reserves are subject to less uncertainty or volatility than other companies that do
formally establish reserve ranges. A typical range of reasonableness for loss and LAE
reserve estimates in our lines of business, which is primarily medical professional
liability insurance, can range from 10% to 15% of the aggregate reserves in width.


Our appointed statutory independent
actuarial firm also performed actuarial studies of the loss and LAE reserves for our
insurance companies as of December 31, 2002, which opinions have been filed with the
statutory annual statements of our insurance companies.


The following table sets forth (in
thousands) the development of our loss and LAE reserves, net of reinsurance recovered or
recoverable, for the 10-year period ended December 31, 2001 (1):
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Year Ended December 31,       | 2002 | 2001      | 2000 | 1999    | 1998 | 1997    | 1996 | 1995    | 1994 | 1993    | 1992
|----------------------------- | ---- | --------- | ---- | ------- | ---- | ------- | ---- | ------- | ---- | ------- | ----
|Balance Sheet Liability       |      | $ 272,007 |      | 238,073 |      | 223,597 |      | 214,692 |      | 200,763 |     
|                              |      |           |      |         |      |         |      |         |      |         |     
|Re-estimated Liability As of: |     
|One Year Later                |      |           |      | 240,489 |      | 232,208 |      | 221,212 |      | 182,208 |     
|Two Years Later               |      |           |      |         |      | 231,617 |      | 222,281 |      | 182,498 |     
|Three Years Later             |      |           |      |         |      |         |      | 221,270 |      | 183,389 |     
|Four Years Later              |      |           |      |         |      |         |      |         |      | 183,491 |     
|Five Years Later              |      |           |      |         |      |         |      |         |      |         |     
|Six Years Later               |      |           |      |         |      |         |      |         |      |         |     
|Seven Years Later             |      |           |      |         |      |         |      |         |      |         |     
|Eight Years Later             |      |           |      |         |      |         |      |         |      |         |     
|Nine Years Later              |      |           |      |         |      |         |      |         |      |         |     
|Ten Years Later               |      |           |      |         |      |         |      |         |      |         |     
|                              |      |           |      |         |      |         |      |         |      |         |     
|Cumulative Paid As of:        |     
|One Year Later                |      |           |      | 96,496  |      | 95,890  |      | 91,269  |      | 76,291  |     
|Two Years Later               |      |           |      |         |      | 163,850 |      | 152,862 |      | 121,199 |     
|Three Years Later             |      |           |      |         |      |         |      | 185,126 |      | 153,200 |     
|Four Years Later              |      |           |      |         |      |         |      |         |      | 168,522 |     
|Five Years Later              |      |           |      |         |      |         |      |         |      |         |     
|Six Years Later               |      |           |      |         |      |         |      |         |      |         |     
|Seven Years Later             |      |           |      |         |      |         |      |         |      |         |     
|Eight Years Later             |      |           |      |         |      |         |      |         |      |         |     
|Nine Years Later              |      |           |      |         |      |         |      |         |      |         |     
|Ten Years Later               |      |           |      |         |      |         |      |         |      |         |     
|                              |      |           |      |         |      |         |      |         |      |         |     
|(Deficiency) / Redundancy     |      | $         |      | (2,416  | )    | (8,020  | )    | (6,578  | )    | 17,272  |     
|% (Deficiency) / Redundancy   |      |           |      | -1.0%   |      | -3.6%   |      | -3.1%   |      | 8.6     | %   

|(1)    
  Data presented from 1992 to 1997 reflects only First Professionals
          liability for losses and LAE. The 1998 year reflects losses and LAE data for
          First Professionals and APAC. The data presented from 1999 to 2002 reflects all
          of FPICs insurance subsidiaries.


This table demonstrates how our total
loss and LAE reserves as of the end of each of the last ten calendar years compares with
paid losses and re-estimates of those reserves after the end of each of these years. A
positive difference at the base of each column means that the reserves carried as of the
end of that particular calendar year (including reserves on claims still open, if any)
have developed downward. When reserves develop downward, this means that we now believe we
will have to pay less for these claims than we had previously set aside in reserves. A
negative difference means that the reserves have been increased since the end of the
calendar year. This means that we now believe we will have to pay more for these claims
than we previously set aside in reserves. For example, the table indicates that the
aggregate reserves carried at the end of calendar years 1992 through 1998 have been higher
than subsequent payments and re-estimates. In contrast, the reserves at the end of
calendar years 1999, 2000 and 2001 have been increased by $6.6 million, $8.0 million and
$2.4 million, respectively.
14
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The following table rolls forward (in
thousands) FPICs aggregate liability for losses and LAE reserves, showing the
changes for the period beginning January 1, 2000 and ending December 31, 2002.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | 2002 | 2001      | 2000
|---------------------------------------- | ---- | --------- | ----
|Net loss and LAE reserves, January 1     |      | $ 238,073 |     
|Incurred related to:                     |     
|Current year                             |      | 137,155   |     
|Prior years                              |      | 2,416     |     
|                                         |      |           |     
|Total incurred                           |      | 139,571   |     
|                                         |      |           |     
|Paid related to:                         |     
|Current year                             |      | 9,130     |     
|Prior years                              |      | 96,507    |     
|                                         |      |           |     
|Total paid                               |      | 105,637   |     
|                                         |      |           |     
|Net loss and LAE reserves, December 31   |      | $ 272,007 |     
|                                         |      |           |     
|Gross loss and LAE reserves, December 31 |      | $ 440,166 |     
|Reinsurance recoverables, December 31    |      | 168,159   |     
|                                         |      |           |     
|Net loss and LAE reserves, December 31   |      | $ 272,007 |     
|                                         |      |           |     

|In the year 2000, most of the prior
years reserve increase occurred on claims reported to us in 1997 and 1998. We made
this increase primarily because, upon re-estimation, we determined that severity (the
average cost of a claim) had increased more than we expected. We also increased reserves
on other lines of business at First Professionals in 2000, including its now discontinued
accident and health line and its assumed reinsurance. The upward development on prior
years reserves in 2001 includes some increase in the initial estimate for 2000 MPL
losses and LAE. In addition, and while most claims and incidents reported are closed
without a loss payment, we also raised our estimates relative to the ratio of claims
closed with a loss payment to all claims and incidents closed in 2000 and 2001.


For additional information, see Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.


Reciprocal Management
Segment


Principal Business. AFP is the
administrator and attorney-in-fact for PRI, the second largest MPL insurer of physicians
in the state of New York. AFP has an exclusive ten-year management agreement with PRI. The
current term of the management agreement runs through December 31, 2008. AFP provides all
of the marketing, underwriting, administrative and investment functions for PRI.
AFPs compensation under the agreement is equal to 13% of PRIs direct premiums
written with an adjustment for expected returned premiums. As such, our revenues and
results of operations are financially sensitive to the revenues and financial condition of
PRI. PRI, as an MPL insurer, is subject to many of the same types of risks as those of our
insurance subsidiaries and MPL companies generally. Growth at PRI is subject to surplus
constraints; however, as a reciprocal, PRI is able to operate at higher leverage ratios
than non-reciprocals such as our insurance subsidiaries. Further, as allowed under New
York insurance laws, PRI has requested and received permission from the New York State
Insurance Department to follow the permitted practice of discounting its loss and LAE
reserves. PRIs rates, including rates charged for policies in excess of $1.3
million, which have been reinsured to First Professionals, are mandated by the New York
State Insurance Department (DOI). Prior to 2002, AFPs compensation also
included an additional incentive provision equal to plus or minus 10% of PRIs
statutory net income or loss. AFP is also reimbursed by PRI for certain expenses paid on
PRIs behalf. The expenses reimbursed by PRI are principally salaries and related
payroll expenses, and overhead costs associated with claims, legal and risk management
course personnel employed by AFP who work on PRI business. During 2002, the agreement was
amended by AFP and PRI to remove the sharing by AFP of 10% of PRIs statutory net
income or loss, effective January 1, 2002.
15
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|With regard
to profit sharing amounts already earned and collected, AFP has agreed to hold the years
1999, 2000 and 2001 open for re-determination and possible adjustment for a period of
five years each (expiring 2004, 2005 and 2006, respectively.) Such adjustments would be
based primarily on development of and related adjustments, if any, to loss and LAE
reserves for those years. AFP has earned and collected profit sharing amounts under the
original agreement totaling $3.6 million for the three years ended December 31, 2001. In
addition, under the amendment, AFP will be reimbursed for 50% of the costs of the risk
management department it maintains for PRI insureds, for which it is not already
reimbursed. The management agreement and amendments were reviewed and approved by the New
York DOI.


In addition, reinsurance brokerage
and placement services are provided by AFPs subsidiary, FPIC Intermediaries. FPIC
Intermediaries also provides these services for our insurance companies. Certain brokerage
and administration services for professional liability insurance programs are provided to
PRI through a third entity, FPICs 70% owned subsidiary, PMA. PMA is licensed as an
insurance broker in New York and the Commonwealth of Pennsylvania. As a program manager,
PMA is responsible for the underwriting, claims administration, risk management, marketing
and accounting for the programs that it administers.


     Competition.    
          AFP has no direct competition for the services it provides to PRI. PRI, however,
          is subject to competition. The MPL insurance market in New York is tightly
          regulated relative to other states. Two carriers make up over 80% of the market:
          Medical Liability Mutual Insurance Company (MLMIC), with 55% of the
          MPL market; and PRI with a 25% market share. While MLMIC has a B++ rating by
          A.M. Best and PRI has no rating, we believe, as exhibited by historical
          experience, that PRIs name recognition, service and reputation contribute
          to its ability to maintain its market share.


     Marketing.    
          AFP markets PRI policies in New York to physicians, podiatrists, chiropractors,
          dentists and healthcare facilities through AFPs in-house marketing
          representatives and through independent brokers. As of December 31, 2002, PRI
          wrote 59% of its business directly and 41% of its business through brokers. AFP
          also offers certain other insurance coverage underwritten by other carriers to
          PRIs insureds on a non-commission basis. AFP markets PRIs healthcare
          facilities professional liability insurance in New York primarily through
          outside brokers.


PRI has also received the exclusive
endorsement agreement of one of New Yorks largest preferred provider organization
(PPO) networks. Through this endorsement agreement, the PPO completes two
mailings per year to its credentialed members endorsing PRI. Since inception in 1998, PRI
has underwritten approximately 2,000 insureds under this program.


The risk management department of AFP
has developed multiple specialty related seminars for doctors. These programs are designed
to educate the insureds on ways to improve their medical practice procedures and to assist
them in implementing risk modification measures. AFP also conducts on-site surveys for
doctors and healthcare facilities to review their practice procedures. All policyholders
are provided with a complete detailed report on the findings and the recommended actions,
if any, to be taken.


During 2000, AFP introduced dental
liability coverage to PRIs list of specialties. This line of business is primarily
marketed through local brokers. AFP has also begun to introduce preferred banking products
and services for PRI insureds as ancillary products.


     Regulation.    
          Both AFP, as reciprocal manager and attorney-in-fact, and PRI are subject to
          regulatory oversight by the New York DOI. In addition,
          AFP is subject to examination by the New York DOI and is
          required to file an annual statement audited and certified by the same
          independent certified public accountant that audits PRI. Additional requirements
          are imposed upon the attorney-in-fact by statutorily mandated provisions, which
          must be included in the agreement between the reciprocal and its subscribers as
          well as the agreement between the reciprocal and the attorney-in-fact.


For additional information, see Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.
16
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Third-Party
Administration (TPA) Segment


Principal Business. EMI
provides TPA services for group accident and health, workers compensation, general
liability and property casualty insurance to self-insured employer
groups. Our TPA services include claims administration, utilization review, loss control,
COBRA administration and insurance placement. We do not assume insurance risks on these
services; instead, each employer assumes this risk. We do act as a broker on behalf of
some of our clients and place excess insurance coverage on their behalf with various
insurers and reinsurers. We earn commission income from the placement of this excess
coverage and ancillary products. We also provide administration services for emerging
managed care organizations and an ambulance service organization.


During the fourth quarter 2001, we
disposed of our Brokerage Services, Inc. division of EMI located in Albuquerque, New
Mexico, and incurred a pre-tax charge of approximately $0.6 million. We sold the
divisions assets and cancelled most of its service agreements with self-insured
customers. We retained some contracts that are now serviced by our Jacksonville, Florida,
division.


We provided TPA services to fifty-two
clients at December 31, 2002, five of which accounted for approximately 37% or $4.7
million of the claims administration fees generated by the TPA segment. Approximately 13%
or $1.6 million was derived from our single largest client. EMI also manages one
workers compensation program for which APAC has the corresponding fronting program.


     Regulation.    
          The Florida Department of Insurance and the United States Department of Labor
          regulate EMI. EMI is also regulated by other states in which it conducts
          business. EMI is required to furnish annual reports on operational activity to
          state supervisory agencies and such agencies may examine EMI from time to time.


As noted earlier, the insurance
industry is under continuous review by Congress, state legislatures and state and federal
regulatory agencies. From time to time, regulatory and legislative changes are proposed
for the insurance industry, some of which could impact the TPA business if adopted. Most
recently, the Health Insurance Portability and Accountability Act (HIPAA)
privacy and non-discrimination rules and patient bill of rights laws were enacted. We are
in compliance with current mandates as related to this legislation and in a position to
remain compliant as implementation of the legislation is completed. We cannot predict
whether other regulatory or legislative proposals being considered will ultimately be
adopted and, if so, what impact they may have on our TPA business.



Competition. We believe our
TPA is competitive with regard to prices and services, and our principal competitors in
the group accident and health market are other similar TPAs and insurance companies
that offer fully insured products and administrative services to self-insurance programs.
While we believe our TPA enjoys strong name recognition within our niche and a good
service reputation with regard to our core administration services, we also recognize
that access to insurance provider networks is a major factor and perhaps the greatest
factor in some cases in obtaining and retaining clients.



Within the market for workers compensation
and property insurance, we must contend with our clientsand potential clients perception
that larger companies will be more competitive with regard to prices and have greater
access to insurance markets. Our TPA also enjoys strong name recognition and loyalty
among its current client base that has resulted in the maintenance of long-term client
relationships.



Marketing. EMI primarily
markets its TPA services in Florida. EMI may sell services directly or operate through
agents and brokers. EMIs marketing strategy includes superior service, competitive
pricing and delivery of support services. EMIs plan is to focus geographically with
an emphasis in Florida and to continue to use agents and brokers to receive requests for
proposals as well as utilize various services in which proposals are listed.



For additional information, see Item
7, Managements Discussion and Analysis of Financial Condition and Results of
Operations.

17
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Employees


At December 31, 2002, FPIC employed
612 people. None of our employees are covered by a collective bargaining agreement. We
believe our relationships with our employees are very important and that the significant
number of long-term employees we have and our low attrition are indicative of good
employee relations.



Additional Information with Respect to FPICs BusinessThe
amounts of operating revenue and identifiable assets attributable to the aforementioned
business segments are included in Note 21 to FPICs consolidated financial statements
contained in Item 8, Financial Statements and Supplementary Data. Additional information
regarding FPICs investments is included in Note 5 to FPICs consolidated
financial statements. Finally, information concerning FPICs revolving credit
facility and term loan is included in Note 14 to FPICs consolidated financial
statements.


Item 2. Properties


The physical properties used by FPIC
and its subsidiaries are summarized below:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Business               | Location | Type of
Property | Owned
or Leased | Approximate
Square Footage
|---------------------- | -------- | ---------------- | --------------- | --------------------------
|Corporate headquarters |          | Jacksonville, FL |                 | Offices                   
|First Professionals    |          | Jacksonville, FL |                 | Offices                   
|APAC                   |          | Coral Gables, FL |                 | Offices                   
|Tenere                 |          | Springfield, MO  |                 | Offices                   
|AFP                    |          | Manhasset, NY    |                 | Offices                   
|EMI                    |          | Stuart, FL       |                 | Offices                   
|EMI                    |          | Jacksonville, FL |                 | Offices                   

|Item 3. Legal Proceedings


FPICs insurance subsidiaries
from time to time become subject to claims for extra-contractual obligations or risks in
excess of policy limits in connection with their insurance claims. These claims are
sometimes referred to as bad faith actions as it is alleged that the insurance
company acted in bad faith in the administration of a claim against an insured. Bad faith
actions are infrequent and generally occur in instances where a jury verdict exceeds the
insureds policy limits. Under such circumstances, it is routinely alleged that the
insurance company failed to negotiate a settlement of a claim in good faith within the
insureds policy limit. FPIC has evaluated such exposures as of December 31, 2002,
and believes its position and defenses are meritorious. However, there can be no absolute
assurance as to the outcome of such exposures. FPIC currently maintains insurance for such
occurrences, which serves to limit exposure to such claims. However, in one such case,
arising in 1993, no such coverage is available and an estimate of possible loss currently
cannot be made. In addition, multiple claims for extra contractual obligations in a single
year could result in potential exposures materially in excess of insurance coverage or in
increased costs of insurance coverage.


FPIC may also become involved in
legal actions not involving claims under its insurance policies from time to time. FPIC
has evaluated such exposures as of December 31, 2002, and in all cases, believes its
position and defenses are meritorious. However, there can be no absolute assurance as to
the outcome of such exposures.


Item 4. Submission of
Matters to a Vote of Security Holders


There were no matters submitted to a
vote of security holders in the fourth quarter of 2002.


PART II


Item 5. Market for
Registrants Common Equity and Related Stockholder Matters


Our common equity has been publicly traded
on the NASDAQ National Market System since August 1, 1996 under the symbol,
FPIC. Additional information about FPIC can be found on our website
www.fpic.com. The following table sets forth, for the periods indicated, the high
and low bid quotations as reported. Such quotations reflect inter-dealer bids and offers,
without retail mark-up, markdown, or commission and may not necessarily represent actual
transactions.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               | 2002 | 2001   
|-------------- | ---- | -------
|
|First Quarter  |      | $15.90 
|Second Quarter |      | $16.00 
|Third Quarter  |      | $15.07 
|Fourth Quarter |      | $  8.97

|18
|--

|We estimate that as of March 20, 2003
there were approximately 2,330 shareholders of record of FPIC common stock. In the
past two years ended December 31, 2002, we have not paid any dividends and we do not
anticipate paying any cash dividends in the foreseeable future. In addition, our credit
facility and term loan agreement places restrictions on the amount of dividends we can pay
our shareholders without the consent of our Lenders.


Equity Compensation
Plan Information as of December 31, 2002
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   
|-----------------------------------
|
|                                   
|
|                                   
|Equity Compensation Plans          
|Approved by Security Holders       
|                                   
|Equity
      Compensation Plans Not
|Approved by Security Holders       
|                                   
|Total                              
|                                   

|Item 6. Selected Financial Data


The selected financial data
presented below for the fiscal years ended December 31 should be read in conjunction with
FPICs consolidated financial statements and the notes thereto which are included
elsewhere herein.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | (In thousands)
|-------------------------- | --------------
|
|Total cash and investments |               
|Total assets               |               
|Liability for loss and LAE |               
|Revolving credit facility  |               
|Term loan                  |               
|Total liabilities          |               
|Shareholders equity       |               

|                                  | (In thousands, except per share data)
|--------------------------------- | -------------------------------------
|
|Direct and assumed                |                                      
|premiums written                  |                                      
|Net premiums written              |                                      
|Net premiums earned               |                                      
|Total revenues                    |                                      
|Income before cumulative effect   |                                      
|of accounting change              |                                      
|Cumulative effect of accounting   |                                      
|change, net of tax                |                                      
|Net (loss) income                 |                                      
|Diluted earnings per share        |                                      
|before cumulative effect          |                                      
|of accounting change              |                                      
|Basic (loss) earnings per share   |                                      
|Diluted (loss) earnings per share |                                      

|19
|--

|For additional information with
respect to FPICs business see Item 7, managements discussion and analysis of
financial condition and results of operations.


Item 7.
Managements Discussion & Analysis of Financial Condition and Results of
Operations


The following discussion and analysis
should be read in conjunction with the consolidated financial statements and the notes to
the consolidated financial statements appearing elsewhere in this report. The consolidated
financial statements include the results of all of FPICs wholly owned and majority
owned subsidiaries.


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 FPIC may include forward-looking
statements, which reflect our 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:
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Uncertainties
relating to government and regulatory policies (such as subjecting FPIC to insurance
regulation or taxation in additional jurisdictions or amending, revoking or enacting any
laws, regulations or treaties affecting our current operations);
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
occurrence of insured or reinsured events with a frequency or severity exceeding our
estimates;
|- | ---------------------------------------------------------------------------------------------------

| | Legal
developments, including claims for extra-contractual obligations or in excess of policy
limits in connection with the administration of insurance claims;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Developments
in global financial markets that could affect our investment portfolio and financing
     plans;
|- | -------------------------------------------------------------------------------------------------------------

| | The
impact of surplus constraints on growth;
|- | --------------------------------------------

| | Developments
in reinsurance markets that could affect our reinsurance programs;
|- | -------------------------------------------------------------------------------

| | The
impact of mergers and acquisitions, including the ability to successfully integrate
acquired businesses and achieve cost savings, competing demands for our capital and the
risk of undisclosed liabilities;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Risk
factors associated with financing and refinancing, including the willingness of credit
institutions to provide financing and the availability of credit generally;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
competitive environment in which FPIC operates, including reliance on agents to place
insurance, physicians electing to practice without insurance coverage, related trends and
associated pricing pressures and developments;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
actual amount of new and renewal business;
|- | ----------------------------------------------

| | Rates,
including rates on excess policies, being subject to or mandated by regulatory approval;
|- | -----------------------------------------------------------------------------------------------

| | The
loss of the services of any of our executive officers;
|- | ----------------------------------------------------------

| | The
uncertainties of the loss reserving process;
|- | ------------------------------------------------

| | The
ability to collect reinsurance recoverables;
|- | ------------------------------------------------

| | Changes
in our financial ratings resulting from one or more of these uncertainties or other
factors and the potential impact on agents ability to place insurance business on
behalf of FPIC; and
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The words believe,
anticipate, foresee, estimate, project,
plan, expect, intend, hope,
should, will, will likely result or will
continue and variations thereof or similar expressions identify forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their dates. FPIC undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.


Critical Accounting
Policies


Our discussion and analysis of
financial condition and results of operations are based upon the consolidated financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates, including those
related to income taxes, loss and loss adjustment expense (LAE) reserves,
contingencies and litigation.
20
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We generally base our estimates on
historical experience or other appropriate assumptions that we believe are reasonable and
relevant under the circumstances. The results of these estimation processes form the
basis for making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.



We believe the following critical
accounting policies affect our more significant judgments and estimates used in
preparation of the consolidated financial statements:



Goodwill and Intangible Assets. We
have made acquisitions in the past that included significant amounts of goodwill and
other intangible assets. Under GAAP in effect through December 31, 2001, we amortized
these assets with charges to income over their estimated useful lives, and tested them
periodically to determine if they were recoverable from operating earnings on the basis
of an estimate of undiscounted cash flows over their useful lives.


Effective January 1, 2002, we
adopted Financial Accounting Standard No. (FAS) 142, Goodwill and Other
Intangible Assets. Under FAS 142, goodwill and indefinite-lived intangible assets
are no longer amortized through charges to income, but do continue to be subject to
annual (or under certain circumstances more frequent) impairment testing based on
estimated fair values. Other intangible assets that meet certain criteria continue to be
amortized over their useful lives and will also be subject to impairment testing based on
estimated fair values. During the first quarter of 2002, we performed transitional
impairment testing required under the new standard and took a charge in the form of a
cumulative effect of accounting change for $29.6 million, net of tax effects, as of the
beginning of the year.


Loss and
Loss Adjustment Expenses. We estimate our liability for losses and LAE (loss
and LAE reserves) using actuarial techniques and projections of the amounts of
ultimate losses and LAE for each period. We also integrate other quantitative and
qualitative analyses of conditions into our actuarial analysis that we expect to affect
the future development of claims and related expenses. Our loss and LAE reserves comprise
the largest liability and most significant estimate or compilation of estimates in our
financial statements. Furthermore, our loss and LAE reserves are subject to significant
inherent uncertainties and so there can be no assurance as to whether the actual results
will be higher or lower than these estimates. Any adjustments or changes for such
differences will almost certainly be material, especially to our operating results for a
period. As our loss and LAE reserves are re-estimated, changes to those estimates and our
carried reserves, if any, are recognized as a charge or credit to income, as the case may
be, in the financial statements for the most recent period presented.


With regard
to our core medical professional liability (MPL) business, which is written primarily on the claims-made policy form, the
estimated liability for losses and LAE is basically comprised of our reserves on
individual reported losses (case reserves), plus provisions for case reserve
development and incurred but not reported (IBNR) reserves to arrive at our
best estimate of what our losses and LAE will be once all cases are settled. These
provisions are negative, in aggregate, or a net reduction from the sum total of our
individual case reserve estimates for most years. This is because our case loss reserves
have historically developed downward, in aggregate, from the time they become fully
established to the time they are settled and we expect this trend to continue. Our core
claims-made policies do not have IBNR losses, as do traditional occurrence based property
and casualty insurance policies. We do estimate and set aside IBNR for LAE, tail coverage
and covered extended reporting endorsements issued in the event of death, disability or
retirement of claims-made insureds. We also have IBNR loss reserves on some of the direct
MPL business we wrote in recent years and on our assumed reinsurance where the coverage
is occurrence based.


For the purposes of setting aside
reserves on risks insured during the most recent year, including interim periods, for
which very little experience is present, forecasted loss ratios were applied to earned
premiums during the interim periods. The forecasted loss ratios were judgmentally
determined taking into account the results of the most recent actuarial studies performed,
current pricing and underwriting, expected loss and LAE trends and other pertinent
considerations. In addition, we monitored and analyzed key loss and LAE indicators and
trends throughout the year. These included paid losses, newly reported claims and
incidents, closed claim activity and other metrics. These indicators were taken into
account in assessing the reasonableness of our loss reserve estimates throughout the year
and the forecasted loss and LAE ratios applied during each interim period.
21
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Reinsurance.    
          Reinsurance recoverables are the balances due for paid and unpaid losses and LAE
          that will be recovered from reinsurers, based on contracts in force. We estimate
          the amounts recoverable from reinsurers in a manner consistent with our
          estimates for the underlying claim liabilities that we reinsured. Reinsurance
          does not relieve us from our primary obligations to policyholders. Failure of
          reinsurers to honor their obligations could result in losses to us. We evaluate
          the financial condition of our reinsurers and monitor concentrations of credit
          risk with respect to the individual reinsurers that participate in our ceded
          programs to minimize our exposure to significant losses from reinsurer
          insolvencies. We hold collateral in the form of letters of credit or trust
          accounts for amounts recoverable from reinsurers that are not designated as
          authorized reinsurers by the domiciliary Departments of Insurance.


Income Taxes.We
account for income taxes in accordance with FAS 109, Accounting for Income
Taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance against deferred tax
assets is recorded if it is more likely than not that all or some portion of the benefits
related to the deferred tax assets will not be realized. Valuation allowances are based on
estimates of taxable income and the period over which deferred tax assets will be
recoverable. In the event that actual results differ from these estimates or these
estimates are adjusted in future periods, we may need to establish a valuation allowance,
which would impact our financial position and results of operations. No such valuation
allowance has been established to date, as we believe it is more likely than not that our
deferred tax assets will be fully realized.


Commitments and Contingencies.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and
penalties and other sources are recorded when it is probable that a liability has been
incurred and the amount of the assessment and/or remediation can be reasonably estimated.


Revenue Recognition.
Premium income, which is our main
source of revenue, is generally recognized pro-rata over the respective period of each
policy. Premium receivables are recorded net of an estimated allowance for uncollectible
amounts. Some of our assumed reinsurance agreements with Physicians Recipricol
Insurers (PRI) contain adjustable premiums based upon loss experience and our
financial statements include estimated adjustments accrued through the end of the
reporting period corresponding with our loss experience under these agreements for the
period.


Management fees
of the reciprocal management segment, determined as a percentage of PRIs premiums,
are recognized as billed and earned under the contract, which generally corresponds with
the reported premiums written of PRI, net of an estimate for premium refunds, for the
calendar year. Such management fees are estimated, billed and earned for quarterly
reporting purposes based upon semi-annual estimates of the reported premiums written of
PRI rather than actual written premiums for a quarter, which may vary significantly from
quarter to quarter. This convention is used so that management fees are recognized more
ratably over the period in relation to the services provided by the reciprocal management
segment to PRI.


General


FPIC  Insurance
Group, Inc. (FPIC) was formed in 1996 through a reorganization (the Reorganization)
in which it became the parent company of Florida Physicians Insurance Company, Inc. (Florida
Physicians) and McCreary Corporation (McCreary), a third party
administrator. Under the Reorganization, Florida Physicians shareholders became the
shareholders of FPIC and received five shares of FPIC common stock for each share of
Florida Physicians common stock. In May 2001, we changed the name of Florida Physicians
to First Professionals Insurance Company, Inc. (First Professionals). In
January 2002, McCreary was merged into its subsidiary, Employers Mutual, Inc. (EMI),
with EMI continuing as the surviving entity.



We have
three main operating segments: insurance, reciprocal management and third party
administration (TPA). FPICs primary sources of revenue are management
fees  and dividends from its subsidiaries. The main sources of
revenue for these amounts are premiums earned and investment income (insurance segment)
and claims administration and management fees and commission income (reciprocal management and TPA segments).
22
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Our insurance
segment specializes in professional liability insurance products and services for
physicians, dentists, other healthcare providers and attorneys. On October 3, 2002,
Interlex entered into an agreement with an unrelated insurance organization to sell the
renewal rights to all of its legal professional liability policies. The reciprocal
management segment contains our subsidiary Administrators For The Professions (AFP),
which serves as the exclusive manager and attorney-in-fact for PRI, an insurance reciprocal in New York. We do not own PRI and so
its financial statements are not consolidated or included in ours. Instead, PRI is
similar to a mutual insurer and the risks and rewards of ownership basically vest with
the policyholders of PRI. The reciprocal management segment also provides brokerage,
administration and intermediary services for insurance and reinsurance programs to PRI
and FPIC. Our TPA segment markets and administers self-insured plans
for both large and small employers, including group accident and health, workerscompensation
and general liability and property insurance. Our financial position and results of
operations are subject to fluctuations due to a variety of factors and our historical
results of operations are not necessarily indicative of future earnings.


Results of Operations
Overview: Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December 31, 2001



For the year ended December 31, 2002,
we reported a net loss of ($14.7) million, or ($1.56) per diluted share, compared to net
income of $2.9 million, or $0.31 per diluted share, for the year ended December 31, 2001.
Our net loss for 2002 includes a $29.6 million after-tax charge for the cumulative effect
of accounting change related to the adoption of FAS 142 on goodwill and other intangible
assets ($48.4 million pre-tax). The transitional impairment charges, resulting from the
adoption of FAS 142, were associated entirely with our non-insurance segments. Our income
before the cumulative effect of accounting change was $14.9 million, or $1.58 per diluted
share, for the year ended December 31, 2002.


Our total revenues for the year
ended December 31, 2002 increased 12% to $220.9 million from $197.6 million for the year
ended December 31, 2001. The increase in revenues is primarily the result of price
improvements on our core MPL business and growth in the number of policyholders. Net
premiums earned on our MPL business increased 23% to $148.6 million for the year ended
December 31, 2002 from $120.5 million for the year ended December 31, 2001. Revenues
earned by our reciprocal management segment increased $2.4 million primarily as the
result of an increase in claims administration and management fees earned. In addition,
brokerage commissions earned by FPIC Intermediaries, Inc. (Intermediaries)
also increased when compared with the prior year.


Our total expenses for the year
ended December 31, 2002 increased less than 1% to $197.2 million from $196.5 million for
the year ended December 31, 2001. Net losses and LAE incurred for the year ended December
31, 2002 increased $11.3 million or 9% when compared with the year ended December 31,
2001. Net losses and LAE incurred on our MPL business increased 17% to $137.7 million for
the year ended December 31, 2002 from $117.4 million for the year ended December 31,
2001. Net losses and LAE incurred in 2002 were also reduced by losses and LAE incurred of
$39.0 million, which was ceded under the Hannover Re reinsurance agreement. The increase
in net losses and LAE incurred for the year ended December 31, 2002, reflects the growth
in our business, taking into consideration expected loss trends. The increases in total
expenses were offset primarily by ceding commissions related to the Hannover Re finite
reinsurance agreement and our adoption of FAS 142. The adoption of FAS 142 eliminated
amortization expense of approximately $3.5 million for the year ended December 31, 2002.


One of the most significant
financial developments for us in 2002 was our new finite reinsurance agreement with
Hannover Re. It is supplemental to our other reinsurance programs and represents a very
large additional reinsurance cession for us. The following table summarizes the effects
of the Hannover Re agreement on our condensed consolidated income statement and
balance sheet accounts. These pro-forma condensed consolidated financial statements are
non-GAAP presentations and are not intended to serve as a substitute for our audited
consolidated financial statements presented elsewhere. Instead, this presentation is
intended to help discern the impact of the Hannover Re agreement in the context of the
overall trends in our reported operating results and financial position for 2002
discussed elsewhere.
23
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Condensed Pro-Forma (Non-GAAP) Consolidated Statements of Financial Position and
(Loss) IncomeAs of and for the years ended December 31, 2002 and 2001(in
thousands, except common share data)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                      | 2002 | Effects of
Hannover Re
Agreement | Proforma 2002
(Excluding
Hannover Re
Agreement) | Proforma
2002 vs 2001
% Change | 2001
|--------------------------------------------------------------------- | ---- | -------------------------------- | ----------------------------------------------- | ------------------------------ | ----
|Assets                                                                |      |                                  |                                                 |                                |     
|Total cash and investments                                            |      | $    538,720                     |                                                 | (3,513                         | )   
|Due from reinsurers on unpaid losses and advance premiums             |      | 168,159                          |                                                 | 38,794                         |     
|Ceded unearned premiums                                               |      | 78,889                           |                                                 | 37,352                         |     
|Deferred policy acquisition costs                                     |      | 4,452                            |                                                 | (5,229                         | )   
|Deferred income taxes                                                 |      | 34,653                           |                                                 | (4,507                         | )   
|Other                                                                 |      | 201,558                          |                                                 |                               |     
|                                                                      |      |                                  |                                                 |                               
|Total assets                                                          |      | $ 1,026,431                      |                                                 | 62,897                         |     
|                                                                      |      |                                  |                                                 |                               
|Liabilities and Shareholders Equity                                  |     
|Losses and loss adjustment expenses                                   |      | $    440,166                     |                                                 |                               |     
|Unearned premiums                                                     |      | 173,421                          |                                                 |                               |     
|Reinsurance payable                                                   |      | 96,470                           |                                                 | 60,196                         |     
|Deferred ceding commission                                            |      | 4,669                            |                                                 | 4,669                          |     
|Federal income tax payable                                            |      | 120                              |                                                 | (3,527                         | )   
|Other                                                                 |      | 145,672                          |                                                 |                               |     
|                                                                      |      |                                  |                                                 |                               
|Total liabilities                                                     |      | 860,518                          |                                                 | 61,338                         |     
|                                                                      |      |                                  |                                                 |                               
|Total shareholders equity                                            |      | 165,913                          |                                                 | 1,559                          |     
|                                                                      |      |                                  |                                                 |                               
|Total liabilities and shareholders equity                            |      | $ 1,026,431                      |                                                 | 62,897                         |     
|                                                                      |      |                                  |                                                 |                               
|Net premiums written                                                  |      | $    140,248                     |                                                 | (85,531                        | )   
|                                                                      |      |                                  |                                                 |                               
|Revenues                                                              |     
|Net premiums earned                                                   |      | $    151,684                     |                                                 | (48,179                        | )   
|Net investment income                                                 |      | 19,902                           |                                                 | (1,075                         | )   
|Other                                                                 |      | 49,279                           |                                                 |                               |     
|                                                                      |      |                                  |                                                 |                               
|Total revenues                                                        |      | 220,865                          |                                                 | (49,254                        | )   
|                                                                      |      |                                  |                                                 |                               
|Expenses                                                              |     
|Net losses and loss adjustment expenses                               |      | 139,571                          |                                                 | (39,025                        | )   
|Other underwriting expenses                                           |      | 19,155                           |                                                 | (12,767                        | )   
|Other                                                                 |      | 38,429                           |                                                 |                               |     
|                                                                      |      |                                  |                                                 |                               
|Total expenses                                                        |      | 197,155                          |                                                 | (51,792                        | )   
|                                                                      |      |                                  |                                                 |                               
|Income before income taxes and cumulative effect of accounting change |      | 23,710                           |                                                 | 2,538                          |     
|Less: Income tax expense (benefit)                                    |      | 8,834                            |                                                 | 979                            |     
|                                                                      |      |                                  |                                                 |                               
|Income before cumulative effect of accounting change                  |      | 14,876                           |                                                 | 1,559                          |     
|Less: Cumulative effect of  accounting change (net of tax)            |      | 29,578                           |                                                 |                               |     
|                                                                      |      |                                  |                                                 |                               
|Net (loss) income                                                     |      | $   (14,702                      | )                                               | 1,559                          |     
|                                                                      |      |                                  |                                                 |                               
|Basic earnings per common share                                       |      | $       (1.57                    | )                                               | 0.17                           |     
|                                                                      |      |                                  |                                                 |                               
|Diluted earnings per common share                                     |      | $       (1.56                    | )                                               | 0.17                           |     
|                                                                      |      |                                  |                                                 |                               
|Loss ratio                                                            |      | 92                               | %                                               | 81                             | %   
|Underwriting expense ratio                                            |      | 13                               | %                                               | 26                             | %   
|GAAP underwriting (combined) ratio                                    |      | 105                              | %                                               | 107                            | %   

|24
|--

|Overview: Twelve Months
Ended December 31, 2001 Compared to Twelve Months Ended December 31, 2000


Net income for the year ended
December 31, 2001, totaled $2.9 million, or $0.31 per diluted share, compared with net
income of $0.6 million, or $0.06 per diluted share, for the year ended December 31, 2000.
The 2001 results include the after-tax effects of $5.4 million for an adjustment made to
increase reserves on prior years business and $0.4 million in restructuring charges
associated with our TPA operations. Improved pricing and growth in policyholders during
2001 generated significant top-line growth.


Total revenues for the year ended
December 31, 2001 increased 9%, to $197.6 million, from $182.1 million for the year ended
December 31, 2000. Annual revenue growth was driven primarily by growth in earned
premiums, which contributed $10.6 million to such growth. Significant improvements in
pricing and the addition of MPL policyholders, primarily in Florida and Missouri, were
the primary source of premium growth. Commission income and claims administration and
management fees earned by our non-insurance subsidiaries in New York and Florida also
grew, contributing $7.2 million to the growth in total revenues. The growth in total
revenues during 2001 was offset by a $1.4 million decline in investment income as a
result of lower market yields.


Total expenses for the year ended
December 31, 2001 increased 6%, to $196.5 million, from $185.1 million for the year ended
December 31, 2000. Net losses and LAE incurred for the year ended December 31, 2001
increased $5.6 million or 5%, over the prior year. Excluding the prior year portions of
pre-tax reserve charges in 2001 and 2000 of $8.6 million and $6.5 million, respectively,
net losses and LAE incurred increased $3.5 million, or 3% during the year 2001. The
increase reflects growth and the continuation of our policy to maintain our reserves at a
conservative level. Other underwriting expenses also contributed to the increase in total
expenses, primarily as a result of enhancements made to our financial and reporting
systems and an increase in operating expenses related to growth in business. Offsetting
the increases in expenses was a reduction in the allowance for bad debts of $1.0 million.


Insurance Segment Our insurance
segment is made up of our four insurance subsidiaries, First Professionals,
Anesthesiologists Professional Assurance Company (APAC) and The Tenere Group,
Inc. (Tenere) companies, Intermed Insurance Company and Interlex Insurance
Company. FPIC operations are also included in the insurance segment due to its size and
prominence and the substantial attention the holding company devotes to the segment.


Effective October 3, 2002, we sold
the renewal rights on Interlexs legal professional liability insurance business to a
subsidiary of Professionals Direct, Inc., a non-affiliate,for $0.4 million. The
sale of Interlexs renewal rights allows us to re-dedicate Interlexs capital to
our core MPL business.

25
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Financial and selected other data of
our insurance segment for the years ended December 31, 2002, 2001 and 2000 is summarized
in the table below. Dollar amounts are in thousands.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                  | 2002 | Percentage
Change | 2001 | Percentage
Change | 2000
|----------------------------------------------------------------- | ---- | ----------------- | ---- | ----------------- | ----
|Direct and assumed premiums written                               |      | $ 344,727         |      | 40                | %   
|                                                                  |      |                   |      |                   |     
|Net premiums written                                              |      | $ 140,248         |      | -5                | %   
|                                                                  |      |                   |      |                   |     
|Net premiums earned                                               |      | $ 151,684         |      | 16                | %   
|Net investment income                                             |      | 19,718            |      | -14               | %   
|Commission income                                                 |      | 8                 |      | -87               | %   
|Net realized investment gains                                     |      | 4,688             |      | 228               | %   
|Finance charge and other income                                   |      | 1,251             |      | 71                | %   
|Intersegment revenue                                              |      | 2,351             |      | 14                | %   
|                                                                  |      |                   |      |                   |     
|Total revenues                                                    |      | 179,700           |      | 14                | %   
|                                                                  |      |                   |      |                   |     
|Net losses and LAE incurred                                       |      | 139,571           |      | 9                 | %   
|Other underwriting expense                                        |      | 19,155            |      | -26               | %   
|Interest expense                                                  |      | 4,827             |      | 6                 | %   
|Other expenses                                                    |      | 456               |      | -54               | %   
|Intersegment expense                                              |      | 3,414             |      | -7                | %   
|                                                                  |      |                   |      |                   |     
|Total expenses                                                    |      | 167,423           |      | 2                 | %   
|                                                                  |      |                   |      |                   |     
|Income (loss) from operations before taxes                        |     
|and cumulative effect of accounting change                        |      | 12,277            |      | 335               | %   
|                                                                  |      |                   |      |                   |     
|Less: Income tax expense (benefit)                                |      | 4,316             |      | 198               | %   
|                                                                  |      |                   |      |                   |     
|Income before cumulative effect of accounting change              |      | 7,961             |      | 1040              | %   
|                                                                  |      |                   |      |                   |     
|Less: Cumulative effect of accounting change                      |      |                  |      | 0                 | %   
|                                                                  |      |                   |      |                   |     
|Net income (loss)                                                 |      | $    7,961        |      | 1040              | %   
|                                                                  |      |                   |      |                   |     
|Selected Insurance Segment Information                            |     
|Net paid losses and LAE on professional liability claims          |      | $  92,497         |      | 7                 | %   
|                                                                  |      |                   |      |                   |     
|Average net paid loss per professional liability claim closed     |     
|with indemnity payment                                            |      | $       184       |      | 5                 | %   
|                                                                  |      |                   |      |                   |     
|Total professional liability claims and incidents reported        |     
|during the period                                                 |      | 3,191             |      | 42                | %   
|                                                                  |      |                   |      |                   |     
|Total professional liability claims closed with indemnity payment |      | 293               |      | -5                | %   
|                                                                  |      |                   |      |                   |     
|Total professional liability claims and incidents closed          |     
|without indemnity payment                                         |      | 2,104             |      | 46                | %   
|                                                                  |      |                   |      |                   |     
|Professional liability policyholders (excludes                    |     
|policyholders under fronting arrangements)                        |      | 16,915            |      | 21                | %   
|                                                                  |      |                   |      |                   |     
|Professional liability policyholders under fronting arrangements  |      | 4,544             |      | 1                 | %   
|                                                                  |      |                   |      |                   |     

|26
|--

|Direct and assumed premiums written
increased 40% to $344.7 million for the year ended December 31, 2002 from $245.4 million
for the year ended December 30, 2001. The increase primarily results from rate increases
realized and growth in the number of policyholders in our core MPL business. First
Professionals implemented rate increases in January and December 2001, and again in
December 2002; APAC implemented rate increases in July 2001 and 2002; and Intermed
implemented rate increases in November 2001 and July 2002. We also experienced growth in
direct premiums written under fronting arrangements for workers compensation
business of $19.4 million for the year ended December 31, 2002 when compared to the year
ended December 31, 2001. The growth in direct premiums written was partially offset by a
decline of $7.8 million in group accident and health (A&H) programs for
the year ended December 31, 2002, which were discontinued in November of 2001.


Direct and assumed premiums written
increased 24% to $245.4 million for the year ended December 31, 2001 from $197.3 million
for the year ended December 31, 2000. Excluding the effects of the non-recurring portion
of assumed premiums under the 100% quota share reinsurance agreement written in the first
quarter of 2000 between our insurance subsidiaries and PRI and the effects of the decline in premiums written under A&H
programs of $16.7 million, direct and assumed premiums written increased approximately
$99 million or 71%. The increase in direct and assumed premiums written is due to the
effect of rate increases and growth in new business in our core MPL lines, and growth in
premiums written under fronting arrangements. The growth in direct premiums written was
partially offset by declines in other MPL assumed premiums written. Under the 100% quota
share reinsurance agreement with PRI, we assumed the death, disability and retirement (DD&R)
risks under PRIs claims-made insurance policies and recognized assumed premiums
written, net of a deferred credit, of approximately $34 million.


Net premiums written decreased 5% to
$140.2 million for the year ended December 31, 2002 from $147.1 million for the year
ended December 31, 2001. The decline in net premiums written is related to the finite
quota share reinsurance agreement effective July 1, 2002 between our largest subsidiary,
First Professionals, and Hannover Re. Under the terms of the Hannover Re agreement, we
ceded approximately $50.8 million of our unearned premiums, and $34.7 million of our
direct written premiums, net of other reinsurance. The agreement, which calls for First
Professionals to cede quota share portions of its 2002 and 2003 written premiums,
contains adjustable features, including a loss corridor, sliding scale ceding commissions
and a cap on the amount of losses that may be ceded to the reinsurer. The effect of these
features is to limit the reinsurers aggregate exposure to loss and reduce the
ultimate costs of this reinsurance to First Professionals as the ceding company. These
features also have the effect of reducing the amount of protection relative to the quota
share amount of premiums ceded by First Professionals. While First Professionals does not
receive pro-rata protection relative to the amount of premiums ceded, the amount of
reinsurance protection is significant, as determined in accordance with guidance under
both GAAP and statutory accounting practices. In addition to ceding a significant portion
of our risks to Hannover Re, the agreement also allows us to reduce our financial
leverage and to realize immediate reimbursement for our up-front acquisition costs,
which, in turn, lessens the strain on our capital.



Net premiums earned increased 16% to
$151.7 million for the year ended December 31, 2002 from $131.1 million for the year
ended December 31, 2001. The increase in net premiums earned is due to rate increases
that we implemented and growth in the number of policyholders. Net premiums earned on our
MPL business increased 23% to $148.6 million for the year ended December 31, 2002 from
$120.5 million for the year ended December 31, 2001.


Net premiums earned increased 9% to
$131.1 million for the year ended December 31, 2001 from $120.5 million for the year
ended December 31, 2000. The increase in net premiums earned is less than the increase in
direct and assumed premiums written for the same period primarily due to the inherent lag
between written and earned premiums. In addition, as noted above, direct premiums written
include premiums written under fronting agreements for which a relatively small portion
of business is retained and therefore only a small portion of premium is ultimately
earned. The increase in net premiums earned is due to growth in the number of
policyholders and the effects of rate increases instituted by our insurance subsidiaries
during 2001. Partially offsetting this increase was a decline in A&H premiums earned
of 70%, to $7.2 million for the year ended December 31, 2001, from $24.1 million for the
year ended December 31, 2000.
27
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Net investment income declined 14%
to $19.7 million for the year ended December 31, 2002 from $22.9 million for the year
ended December 31, 2001. The decline in net investment income is primarily due to lower
prevailing interest rates and reduced yields on fixed income investments, beginning in
the second half of 2001. We also continued to hold significant funds in short-term
invested cash in anticipation of possible improvements in fixed income rates rather than
committing those funds to longer-term investments at historically low yields. On a
consolidated basis, our total cash and investments grew to $538.7 million in 2002, up
$96.7 million or 22% from $442.0 million in 2001. Once again, the effects of historically
low yields have been offset at least to some extent by growth in cash and invested assets.


Net investment income decreased 6%
to $22.9 million for the year ended December 31, 2001 from $24.3 million for the year
ended December 31, 2000. The decrease in net investment income is primarily due to lower
prevailing interest rates in fixed income securities. The effects of lower yields were
offset to some degree by growth in cash and invested assets resulting from growth in
insurance premiums. On a consolidated basis, our total cash and investments grew to $
442.0 million in 2001, up $18.0 million or 4%, from $424.0 million in 2000.


Net realized investment gains
increased 228% to $4.7 million for the year ended December 31, 2002 from $1.4 million for
the year ended December 31, 2001. Our investment strategy remains focused on high
quality, fixed income securities held for the long-term; however, certain securities may
be liquidated from time to time in order to reposition the portfolio or to take advantage
of current market and economic conditions. The increase in net realized investment gains
in 2002 is a reflection of this strategy.



Net realized investment gains
increased 420% to $1.4 million for the year ended December 31, 2001 from $0.3 million for
the year ended December 31, 2000. We engaged new professional investment managers during
2001 as part of our overall investment strategy. While our investment strategy remains
focused on high quality, fixed income securities, some changes have been made in our
asset allocations among these types of securities to take advantage of changing market
conditions. The increase in net realized investment gains coincides with the liquidation
of investments associated with repositioning our investment portfolio.


Finance charges and other income
increased 71% to $1.3 million for the year ended December 31, 2002 from $0.7 million for
the year ended December 31, 2001. The increase in finance charges and other income is
primarily the result of the sale of the renewal rights on Interlexs legal
professional liability business, whereby we realized income in the amount of $0.4 million.


Finance charges and other income
decreased 52% to $0.7 million for the year ended December 31, 2001 from $1.5 million for
the year ended December 31, 2000. The decline in finance charges and other income is due
to our decision to include a provision for finance charges within our Florida MPL policy
premiums, rather than assessing finance charges separately.


Net losses and LAE incurred
increased 9% to $139.6 million for the year ended December 31, 2002 from $128.3 million
for the year ended December 31, 2001. Net losses and LAE incurred in 2002 were reduced by
an increase in ceded losses and LAE incurred under the Hannover Re reinsurance agreement
of $39.0 million. The increase in net losses and LAE incurred for the year ended December
31, 2002 reflects growth in business, taking into consideration expected loss trends. Our
loss ratios for the years ended December 31, 2002 and 2001 were 92% and 98%,
respectively. A loss ratio is defined as the ratio of loss and LAE incurred to net
premiums earned. The 6% decrease in the reported loss ratio for the year ended December
31, 2002 is primarily due to a significant prior year reserve charge taken in 2001, which
was not necessary in 2002 (-5%), loss expense reduction and productivity (-2%), our exit
from our former group A&H business (-1%) and other (-1%); which were partially offset
by the effects of the new Hannover Re agreement (3%).


Net losses and LAE incurred
increased 5% to $128.3 million for the year ended December 31, 2001 from $122.8 million
for the year ended December 31, 2000. The loss ratios for such periods were 98% and 102%,
respectively. During the fourth quarter of 2001, we made a decision to adjust reserves
upward by $8.8 million, pre-tax. Our decision to increase reserves reflects our policy to
maintain our reserves at a conservative level. Excluding the prior year portions of
pre-tax reserve charges in 2001 and 2000 of $8.6 million and $6.5 million, respectively,
net losses and LAE incurred increased $3.5 million, or 3% during the year 2001. The
increase in losses and LAE incurred was partially offset by a decline in our group A&H
business corresponding with the withdrawal from our group A&H programs in 2001. The
remaining increase is consistent with the growth in business during 2001 and continues to
reflect our stated objective of maintaining our reserves at conservative levels, taking
into consideration expected loss trends and all other pertinent considerations.
28
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The loss and LAE reserves represent
our best estimate of the ultimate cost of all losses incurred but unpaid and considers
prior loss experience, loss trends, our loss retention levels and the expected frequency
and severity of claims. The process of establishing reserves for property and casualty
claims is a complex and uncertain process, requiring the use of informed estimates and
judgments. Our estimates and judgments may be revised as additional experience and other
data become available and are reviewed, as new or improved methodologies are developed or
as the current legal environment affecting the settlement of our liability claims changes.
Any such changes could result in future revisions in the estimates of losses or
reinsurance recoverables, and would be reflected in our results of operations for the most
recent period being reported coinciding with when the change occurs. We believe our
reserves for losses and LAE are adequate; however, given the inherent uncertainty in
reserve estimates, there can be no assurance that the ultimate amount of actual losses
will not exceed the related amounts currently estimated. Furthermore, any such difference,
either positive or negative, could have a material effect on our results of operations and
financial position.


Other underwriting expenses
decreased 26% to $19.2 million for the year ended December 31, 2002 from $25.9 million
for the year ended December 31, 2001. The decline in other underwriting expenses is
attributable to ceding commissions recognized under the terms of the finite quota share
reinsurance agreement with Hannover Re in the amount of $13.2 million. In addition, First
Professionals, our largest insurance subsidiary, performed a study of its 2001 expenses
incurred in the administration of claims and based on the results of this study,
decreased the amount of expenses allocated to LAE in 2002.


Other underwriting expenses
increased 25% to $25.9 million for the year ended December 31, 2001 from $20.6 million
for the year ended December 31, 2000. The increase in other underwriting expenses is
primarily attributable to additional operating expenses associated with the growth in
business and expenses incurred to improve our information systems. In addition, two of
our insurance subsidiaries, First Professionals and APAC, increased their accruals for
guarantee fund assessments by approximately $0.9 million, combined. Offsetting these
increases was a reduction in the allowance for bad debts of $1.0 million.


Other expenses decreased 54% to $0.5
million for the year ended December 31, 2002 from $1.0 million for the year ended
December 31, 2001. The decline in other expenses is due to our adoption of FAS 142. In
accordance with FAS 142, we ceased the amortization of goodwill and indefinite lived
intangible assets during the first quarter of 2002.


Other expenses declined 64% to $1.0
million for the year ended December 31, 2001 from $2.8 million for the year ended
December 31, 2000. Other expenses for the year 2000 included a non-recurring pre-tax
severance charge of $1.8 million.


Income tax expense increased to $4.3
million for the year ended December 31, 2002 from an income tax benefit of $4.4 million
for the year ended December 31, 2001. Income tax expense in 2002 increased primarily as a
result of an increase in pre-tax income when compared with 2001. We recognized an income
tax benefit in the prior year because our permanent differences, primarily tax-exempt
interest, were greater than our pre-tax income. The effect of these permanent differences
was proportionately less when compared with pre-tax income in 2002, resulting in tax
expense at an effective rate of 37%. In 2001, we also engaged outside investment managers
and began re-positioning investments including the re-positioning of investments in
tax-exempt municipal securities to investments in taxable securities.


Reciprocal ManagementOur
reciprocal management segment is made up of AFP, our New York subsidiary, and its two wholly owned subsidiaries,
Intermediaries and Group Data Corporation (Group
Data). AFP acts as administrator and attorney-in-fact for PRI, the second largest
medical professional liability insurer for physicians in the state of New York.
Intermediaries acts as a reinsurance broker and intermediary in the placement of
reinsurance. Group Data acts as a broker in the placement of annuities for structured
settlements. The segment also includes the business of Professional Medical Administrators,
LLC (PMA), a 70% owned subsidiary. Effective January 1, 2003, FPIC owns 80% of
PMA. PMA provides brokerage and administration services for professional liability
insurance programs. Financial and selected other data for the reciprocal management
segment for the years ended December 31, 2002, 2001 and 2000 is summarized in the table
below. Dollar amounts are in thousands.
29
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                      | 2002 | Percentage
Change | 2001 | Percentage
Change | 2000
|----------------------------------------------------- | ---- | ----------------- | ---- | ----------------- | ----
|Claims administration and management fees             |      | $   24,341        |      | 6                 | %   
|Net investment income                                 |      | 141               |      | -59               | %   
|Commission income                                     |      | 3,732             |      | 50                | %   
|Other income                                          |      | 83                |      | -79               | %   
|Intersegment revenue                                  |      | 3,381             |      | 9                 | %   
|                                                      |      |                   |      |                   |     
|Total revenues                                        |      | 31,678            |      | 8                 | %   
|                                                      |      |                   |      |                   |     
|Claims administration and management expenses         |      | 18,940            |      | 3                 | %   
|Interest expense                                      |      | 213               |      | 100               | %   
|Other expenses                                        |      | 35                |      | -98               | %   
|Intersegment expense                                  |      | 1,577             |      | 4                 | %   
|                                                      |      |                   |      |                   |     
|Total expenses                                        |      | 20,765            |      | -6                | %   
|                                                      |      |                   |      |                   |     
|Income from operations before taxes and cumulative    |     
|effect of accounting change                           |      | 10,913            |      | 52                | %   
|                                                      |      |                   |      |                   |     
|Less: Income tax expense                              |      | 4,309             |      | 52                | %   
|                                                      |      |                   |      |                   |     
|Income before cumulative effect of accounting change  |      | 6,604             |      | 52                | %   
|                                                      |      |                   |      |                   |     
|Less: Cumulative effect of accounting change          |      | 24,363            |      | 100               | %   
|                                                      |      |                   |      |                   |     
|Net (loss) income                                     |      | $ (17,759         | )    | -508              | %   
|                                                      |      |                   |      |                   |     
|                                                      |      |                   |      |                   |     
|Selected Reciprocal Management Segment Information    |     
|Reciprocal premiums written under management          |      | $ 186,924         |      | 4                 | %   
|                                                      |      |                   |      |                   |     
|Reciprocal statutory assets under management          |      | $ 821,396         |      | -2                | %   
|                                                      |      |                   |      |                   |     
|Professional liability policyholders under management |      | 10,547            |      | 6                 | %   
|                                                      |      |                   |      |                   |     

|Claims administration and management
fees increased 6% to $24.3 million for the year ended December 31, 2002, from $23.0
million for the year ended December 31, 2001. The claims administration and management
fees earned by AFP are comprised entirely of management fees from PRI and the increase is
due to the growth in premiums written by PRI.


In accordance with the management
agreement between AFP and PRI, AFP receives a management fee equal to 13% of PRIs
direct premiums written, with an adjustment for expected return premiums. As such, our
revenues and results of operations are financially sensitive to the revenues and financial
condition of PRI. PRI, as an MPL insurer, is subject to many of the same types of risks as
those of our insurance subsidiaries and MPL companies generally. Growth at PRI is subject
to surplus constraints; however, as a reciprocal, PRI is able to operate at higher
leverage ratios than non-reciprocals such as our insurance subsidiaries. Further, as
allowed under New York insurance laws, PRI has requested and received permission from the
New York State Insurance Department to follow the permitted practice of discounting its
loss and LAE reserves. The New York State Insurance Department mandates PRIs rates,
including rates charged for policies in excess of $1.3 million, which have been reinsured
to First Professionals.
30
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Claims administration and management
fees increased 35% to $23.0 million for the year ended December 31, 2001, from $17.0
million for the year ended December 31, 2000. The increase in claims administration and
management fees is due to an increase in the premiums written by PRI.


Commission income increased 50% to
$3.7 million for the year ended December 31, 2002 from $2.5 million for the year ended
December 31, 2001. The increase in commission income is due to an increase in brokerage
commissions earned by Intermediaries for the placement of reinsurance, which is the
result of an increase in written premiums placed and the rates for reinsurance. In
addition, commission income of approximately $0.5 million was recognized as a result of a
brokerage fee earned from Hannover Re related to the placement of our finite reinsurance
agreement.


Commission income increased 106% to
$2.5 million for the year ended December 31, 2001 from $1.2 million for the year ended
December 31, 2000. The increase in commission income corresponds with the increase in the
amount of reinsurance brokered by Intermediaries in 2001.


Other income decreased 79% to $0.1
million for the year ended December 31, 2002 from $0.4 million for the year ended
December 31, 2001. Effective January 1, 2002, AFP and PRI amended the management
agreement, including the elimination of the sharing by AFP of 10% of PRIs statutory
net income or loss, which accounts for the decline in other income. The amendment was
approved by the New York State Insurance Department.


Other income decreased 76% to $0.4
million for the year ended December 31, 2001 from $1.7 million for the year ended
December 31, 2000. The decrease in other income is the result of lower statutory net
income at PRI compared to the year 2000. The income received by AFP related to PRIs
statutory net income for the years ended December 31, 2001 and 2000 was $0.3 million and
$1.6 million, respectively. In accordance with the management agreement between AFP and
PRI, through 2001, AFP received or paid an amount equal to 10% of PRIs statutory
net income or loss.


Claims administration and management
expenses increased 3% to $18.9 million for the year ended December 31, 2002 from $18.4
million for the year ended December 31, 2001. The increase in claims administration and
management expenses for the year ended December 31, 2002 is due to an increase in
operating expenses incurred to manage the growth in business at PRI, offset partially by
a decline in risk management department expenses when compared to the year ended December
31, 2001. As noted above, the management agreement between AFP and PRI was amended in
2002. As part of the amended agreement, PRI is to reimburse AFP for 100% of risk
management department expenses as compared with 50% under the former agreement.


Claims administration and management
expenses increased 23% to $18.4 million for the year ended December 31, 2001 from $15.0
million for the year ended December 31, 2000. The increase in claims administration and
management expense is primarily attributable to an increase in commission expense
incurred as a result of growth in brokerage and administration business at AFP and PMA.
Under terms of the management agreement between AFP and PRI, AFP is responsible for
brokerage costs incurred by PRI. In addition, AFP incurred additional operating expenses
related to the growth in direct business at PRI.


Interest expense increased to $0.2
million for the year ended December 31, 2002. The increase in interest expense is the
result of the 2002 amendment to the management agreement between AFP and PRI. In
accordance with the amended agreement, AFP has agreed to pay 6% annual interest on the
10% profit share amounts already earned and collected under the original agreement for
1999, 2000 and 2001, while those years remain open for possible future re-determination
and adjustment, if any.


Other expenses decreased 98% to
$0.04 million for the year ended December 31, 2002 from $2.2 million for the year ended
December 31, 2001. The decline in other expenses is due to the effects of the adoption of
FAS 142. In accordance with FAS 142, we ceased the amortization of goodwill and
indefinite lived intangible assets during the first quarter of 2002. The reciprocal
management segment also recorded a transitional impairment charge of $24.4 million,
after-tax, which is accounted for as the cumulative effect of accounting change. The
non-cash transitional impairment charge primarily reflects certain intangibles and
synergies, which, in our opinion, are opportunistic in nature and carry a significant
degree of uncertainty; therefore, we treated these intangibles conservatively in the
valuation required by FAS 142.
31
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Third Party
Administration


Our TPA segment is made up of our
subsidiary EMI. Financial and selected other data for our TPA segment for the years ended
December 31, 2002, 2001 and 2000 is summarized in the table below. Dollar amounts are in
thousands.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                    | 2002 | Percentage
Change | 2001 | Percentage
Change | 2000
|--------------------------------------------------------------------------------------------------- | ---- | ----------------- | ---- | ----------------- | ----
|Claims administration and management fees                                                           |      | $   12,693        |      | 1                 | %   
|Net investment income                                                                               |      | 43                |      | -73               | %   
|Commission income                                                                                   |      | 2,475             |      | -1                | %   
|Net realized investment losses                                                                      |      |                  |      | 100               | %   
|Other income                                                                                        |      | 8                 |      | -78               | %   
|Intersegment revenue                                                                                |      | 83                |      | -89               | %   
|                                                                                                    |      |                   |      |                   |     
|Total revenues                                                                                      |      | 15,302            |      | -4                | %   
|                                                                                                    |      |                   |      |                   |     
|Claims administration and management expenses                                                       |      | 13,958            |      | -6                | %   
|Other expenses                                                                                      |      |                  |      | -100              | %   
|Intersegment expense                                                                                |      | 824               |      | 11                | %   
|                                                                                                    |      |                   |      |                   |     
|Total expenses                                                                                      |      | 14,782            |      | -12               | %   
|                                                                                                    |      |                   |      |                   |     
|Income (loss) from operations before taxes and 
             cumulative effect of accounting change |      | 520               |      | 160               | %   
|                                                                                                    |      |                   |      |                   |     
|Less: Income tax expense (benefit)                                                                  |      | 209               |      | 170               | %   
|                                                                                                    |      |                   |      |                   |     
|Income (loss) before cumulative effect of accounting change                                         |      | 311               |      | 154               | %   
|                                                                                                    |      |                   |      |                   |     
|Less: Cumulative effect of accounting change                                                        |      | 5,215             |      | 100               | %   
|                                                                                                    |      |                   |      |                   |     
|Net loss                                                                                            |      | $  (4,904         | )    | -759              | %   
|                                                                                                    |      |                   |      |                   |     
|Selected TPA Segment Information                                                                    |     
|Covered lives under employee benefit programs                                                       |      | 109,171           |      | 31                | %   
|                                                                                                    |      |                   |      |                   |     
|Covered lives under workers compensation programs                                                  |      | 38,100            |      | 1                 | %   
|                                                                                                    |      |                   |      |                   |     

|Claims administration and management
fees increased 1% to $12.7 million for the year ended December 31, 2002 from $12.5
million for the year ended December 31, 2001. Our results of operations for the period
ended December 31, 2001 include our Albuquerque TPA division, which was disposed of in
December 2001. Excluding the effect of the Albuquerque TPA division, claims
administration and management fees increased $2.7 million for the year ended December 31,
2002, when compared with the year ended December 31, 2001. The increase in claims
administration and management fees reflects growth in new business.


Claims administration and management
fees declined 3% to $12.5 million for the year ended December 31, 2001 from $13.0 million
for the year ended December 31, 2000. The decline in claims administration and management
fees is due to the termination of certain non-profitable contracts at our Albuquerque
division. Excluding the effect of the terminated contracts, claims administration and
management fees increased $1.1 million for the year ended December 31, 2001, as compared
to the same period in 2000.


Commission income was $2.5 million
for the year ended December 31, 2002 and relatively flat when compared to commission
income for the year ended December 31, 2001. The amount of premium placed by the TPA
segment increased during the years 2002 and 2001; however, we decreased the commission
rates paid by customers during 2002 and as a result, commission income was relatively
flat when compared with the prior year.

32
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Commission income increased 19% to
$2.5 million for the year ended December 31, 2001 from $2.1 million for the year ended
December 31, 2000. The increase in commission income corresponds with increases in the
underlying rates paid by customers for reinsurance being placed by the TPA segment under
alternative market arrangements.


Net realized investment losses for
the year ended December 31, 2000 were $0.4 million, largely due to the write down of our
investment in a joint venture, Bexar Credentials, Inc. (Bexar) in the fourth
quarter of 2000. Our stock in Bexar was redeemed for $70 thousand in cash and notes
receivable in January 2001. All amounts receivable from the sale have been collected.


Claims administration and management
expenses decreased 6% to $14.0 million for the year ended December 31, 2002 from $14.8
million for the year ended December 31, 2001. The decline in claims administration and
management expenses is due to the disposition of our Albuquerque division. Excluding the
effect of the Albuquerque TPA division, claims administration and management expenses
increased $2.3 million for the year ended December 31, 2002, when compared with the year
ended December 31, 2001. The increase in claims administration and management expenses is
due to additional expenses incurred as the result of new business.


Claims administration and management
expenses declined 5%, to $14.8 million for the year ended December 31, 2001 from $15.5
million for the year ended December 31, 2000. The decline in claims administration and
management expenses is due to the termination of certain non-profitable contracts at our
Albuquerque division. Excluding the effect of the terminated contracts, claims
administration and management expenses increased $1.0 million for the year ended December
31, 2001, as compared to the same period in 2000.


Other expenses decreased 100% for the
year ended December 31, 2002 from $1.3 million for the year ended December 31, 2001. The
decline in other expenses is due to the adoption of FAS 142. In accordance with FAS 142,
we ceased the amortization of goodwill and indefinite lived intangible assets during the
first quarter of 2002. In addition, and as noted above, in 2001 we recognized a pre-tax
charge of approximately $0.6 million in connection with the disposition of the Brokerage
Services, Inc. (BSI) division of EMI in Albuquerque, New Mexico, which did not recur in 2002.


The TPA segment also recorded a
transitional impairment charge of $5.2 million, after-tax in 2002, which is accounted for
as the cumulative effect of accounting change. In our opinion, the non-cash transitional
impairment charge primarily reflects changes in market conditions and an increase in
competition in recent years in the markets served by the TPA segment.


For the year ended December 31, 2001,
other expenses decreased 28%, to $1.3 million from $1.8 million for the year ended
December 31, 2000. Excluding the restructuring charges taken during the fourth quarter of
2001 and 2000 mentioned below, other expenses declined 46%, to $0.7 million for the year
ended December 31, 2001, from $1.3 million for the year ended December 31, 2000. The
decrease in other expenses represents savings from our disposition of non-core businesses
during 2000.


During the fourth quarter 2001, we
incurred a pre-tax charge of approximately $0.6 million in connection with the disposition
of BSI. Under the plan, we sold the divisions assets and cancelled its service
agreements with self-insured customers. Certain other contracts were retained and are
serviced by our Jacksonville, Florida, division. The 2001 restructuring activity was a
continuation of our consolidation of the TPA operations and concluded the restructuring
activities of the Albuquerque division that began during 2000. We incurred a pre-tax
charge of $0.5 million in 2000 related to this now disposed of division. Excluding the
effects of the restructuring charges, the TPA segment incurred a net loss of approximately
$0.2 million and $0.5 million for the years 2001 and 2000, respectively.
33
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Managements
Discussion & Analysis of Financial Position: December 31, 2002 Compared to December
31, 2001


Cash and invested assets increased
22% to $538.7 million as of December 31, 2002 from $442.0 million as of December 31, 2001.
The increase in cash and invested assets is due primarily to the growth in premiums and
related cash flows from operating activities, which increased the amounts available for
investment.


Premiums receivable increased 48% to
$108.5 million as of December 30, 2002 from $73.4 million as of December 31, 2001.
Approximately $28.3 million of the increase in premiums receivable is associated with
growth in premiums written on our core MPL insurance business. Approximately $6.7 million
of the increase in premiums receivable is associated with growth in premiums written under
fronting arrangements for workers compensation business.


Due from reinsurers on unpaid losses
and advance premiums increased 109% to $168.2 million as of December 31, 2002 from $80.4
million as of December 31, 2001. Approximately $38.8 million of the increase is associated
with reserves ceded under the finite reinsurance agreement with Hannover Re. The remaining
increase in due from reinsurers on unpaid losses and advance premiums is primarily the
result of the increase in the underlying reserves ceded to other insurance carriers under
reinsurance arrangements associated with growth in our core MPL insurance business.


Ceded unearned premiums increased 93%
to $78.9 million as of December 31, 2002 from $40.8 million as of December 31, 2001.
Approximately $37.4 million of the increase is associated with the unearned premiums ceded
under the finite reinsurance agreement with Hannover Re.


On August 2, 2002, Gerling Global
Reinsurance Corporation of America (Gerling), one of our reinsurers, had its
financial strength rating lowered by A.M. Best from A- (Excellent) to B+ (Very Good). On
December 20, 2002, Gerlings A.M. Best rating was further downgraded to B- (Fair).
These rating actions by A.M. Best followed an announcement by Gerling of its intention to
exit the U.S. non-life reinsurance market. Since then, Gerling has essentially placed
itself in voluntary run-off with respect to its U.S. non-life reinsurance business and
A.M. Best has withdrawn Gerlings financial strength rating and replaced it with the
designation NR-3, which means that A.M. Bests rating methodology no
longer applies. Gerling has participated in our excess of loss reinsurance programs in
2000 at 15%, and in 2001 and 2002 at 20%. Gerling has also provided facultative
reinsurance coverage for non-standard risks. We replaced Gerlings participation in
our reinsurance programs, effective with our renewal, as of January 1, 2003. As of
December 31, 2002, the estimated amount of net reinsurance recoverables from Gerling was
approximately $13 million, comprised of the gross recoverables from Gerling, less
reinsurance payables to Gerling of approximately $4 million. Gerling is an authorized
reinsurer in our markets; therefore, we do not hold collateral for these reinsurance
recoverables.


Gerlings actions, including
placing itself in run-off with respect to its U.S. non-life reinsurance business, have
been voluntary and as recently as March 10, 2003, it has publicly stated that it is paying
its outstanding claims. Consequently, we currently expect that Gerling will fully meet its
obligations to us. We will continue to monitor developments at Gerling and should its
financial condition worsen, we could, in-turn, recognize a charge for
uncollectible reinsurance recoverables.


Deferred income taxes increased 74%
to $34.7 million as of December 31, 2002 from $19.9 million as of December 31, 2001. The
increase in deferred income taxes is primarily due to the adoption of FAS 142. As a result
of the transitional impairment tests required by FAS 142, in 2002 we recognized a
one-time, non-cash pre-tax charge of $48.4 million and recorded deferred tax assets for
tax-deductible goodwill, in the amount of $18.8 million.


Goodwill decreased 72% to $18.9
million as of December 31, 2002 from $67.2 million as of December 31, 2001. The decrease
in goodwill is due to the adoption of FAS 142. As a result of the transitional impairment
tests required by FAS 142, we reduced the carrying value of goodwill at our reciprocal
management and TPA segments. The transitional impairment charge at the reciprocal
management segment primarily reflects certain intangibles and synergies, which, in our
opinion, are opportunistic in nature and carry a relatively higher degree of uncertainty;
therefore, we treated these intangibles conservatively in the valuation required by FAS
142. The transitional impairment charge at the TPA segment primarily reflects changes in
market conditions and an increase in competition in recent years in the markets served by
the TPA segment.
34
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Other assets increased 313% to $54.6
million as of December 31, 2002 from $13.2 million as of December 31, 2001. Approximately
$38.2 million of the increase in other assets is due to the sale of investments for which
the proceeds from the sale had not been received at December 31, 2002 and a receivable
from the broker was recorded. The increase in other assets is also attributable to
receivables for amounts due under our fronting programs and an increase in amounts due
from PRI related to a change in the management agreement between AFP and PRI, partially
offset by the receipt of a state tax refund due to the overpayment of estimated taxes in
2001.


The liability for losses and LAE
increased 38% to $440.2 million as of December 31, 2002 from $318.5 million as of December
31, 2001. Excluding the effect of the return of loss and LAE reserves of approximately
$9.3 million on business previously assumed from PRI, which was commuted in the first
quarter of 2002, the increase in our liability for loss and LAE was approximately $131.0
million. The increase in the liability for losses and LAE is primarily attributable to the
growth in our core MPL book of business, taking into consideration expected loss trends
and other pertinent considerations.


The loss and LAE reserves represent
our best estimate of the ultimate cost of all losses incurred but unpaid and considers
prior loss experience, loss trends, our loss retention levels and the expected frequency
and severity of claims. The process of establishing reserves for property and casualty
claims is a complex and uncertain process, requiring the use of informed estimates and
judgments. Our estimates and judgments may be revised as additional experience and other
data become available and are reviewed, as new or improved methodologies are developed or
as the current legal environment affecting the settlement of our liability claims changes.
Any such changes could result in future revisions in the estimates of losses or
reinsurance recoverables, and would be reflected in our results of operations for the most
recent period being reported coinciding with when the change occurs. We believe our
liability for losses and LAE is adequate; however, given the inherent uncertainty in
reserve estimates, there can be no assurance that the ultimate amount of actual losses
will not exceed the related amounts currently estimated. Furthermore, any such difference,
either positive or negative, could have a material effect on our results of operations and
financial position.


Unearned premiums increased 18% to
$173.4 million as of December 31, 2002 from $146.8 million as of December 31, 2001. The
increase in unearned premiums is the result of the growth in premiums written at our
insurance subsidiaries.


Reinsurance payable increased 261% to
$96.5 million as of December 31, 2002 from $26.7 million as of December 31, 2001.
Approximately $60.2 million of the increase is the result of funds withheld under the
terms of the finite reinsurance agreement with Hannover Re. The remaining increase in
reinsurance payable is primarily the result of an increase in MPL premiums written.


Paid in advance and unprocessed
premiums increased 41% to $14.1 million as of December 31, 2002 from $9.9 million as of
December 31, 2001. The increase in paid in advance and unprocessed premiums is primarily
the result of growth in our core MPL book of business.


Accrued expenses and other
liabilities increased 142% to $75.7 million as of December 31, 2002 from $31.3 million as
of December 31, 2001. Approximately $32.6 million of the increase in accrued expenses and
other liabilities is related to the purchase of investments for which the costs from the
purchase had not been paid at December 31, 2002 and a payable to broker was recorded.
Approximately $4.9 million of the increase in accrued expenses and other liabilities is
related to commissions payable associated with an increase in insurance business.

35
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Stock Repurchase Plans


Under our stock repurchase programs,
we may repurchase shares at such times, and in such amounts, as management deems
appropriate, subject to the requirement of our credit facility. In accordance with an
amendment to our credit facility dated November 21, 2002, we must obtain the consent of
our lenders to repurchase any of our stock. We did not repurchase any shares during 2002.
Since the commencement of these repurchase programs, we have repurchased 875,000 of our
shares at a cost of approximately $16.2 million. A total of 365,500 shares remain
available to be repurchased under the programs.


Liquidity and Capital
Resources


The payment of losses and LAE,
operating expenses, interest expense and income taxes in the ordinary course of business
and the repayment of debt and assignment of collateral are the principal needs for our
liquid funds. Cash provided by operating activities has been used to pay these items and
was sufficient during 2002 to meet these needs. As reported in the consolidated statement
of cash flows, we generated positive net cash from operating activities of $98.1 million
for the year ended December 31, 2002. At December 31, 2002, we had cash and cash
equivalents of $86.6 million and held fixed maturity debt securities with a fair value of approximately
$9.2 million with scheduled maturities during the next twelve months. We believe that cash
and cash equivalents as of December 31, 2002, combined with cash flows from operating
activities and the scheduled maturities of investments in 2003, will be sufficient to meet
our cash needs for operating purposes for at least the next twelve months. A number of
factors could cause unexpected changes in liquidity and capital resources available,
including but not limited to the following:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|i) | Unexpected
changes in premium revenue due to higher or lower than expected new
               business or retention of insurance policies in force;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------

|ii) | Unexpected
changes in the amounts needed to defend and settle claims;
|--- | ---------------------------------------------------------------------

|iii) | Unexpected
changes in operating costs, including new or increased taxes;
|---- | ------------------------------------------------------------------------

|iv) | Failure
of one or more of our reinsurers leading to uncollectible reinsurance
               recoverables;
|--- | ----------------------------------------------------------------------------------------------------------

|v) | Possible
impairments of our long term investments; and
|-- | ------------------------------------------------------

|vi) | Uncertainties
surrounding the availability and costs associated with our bank                credit
financing.
|--- | --------------------------------------------------------------------------------------------------------------

|Furthermore, liquidity and capital
risks can come about as the result of the broader business and financial risks facing us
including the uncertainties and factors disclosed in the Safe Harbor Disclosure. Many, if
not most of these types of uncertainties, could have a corresponding and materially
negative affect on our liquidity and capital resources, as well as our financial condition
and results of operations. In order to compensate for such risk, we:
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(i) | Maintain
what management considers to be adequate reinsurance;
|--- | --------------------------------------------------------------

|(ii) | Monitor
our reserve positions and regularly perform actuarial reviews of loss                and
LAE reserves; and
|---- | ------------------------------------------------------------------------------------------------------------------

|(iii) | Attempt
to maintain adequate asset diversification and liquidity (by managing                our
cash flow from operations coupled with the maturities from our fixed income
               portfolio investments).
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|As of December 31, 2002, we had an
outstanding principal balance of $47.2 million under a senior credit facility with five
banks. The senior credit facility is comprised of (i) a $37.5 million revolving credit
facility (with a $15 million letter of credit sub-facility), which matures on August 31,
2004, and (ii) a $10.2 million term loan facility, repayable in quarterly installments of
approximately $1.5 million. We have also deposited $3.0 million (of which, $1.0 million
was deposited in January 2003) as collateral under the terms of the credit facility, and
are required to either pre-pay principal or make additional collateral deposits of $0.35
million quarterly in 2003. The credit facility also requires that we pre-pay principal or
make additional collateral deposits of approximately $1.3 million each at March 31 and
June 30, 2004. Amounts outstanding under the credit facility bear interest at a variable
rate, primarily based upon LIBOR plus a current margin of 3.0 percentage points, which may
be reduced to a minimum of 2.75 percentage points as we reduce our outstanding
indebtedness. In connection with our credit facility, we also entered into two-interest
rate swap agreements (the swap agreements). We use the swap agreements to
minimize fluctuations in cash flows caused by interest rate volatility and to effectively
convert all of our floating-rate debt to fixed-rate debt.

36
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|We are not required to maintain
compensating balances in connection with our credit facility but we are charged a fee on
the unused portion, which ranges from 30 to 40 basis points. Under the terms of the credit
facility, we are required to meet certain financial and non-financial covenants.
Significant covenants are as follows:
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|i) | Total
debt to cash flow available for debt service may not exceed 3.00:1;
|-- | -------------------------------------------------------------------------

|ii) | Combined
net premiums written to combined statutory capital and surplus may not
               exceed 1.75:1;
|--- | -------------------------------------------------------------------------------------------------------------

|iii) | Funded
debt to total capital plus funded debt may not exceed 0.27:1;
|---- | --------------------------------------------------------------------

|iv) | The
fixed charge coverage ratio may not be less than 2.00:1 at the end of each
               quarter through December 31, 2002, and thereafter the fixed charge
coverage                ratio may not be less than 2.25:1; and
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|v) | Combined
gross premiums written to combined statutory capital and surplus may                not
exceed 2.75:1.
|-- | ---------------------------------------------------------------------------------------------------------------

|The credit facility also contains
minimum equity and risk-based capital requirements and requires our insurance subsidiary,
First Professionals, to maintain at least a B++ (Very Good) group rating from A.M. Best.


Should we fail to meet one or more of
our loan covenants, such occurrence would be considered an event of default. If we were
unable to provide an acceptable resolution for an event of default, our lenders would have
the right to demand immediate repayment in full. Although we have consolidated cash and
investments on hand and net cash flows from operating activities in excess of our
outstanding debt, as explained further below, most of these funds are held and generated
by our insurance subsidiaries, which are subject to regulatory requirements to maintain
capital and surplus and dividend restrictions. Therefore, the majority of these funds are
not available to the holding company. So, if repayment of our loans were accelerated, FPIC
may not have sufficient liquidity from immediately available operating funds. In the case
of a significant acceleration or demand for repayment in full, we may be required to
secure replacement financing, raise additional capital, restructure our operations or sell
assets, or a combination of these, in order to raise the funds necessary to repay our
loans. Any such circumstances would likely have a material detrimental impact on our
results of operations and financial condition.


On October 23, 2002, A.M. Best
announced its decision to change our insurance group rating from A- (Excellent) with a
negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating
change, we were temporarily in non-compliance with the credit facility. As a result of
such non-compliance, we negotiated an amendment to the credit facility with our lenders.
The terms and conditions of the credit facility described above reflect this amendment.


Shareholder dividends available from
our insurance subsidiaries are subject to certain limitations imposed by Florida and
Missouri laws. During 2003, these subsidiaries are permitted, within insurance regulatory
guidelines, to pay dividends of approximately $12.5 million without prior regulatory
approval.


The National Association of Insurance
Commissioners has developed risk-based capital (RBC) measurements for
insurers, which have been adopted by the Florida and Missouri Departments of Insurance.
RBC measurements provide state regulators with varying levels of authority based on the
adequacy of an insurers adjusted surplus. At December 31, 2002, our insurance
subsidiaries maintained adjusted surplus in excess of their required RBC thresholds.


Our insurance subsidiaries are also
subject to assessment by the financial guaranty associations in the states in which they
conduct business for the provision of funds necessary for the settlement of covered claims
under certain policies of insolvent insurers. Generally, these associations can assess
member insurers on the basis of written premiums in their particular states. In addition
to standard assessments, the Florida and Missouri legislatures may also levy special
assessments to settle claims caused by certain catastrophic losses. We would be assessed
on a basis of premiums written. During 2001, a special assessment was levied on First
Professionals and APAC that totaled $0.9 million. No special assessments were made in 2002
or 2000. In addition, we could be subject to additional assessments in the future as a
result of damages caused by catastrophic losses, such as a hurricane.
37
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Accounting Pronouncements


In June 2002, the Financial Accounting Standards Board (FASB)
 issued FAS
146, Accounting for Costs Associated with Exit or Disposal Activities. FAS 146
addresses financial accounting and reporting for costs associated with exit or disposal
activities. It requires that the cost associated with an exit or disposal activity be
recognized when the liability is incurred, not necessarily at the date of an entitys
commitment to an exit plan.  As a result, some costs relating to the disposition may
be deferred until later periods when they are incurred. The provisions of FAS 146 are
effective for exit or disposal activities initiated after December 31, 2002. Accordingly,
we will adopt this statement for applicable transactions occurring on or after January 1,
2003.


FAS 148, Accounting for
Stock-Based Compensation- Transition and Disclosure, amends FAS 123,
Accounting for Stock-Based Compensation, to provide transition guidance for a
change to the fair value based method of accounting for stock-based employee compensation.
 In addition, this statement amends the disclosure requirements of FAS 123 for both
annual and interim financial statements.  FAS 148 is effective December 31, 2002.
 The adoption of FAS 148 did not have a material effect on our financial statements.
The disclosure requirements of FAS 148 have been incorporated into Note 19 to the
consolidated financial statements.


In November 2002, the FASB issued
FASB Interpretation No. (FIN) 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN 45 expands existing accounting guidance and disclosure requirements for
certain guarantees and requires the recognition of a liability for the fair value of
certain types of guarantees issued or modified after December 31, 2002. We do not believe
that the adoption of FIN 45s guidance will have a material effect on our financial
position.


In January 2003, the FASB issued FIN
46, Consolidation of Variable Interest Entities. FIN 46 addresses whether
certain types of entities, referred to as variable interest entities (VIEs),
should be consolidated in a companys financial statements. A VIE is an entity that
either (1) has equity investors that lack certain essential characteristics of a
controlling financial interest (including the ability to control the entity, the
obligation to absorb the entitys expected losses and the right to receive the
entitys expected residual returns), or (2) lacks sufficient equity to finance its
own activities without financial support provided by other entities, which in turn would
be expected to absorb at least some of the expected losses of the VIE. An entity should
consolidate a VIE if it stands to absorb a majority of the VIEs expected losses or
to receive a majority of the VIEs expected residual returns. The provisions of FIN
46 are effective immediately for all VIEs created after January 31, 2003. With respect to
VIEs created before February 1, 2003, FIN 46 would become effective for public companies
no later than the beginning of the first interim or annual period beginning after June 15,
2003 (i.e., third calendar quarter of 2003). FIN 46 also requires that if it is reasonably
possible that an enterprise will consolidate or disclose information about a VIE when it
does become effective, that the enterprise is required to disclose certain information
about it in all financial statements initially issued after January 31, 2003. We have
considered the guidance contained in FIN 46 and, to date, have not identified any
interests or relationships that we believe would be a variable interest in a VIE, as
defined.


Item 7A. Quantitative
and Qualitative Disclosures About Market Risk


Market risk is the risk of loss
arising from adverse changes in market and economic 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 our primary market risk exposures and how we managed
those exposures as of December 31, 2002. Our market risk sensitive instruments are entered
into for purposes other than trading.


The fair value of our debt and equity
investment portfolio as of December 31, 2002 was approximately $437.0 million. Our
investment portfolio was invested primarily in fixed maturity securities. The fixed
maturity portfolio currently maintains an average Moodys credit quality of AA. We
invest in securities with investment grade credit ratings, with the intent to minimize
credit risks. As of December 31, 2002, our investments in below investment grade
securities were less than 1% of the fixed income portfolio. These securities were
downgraded subsequent to acquisition by FPIC. Approximately 54% of the fixed income
portfolio is invested in securities rated AAA or its equivalent by investment rating
services, 14% is AA, 19% is A, and 12% is BBB. We purchased collateral mortgage
obligations in the context of our overall investment and asset class allocation strategy
and, specifically, to help improve our yields and current income. Approximately 20% of our
fixed income portfolio is allocated to the municipal sector. The balance is diversified
through investments in treasury, agency, and corporate and mortgage-backed securities.
38
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Generally, we do not invest in
derivatives and do not currently use hedging strategies in our investment portfolio.
However, we do have investments in two interest rate swaps to fix the interest rate in
connection with our revolving credit facility and term loan.


The four market risks that can most
directly affect the investment portfolio are changes in U.S. interest rates, credit risks,
prepayment risks, and legislative changes, including changes in tax laws that might affect
the taxation of our invested securities.


From time to time, discussion arises
in the United States Congress relative to changing or modifying the tax-exempt status of
municipal securities. We stay abreast of possible legislative acts that could adversely
affect the tax-exempt status of municipal securities. At present there are no hedging or
other strategies being used to minimize this risk. However, we have also reduced our
concentration in tax-exempt municipal securities during 2002, as part of our overall
investment strategy.


We manage risks associated with the
changes in interest rates by attempting to manage the duration of our investments in
relation to the duration of our anticipated liabilities (principally claim payments and
related defense costs). Effective duration is a standard measure of interest rate
sensitivity, which takes into account, among other things, the effect that changing
interest rates will have on prepayments and the re-investment of these funds. The
effective duration of our investment portfolio as of December 31, 2002 was 4.8 years. If
prevailing market interest rates on investments in debt securities comparable to those we
held as of December 31, 2002 were to increase 100 basis points, the fair value of our
fixed maturity securities would have decreased approximately $21.0 million.


The amounts reported as cash flows in
the table below for fixed maturities represent par values at maturity date, and exclude
investment income and expenses and other cash flows. The fair values of fixed maturities
are based upon quoted market prices or dealer quotes for comparable securities. The
projected cash flows of the credit facility and term loan and operating leases approximate
fair value as of December 31, 2002. The fair value of the interest rate swaps is estimated
using quotes from brokers and represents the cash requirement if the existing agreement
had been settled at year-end.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Projected
      Cash Flows (in thousands)
|------------------------------------ | -----------------------------------------
|
|Assets                               |                                          
|Fixed maturity
      securities,     |                                          
|Available
      for sale             |                                          
|Liabilities                          |                                          
|Credit
      facility(1)             |                                          
|Term
      loan(1)                   |                                          
|Interest
      rate swaps            |                                          
|Operating
      leases               |                                          
|Weighted
      Average Interest Rate |                                          
|Fixed
      maturity securities      |                                          
|Credit
      Facility                |                                          
|Term
      Loan                      |                                          
|Interest
      rate swaps            |                                          

|(1)   
          In accordance with our amended Revolving Credit and Term Loan Agreement, we are
          also required to make mandatory principal prepayments on our Term Loan or
          provide liquid collateral acceptable to our lenders, in the amount of $0.35
          million quarterly in 2003 and $1.3 million at March 31 and June 30, 2004.


39
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Item 8. Financial
Statements and Supplementary Data


Report of Independent
Certified Public Accountants


To the Board of Directors and
Shareholders ofFPIC Insurance Group, Inc.:


In our opinion, the accompanying
consolidated statements of financial position and the related consolidated statements of
(loss) income and comprehensive (loss) income, changes in shareholders equity and
cash flows, present fairly, in all material respects, the financial position of FPIC
Insurance Group, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the accompanying financial
statement schedules present fairly, in all material respects, the information set forth
therein, as of and for the years ended December 31, 2002 and 2001, when read in
conjunction with the related consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the Companys management.
We conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.


As discussed in Notes 2 and 10 to the
consolidated financial statements, effective January 1, 2002, the Company changed its
method of accounting for goodwill following adoption of Statement of Financial Accounting
Standard No. 142 Goodwill and Other Intangible Assets.


PricewaterhouseCoopers
LLP




Jacksonville, FloridaFebruary
20, 2003


40
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Consolidated Statements of Financial PositionAs of
December 31, 2002 and 2001(in thousands, except common share data)
|-----------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | 2002 | 2001        
|----------------------------------------------------------- | ---- | ------------
|Assets                                                      |      |             
|Cash and cash equivalents                                   |      | $     86,589
|Bonds and U.S. Government securities, available for sale    |      | 436,970     
|Equity securities, available for sale                       |      | 6           
|Other invested assets                                       |      | 10,801      
|Real estate                                                 |      | 4,354       
|                                                            |      |             
|Total cash and investments                                  |      | 538,720     
|Premiums receivable, net of allowance for doubtful accounts |     
|of $400 and $734 in 2002 and 2001, respectively             |      | 108,494     
|Accrued investment income                                   |      | 5,998       
|Reinsurance recoverable on paid losses                      |      | 6,529       
|Due from reinsurers on unpaid losses and advance premiums   |      | 168,159     
|Ceded unearned premiums                                     |      | 78,889      
|Property and equipment, net                                 |      | 4,334       
|Deferred policy acquisition costs                           |      | 4,452       
|Deferred income taxes                                       |      | 34,653      
|Prepaid expenses                                            |      | 1,744       
|Goodwill                                                    |      | 18,870      
|Intangible assets                                           |      | 1,034       
|Federal income tax receivable                               |      |            
|Other assets                                                |      | 54,555      
|                                                            |      |             
|Total assets                                                |      | $1,026,431  
|                                                            |      |             
|Liabilities and Shareholders Equity                        |     
|Losses and loss adjustment expenses                         |      | $   440,166 
|Unearned premiums                                           |      | 173,421     
|Reinsurance payable                                         |      | 96,470      
|Paid in advance and unprocessed premiums                    |      | 14,060      
|Revolving credit facility                                   |      | 37,000      
|Term loan                                                   |      | 10,208      
|Deferred credit                                             |      | 8,749       
|Deferred ceding commission                                  |      | 4,669       
|Federal income tax payable                                  |      | 120         
|Accrued expenses and other liabilities                      |      | 75,655      
|                                                            |      |             
|Total liabilities                                           |      | 860,518     
|                                                            |      |             
|Commitments and contingencies (Note 17)                     |     
|                                                           
|Common stock, $.10 par value, 50,000,000 shares authorized; |     
|9,390,795 and 9,337,755 shares issued and outstanding at    |     
|December 31, 2002 and 2001, respectively                    |      | 939         
|Additional paid-in capital                                  |      | 38,322      
|Accumulated other comprehensive income (loss)               |      | 5,525       
|Retained earnings                                           |      | 121,127     
|                                                            |      |             
|Total shareholders equity                                  |      | 165,913     
|                                                            |      |             
|Total liabilities and shareholders equity                  |      | $1,026,431  
|                                                            |      |             

|The accompanying notes are an
integral part of the consolidated financial statements.


41
|------------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income
For the Years Ended December 31, 2002, 2001 and 2000(in
thousands, except common share data)
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                    | 2002 | 2001       | 2000
|------------------------------------------------------------------- | ---- | ---------- | ----
|Revenues                                                            |      |            |     
|Net premiums earned                                                 |      | $ 151,684  |     
|Claims administration and management fees                           |      | 37,034     |     
|Net investment income                                               |      | 19,902     |     
|Commission income                                                   |      | 6,215      |     
|Net realized investment gains (losses)                              |      | 4,688      |     
|Finance charge and other income                                     |      | 1,342      |     
|                                                                    |      |            |     
|Total revenues                                                      |      | 220,865    |     
|                                                                    |      |            |     
|                                                                    |      |            |     
|Expenses                                                            |     
|Net losses and loss adjustment expenses                             |      | 139,571    |     
|Other underwriting expenses                                         |      | 19,155     |     
|Claims administration and management expenses                       |      | 32,898     |     
|Interest expense                                                    |      | 5,040      |     
|Other expenses                                                      |      | 491        |     
|                                                                    |      |            |     
|Total expenses                                                      |      | 197,155    |     
|                                                                    |      |            |     
|Income (loss) before income taxes and cumulative effect of          |     
|accounting change                                                   |      | 23,710     |     
|Less: Income tax expense (benefit)                                  |      | 8,834      |     
|                                                                    |      |            |     
|Income before cumulative effect of accounting change                |      | 14,876     |     
|Less: Cumulative effect of  accounting change (net of an            |     
|$18,784 deferred income tax benefit, Note 10)                       |      | 29,578     |     
|                                                                    |      |            |     
|Net (loss) income                                                   |      | $(14,702   | )   
|                                                                    |      |            |     
|Basic (loss) earnings per common share                              |      | $    (1.57 | )   
|                                                                    |      |            |     
|Diluted (loss) earnings per common share                            |      | $    (1.56 | )   
|                                                                    |      |            |     
|Basic weighted average common shares outstanding                    |      | 9,387      |     
|                                                                    |      |            |     
|Diluted weighted average common shares outstanding                  |      | 9,432      |     
|                                                                    |      |            |     
|Comprehensive (Loss) Income                                         |     
|Net (loss) income                                                   |      | $(14,702   | )   
|                                                                    |      |            |     
|Other comprehensive income (loss):                                  |     
|Cumulative effect of accounting change                              |      |           |     
|Unrealized holding gains on debt and  equity securities             |      | 8,966      |     
|Unrealized holding losses and amortization on derivative            |     
|financial instruments                                               |      | (183       | )   
|Income tax (benefit) expense related to unrealized gains and losses |      | (3,232     | )   
|                                                                    |      |            |     
|Other comprehensive income (loss)                                   |      | 5,551      |     
|                                                                    |      |            |     
|Comprehensive (loss) income                                         |      | $  (9,151  | )   
|                                                                    |      |            |     

|The accompanying notes are an
integral part of the consolidated financial statements.


42
|------------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Consolidated Statements of Changes in Shareholders EquityFor the
Years Ended December 31, 2002, 2001 and 2000(in thousands)
|------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   | Common
Stock | Additional
Paid-in capital | Unearned
Compensation | Accumulated
Other
Comprehensive
Income | Retained
Earnings | Total
|---------------------------------- | ------------ | -------------------------- | --------------------- | -------------------------------------- | ----------------- | -----
|Balance, December 31, 1999         |              | $ 962                      |                       | 41,858                                 |                   | (231 
|Net income                         |              |                           |                       |                                       |                   |     
|Compensation earned on             |             
|issuance of stock options          |              |                           |                       |                                       |                   | 126  
|Unrealized gain on debt            |             
|and equity securities, net         |              |                           |                       |                                       |                   |     
|Repurchase of shares, net          |              | (24                        | )                     | (4,031                                 | )                 |     
|                                   |              |                            |                       |                                        |                   |      
|Balance, December 31, 2000         |              | 938                        |                       | 37,827                                 |                   | (105 
|                                   |              |                            |                       |                                        |                   |      
|Net income                         |              |                           |                       |                                       |                   |     
|Cumulative effect of change in     |             
|accounting principle (Note 2)      |              |                           |                       |                                       |                   |     
|Compensation earned on             |             
|issuance of stock options          |              |                           |                       |                                       |                   | 105  
|Unrealized gain on debt            |             
|and equity securities, net         |              |                           |                       |                                       |                   |     
|Unrealized loss on derivative      |             
|financial instruments, net         |              |                           |                       |                                       |                   |     
|Repurchase of shares, net          |              | (4                         | )                     | 10                                     |                   |     
|                                   |              |                            |                       |                                        |                   |      
|Balance, December 31, 2001         |              | 934                        |                       | 37,837                                 |                   |     
|                                   |              |                            |                       |                                        |                   |      
|Net loss                           |              |                           |                       |                                       |                   |     
|Unrealized gain on debt            |             
|and equity securities, net         |              |                           |                       |                                       |                   |     
|Unrealized loss on derivative      |             
|financial instruments, net         |              |                           |                       |                                       |                   |     
|Amortization of unrealized loss on |             
|derivative financial instrument    |              |                           |                       |                                       |                   |     
|Issuance of shares                 |              | 5                          |                       | 485                                    |                   |     
|                                   |              |                            |                       |                                        |                   |      
|Balance, December 31, 2002         |              | $ 939                      |                       | 38,322                                 |                   |     
|                                   |              |                            |                       |                                        |                   |      

|The accompanying notes are an
integral part of the consolidated financial statements.



43
|-------------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Consolidated Statements of Cash Flows (in thousands)For the Years
Ended December 31, 2002, 2001 and 2000
|----------------------------------------------------------------------------------------------------------------------------------

|                                                                       | 2002 | 2001       | 2000
|---------------------------------------------------------------------- | ---- | ---------- | ----
|Cash flows from operating activities:                                  |      |            |     
|Net (loss) income                                                      |      | $ (14,702  | )   
|Adjustments to reconcile net (loss) income to cash provided by         |     
|operating activities:                                                  |     
|Cumulative effect of accounting change, net of deferred tax benefit    |      | 29,578     |     
|Depreciation, amortization and accretion                               |      | 7,960      |     
|Realized (gain) loss on sale of investments                            |      | (4,688     | )   
|Realized loss (gain) on sale of property and equipment                 |      | 93         |     
|Noncash compensation                                                   |      |           |     
|Net loss from equity investments                                       |      | 110        |     
|Deferred income tax expense (benefit)                                  |      | 844        |     
|Bad debt expense                                                       |      | 668        |     
|Changes in assets and liabilities:                                     |     
|Premiums receivable, net                                               |      | (35,800    | )   
|Accrued investment income                                              |      | (1,393     | )   
|Reinsurance recoverable on paid losses                                 |      | 776        |     
|Due from reinsurers on unpaid losses and advance premiums              |      | (87,749    | )   
|Ceded unearned premiums                                                |      | (38,095    | )   
|Deferred policy acquisition costs                                      |      | (5,403     | )   
|Prepaid expenses                                                       |      | (80        | )   
|Federal income tax receivable                                          |      | 5,443      |     
|Other assets                                                           |      | (3,155     | )   
|Loss and loss adjustment expenses                                      |      | 121,683    |     
|Unearned premiums                                                      |      | 26,660     |     
|Reinsurance payable                                                    |      | 69,781     |     
|Paid in advance and unprocessed premiums                               |      | 4,118      |     
|Deferred ceding commission                                             |      | 10,691     |     
|Accrued expenses and other liabilities                                 |      | 10,786     |     
|                                                                       |      |            |     
|Net cash provided by operating activities                              |      | 98,126     |     
|                                                                       |      |            |     
|Cash flows from investing activities:                                  |     
|Proceeds from sale or maturity of bonds and U.S. Government securities |      | 313,313    |     
|Purchase of bonds and U.S. Government securities                       |      | (395,070   | )   
|Proceeds from sale of equity securities                                |      |           |     
|Purchase of equity securities                                          |      |           |     
|Proceeds from sale of other invested assets                            |      | 2,682      |     
|Purchase of other invested assets                                      |      | (48        | )   
|Proceeds from sale of real estate                                      |      |           |     
|Purchase of real estate investments                                    |      | (385       | )   
|Proceeds from sale of property and equipment                           |      | 22         |     
|Purchase of property and equipment                                     |      | (1,876     | )   
|Proceeds from sale of subsidiary                                       |      |           |     
|Purchase of subsidiarys net other assets and stock                    |      |           |     
|Purchase of goodwill and intangible assets                             |      |           |     
|                                                                       |      |            |     
|Net cash (used in) provided by investing activities                    |      | (81,362    | )   
|                                                                       |      |            |     
|Cash flows from financing activities:                                  |     
|Receipt of proceeds from  revolving credit facility and term loan      |      |           |     
|Payment on revolving credit facility                                   |      | (5,833     | )   
|Issuance of common stock                                               |      | 438        |     
|Buyback of common stock                                                |      |           |     
|                                                                       |      |            |     
|Net cash (used in) provided by financing activities                    |      | (5,395     | )   
|                                                                       |      |            |     
|Net increase in cash and cash equivalents                              |      | 11,369     |     
|Cash and cash equivalents at beginning of period                       |      | 75,220     |     
|                                                                       |      |            |     
|Cash and cash equivalents at end of period                             |      | $   86,589 |     
|                                                                       |      |            |     

|The accompanying notes are an
integral part of the consolidated financial statements.
44
|----------------------------------------------------------------------------------------

|FPIC INSURANCE GROUP,
INC.Consolidated Statements
of Cash Flows (Continued)  For the Years Ended December 31, 2002, 2001 and 2000
 (in thousands)
|-------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                     | 2002 | 2001    | 2000
|-------------------------------------------------------------------- | ---- | ------- | ----
|Supplemental disclosure of cash flow activities:                     |      |         |     
|Interest paid                                                        |      | $ 4,718 |     
|                                                                     |      |         |     
|Federal income taxes paid                                            |      | $ 6,293 |     
|                                                                     |      |         |     
|Federal income tax refunds received                                  |      | $ 4,958 |     
|                                                                     |      |         |     
|Supplemental schedule of noncash investing and financing activities: |     
|Effective January 1, 2000, our insurance subsidiaries                |     
|entered into a 100% quota share reinsurance agreement to             |     
|assume the death, disability, and retirement risks under             |     
|Physicians Reciprocal Insurers (PRI) claims made insurance       |     
|policies.  We received cash and bonds in exchange for                |     
|business assumed from PRI recorded as follows:                       |     
|                                                                    
|Assumed unearned premium                                             |      | $      |     
|Reduction in net goodwill and intangible assets                      |      |        |     
|Receipt of bonds at market                                           |      |        |     
|                                                                     |      |         |     
|Net cash received                                                    |      | $      |     
|                                                                     |      |         |     

|The accompanying notes are an intregal part of the
consolidated financial statements.


45
|------------------------------------------------------------------------------------------

|Notes to the
Consolidated Financial Statements(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------

|1. | Organization
and Nature of Operations
|-- | -------------------------------------

| | FPIC
Insurance Group, Inc. (FPIC) was formed in 1996 in a reorganization of First
Professionals Insurance Company, Inc. (First Professionals, formerly named
Florida Physicians Insurance Company, Inc.) and McCreary Corporation (McCreary).
Under the reorganization plan, First Professionalsshareholders became the
shareholders of FPIC. They received five shares of FPIC common stock for each share of
their First Professionals common stock. McCreary also became a subsidiary of FPIC.
Effective January 1, 2002, McCreary was merged into its subsidiary, Employers Mutual,
Inc. (EMI), with EMI continuing as the surviving entity. FPIC and its
subsidiaries operate in three business segments: Insurance, Reciprocal Management and
Third Party Administration (TPA). The following table provides additional
information about FPIC, its business segments and subsidiaries.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|Segment |  | Nature of Business, Products and Services and Companies
|------- |  | -------------------------------------------------------

|
|

| |  | Specializes  in  professional  liability  insurance  products and related
                                          risk  management  services  for  physicians,  dentists,  and  other  healthcare
                                          providers.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries(1):
| | - | ---------------------

|Insurance |  |  | First Professionals
|--------- |  | - | -------------------

| |  |  |  | The Tenere Group, Inc. (Tenere)
| |  |  | - | ---------------------------------

| |  |  |  |  | Intermed Insurance Company (Intermed)
| |  |  |  | - | ---------------------------------------

| |  |  |  |  |  | Interlex Insurance Company (Interlex)
| |  |  |  |  | - | ---------------------------------------

| |  |  |  |  |  | Insurance Services, Inc. (Insurance Services)
| |  |  |  |  | - | -----------------------------------------------

| |  |  |  |  |  | Trout Insurance Services, Inc.
| |  |  |  |  | - | ------------------------------

| |  |  | Anesthesiologists Professional Assurance Company (APAC)
| |  | - | ---------------------------------------------------------

| |  |  | FPIC Insurance Agency, Inc. (FPIC Agency)
| |  | - | -------------------------------------------

| |  | Medical professional liability (MPL) and legal professional liability (LPL)
                             insurance is primarily written in Florida and Missouri.  FPIC is also licensed to write
                             insurance in Alabama, Arizona, Arkansas, Delaware, Georgia, Illinois, Indiana, Kansas,
                             Kentucky, Maine, Maryland, Michigan, Minnesota, Mississippi, Montana, Nevada, North
                             Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia,
                             Washington and West Virginia.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Effective December 1, 2002, Interlex ceased writing LPL Insurance.  Interlex sold
                             the renewal rights to its LPL policies to an unrelated insurance organization on October 3,
                             2002.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (1) | FPIC, the holding company, is also grouped within the insurance segment.
| | --- | ------------------------------------------------------------------------

|
|

|Reciprocal Management |  | Provides   management,   administrative   and   brokerage   services   to
                                          Physicians  Reciprocal  Insurers (PRI), a professional  liability  insurance
                                          reciprocal  that  conducts  business  in the state of New  York.  (PRI is not a
                   subsidiary  of  FPIC.)   Reciprocal   Management   also  provides   reinsurance
                                          brokerage and administrative services to FPIC.
|--------------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries:
| | - | ------------------

| |  |  | Administrators For The Professions, Inc. (AFP)
| |  | - | ------------------------------------------------

| |  |  |  | FPIC Intermediaries, Inc. (FPIC Intermediaries)
| |  |  | - | -------------------------------------------------

| |  |  |  | Group Data Corporation (Group Data)
| |  |  | - | -------------------------------------

| |  |  | Professional Medical Administrators, LLC (PMA) (70% owned by FPIC as
                                            of December 31, 2002; Effective January 1, 2003, FPIC has an 80% ownership
                                            interest in PMA.)
| |  | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|
|

|TPA |  | Provides administrative and claims management services to self-insured
                                          employer groups for group accident and health insurance, workers compensation
                                          insurance and general liability and property insurance plans.
|--- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC subsidiaries:
| | - | ------------------

| |  |  | EMI
| |  | - | ---

| |  |  |  | Professional Strategy Options, Inc.
| |  |  | - | -----------------------------------

| |  |  |  | FPIC Services, Inc.
| |  |  | - | -------------------

|
|

|46
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
main sources of revenue for FPIC are dividends and management fees from our subsidiaries.
The main sources of revenue for the subsidiaries are premiums earned and investment
income (insurance segment) and claims administration and management fees and commission
income (reciprocal management and TPA segments).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Risks
inherent in FPICs operations include legal/regulatory risk, credit risk,
underwriting risk and market risk. These risks are discussed below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Legal/Regulatory
Risk is the risk that changes in the legal or regulatory environment in which FPIC
operates will change and create additional costs or expenses not anticipated in pricing
our products. That is, regulatory initiatives designed to reduce FPICs profits or
new legal theories may create costs for FPIC beyond those currently reflected in the
consolidated financial statements. This risk is concentrated in Florida, Missouri and New
York, where FPIC has written or assumed approximately 52%, 20% and 13%, respectively, of
the insurance and reinsurance business we have retained for our own account.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Credit
Risk is the risk that issuers of securities owned by FPIC will default, or other
parties, primarily our insureds and reinsurers that owe FPIC money, will not pay.
Financial instruments that potentially expose FPIC to concentrations of credit risk
consist of fixed maturity investments, premiums receivable, deposits with reinsurers, and
assets carried for reinsurance recoverable related to unpaid losses and LAE and unearned
premiums. Reinsurers that are neither authorized nor accredited by applicable state
insurance departments (unauthorized reinsurers) are required to provide
collateral in the form of an irrevocable letter of credit or investment securities held
in a trust account to collateralize their respective balances due to FPIC. We have not
experienced significant credit-related losses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Underwriting
Risk is the risk that actual ultimate losses are higher than the losses we estimated
in our decisions regarding pricing and selecting of insured risks. Such criteria are
generally based upon the expected loss experience for particular types, classes and
geographic locations of the insured risks. Unlike other businesses, we must price and
sell our insurance policies before the actual loss costs associated with those policies
are known. Therefore, to the extent the actual insurance-related results of an insurer,
before consideration of investment income, fail to correspond with the related pricing
and/or selection criteria, an underwriting gain or loss occurs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Market
Risk is the risk that a change in interest rates will cause a decrease in the value
of FPICs investments. To the extent that liabilities come due more quickly than
assets mature, we would have to sell assets prior to maturity and recognize a gain or
loss.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | Significant
Accounting Policies
|-- | -------------------------------

| | Basis
of Presentation. The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally accepted in the United States
of America (GAAP). These financial statements include the accounts of FPIC
and all of our wholly owned and majority owned subsidiaries. Certain other entities in
which FPIC has a significant investment are reported on the equity basis. Intercompany
transactions and balances have been eliminated in consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Use
of Estimates. Management is responsible for making estimates in the preparation of
FPICs financial statements. These estimates affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. The estimates most susceptible to change are those used in determining
the liability for losses and loss adjustment expenses (LAE). Although these
estimates can vary, we believe that the liability for losses and LAE is adequate.
However, there can be no assurance that the estimated amounts will not differ from actual
results.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
and Cash Equivalents. For purposes of the consolidated statements of cash flows, FPIC
considers cash equivalents to include all demand deposits, overnight investments and
instruments with a maturity of three months or less.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|47
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Investments. We
account for our investments in debt and equity securities under Statement of
Financial Accounting Standard No. (FAS) 115, Accounting for
Certain Investments in Debt and Equity Securities. Under the provisions of
FAS 115, FPIC is required to classify investments in debt and equity securities
into one of three categories: held-to-maturity, available-for-sale or trading.
All of our investments in debt and marketable equity securities are classified
as available-for-sale on the consolidated statements of financial position, with
the change in fair value during the period excluded from earnings and recorded
net of tax as a component of other comprehensive income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Market
values for debt and marketable equity securities were based on quoted market prices.
Other invested assets include investments in two limited partnerships. One of these
partnerships invests in stocks and other financial securities of both publicly and
non-publicly traded companies, primarily in the insurance and financial services
industries. The other partnership is a diversified real estate fund. FPIC also has a
private equity investment in one corporation. The carrying values for these investments
approximate their fair values.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, FPIC has non-controlling interests in a corporation and another limited
partnership, which are accounted for under the equity method of accounting due to the
significance of FPICs investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
on investments includes the amortization of premium and accretion of discount on the
yield-to-maturity method relating to debt securities acquired at other than par value.
Realized investment gains and losses are determined on the basis of specific
identification. Declines in the fair value of securities considered to be other than
temporary, if any, would be recorded as realized losses in the consolidated statements of
income. As of December 31, 2002, we did not hold any investment securities that were
deemed to be other than temporarily impaired.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Real
estate investments consist of a building, condominium units and developed land. These
investments are carried at cost less accumulated depreciation. Depreciation is computed
over the estimated useful lives of the property (exclusive of land, which is
non-depreciable), using the straight-line method. Estimated useful lives range from
twenty-seven to thirty-nine years. Rental income and expenses are included in net
investment income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
periodically review our real estate investments for impairment and assess whether
significant events or changes in business circumstances indicate that the carrying value
of the assets may not be recoverable. An impairment loss is recognized when the carrying
amount of an asset exceeds the anticipated future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition. The amount of the
impairment loss to be recorded, if any, is calculated by the excess of the assets
carrying value over its fair value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reinsurance.
We record our reinsurance contracts under the provisions of FAS 113,
                    Accounting and Reporting for Reinsurance on Short-Duration and
                    Long-Duration Contracts. Net premiums written, net premiums
earned, losses                     and LAE and underwriting expenses are reported net of
the amounts related to                     reinsurance ceded to other companies. Amounts
recoverable from reinsurers                     related to the portions of the liability
for losses and LAE and unearned                     premiums ceded to them are reported
as assets. Reinsurance assumed from other                     companies including assumed
premiums written and earned, losses and LAE and                     underwriting expenses
(principally ceding commissions) is accounted for in the                     same manner
as direct insurance written.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reinsurance
recoverables include balances due from reinsurance companies for paid and unpaid losses
and LAE that will be recovered from reinsurers, based on contracts in force. Amounts
recoverable from reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. Reinsurance contracts do not relieve FPIC from our
primary obligations to policyholders. Failure of reinsurers to honor their obligations
could result in losses to FPIC. We evaluate the financial condition of our reinsurers and
monitor concentrations of credit risk with respect to the individual reinsurer that
participates in our ceded programs to minimize our exposure to significant losses from
reinsurer insolvencies. We hold collateral in the form of letters of credit or trust
accounts for amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the domiciliary Departments of Insurance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|48
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Property
and Equipment. The cost of property and equipment is depreciated over the estimated
useful lives of the related assets ranging from three to fifteen years. Depreciation is
computed on the straight-line basis. Leasehold improvements are stated at cost less
accumulated amortization and amortized over the shorter of the useful life or the term of
the lease. Gains and losses upon asset disposal are taken into income in the year of
disposition.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
periodically review our property and equipment for impairment and assess whether
significant events or changes in business circumstances indicate that the carrying value
of the assets may not be recoverable. An impairment loss is recognized when the carrying
amount of an asset exceeds the anticipated future undiscounted cash flows expected to
result from the use of the asset and its eventual disposition. The amount of the
impairment loss to be recorded, if any, is calculated by the excess of the assets
carrying value over its fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
Policy Acquisition Costs.Deferred policy acquisition costs consist
primarily of commissions and premium taxes that are related to the production of new and
renewal insurance business. Acquisition costs are deferred and amortized over the period
in which the related premium is earned. Deferred policy acquisition costs are reviewed to
determine if they are recoverable from future income, including investment income. If
such costs are estimated to be unrecoverable, they are expensed. Commissions and
brokerage fee expenses incurred by FPICs non-insurance businesses are expensed as
incurred.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
Taxes. FPIC accounts for income taxes in accordance with FAS 109, Accounting
for Income Taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance against deferred tax
assets is recorded if it is more likely than not that all or some portion of the benefits
related to the deferred tax assets will not be realized. We have not established a
valuation allowance because we believe it is more likely than not that our deferred tax
assets will be fully realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Goodwill
and Intangible Assets.FPIC has made acquisitions in the past that have
included goodwill and other intangible assets. Under accounting principles in effect
through December 31, 2001, these assets were amortized as expense over their estimated
useful lives. They were also tested periodically to determine if they were recoverable
from operating earnings on an undiscounted basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2002, we adopted FAS 142, Goodwill and Other Intangible Assets. In
accordance with FAS 142, goodwill and indefinite lived intangible assets are no longer
amortized. Instead, they are subject to an annual (or under certain circumstances more
frequent) impairment test based on their estimated fair value. Other intangible assets
that meet certain criteria continue to be amortized over their useful lives and are also
subject to an impairment test based on estimated fair value. We completed the
transitional impairment analysis required by FAS 142 during the first quarter 2002 and
recorded an impairment charge of $29.6 million, net of an $18.8 million income tax
benefit, as the cumulative effect of accounting change. There are many assumptions and
estimates underlying the determination of an impairment loss. Another estimate using
different, but still reasonable, assumptions could produce a significantly different
result. Therefore, additional impairment losses could be recorded in the future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | See
Notes 10 and 11 for a discussion of goodwill and intangible assets.
| | -----------------------------------------------------------------------

|49
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Revenue
Recognition. Premiums are earned and recognized as revenues on a monthly pro rata
basis over the terms of our insurance policies. Policy terms do not exceed one year.
Unearned premiums represent the portion of written premiums that remain to be earned in
future periods. Premiums received in advance of the policy year are recorded as premiums
collected in advance in the consolidated statements of financial position. Claims
administration and management fee income is comprised of revenues from the reciprocal
management and TPA segments. Management fees of the reciprocal management segment,
determined as a percentage of PRIs premiums, are recognized as billed and earned under the contract,
which generally corresponds with the reported premiums written of PRI, net of an estimate for premium refunds,
for the calendar year. Such management fees are estimated, billed and earned for quarterly reporting purposes
based upon semi-annual estimates of the reported premiums written of PRI rather than actual written premiums
for a quarter, which may vary significantly from quarter to quarter. This convention is used so that management
fees are recognized more ratably over the period in relation to the services provided by the reciprocal management segment to PRI.
Claims administration and
management fees of the TPA segment are subject to contractual arrangements, some of which
exceed one year. These revenues are recognized as earned and billed under the terms of
these contracts, which generally correspond with the provision of services to customers.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commission
income for both non-insurance segments is associated with the placement of reinsurance
with outside reinsurers on behalf of PRI, various TPA customers and in some cases, FPIC,
where commissions or brokerage fees related to a transaction are payable by the
reinsurer. Commissions and brokerage fees are recognized as revenues at the later of the
billing or the effective date as there is not an obligation to perform any services after
that date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Losses
and Loss Adjustment Expenses. The liability for losses and LAE is based upon our best
estimate of the ultimate cost of settling the claims (including the effects of inflation
and other societal and economic factors). The estimated costs of settling claims is
generally based upon past experience adjusted for current trends, and any other factors
that would modify past experience. These liabilities are not discounted.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
use various actuarial techniques to estimate the liability for losses and LAE, including
losses that have been incurred but not reported to us (IBNR), where
applicable. These techniques generally consist of statistical analysis of historical
experience and are commonly referred to as loss reserve projections. Our estimation
process is generally performed by line of business, grouping contracts with like
characteristics and policy provisions. Our decisions to use particular projection methods
and the results obtained from those methods are evaluated by considering the inherent
assumptions underlying the methods and the appropriateness of those assumptions to the
circumstances. No single projection method is inherently better than any other in all
circumstances. We generally apply multiple methods in determining our actuarial
estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Because
the ultimate settlement of claims (including IBNR reserves) is subject to future events,
no single claim or loss and loss adjustment expense reserve can be considered accurate
with certainty. Our analysis of the reasonableness of loss and LAE reserve estimates does
include consideration of the amount of potential variability in the estimate.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liabilities for losses and LAE and the related estimation methods are continually
reviewed and revised to reflect current conditions and trends. The resulting adjustments
are reflected in current year net income. While management believes the liabilities for
losses and LAE are adequate to cover the ultimate liability, the actual ultimate loss
costs may vary from the amounts presently estimated and such differences may be material.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
attributable to ceded reinsurance derived in estimating the liability for loss and LAE
are reclassified as assets in the consolidated statements of financial position as
required by FAS 113.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPIC
also has direct and assumed liabilities associated with covered extended reporting
endorsements under claims-made MPL policy forms, which provide, at no additional charge,
continuing MPL coverage for claims-made insureds in the event of death, disability or
retirement. These liabilities, which possess elements of both loss reserves and
pension-type liabilities, are carried within unearned premiums and are estimated using
assumptions for mortality, morbidity, retirement, interest and inflation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|50
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Per
Share Data.Basic earnings per share are calculated by dividing net
income by the weighted average number of common shares outstanding during the year.
Diluted earnings per common share are calculated using the combination of dilutive common
share equivalents and the weighted average number of common shares outstanding during the
period.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
for Stock-based Compensation.FAS 123, Accounting for Stock-based
Compensation, requires the fair value of stock options and other stock-based
compensation issued to employees to either be recognized as compensation expense in the
income statement, or be disclosed as a pro forma effect on net income and earnings per
share in the footnotes to FPICs consolidated financial statements. FPIC elected to
adopt FAS 123 on a disclosure basis only and measures stock-based compensation in
accordance with Accounting Principles Board Opinion No. (APB) 25, Accounting
for Stock Issued to Employees, using intrinsic values with appropriate disclosures
under the fair value based method as required by FAS 123 and the new accounting
pronouncement FAS 148 (see discussion of FAS 148 below.)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Commitments
and Contingencies. Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment and/or
remediation can be reasonably estimated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
Rate Swap.We account for our interest rate swaps in accordance with FAS
133, Accounting for Derivative Instruments and Hedging Activities as amended
by FAS 138, Accounting for Certain Derivative Instruments and Certain Hedging
Activities. FPIC uses derivative financial instruments to manage market risks
related to changes in interest rates associated with its revolving credit facility and
term loan. The differential to be paid or received as interest rates change is accrued
and recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from the counter parties are included as adjustments to
accrued interest. See Note 15 for additional information related to the interest rate
swaps. FPIC does not currently hold and has not issued any other derivative financial
instruments.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reclassification.  Certain
amounts for 2001 and 2000 have been reclassified to conform to the 2002
                    presentation.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | New
Accounting Pronouncements.  In
June 2002, the Financial Accounting Standards Board (FASB) issued FAS 146, Accounting for Costs Associated with Exit or
Disposal Activities. FAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities. It requires that the cost associated with an
exit or disposal activity be recognized when the liability is incurred, not necessarily
at the date of an entitys commitment to an exit plan.  As a result, some costs
relating to the disposition may be deferred until later periods when they are incurred.
The provisions of FAS 146 are effective for exit or disposal activities initiated after
December 31, 2002. Accordingly, we will adopt this statement for applicable transactions
occurring on or after January 1, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FAS
148, Accounting for Stock-Based Compensation- Transition and Disclosure, amends
FAS 123, Accounting for Stock-Based Compensation, to provide transition
guidance for a change to the fair value based method of accounting for stock-based
employee compensation.  In addition, this statement amends the disclosure
requirements of FAS 123 for both annual and interim financial statements.  FAS 148
is effective December 31, 2002.  The adoption of FAS 148 did not have a material
effect on our financial statements. The disclosure requirements of FAS 148 have been
incorporated into Note 19.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN 45 expands existing accounting guidance and disclosure
requirements for certain guarantees and requires the recognition of a liability for the
fair value of certain types of guarantees issued or modified after December 31, 2002. We
do not believe that the adoption of the FIN 45s guidance will have a material
effect on our financial position.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|51
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | In
January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN
46 addresses whether certain types of entities, referred to as variable interest entities
(VIEs), should be consolidated in a companys financial statements. A
VIE is an entity that either (1) has equity investors that lack certain essential
characteristics of a controlling financial interest (including the ability to control the
entity, the obligation to absorb the entitys expected losses and the right to
receive the entitys expected residual returns), or (2) lacks sufficient equity to
finance its own activities without financial support provided by other entities, which in
turn would be expected to absorb at least some of the expected losses of the VIE. An
entity should consolidate a VIE if it stands to absorb a majority of the VIEs
expected losses or to receive a majority of the VIEs expected residual returns. The
provisions of FIN 46 are effective immediately for all VIEs created after January 31,
2003. With respect to VIEs created before February 1, 2003, FIN 46 would become effective
for public companies no later than the beginning of the first interim or annual period
beginning after June 15, 2003 (i.e., third calendar quarter of 2003). FIN 46 also
requires that if it is reasonably possible that an enterprise will consolidate or
disclose information about a VIE when it does become effective, that the enterprise is
required to disclose certain information about it in all financial statements initially
issued after January 31, 2003. We have considered the guidance contained in FIN 46 and,
to date, have not identified any interests or relationships that we believe would be a
variable interest in a VIE, as defined.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | Business
Acquisitions
|-- | ---------------------

| | On
March 22, 2000, FPIC entered into agreements (the new agreements) with the
sellers of McCreary and EMI to lock in the remaining payments due under their prior
respective acquisition agreements, and thereby effectively eliminated the contingent
terms under those agreements. Under the new agreements, FPIC paid the sellers of McCreary
$1.7 million on July 31, 2000, and agreed to pay the sellers of EMI $227 and $538 on
March 27, 2000 and March 1, 2001, respectively. These payments increased the original
purchase price and the recorded goodwill, accordingly.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Fair
Value of Financial Instruments
|-- | -----------------------------------

| | Fair
value estimates are made as of a specific point in time based on the characteristics of
the financial instruments and relevant market information. Where available, quoted market
prices are used. In other cases, fair values are based on estimates using valuation
techniques, such as discounting estimated future cash flows using a rate commensurate
with the risks involved or other acceptable methods. These techniques involve
uncertainties and are significantly affected by the assumptions used and the judgments
made regarding risk characteristics of various financial instruments, prepayments,
discount rates, estimates of future cash flows, future anticipated loss experience and
other factors. Changes in assumptions could significantly affect these estimates.
Independent market data may not be available to validate those fair value estimates that
are based on internal valuation techniques. Moreover, such fair value estimates may not
be indicative of the amounts that could be realized in an immediate sale of the
instrument. Also, because of differences in methodologies and assumptions used to
estimate fair values, the fair values of FPICs financial instruments may not be
comparable to those of other companies.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value estimates are based on existing financial instruments without attempting to
estimate the value of anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Accordingly, the aggregate fair value
amounts presented do not represent the underlying value of FPIC. For certain assets and
liabilities, the information required is supplemented with additional information
relevant to an understanding of the fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate that value:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cash
and cash equivalents  Carrying value approximates the fair value because of the
short maturity of these instruments.
| | - | --------------------------------------------------------------------------------------------------------------------------

| |  | Bonds
and equity securities  Fair value was estimated based on bid prices published in
financial newspapers.
| | - | -------------------------------------------------------------------------------------------------------------

| |  | Other
invested assets  Carrying value approximates the fair value.
| | - | -------------------------------------------------------------------

| |  | Revolving
credit facility  Carrying value approximates the fair value.
| | - | -----------------------------------------------------------------------

| |  | Term
loan  Carrying value approximates the fair value.
| | - | -------------------------------------------------------

| |  | Interest
rate swaps  Fair value was estimated using quotes from brokers and represents the
cash requirement if the existing agreement had been settled at year-end.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|52
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
following table presents the carrying values and estimated fair values of FPICs
financial instruments as of December 31, 2002 and 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------

|                            | December 31, 2002 | December 31, 2001
|--------------------------- | ----------------- | -----------------
|
|Financial assets            |                   |                  
|Cash and cash equivalents   |                   | $  86,589        
|Bonds                       |                   | 436,970          
|Equity securities           |                   | 6                
|Other invested assets       |                   | 10,801           
|                            |                   |                  
|Total financial assets      |                   | $ 534,366        
|                            |                   |                  
|Financial liabilities       |                  
|Revolving credit facility   |                   | $  37,000        
|Term loan                   |                   | 10,208           
|Interest rate swaps         |                   | 3,383            
|                            |                   |                  
|Total financial liabilities |                   | $ 50,591         
|                            |                   |                  

|5. | Investments
|-- | -----------

The amortized cost and estimated
fair value of investments in debt and equity securities as of December 31, 2002 and 2001
were as follows:

|2002                                | Amortized
Cost | Gross
Unrealized
Gains | Gross
Unrealized
Losses | Fair
Value
|----------------------------------- | -------------- | ---------------------- | ----------------------- | ----------
|                                    |                |                        |                         |           
|Bonds                               |               
|Corporate securities                |                | $ 166,161              |                         | 5,722     
|United States Government            |               
|agencies and authorities            |                | 104,604                |                         | 3,196     
|States, municipalities and          |               
|political subdivisions              |                | 86,849                 |                         | 2,746     
|Mortgage-backed securities          |                | 67,563                 |                         | 1,647     
|                                    |                |                       
|Total bonds                         |                | 425,177                |                         | 13,311    
|                                    |                |                       
|Equity securities                   |               
|Common stocks                       |                | 7                      |                         |          
|                                    |                |                       
|Total equity securities             |                | 7                      |                         |          
|                                    |                |                       
|Total securities available-for-sale |                | $ 425,184              |                         | 13,311    
|                                    |                |                       
|2001                                |               
|Bonds                               |               
|Corporate securities                |                | $ 104,175              |                         | 2,357     
|United States Government            |               
|agencies and authorities            |                | 47,157                 |                         | 945       
|States, municipalities and          |               
|political subdivisions              |                | 94,304                 |                         | 1,999     
|Mortgage-backed securities          |                | 100,488                |                         | 1,693     
|                                    |                |                       
|Total bonds                         |                | 346,124                |                         | 6,994     
|                                    |                |                       
|Equity securities                   |               
|Common stocks                       |                | 7                      |                         | 2         
|                                    |                |                       
|Total equity securities             |                | 7                      |                         | 2         
|                                    |                |                       
|Total securities available-for-sale |                | $ 346,131              |                         | 6,996     
|                                    |                |                       

|53
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost and estimated fair value of debt securities at December 31, 2002 by
contractual maturity are shown below. Expected maturities will differ from contractual
maturities, because borrowers have the right to call or prepay these obligations with or
without call or prepayment penalties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | Amortized
Cost | Fair
Value
|-------------------------------------- | -------------- | ----------
|Due in one year or less                |                | $    9,117
|Due after one year through five years  |                | 135,407   
|Due after five years through ten years |                | 146,243   
|Due after ten years                    |                | 66,847    
|                                       |                |           
|                                       |                | 357,614   
|Mortgage-backed securities             |                | 67,563    
|                                       |                |           
|                                       |                | $ 425,177 
|                                       |                |           

|As of December 31, 2002, investments
in securities and cash with an amortized cost of $15,168 and a market value of $16,546
were on deposit with the insurance departments in various states as required by law.
Investments in securities and cash with an amortized cost of $86,116 and a market value
of $88,850 were held in trust as collateral for reinsurance assumed as required by law in
various states in which we assume insurance business.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
investment income for the years ended December 31, 2002, 2001 and 2000 was as
follows:
| | ------------------------------------------------------------------------------------------

|                            | 2002 | 2001     | 2000
|--------------------------- | ---- | -------- | ----
|Bonds                       |      | $ 20,714 |     
|Equity securities           |      |         |     
|Real estate                 |      | 534      |     
|Short-term investments      |      | 805      |     
|Other invested assets       |      | 102      |     
|Cash on hand and on deposit |      | 416      |     
|                            |      |         
|                            |      | 22,571   |     
|Less: investment expense    |      | (2,669   | )   
|                            |      |         
|Net investment income       |      | $ 19,902 |     
|                            |      |         

| | Proceeds
from sales and maturities of bonds were $313,313, $221,596 and $59,373, for the years
ended December 31, 2002, 2001 and 2000, respectively. Proceeds from sales of equity
securities were $566 and $966 for the years ended December 31, 2001 and 2000,
respectively. Gross gains of $8,769, $4,530 and $168 were realized on sales of debt and
equity securities for the years ended December 31, 2002, 2001 and 2000,
respectively. Gross losses of $4,092, $3,101 and $3 were realized on sales of debt and
equity securities for the years ended December 31, 2002, 2001 and 2000,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2002, FPICs other invested assets included investments in three
limited partnerships and two private corporations. These assets were recorded at an
aggregate value of $10,801 and $11,334 at December 31, 2002 and 2001, respectively. FPIC
sold its investment in HCIF Management Company during November 2002 and received payment
in the amount $174. In December 2002, FPIC sold its investment in Renaissance LLP and
recorded a note receivable in the amount $2,037, all of which has been collected in 2003.
In January 2001, FPICs investment in a joint venture, Bexar Credentials Inc., was
redeemed for $70.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|54
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|6. | Real
Estate Investments
|-- | -----------------------

| | At
December 31, 2002 and 2001, real estate investments consisted of the following:
| | ----------------------------------------------------------------------------------

|                               | 2002 | 2001   
|------------------------------ | ---- | -------
|Land and building              |      | $ 5,667
|Condominium units              |      | 261    
|Other                          |      | 38     
|                               |      |        
|                               |      | 5,966  
|Less: accumulated depreciation |      | (1,612 
|                               |      |        
|Net real estate investments    |      | $ 4,354
|                               |      |        

| | Total
depreciation expense on real estate investments was $286, $256 and $256 in 2002, 2001 and
2000, respectively.
| | -------------------------------------------------------------------------------------------------------------------

|7. | Property
and Equipment
|-- | ----------------------

| | At
December 31, 2002 and 2001, property and equipment consisted of the following:
| | ---------------------------------------------------------------------------------

|                                       | 2002 | 2001     
|-------------------------------------- | ---- | ---------
|Furniture, fixtures and equipment      |      | $   3,333
|Data processing equipment and software |      | 8,393    
|Leasehold improvements                 |      | 1,351    
|Automobiles                            |      | 251      
|                                       |      |          
|                                       |      | 13,328   
|Less: accumulated depreciation         |      | (8,994   
|                                       |      |          
|Net property and equipment             |      | $   4,334
|                                       |      |          

|8. | Deferred
Policy Acquisition Costs
|-- | ---------------------------------

| | Changes
in deferred policy acquisition costs for the years ended December 31, 2002, 2001 and 2000
were as follows:
| | ------------------------------------------------------------------------------------------------------------------

|                     | 2002 | 2001    | 2000
|-------------------- | ---- | ------- | ----
|Beginning balance    |      | $ 9,001 |     
|Additions            |      | 6,707   |     
|Amortization expense |      | (9,952  | )   
|Reductions           |      | (1,304  | )   
|                     |      |        
|Ending balance       |      | $ 4,452 |     
|                     |      |        

| | During
2002, we recorded a charge related to our MPL business at Intermed, as it was estimated
that not all of its deferred policy acquisition costs were recoverable. As a result,
deferred policy acquisition costs were reduced by the amount $1,304.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|55
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|9. | Income
Taxes
|-- | ------------

| | FPICs
provision for income taxes for 2002, 2001 and 2000 consisted of the following:
| | -------------------------------------------------------------------------------------

|                                 | 2002 | 2001    | 2000
|-------------------------------- | ---- | ------- | ----
|Current expense (benefit)        |      |         |     
|Federal                          |      | $ 6,605 |     
|State                            |      | 1,385   |     
|                                 |      |        
|Total                            |      | 7,990   |     
|                                 |      |        
|Deferred expense (benefit)       |     
|Federal                          |      | 767     |     
|State                            |      | 77      |     
|                                 |      |        
|Total                            |      | 844     |     
|                                 |      |        
|Net income tax expense (benefit) |      | $ 8,834 |     
|                                 |      |        

| | The
provision for income taxes differs from the statutory corporate tax rate of 35% for 2002,
2001 and 2000 as follows:
| | -----------------------------------------------------------------------------------------------------------------------

|                                            | 2002 | 2001    | 2000
|------------------------------------------- | ---- | ------- | ----
|Computed expected tax expense (benefit)   |      | $ 8,298 |     
|Municipal bond interest                     |      | (1,309  | )   
|State income taxes, net of Federal benefit  |      | 950     |     
|Prior year adjustments upon IRS examination |      | 544     |     
|Other, net                                  |      | 351     |     
|                                            |     
|Actual income tax expense (benefit)         |      | $ 8,834 |     
|                                            |     

| | At
December 31, 2002 and 2001, the significant components of the net deferred tax asset were
as follows:
| | --------------------------------------------------------------------------------------------------------

|                                        | 2002 | 2001    
|--------------------------------------- | ---- | --------
|Deferred tax assets arising from:       |      |         
|Goodwill                                |      | $ 15,231
|Loss reserve discounting                |      | 9,399   
|Unearned premium reserves               |      | 9,044   
|Net operating loss carry forward        |      | 2,221   
|Deferred ceding commission              |      | 1,801   
|Unrealized losses on securities         |      | 2,069   
|Benefit plans                           |      | 1,188   
|Other                                   |      | 1,251   
|                                        |      |         
|Total deferred tax assets               |      | 42,204  
|                                        |      |         
|Deferred tax liabilitites arising from: |     
|Unrealized gains on securities          |      | 4,413   
|Deferred policy acquisition costs       |      | 2,626   
|Goodwill                                |      |        
|Other                                   |      | 512     
|                                        |      |         
|Total deferred tax liabilities          |      | 7,551   
|                                        |      |         
|Net deferred tax asset                  |      | $ 34,653
|                                        |      |         

|56
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Net
deferred tax assets and Federal income tax expense in future years can be significantly
affected by changes in enacted tax rates or by unexpected adverse events that would
influence managements conclusions as to the ultimate realizability of deferred tax
assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2002, FPIC concluded examinations by the Internal Revenue Service (IRS) of
its consolidated Federal income tax returns for the years ended December 31, 1998 and
1999. As a result of these examinations, a net additional provision for income taxes was
recognized in the amount of $554. FPIC is scheduled to undergo an IRS examination of its
Federal income tax returns for the years ended December 31, 2000 and 2001, beginning in
April of 2003. Based on the results of our recently completed IRS examinations, we
believe that our income tax returns are correct and in compliance with applicable tax
laws in all material respects. However, there can be no assurance that additional tax
adjustments and related penalties and interest will not be proposed and incurred as a
result of an IRS examination.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | Goodwill
|--- | --------

| | The
changes in the carrying amount of goodwill for the years ended December 31, 2002, 2001
and 2000 are as follows:
| | -------------------------------------------------------------------------------------------------------------------

|                               | 2002 | 2001     | 2000
|------------------------------ | ---- | -------- | ----
|Beginning balance              |      | $ 67,232 |     
|Additions at cost              |      |         |     
|Reductions at cost             |      |         |     
|Transitional impairment charge |     
|under FAS 142                  |      | (48,362  | )   
|Amortization expense           |      |         |     
|                               |      |         
|Ending balance                 |      | $ 18,870 |     
|                               |      |         

| | FPIC
adopted FAS 142 effective January 1, 2002. In connection with the adoption, in the first
quarter of 2002, FPIC discontinued the amortization of goodwill and engaged independent
valuation consultants to perform transitional impairment tests at each of its operating
segments: insurance, reciprocal management and TPA. These operating segments meet the
reporting unit requirements as defined by FAS 142.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values for each of the reporting units were calculated using one or more of the
following approaches: (i) market multiple approach; (ii) discounted cash flow (DCF)
approach; and/or (iii) asset approach.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Under
the market multiple approach, the values of the reporting units were based on the market
prices and performance fundamentals of similar public companies.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Under
the DCF approach, the values of the reporting units were based on the present value of
the projected future cash flows to be generated.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | Under
the asset approach, the value of a reporting unit is the difference in the fair value of
total assets and the fair value of total liabilities. The fair value of each asset and
liability may in turn be estimated using an income approach, market approach or cost
approach.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on the results of the impairment tests, goodwill was not deemed to be impaired at the
insurance segment, since the fair value of the reporting unit exceeded its carrying
value. Therefore, the second step of the goodwill impairment test was not performed.
However, the carrying values of the reciprocal management and TPA segments exceeded their
respective fair values, indicating a potential impairment of goodwill. Under step 2 of
the test, the implied fair values of the reciprocal management and TPA goodwill were
compared to their carrying values to measure the amount of impairment loss. As a result,
a non-cash transitional impairment charge of $48,362 ($29,578, net of an income tax
benefit of $18,784) was recognized and recorded as a cumulative effect of accounting
change in the accompanying consolidated statements of income for the year ended December
31, 2002. The results of the transitional impairment tests and charges were as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|57
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|                                | Insurance | Reciprocal
Management | Third Party
Administration | Total  
|------------------------------- | --------- | --------------------- | -------------------------- | -------
|Balance as of December 31, 2001 |           | $ 10,833              |                            | 49,140 
|Impairment charge               |           |                      |                            | (41,103
|                                |           |                       |                            |        
|Balance as of December 31, 2002 |           | $ 10,833              |                            | 8,037  
|                                |           |                       |                            |        

| | The
transitional impairment charge at the reciprocal management segment primarily reflects
certain intangibles and synergies, which, in our opinion, are opportunistic in nature and
carry a relatively significant degree of uncertainty; therefore, we treated these
intangibles conservatively in the valuation required by FAS 142. The transitional
impairment charge at the TPA segment primarily reflects changes in market conditions and
an increase in competition in recent years in the markets served by FPICs TPA
segment. The following table provides comparative disclosures of net income excluding the
cumulative effect of accounting change and goodwill amortization, net of taxes, for 2002,
2001 and 2000.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                          | 2002 | 2001            | 2000
|----------------------------------------- | ---- | --------------- | ----
|Net (loss) income:                        |      |                 |     
|Net (loss) income, as reported            |      | $    (14,702    | )   
|Cumulative effect of accounting change    |      | 29,578          |     
|                                          |      |                 |     
|Net income, adjusted                      |      | 14,876          |     
|Goodwill amortization, net of tax         |      |                |     
|                                          |      |                 |     
|Net income, comparative                   |      | $      14,876   |     
|                                          |      |                 |     
|Basic (loss) earnings per common share:   |     
|Net (loss) income, as reported            |      | $       (1.57   | )   
|Cumulative effect of accounting change    |      | 3.15            |     
|                                          |      |                 |     
|Net income, adjusted                      |      | 1.58            |     
|Goodwill amortization, net of tax         |      |                |     
|                                          |      |                 |     
|Net income, comparative                   |      | $          1.58 |     
|                                          |      |                 |     
|Diluted (loss) earnings per common share: |     
|Net (loss) income, as reported            |      | $       (1.56   | )   
|Cumulative effect of accounting change    |      | 3.14            |     
|                                          |      |                 |     
|Net income, adjusted                      |      | 1.58            |     
|Goodwill amortization, net of tax         |      |                |     
|                                          |      |                 |     
|Net income, comparative                   |      | $          1.58 |     
|                                          |      |                 |     

|58
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|11. | Intangible
Assets
|--- | -----------------

| | At
December 31, 2002, 2001 and 2000, identifiable intangibles consisted of the following:
| | -----------------------------------------------------------------------------------------

|                                | As of December 31, 2002 | As of December 31, 2001 | As of December 31, 2000
|------------------------------- | ----------------------- | ----------------------- | -----------------------
|
|Trade secrets                   |                         | $ 1,500                 |                        
|Non-compete agreements          |                         | 500                     |                        
|Other                           |                         | 305                     |                        
|                                |                         |                         |                        
|Total                           |                         | $ 2,305                 |                        
|                                |                         |                         |                        
|Aggregate amortization expense: |                        
|2000                            |                         | $   282                 |                        
|2001                            |                         | $   282                 |                        
|2002                            |                         | $   283                 |                        
|Estimated amortization expense: |                        
|2003                            |                         | $   252                 |                        
|2004                            |                         | $   221                 |                        
|2005                            |                         | $   186                 |                        
|2006                            |                         | $   150                 |                        
|2007                            |                         | $   150                 |                        

|12. | Liability
for Losses and LAE
|--- | ----------------------------

| | Activity
in the liability for loss and LAE for the years ended December 31, 2002, 2001, and 2000
was as follows:
| | ----------------------------------------------------------------------------------------------------------------

|                              | 2002 | 2001      | 2000
|----------------------------- | ---- | --------- | ----
|Gross balance, January 1      |      | $ 318,483 |     
|Less reinsurance recoverables |      | 80,410    |     
|                              |      |           |     
|Net balance, January 1        |      | 238,073   |     
|                              |      |           |     
|Incurred related to:          |     
|Current year                  |      | 137,155   |     
|Prior years                   |      | 2,416     |     
|                              |      |           |     
|Total incurred                |      | 139,571   |     
|                              |      |           |     
|Paid related to:              |     
|Current year                  |      | 9,130     |     
|Prior years                   |      | 96,507    |     
|                              |      |           |     
|Total paid                    |      | 105,637   |     
|                              |      |           |     
|Net balance, December 31      |      | 272,007   |     
|Plus reinsurance recoverables |      | 168,159   |     
|                              |      |           |     
|Gross balance, December 31    |      | $ 440,166 |     
|                              |      |           |     

| | Incurred
losses and LAE for claims related to prior years represent the changes in estimates
charged or credited to earnings in the current year with respect to the liabilities that
originated and were established in prior years. Information regarding incurred losses and
LAE is accumulated over time and the estimates of the liability are revised accordingly,
resulting in gains or losses in the period revisions are made.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the year 2000, most of the prior years reserve increase occurred on claims reported to us
in 1997 and 1998. We made this increase primarily because upon re-estimation we
determined that severity (the average cost of a claim) had increased more than we
expected. We also increased reserves on other lines of business at First Professionals in
2000, including its now discontinued accident and health line and its assumed
reinsurance. The upward development on prior years reserves in 2001 included some
increase in the initial estimate for 2000 MPL losses and LAE. In addition and while most
claims and incidents reported are closed without a loss payment, we also raised our
estimates relative to the ratio of claims closed with a loss payment to all claims and
incidents closed in 2000 and 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|59
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|13. | Reinsurance
|--- | -----------

| | FPIC
cedes certain premiums and losses to other insurance and reinsurance carriers under
various reinsurance agreements and fronting programs. FPICs reinsurance agreements
do not relieve FPIC from its obligations as primary insurer to its policyholders. To the
extent that any reinsurer might be unable to meet its obligations, FPIC would nonetheless
continue to be liable to its policyholders for the insured losses and LAE.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, FPIC reinsured under its main excess of loss program losses incurred in excess of
$500 (retention on FPICs anesthesiology programs was $375 per loss because 25% of
that business is already ceded to American Professional Assurance Ltd. (APAL),
a Cayman Island insurance company of which FPIC owns 9.9%). In 2000 and 2001, we
reinsured losses incurred under this program in excess of $250 (retention on FPICs
anesthesiology programs was $187 per loss because of the program between FPIC and APAL).
The 2001 and 2000 programs included an annual aggregate deductible. In 2001, FPICs
annual aggregate deductible was 10.73% of subject written premium or approximately $12.9
million. In 2000, FPICs annual aggregate deductible was $9.0 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of reinsurance on premiums written and earned for the years ended December 31,
2002, 2001 and 2000, was as follows:
| | ------------------------------------------------------------------------------------------------------------------------------

|                   | 2002 | 2001      | 2000
|------------------ | ---- | --------- | ----
|
|Direct and assumed |      | $ 344,727 |     
|Ceded              |      | (204,479  | )   
|                   |      |           |     
|Net                |      | $ 140,248 |     
|                   |      |           |     

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

|                                                                |  | Proforma (Non-GAAP) Amounts Excluding the Effects of the Reinsurance Agreement
|--------------------------------------------------------------- |  | --------------------------------------------------------------------------------
|
|Net premiums written                                            |  | $ 140,248                                                                       
|Net premiums earned                                             |  | $ 151,684                                                                       
|Loss and LAE incurred                                           |  | $ 139,571                                                                       
|Income before income taxes and cumulative effect of             | 
|accounting change                                               |  | $  23,710                                                                       
|Consolidated statutory surplus                                  |  | $ 125,470                                                                       
|Ratio of net premiums written to consolidated statutory surplus |  | 1.1:1                                                                           

|60
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | First
Professionals has the option to commute the agreement should the business perform such
that the underlying protection proves to be unnecessary, in which case the reinsurance
would cease, the underlying reinsurance assets and liabilities would unwind, and any net
funds under the agreement, less a 4.2% risk charge to the reinsurers, would be retained
by First Professionals. The decision of whether to commute the agreement and the timing
of any such commutation will depend on the performance of the underlying business, the
need for the agreement based on our capital position and other relevant considerations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2002, three Hannover Re group companies and two other reinsurers accounted
for approximately $138.7 million, or 63%, of our total reinsurance recoverables and ceded
unearned premiums. The Hannover Re companies are authorized reinsurers, so we do not
maintain collateral on their recoverable balances. At December 31, 2002, we withheld
funds under the terms of the finite reinsurance agreement with Hannover Re in the amount
of $60.9 million, and held collateral in the form of irrevocable letters of credit or
assets held in trust for the reinsurance recoverables due from the other two reinsures in
the aggregate amount of $52.0 million. At December 31, 2001, $48.9 million of our total
reinsurance recoverables were due from three reinsurers, of which irrevocable letters of
credit or assets held in trust collateralized $34.4 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
August 2, 2002, Gerling Global Reinsurance Corporation of America (Gerling),
one of our reinsurers, had its financial strength rating lowered by A.M. Best from A-
(Excellent) to B+ (Very Good). On December 20, 2002, Gerlings A.M. Best rating was
further downgraded to B- (Fair). These rating actions by A.M. Best followed an
announcement by Gerling of its intention to exit the U.S. non-life reinsurance market.
Since then, Gerling has essentially placed itself in voluntary run-off with respect to
its U.S. non-life reinsurance business and A.M. Best has withdrawn Gerlings
financial strength rating and replaced it with the designation NR-3, which
means that A.M. Bests rating methodology no longer applies. Gerling has
participated in our excess of loss reinsurance programs in 2000 at 15%, and in 2001 and
2002 at 20%. Gerling has also provided facultative reinsurance coverage for non-standard
risks. We replaced Gerlings participation in our reinsurance programs, effective
with our renewal, as of January 1, 2003. As of December 31, 2002, the estimated amount of
net reinsurance recoverables from Gerling was approximately $13 million, comprised of the
gross recoverables from Gerling, less reinsurance payables to Gerling of approximately $4
million. Gerling is an authorized reinsurer in our markets; therefore, we do not hold
collateral for these reinsurance recoverables.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gerlings
actions, including placing itself in run-off with respect to its U.S. non-life
reinsurance business, have been voluntary and as recently as March 10, 2003, it has
publicly stated that it is paying its outstanding claims. Consequently, we currently
expect that Gerling will fully meet its obligations to us. We will continue to monitor
developments at Gerling and should its financial condition worsen, we could, in-turn,
recognize a charge for uncollectible reinsurance recoverables.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | Borrowing
Arrangements
|--- | ----------------------

| | On
August 31, 2001, FPIC entered into a Revolving Credit and Term Loan Agreement (the credit
facility) with five financial institutions. The initial aggregate principal amount
of the credit facility was $55 million, including (i) a $37.5 million revolving credit
facility (with a $15 million letter of credit sub-facility), which matures on August 31,
2004, and which FPIC has the right to increase up to $47.5 million by securing additional
lenders to participate in the facility; and (ii) a $17.5 million term loan facility,
repayable in twelve equal quarterly installments of approximately $1.5 million that
commenced on December 31, 2001.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amounts
outstanding under the credit facility bear interest at a variable rate, primarily based
upon LIBOR plus a current margin of 3.00 percentage points, which may be reduced to a
minimum of 2.75 percentage points as FPIC reduces its outstanding indebtedness. The
credit facility replaced a $75 million revolving credit facility (the prior facility)
that was scheduled to have matured on January 4, 2002. Approximately $67.2 million of
principal was outstanding under the prior facility at the time of refinancing. FPIC used
available funds to pay down the difference between the outstanding principal amount of
the prior facility and the initial amount of the new facility. We have also deposited
$3.0 million (of which, $1.0 million was deposited in January 2003) as collateral under
the terms of the credit facility, and are required to either pre-pay principal or make
additional collateral deposits of $0.35 million quarterly in 2003. The credit facility
also requires that we pre-pay principal or make additional collateral deposits of
approximately $1.3 million each at March 31 and June 30, 2004. As of December 31, 2002
and 2001, the interest rates on FPICs credit facilities were 6.25% (as of January
2, 2003, the interest rate was 4.38%) and 4.16%, respectively. FPIC is not required to
maintain compensating balances in connection with these credit facilities but is charged
a fee on the unused portion, which ranges from 30 to 40 basis points.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|61
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Under
the terms of the credit facility, we are required to meet certain financial and
non-financial covenants. Significant covenants are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | i) | Total
debt to cash flow available for debt service may not exceed 3.00:1;
| | -- | -------------------------------------------------------------------------

| | ii) | Combined
net premiums written to combined statutory capital and surplus may not
               exceed 1.75:1;
| | --- | -------------------------------------------------------------------------------------------------------------

| | iii) | Funded
debt to total capital plus funded debt may not exceed 0.27:1;
| | ---- | --------------------------------------------------------------------

| | iv) | The
fixed charge coverage ratio may not be less than 2.00:1 at the end of each
               quarter through December 31, 2002, and thereafter the fixed charge
coverage                ratio may not be less than 2.25:1; and
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v) | Combined
gross premiums written to combined statutory capital and surplus may                not
exceed 2.75:1.
| | -- | ---------------------------------------------------------------------------------------------------------------

| | The
credit facility also contains minimum equity and risk-based capital requirements and
requires our insurance subsidiary, First Professionals, to maintain at least a B++ (Very
Good) group rating from A.M. Best.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Should
FPIC fail to meet one or more of its loan covenants, such occurrence would be considered
an event of default. In the event FPIC was unable to provide an acceptable resolution for
such event of default, FPICs lenders would be entitled to certain remedies,
including the right to demand immediate repayment, including payment in full. Were FPICs
lenders to demand immediate payment in full, FPIC could not make such payment from
existing funds and would have to seek replacement financing or take other steps to raise
the required funds. Under such circumstances, FPICs ability to secure such
replacement financing could not be assured, and if obtained, such financing would likely
carry higher costs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. | Derivative
Financial Instruments
|--- | --------------------------------

| | In
connection with FPICs credit facility entered into on August 31, 2001, FPIC
replaced its interest rate swaps (the previous swaps). In accordance with the
accounting prescribed by FAS 133, Accounting for Derivative Financial Instruments, FPIC
recorded an unrealized loss associated with the fair value of the previous swaps upon
their replacement, which is included in accumulated other comprehensive income (loss) as
a component of shareholders equity. The unrealized loss is being amortized into
income over the term of the previous swaps, which would have expired January 2, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPIC
uses interest rate swap agreements (the swap agreements) to minimize
fluctuations in cash flows caused by interest rate volatility and to effectively convert
all of its floating-rate debt to fixed-rate debt. Such agreements involve the exchange of
fixed and floating interest rate payments over the life of the agreement without the
exchange of the underlying principal amounts. Accordingly, the impact of fluctuations in
interest rates on these swap agreements is offset by the opposite impact on the related
debt. Amounts 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. We
believe that the counterparties to the swap agreements are creditworthy.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
swap agreements in effect at December 31, 2002 are as follows:
| | ------------------------------------------------------------------

|Notional Amount | Maturities | Receive Rate (1) | Pay Rate
|--------------- | ---------- | ---------------- | --------
|$ 37,000        |            | 08/31/2004       |         
|$ 10,208        |            | 08/31/2004       |         

| | (1)          Based
on three-month LIBOR
| | ---------------------------------------

|62
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
following is a summary of FPICs interest risk management strategy and the effect of
this strategy on FPICs consolidated financial statements:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the swap agreements, FPIC 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPICs
swap agreements provide a hedge against changes in the amount of cash flows associated
with FPICs revolving credit facility and term loan. Accordingly, the swap
agreements are reflected at fair value in FPICs consolidated statements of
financial position 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 (loss)). The net effect of this accounting on FPICs
operating results is that interest expense on the variable debt being hedged is recorded
based on fixed interest rates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPIC
formally documents the relationships between the hedging instruments and the revolving
credit facility and term loan. FPIC also assesses the effectiveness of the hedging
instruments on a quarterly basis. If it is determined that the hedging instruments are no
longer highly effective, the change in the fair value of the ineffective portion of the
swaps would be included in earnings rather than comprehensive income. For the year ended
December 31, 2002, the net gain or loss on the ineffective portion of the swap agreements
was not material.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|16. | Deferred
Credit
|--- | ---------------

| | At
December 31, 2002, 2001 and 2000, FPICs deferred credit consisted of the following:
| | ---------------------------------------------------------------------------------------

| | 2002                       | 2001 | 2000     
| | -------------------------- | ---- | ---------
| | Beginning
      balance    |      | $ 10,007 
| | Deferred
      credit      |      |         
| | Amortization
      expense |      | (1,258   
| |                            |     
| | Ending
      balance       |      | $   8,749
| |                            |     

| | Effective
January 1, 2000, FPIC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. FPIC completed a GAAP valuation of the underlying liability during 2000 and
a deferred credit in the amount of $13,205 was recognized. The deferred credit, which
will be accreted into income over 20 years, represents the difference between the GAAP
valuation of the underlying liabilities 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).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|17. | Commitments
and Contingencies
|--- | -----------------------------

| | The
future minimum annual rentals under non-cancelable operating leases are as follows:
| | ---------------------------------------------------------------------------------------

|2003       |  | $  2,695 | 
|---------- |  | -------- | 
|2004       |  | 2,717    | 
|2005       |  | 2,557    | 
|2006       |  | 2,190    | 
|2007       |  | 1,962    | 
|Thereafter |  | 3,659    | 
|           |  |         
|Total      |  | $ 15,780 | 
|           |  |         

|63
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | Total
rental expense was $2,581, $2,410, and $2,190 for 2002, 2001 and 2000, respectively.
| | ------------------------------------------------------------------------------------------

| | FPICs
insurance subsidiaries from time to time become subject to claims for extra-contractual
obligations or risks in excess of policy limits in connection with their insurance
claims. These claims are sometimes referred to as bad faith actions as it is
alleged that the insurance company acted in bad faith in the administration of a claim
against an insured. Bad faith actions are infrequent and generally occur in instances
where a jury verdict exceeds the insureds policy limits. Under such circumstances,
it is routinely alleged that the insurance company failed to negotiate a settlement of a
claim in good faith within the insureds policy limit. FPIC has evaluated such
exposures as of December 31, 2002, and believes its position and defenses are
meritorious. However, there can be no absolute assurance as to the outcome of such
exposures. FPIC currently maintains insurance for such occurrences, which serves to limit
exposure to such claims. However, in one such case, arising in 1993, no such coverage is
available and an estimate of possible loss currently cannot be made. In addition,
multiple claims for extra contractual obligations in a single year could result in
potential exposures materially in excess of insurance coverage or in increased costs of
insurance coverage.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPIC
may also become involved in legal actions not involving claims under its insurance
policies from time to time. FPIC has evaluated such exposures as of December 31, 2002,
and in all cases, believes its position and defenses are meritorious. However, there can
be no absolute assurance as to the outcome of such exposures.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPICs
insurance subsidiaries are subject to assessment by the financial guaranty associations
in the states in which they conduct business for the provision of funds necessary for the
settlement of covered claims under certain policies of insolvent insurers. Generally,
these associations can assess member insurers on the basis of written premiums in their
particular states.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to standard assessments, the Florida and Missouri, Legislatures may also levy
special assessments to settle claims caused by certain catastrophic losses. FPIC would be
assessed on the basis of premiums written in the state. During 2001, a special assessment
was levied on First Professionals and APAC that totaled $0.9 million. No special
assessments were made in 2002 and 2000. In addition, FPIC could be subject to additional
assessments in the future as a result of damages caused by catastrophic losses, such as a
hurricane.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | While
management has evaluated the incidents and circumstances surrounding the above-mentioned
asserted or unasserted legal claims and assessments of which it is aware and believes
that these will not have materially adverse effects on FPIC beyond amounts already
recognized and accrued, there can be no absolute assurance as to their ultimate outcomes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|-64 -
|-----

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|18. | Reconciliation
of Basic and Diluted Earnings Per Share
|--- | ------------------------------------------------------

| | Data
with respect to FPICs basic and diluted earnings per common share are shown below:
| | ----------------------------------------------------------------------------------------

|                                            | 2002 | 2001       | 2000
|------------------------------------------- | ---- | ---------- | ----
|Net income (loss):                          |      |            |     
|Income before cumulative effect of          |     
|accounting change                           |      | $ 14,876   |     
|Cumulative effect of accounting change      |      | (29,578    | )   
|                                            |      |           
|Net (loss) income                           |      | $ (14,702  | )   
|                                            |      |           
|Basic earnings (loss) per common share:     |     
|Income before cumulative effect of          |     
|accounting change                           |      | $     1.58 |     
|Cumulative effect of accounting change      |      | (3.15      | )   
|                                            |      |           
|Net (loss) income                           |      | $ (1.57    | )   
|                                            |      |           
|Diluted earnings (loss) per common share:   |     
|Income before cumulative effect of          |     
|accounting change                           |      | $     1.58 |     
|Cumulative effect of accounting change      |      | (3.14      | )   
|                                            |      |           
|Net (loss) income                           |      | $  (1.56   | )   
|                                            |      |           
|Basic weighted average shares outstanding   |      | 9,387      |     
|Common stock equivalents                    |      | 45         |     
|                                            |      |           
|Diluted weighted average shares outstanding |      | 9,432      |     
|                                            |      |           

| | Diluted
loss per common share for the three months ended December 31, 2001 is based only on the
weighted average number of common shares outstanding during the period, as the inclusion
of 115 common stock equivalents would have been anti-dilutive.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|19. | Stock
Option Plans
|--- | ------------------

| | FPIC
has a stock option plan for officers and key employees (the employee plan)
and a plan for non-employee directors (the director plan). Under the director
plan, only non-qualified stock options may be issued. Under the employee plan, both
incentive stock options and non-qualified stock options may be granted to the same
individual. The option price of an incentive stock option may not be less than 100% of
the fair market value of shares on the grant date. The option price of a non-qualified
option may not be less than 50% of the fair market value of shares on the grant date.
Under the terms of the director plan, 5,000 shares are granted to each director on the
date that person becomes a director and on an annual basis as approved by the Board. The
plan also provides for discretionary grants at future dates as approved by the Board.
Stock grants made under the director plan are at a price not less than 100% of the fair
market value of the underlying stock on the grant date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2000, FPIC offered a stock purchase incentive program (the incentive plan) to
eligible employees, including executive officers. Under the incentive plan, employees who
purchased shares of FPICs common stock in the open market during the term of the
incentive plan were granted matching nonqualified stock options on a one-for-one basis,
up to the maximum of 5,000 options per employee. The incentive plan began January 2000
and ended April 2000. Option grants under the incentive plan were made as of May 1, 2000
at an exercise price equal to the closing market price of FPICs common stock on
that date. Options granted under the incentive plan vest in three equal annual
installments commencing on the one-year anniversary of their grant. Options under this
plan were granted under the employee plan.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPIC
also maintains an Employee Stock Purchase Plan that allows employees to purchase FPICs
common stock at 85% of the market value on the first or last day of the offering period,
whichever is lower. At December 31, 2002 and 2001, 11,279 and 36,032 shares of FPICs common
stock were reserved for issuance in connection with this plan.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|65
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|At December 31, 2002 and 2001,
558,641 and 483,250 shares of FPICs common stock were reserved for issuance in
connection with the stock option plans, respectively. A summary of the status of FPICs
stock options is presented below:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | Shares | Weighted-
Average
Exercise Price | Exercisable | Weighted-
Average
Exercise Price
|-------------------------- | ------ | -------------------------------- | ----------- | --------------------------------
|Balance, December 31, 1999 |        | 1,359,236                        |             | $ 21.77                         
|Granted                    |        | 510,798                          |             | 12.19                           
|Exercised                  |        | (119,500                         | )           | 9.10                            
|Forfeited                  |        | (210,251                         | )           | 29.17                           
|                           |        |                                  |             |                                 
|Balance, December 31, 2000 |        | 1,540,283                        |             | $ 18.56                         
|                           |        |                                  |             |                                 
|Granted                    |        | 311,750                          |             | 13.75                           
|Exercised                  |        | (13,000                          | )           | 8.90                            
|Forfeited                  |        | (173                             | )           | 14.38                           
|                           |        |                                  |             |                                 
|Balance, December 31, 2001 |        | 1,838,860                        |             | $ 17.82                         
|                           |        |                                  |             |                                 
|Granted                    |        | 327,500                          |             | 8.49                            
|Exercised                  |        | (23,833                          | )           | 8.63                            
|Forfeited                  |        | (138,665                         | )           | 19.91                           
|                           |        |                                  |             |                                 
|Balance, December 31, 2002 |        | 2,003,862                        |             | $ 16.26                         
|                           |        |                                  |             |                                 

| | The
following table summarizes information for options outstanding and exercisable at
December 31, 2002:
| | --------------------------------------------------------------------------------------------------------

|               | Options Outstanding | Options Exercisable
|-------------- | ------------------- | -------------------
|
|$  6.00-11.99  |                     | 790,504            
|$  12.00-15.99 |                     | 633,957            
|$  16.00-19.99 |                     | 75,167             
|$  20.00-35.99 |                     | 374,500            
|$  36.00-60.99 |                     | 129,734            
|               |                     |                    
|               |                     | 2,003,862          
|               |                     |                    

|On a pro-forma basis, assuming
compensation expense for FPICs stock options had been recognized based on their
fair values on the grant date under the methodology prescribed by FAS 123, FPICs
net income, tax expense and diluted earnings per share for the three years ended December
31, 2002, 2001 and 2000, would have been impacted as follows:
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            | 2002 | 2001           | 2000
|------------------------------------------- | ---- | -------------- | ----
|Pro-forma net (loss) income                 |      | $    (15,755   | )   
|Pro-forma basic (loss) earnings per share   |      | $        (1.68 | )   
|Pro-forma diluted (loss) earnings per share |      | $        (1.67 | )   

|66
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of options granted, which is amortized to expense over the option vesting
period in determining the pro-forma impact, is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average assumptions:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2002                               | 2001 | 2000       
| | ---------------------------------- | ---- | -----------
| | Expected
      life of options     |      | 5
      yea
| | Risk
      free interest rate      |      | 3.31       
| | Expected
      volatility of stock |      | 50.41      

| | The
weighted average fair value of options granted during 2002, 2001 and 2000 are as follows:
| | ---------------------------------------------------------------------------------------------

| | 2002                                          | 2001 | 2000        
| | --------------------------------------------- | ---- | ------------
| | Fair
      value of options granted           |      | $       4.03
| | Total
      fair value of all options granted |      | $     1,319 
| | Expected
      dividends                      |      | $          
| | Total
      number of options granted         |      | 327,500     

| | In
accordance with FAS 123, the weighted average fair value of stock options granted is
required to be based on a theoretical statistical model using the preceding Black-Scholes
assumptions. In actuality, because FPICs incentive stock options are not traded on
any exchange, employees can receive no value nor derive any benefit from holding stock
options under these plans without an increase in the market price of FPICs stock.
Such an increase in stock price would benefit all stockholders commensurately.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|20. | Employee
Benefit Plans
|--- | ----------------------

| | FPIC
currently sponsors eight post-retirement plans for its employees. The table below lists
those plans and the subsidiary of FPIC whose employees are covered by that plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Holding company (FIG) |  | Defined contribution profit sharing plan           | 
|----------------------- |  | -------------------------------------------------- | 
|FIG                     |  | Defined benefit plan                               | 
|FIG                     |  | Supplemental executive retirement plan (SERP)    | 
|Tenere                  |  | Defined contribution profit sharing plan and trust | 
|Tenere                  |  | Money purchase pension plan                        | 
|AFP                     |  | Defined contribution profit sharing plan           | 
|AFP                     |  | Defined benefit plan                               | 
|EMI                     |  | Defined contribution profit sharing plan           | 

| | The
FIG defined contribution profit sharing plan is available to all employees of FIG after
meeting certain eligibility requirements. The plan is comprised of two parts. The first
part of the plan is a defined contribution plan that allows employees to contribute up to
12.5% of their annual compensation, subject to IRS limits. FPIC contributes a matching
amount equal to 2.5% of the employees annual compensation. The second part of the
plan is a profit sharing plan, whereby FPIC may at its discretion make an additional
contribution to the plan up to a maximum of 10% of the employees annual
compensation. FPICs policy is to fully fund the liability for the matching portion
at the end of each year. At December 31, 2002 and 2001, the fair market value of defined
contribution profit sharing plan assets was $5,121 and $4,900, respectively. The expense
for this plan amounted to $990, $1,138 and $896 in 2002, 2001 and 2000, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FIG defined benefit plan is available to all eligible employees of FIG who have six
months of service and whose ages are twenty and one half years of age or older. The
amount of benefits is based on years of service and 0.75% of the employees average
monthly salary not over the Social Security base plus 1.4% of the employees average
monthly salary over the Social Security base. FPICs policy is to contribute the
maximum amount towards funding benefits under the plan subject to IRS limits. At December
31, 2002 and 2001, the fair market value of defined benefit plan assets was $1,651 and
$1,584, respectively. FPIC had a net periodic pension cost of $277, $217 and $197 for
this plan in 2002, 2001 and 2000, respectively. The expense for this plan amounted to
$183, $143 and $193 in 2002, 2001 and 2000, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|67
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | FIG
also has a SERP that provides certain executives with income at retirement equal to 60%
of pre-retirement base compensation, less qualified pension plan benefits paid by FPIC
and all predecessor plans and Social Security benefits. The plan has no vesting prior to
age 55. The total liability included in the financial statements for this plan amounted
to approximately $1,541 and $1,353 as of December 31, 2002 and 2001, respectively. FPIC
had a net periodic pension cost of $258, $386 and $395 under this plan in 2002, 2001 and
2000, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Tenere defined contribution profit sharing plan and trust is available to all employees
of Tenere upon meeting certain eligibility requirements. The plan is comprised of two
parts. The first part is a defined contribution plan that allows employees to contribute
up to 10% of their annual compensation, subject to IRS limits. The second part is a
profit sharing plan, whereby Tenere may at its discretion contribute an employer
contribution to the plan. At December 31, 2002 and 2001, the fair market value of plan
assets was $773 and $1,122, respectively. The expense for this plan amounted to $76, $66
and $59 in 2002, 2001 and 2000, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Tenere money purchase plan is available to all employees of Tenere upon meeting certain
eligibility requirements. The plan is designed to reward long and loyal service, whereby
Tenere will make contributions to the plan on behalf of the participants for each year of
service until the employee retires. At retirement, the employee will be eligible to
receive the value of the contributions made to the plan on the employees behalf.
Tenere contributes on behalf of each participant an amount equal to 6.0% of the employees
annual compensation plus 5.7% of the employees annual compensation in excess of the
Social Security Taxable Wage Base. At December 31, 2002 and 2001, the fair market value
of plan assets was $358 and $445, respectively. The expense for this plan amounted to
$94, $94 and $75 in 2002, 2001 and 2000, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
AFP defined contribution and profit sharing and defined benefit plans are available to
all eligible employees of AFP. The benefits under these plans are based on years of
service and employee compensation. AFPs funding policy is to contribute to the
plans an amount sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus any additional amounts determined
to be appropriate from time to time. Contributions are intended to be sufficient to cover
the costs of benefits earned for service to date and an estimate of those costs for
future service. AFP contributed $1,221, $957 and $650 to the plans in 2002, 2001 and
2000, respectively. The invested assets of the plans consist of investments in various
types and categories of stocks and bonds. At December 31, 2002 and 2001, the fair market
value of plan assets was $6,732 and $6,185, respectively. Pension costs for the years
2002, 2001 and 2000 amounted to $1,255, $978 and $748, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
EMI defined contribution profit sharing plan is available for all employees of EMI upon
meeting certain eligibility requirements. Under the plan, employees can contribute up to
16% of their annual salary, subject to IRS limits, of which EMI may, at its discretion,
contribute a matching amount of up to 100% of the employee contributions. Historically,
EMI has contributed a matching amount equal to approximately 30% of the employee
contribution. At December 31, 2002 and 2001, the fair market value of plan assets was
$2,167 and $3,281. The expense for this plan amounted to $94, $147 and $125 for 2002,
2001 and 2000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|68
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|The actuarially computed net
periodic pension cost for our two defined benefit plans combined at 2002, 2001 and 2000,
included the following:
|---------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | 2002 | 2001    | 2000
|------------------------------------------------- | ---- | ------- | ----
|Service cost of benefits earned during the period |      | $ 1,034 |     
|Interest cost on projected benefit obligation     |      | 729     |     
|Expected return on plan assets                    |      | (548    | )   
|Recognized net actuarial loss                     |      | 235     |     
|Net amortization and deferral                     |      | 82      |     
|                                                  |      |         |     
|Net periodic pension cost                         |      | $ 1,532 |     
|                                                  |      |         |     

|                                                                       | 2002 | 2001      | 2000
|---------------------------------------------------------------------- | ---- | --------- | ----
|Actuarial Present Value of Benefit Obligation                          |      |           |     
|Accumulated benefit obligations                                        |      | $ (8,938  | )   
|                                                                       |      |           |     
|Projected benefit obligations for service rendered to date             |      | $ (13,718 | )   
|Plan assets at fair value                                              |      | 8,383     |     
|                                                                       |      |           |     
|Projected benefit obligations in excess of plan assets                 |      | (5,335    | )   
|Unrecognized net loss from past experience different from that assumed |      | 4,288     |     
|Prior service cost not yet recognized in net periodic pension cost     |      | 215       |     
|Unrecognized net obligations at inception recognized over 15.29 years  |      | 169       |     
|                                                                       |      |           |     
|Accrued pension cost                                                   |      | $    (663 | )   
|                                                                       |      |           |     

|The following tables set forth the
status of our two defined benefit plans combined for the fiscal years ending December 31,
2002 and 2001, respectively.
|---------------------------------------------------------------------------------------------------------------------------------------------------------

|                                       | 2002 | 2001     
|-------------------------------------- | ---- | ---------
|Change in Benefit Obligation           |      |          
|Benefit obligation, January 1          |      | $ 10,680 
|Service cost                           |      | 1,034    
|Interest cost                          |      | 729      
|Actuarial loss (gain)                  |      | 1,361    
|Benefits paid                          |      | (86      
|Other                                  |      |         
|                                       |      |          
|Benefit obligation, December 31        |      | $ 13,718 
|                                       |      |          
|Change in Plan Assets                  |     
|Fair value of plan assets, January 1   |      | $   7,769
|Actual return on plan assets           |      | (662     
|Employer contributions                 |      | 1,363    
|Benefits paid                          |      | (87      
|                                       |      |          
|Fair value of plan assets, December 31 |      | $   8,383
|                                       |      |          

|Assumptions used in the accounting
for the net periodic pension cost and plan status for our two defined benefit plans
combined at December 31, 2002, 2001 and 2000, were as follows (weighted-average of the
combined plans based on the fair value of the plan assets at year-end):
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | 2002 | 2001 | 2000
|--------------------------------------- | ---- | ---- | ----
|Discount rates                          |      | 6.45 | %   
|Rate of increase in compensation levels |      | 5.14 | %   
|Return on assets                        |      | 6.70 | %   

|-69 -
|-----

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|21. | Segment
Information
|--- | -------------------

| | In
accordance with the provisions of FAS 131, Disclosures about Segments of an
Enterprise and Related Information, FPIC has determined that it has three
reportable operating segments: insurance, reciprocal management and TPA. Our insurance
segment specializes in professional liability insurance products and services for
physicians, dentists, other healthcare providers and attorneys. On October 3, 2002,
Interlex entered into an agreement with an unrelated insurance organization to sell the
renewal rights to all of its legal professional liability policies. The reciprocal
management segment contains our subsidiary AFP, which serves as the exclusive manager and
attorney-in-fact of PRI, an insurance reciprocal in New York. We do not own PRI and so
its financial statements are not consolidated or included in ours. Instead, PRI is
similar to a mutual insurer and the risks and rewards of ownership basically vest with
the policyholders of PRI. The reciprocal management segment also provides brokerage,
administration and intermediary services for insurance and reinsurance programs to PRI
and FPIC. Our TPA segment markets and administers self-insured and fully insured plans
for both large and small employers, including group accident and health, workers compensation
and general liability and property insurance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accounting policies of the segments are the same as those described in the summary of
significant accounting policies found in Note 2. FPIC evaluates a segments
performance based on net income or loss and accounts for intersegment sales and transfers
as if the sales or transfers were to a third party. 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. Intersegment revenues for transactions between
the segments are based on actual costs incurred and are similar to services that may have
been obtained from an unrelated third party. All segments are managed separately because
each business requires different technology and marketing strategies. Selected financial
information by segment follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               | For the year ended December 31, 2002
|------------------------------ | ------------------------------------
|
|Total revenue                  |                                     
|Interest revenue               |                                     
|Interest expense               |                                     
|Depreciation and amortization  |                                     
|Cumulative effect of change in |                                     
|accounting, net of tax         |                                     
|Net income (loss)              |                                     
|Identifiable assets            |                                     
|Goodwill                       |                                     

|                              | For the year ended December 31, 2001
|----------------------------- | ------------------------------------
|
|Total revenue                 |                                     
|Interest revenue              |                                     
|Interest expense              |                                     
|Depreciation and amortization |                                     
|Net (loss) income             |                                     
|Identifiable assets           |                                     
|Goodwill                      |                                     

|                              | For the year ended December 31, 2000
|----------------------------- | ------------------------------------
|
|Total revenue                 |                                     
|Interest revenue              |                                     
|Interest expense              |                                     
|Depreciation and amortization |                                     
|Net (loss) income             |                                     
|Identifiable assets           |                                     
|Goodwill                      |                                     

|70
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | The
following table provides a reconciliation of reportable segment assets to FPICs
consolidated assets:
| | ---------------------------------------------------------------------------------------------------------

|                                       | 2002 | 2001        | 2000
|-------------------------------------- | ---- | ----------- | ----
|Total assets for reportable segments   |      | $ 1,262,407 |     
|Investments in equity method investees |      | (233,069    | )   
|Intercompany receivables               |      | (2,907      | )   
|                                       |      |            
|Total consolidated assets              |      | $ 1,026,431 |     
|                                       |      |            

|22. | Statutory
Accounting
|--- | --------------------

| | First
Professionals, APAC, Intermed and Interlex are required to file statutory-basis financial
statements with state insurance regulatory authorities. The insurance subsidiaries are
restricted under the Florida and Missouri Insurance Codes as to the amount of dividends
they may pay without regulatory consent. In 2003, dividends of $12,547 may be paid
without regulatory consent.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
restricted net assets for FPICs insurance subsidiaries at December 31, 2002, 2001
and 2000, are as follows:
| | ----------------------------------------------------------------------------------------------------------------

| | 2002                      | 2001 | 2000    
| | ------------------------- | ---- | --------
| | First
      Professionals |      | $ 99,772
| | APAC                      |      | 13,151  
| | Intermed                  |      | 24,743  
| | Interlex                  |      | 5,822   

| | The
statutory capital and surplus for FPICs insurance subsidiaries at December 31,
2002, 2001 and 2000, is shown in the table below.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | 2002 | 2001                                  | 2000
| | ---- | ------------------------------------- | ----
| |      | First
      Professionals             |     
| |      | APAC                                  |     
| |      | Intermed                              |     
| |      | Interlex                              |     
| |     
| |      | Combined
      statutory surplus      |     
| |      | Less:
      Intercompany eliminations |     
| |     
| |      | Consolidated
      statutory surplus  |     
| |     

| | For
the years ended December 31, 2002, 2001 and 2000, the statutory net income or loss for
FPICs insurance subsidiaries was as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | 2002                                | 2001 | 2000    
| | ----------------------------------- | ---- | --------
| | First
      Professionals           |      | $ 10,961
| | APAC                                |      | 569     
| | Intermed                            |      | 1,295   
| | Interlex                            |      | 99      
| |                                     |     
| | Total
      statutory income (loss) |      | $ 12,924
| |                                     |     

| | In
March 1998, the National Association of Insurance Commissioners (NAIC)
adopted the Codification of Statutory Accounting Principles (the Codification)
as the NAIC supported basis of accounting. Codification affects all statutory financial
statements issued after January 1, 2001. The Codification was approved with a provision
allowing for discretion by each states Department of Insurance (DOI) in
determining appropriate statutory accounting for insurers. Accordingly, such discretion
will continue to allow prescribed or permitted accounting practices that may differ from
state to state or company to company. The Codification does not affect FPICs
consolidated financial statements, which have been prepared in accordance with GAAP.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|71
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | FPICs
insurance subsidiaries: First Professionals, APAC, Intermed and Interlex prepare
financial statements for regulatory purposes on a statutory-basis in conformity with the
accounting practices prescribed or permitted by the states of Florida and Missouri.
Effective January 1, 2001, both states required all domiciled insurance companies to
prepare their statutory-basis financial statements in accordance with the provisions of
the Codification subject to the deviations prescribed or permitted by each states
department of insurance. Accounting changes adopted to conform to the provisions of
Codification are reported in the statutory financial statements as a cumulative effect of
changes in accounting principles and are recorded as an adjustment to statutory surplus.
As a result of the Codification, FPICs statutory surplus, on a consolidated basis,
increased by $7.1 million for the year ended December 31, 2001. The components of this
increase included surplus increases of $5.5 million, $1.2 million, $0.3 million and $0.1
million for First Professionals, APAC, Intermed and Interlex, respectively. In addition,
on a consolidated basis and at the subsidiary level, FPICs statutory surplus after
adoption continues to be in excess of the current regulatory and risk-based capital
requirements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|23. | Related
Party Transactions
|--- | --------------------------

| | Effective
June 30, 1998, FPIC entered into a management services agreement with APA Management,
Inc. (APAM) and Consulting Group of APA, Inc., (CGA Consulting),
to provide FPIC with all necessary insurance management and administrative services for
APAC, a wholly owned subsidiary of FPIC. FPIC has an indirect financial interest in APAM
through its 9.9% interest in APAL,
which owns 100% of APAM. The agreement terminates on December 31, 2003, subject to renewal as provided in the agreement. Prior to January
1, 2002, the agreement provided that APAM would receive an annual fee of 14.5% of direct
premiums (net of refunds) consisting of an annual 10.5% service fee and 4% claims
management fee. Effective January 1, 2002, the agreement was amended to implement a
sliding fee scale of 14.5% on the first $8 million of written premiums, 11% on written
premiums between $8 million and $10 million, and 10% on all written premiums in excess of
$10 million. In addition, the CGA Consulting fee is $500 annually. The agreement as it
concerns APAM, also provides that anesthesiologist business produced by First
Professionals or its respective agents will be transferred to APAC upon renewal, assuming
the insured agrees, and that APAM will receive an annual 1% service fee on such business.
Management fees incurred by FPIC related to its agreement with APAM were as follows for
the periods presented:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                          | 2002 | 2001    | 2000
|------------------------- | ---- | ------- | ----
|Management and consulting |      |         |     
|fees incurred             |      | $ 2,722 |     

| | On
July 1, 1998, First Professionals and APAC also entered into a quota share reinsurance
agreement with APAL whereby these two subsidiaries cede a 25% quota share portion of all
business written by them related to anesthesiologists and certain related specialties to
APAL. These agreements were entered into in connection with and at the time of FPICs
acquisition of APAC. Premiums ceded and ceding commission earned by FPIC related to its
agreement with APAL were as follows for the periods presented:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | 2002 | 2001    | 2000
|------------------------ | ---- | ------- | ----
|Ceded premiums written   |      | $ 8,387 |     
|Ceding commission earned |      | 1,632   |     

| | Effective
in 2001, APAL formed a new subsidiary, APAL (SPC) Limited, which was established in
accordance with Section 235(1) of the Company Law 2nd Revision of Caymanian
Law as a segregated portfolio corporation. FPIC, through its subsidiaries, EMI and APAC,
has developed alternative risk insurance programs for insureds, whereby segregated
portfolio corporations have been formed for each to assume workers compensation
risks. APAC receives a fee for the use of its policy forms and does not retain the
underwriting risks or incur the administrative expenses under these programs. Like other
reinsurance agreements, APAC does remain liable to the insureds under these programs as
the primary insurer in the event APAL (SPC) Limited or other reinsurers under these
programs were not to perform. Therefore, APAC maintains collateral in the form of assets
in trust and an irrevocable letter of credit corresponding with applicable reinsurance
recoverable balances. Premiums written and premiums ceded by FPIC related to its
agreement with APAL (SPC) Limited were as follows for the periods presented:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|72
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|                       | 2002 | 2001     | 2000
|---------------------- | ---- | -------- | ----
|Premiums written       |      | $  32,66 | 9   
|Ceded premiums written |      | 20,972   |     

| | On
July 1, 1998, First Professionals began assuming reinsurance from PRI, a writer of
medical liability insurance in the state of New York. PRI is managed by an
attorney-in-fact, AFP, which is a wholly owned subsidiary of FPIC. Under one contract,
which reinsures PRI for policies with limits of $1.0 million in excess of $1.0 million,
First Professionals assumes losses only and pays PRI a ceding commission on the premiums
assumed. Effective April 1, 2002, the contract was changed to reinsure PRI for policies
with limits of $1.0 million in excess of $1.3 million. Under another contract, which
First Professionals and PRI ceased to renew for periods subsequent to December 31, 2000,
First Professionals reinsured PRI for losses of $0.25 million in excess of $0.5 million
on each claim. Premiums on these contracts are paid by PRI on a quarterly basis. The net
premiums written under these agreements are subject to experience adjustments, which are
estimated and accrued periodically based on loss experience.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Assumed
premiums written, net premiums written, premiums earned, losses incurred and ceding
commissions earned by FPIC related to these agreements with PRI were as follows for the
periods presented:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | 2002 | 2001     | 2000
|------------------------ | ---- | -------- | ----
|Assumed premiums written |      | $ 12,316 |     
|Premiums earned          |      | 12,316   |     
|Losses incurred          |      | 3,500    |     
|Ceding commissions       |      | 3,097    |     

| | As of December 31, 2002, 2001 and
2000, the net amounts due from PRI under these contracts were approximately $6.3 million,
$2.4 million and $1.1 million, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
excess of loss reinsurance treaty between First Professionals and PRI related to losses
of $0.25 million in excess of $0.5 million and the reinsurance treaty in which First
Professionals reinsures PRI for policies with limits of $1.0 million in excess of $1.3
million both contain clauses under which PRI has the option to commute each such
agreement. During the fourth quarter of 2001, the 1999 treaty relating to
losses of $0.25 million in excess of $0.5 million was commuted. During the first quarter
of 2002, the 2000 treaty relating to losses of $0.25 million in excess of $0.5 million
was commuted. The commutations eliminated all of First Professionals present and
future liabilities under the treaty in exchange for the return by First Professionals of
all but the minimum contract premium to PRI. As a result of these commutations, First
Professionals reported approximately $9.0 million and $9.3 million during the 4th quarter
of 2001 and 1st quarter of 2002, respectively, of paid losses and LAE with a
corresponding reduction in reserves. There was no net income effect from these
commutations, due to the prior accrual of such charges.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2000, First Professionals entered into a 100% quota share reinsurance
agreement with PRI to assume PRIs death, disability and retirement risks under its
claims-made insurance policies in exchange for cash and investments in the amount of
$47.0 million. During 2000, a GAAP valuation of the underlying liability was completed
and a deferred credit in the amount of $13.2 million was recognized. The deferred credit,
which will be amortized into income over 20 years, represents the difference between the
GAAP valuation of the liability and the initial premium received. The liability was
calculated using benefit assumptions and elements of pension actuarial models (i.e.,
mortality, morbidity, retirement, interest and inflation rate assumptions). In connection
with the agreement, First Professionals recognized a 5% ceding commission expense, which
is being deferred and amortized as premiums are earned under the agreement.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|73
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with a management agreement, AFP performs underwriting, administrative and
investment functions on PRIs behalf for which it receives compensation.
Compensation under the agreement as originally in effect was equal to 13% of PRIs
direct premiums written, with an adjustment for expected return premiums, plus or minus
10% of PRIs statutory net income or loss. In addition, the management agreement
provided that AFP is to be reimbursed by PRI for certain expenses paid by AFP on PRIs
behalf, namely salaries and related payroll costs of personnel in AFPs claims,
legal and risk management departments. Such directly reimbursed expenses are not reported
in the accompanying  consolidated financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2002, the agreement was amended by AFP and PRI to remove the sharing by AFP of 10% of PRIs
statutory net income or loss, effective January 1, 2002. With regard to profit sharing
amounts already earned and collected, AFP has agreed to hold the years 1999, 2000 and
2001 open for re-determination and possible adjustment for a period of five years each
(expiring 2004, 2005 and 2006, respectively.) Such adjustments would be based primarily
on development of and related adjustments, if any, to loss and LAE reserves for those
years. AFP has earned and collected profit sharing amounts under the original agreement
totaling $3.6 million for the three years ended December 31, 2001. In accordance with the
amended agreement, AFP has agreed to pay 6% annual interest on the 10% profit share
amounts already earned and collected under the original agreement for 1999, 2000 and
2001, while those years remain open for possible future re-determination and adjustment,
if any. In addition, AFP will be reimbursed for 100% of the costs of the risk management
department it maintains for PRI insureds, for which it is not already reimbursed,
compared with 50% under the previous agreement. The management agreement and amendments
were reviewed and approved by the New York State Insurance Department.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FPICs
revenues and results of operations are financially sensitive to the revenues and results
of operations of PRI. In addition PRI, as an MPL insurer, is subject to many of the same
types of risks as those of FPICs insurance subsidiaries.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Claims administration and management fees earned, profit sharing income earned and reimbursed expenses
collected by FPIC related to its agreement with PRI were as follows for the periods presented:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                         | 2002 | 2001      | 2000
|------------------------------------------------------------------------ | ---- | --------- | ----
|Claims administration and 
                       management fees earned |      | $  24,341 |     
|Profit sharing income earned                                             |      |          |     
|Reimbursed expenses                                                      |      | 14,175    |     

| | Effective
July 1, 2000, First Professionals entered into an agreement with PRI whereby, First
Professionals, through FPICs 70% owned subsidiary, PMA, manages an MPL insurance
program in Pennsylvania for PRI. Effective January 1, 2003, FPIC owns 80% of PMA. Under
this program, whereby business is written on First Professionals policy forms and
ceded to PRI under a 100% quota share reinsurance agreement. FPIC receives a fronting fee
of 7% and PMA receives an administration fee of 20% of premiums written, in return for
its services to PRI, which include underwriting, claims management and other
administrative aspects of this program. PMA also pays all commissions and brokerage to
outside agents and brokers for the placement of business under the program. Effective
January 1, 2002, the terms of this agreement were amended to cede 100% of the premiums
written to PRI. The amendment has been filed with the New York State Insurance
Department. Direct premiums written, ceded premiums written and ceding commission earned
by FPIC under this program were as follows for the periods presented:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         | 2002 | 2001      | 2000
|------------------------ | ---- | --------- | ----
|Direct premiums written  |      | $  11,312 |     
|Ceded premiums written   |      | 11,227    |     
|Ceding commission earned |      | 3,045     |     

|74
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|24. | Restructuring
|--- | -------------

| | During
the fourth quarter of 2001, FPIC recorded a pre-tax charge of $632 in connection with the
disposition of its unprofitable TPA division in Albuquerque, New Mexico. Under the plan,
FPIC sold the divisions assets and cancelled its service agreements with
self-insured customers. Certain other contracts were retained and are serviced by FPICs
Jacksonville, Florida, TPA division. The 2001 restructuring activity was a continuation
of FPICs consolidation of the TPA operations and brings to an end the restructuring
activities of the Albuquerque division that began during the fourth quarter of 2000 when
FPIC incurred a pre-tax charge of $500. As a result of the plan, fifty-two employees were
terminated at December 31, 2001. This reduction represents 24% of the TPA workforce and
100% of the New Mexico office. Thirty employees were terminated at December 31, 2000.
This reduction represented 12% of the TPA workforce and 35% of the New Mexico office. All
employees terminated in 2001 and 2000 were located in the Albuquerque location.
Restructuring activity for years 2002, 2001 and 2000 was as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
      & Benefits             | Rental
      Facilities | Other
      Expense | Total
| | -------------------------------------- | ----------------------- | ------------------- | -----
| | Fiscal
      2000 restructuring charge |                         | $ 360               |      
| | Amount
      utilized in 2000          |                         | (10                 | )    
| |                                       
| | Balance,
      December 31, 2000       |                         | 350                 |      
| | Fiscal
      2001 restructuring charge |                         | 88                  |      
| | Amount
      utilized in 2001          |                         | (350                | )    
| |                                       
| | Balance,
      December 31, 2001       |                         | 88                  |      
| | Amount
      utilized in 2002          |                         | (87                 | )    
| |                                       
| | Balance,
      December 31, 2002       |                         | $     1             |      
| |                                       

|25. | Unaudited
Quarterly Results of Operations
|--- | -----------------------------------------

| | The
following is a summary of our unaudited quarterly consolidated results of operations for
the years ended December 31, 2002, 2001 and 2000:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

|2002 | First                                    | Second | Third    | Fourth
|---- | ---------------------------------------- | ------ | -------- | ------
|     | Direct
      and assumed                 |        |          |       
|     | premiums
      written                   |        | $ 89,258 |       
|     | Net
      premiums written               |        | 56,196   |       
|     | Premiums
      earned                    |        | 39,342   |       
|     | Net
      investment income              |        | 4,888    |       
|     | Total
      revenues                     |        | 53,416   |       
|     | Income
      before cumulative effect of |       
|     | accounting
      change                  |        | 2,865    |       
|     | Cumulative
      effect of accounting    |       
|     | change,
      net of tax                 |        | (29,578  | )     
|     | Net
      (loss) income                  |        | (26,713  | )     
|     | Basic
      earnings per share           |        | (2.85    | )     
|     | Diluted
      earnings per share         |        | (2.82    | )     

|2001 | First                            | Second | Third    | Fourth
|---- | -------------------------------- | ------ | -------- | ------
|     | Direct
      and assumed         |        |          |       
|     | premiums
      written           |        | $ 55,173 |       
|     | Net
      premiums written       |        | 35,898   |       
|     | Premiums
      earned            |        | 31,517   |       
|     | Net
      investment income      |        | 6,716    |       
|     | Total
      revenues             |        | 46,287   |       
|     | Net
      income (loss)          |        | 1,294    |       
|     | Basic
      earnings per share   |        | .14      |       
|     | Diluted
      earnings per share |        | .14      |       

|75
|--

|Notes to the
Consolidated Financial Statements (Continued)(Dollars in Thousands,
Except Per Share Amounts and Elsewhere as Noted)
|---------------------------------------------------------------------------------------------------------------------------------

|2000 | First                            | Second | Third    | Fourth
|---- | -------------------------------- | ------ | -------- | ------
|     | Direct
      and assumed         |        |          |       
|     | premiums
      written           |        | $ 76,033 | (1)   
|     | Net
      premiums written       |        | 66,247   |       
|     | Premiums
      earned            |        | 29,119   |       
|     | Net
      investment income      |        | 6,039    |       
|     | Total
      revenues             |        | 44,177   |       
|     | Net
      income (loss)          |        | 4,712    |       
|     | Basic
      earnings per share   |        | .49      |       
|     | Diluted
      earnings per share |        | .49      |       

| | (1) Includes
      the effect of the reclassification of a portion of the statutory-basis assumed
      reinsurance premiums written in the amount of $13.2 million related to the
      100% Quota Share reinsurance agreement with PRI. This amount was finalized,
      reclassified and reported directly as a deferred credit in the balance sheet
      during the second quarter of 2000, after the initial reporting of the contract
      in the first quarter. This reclassification had no effect on revenues or
      income previously reported.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|76
|--

|SCHEDULE I


FPIC Insurance Group,
Inc.   Summary of Investments Other Than Investments in Related Parties (in
thousands)As of December 31, 2002
|------------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Cost or
Amortized Cost | Fair
Value | Amount in Statement
of Financial Position
|------------------------------------ | ---------------------- | ---------- | -----------------------------------------
|Bonds:                               |                        |            |                                          
|Corporate securities                 |                        | $ 166,161  |                                          
|United States Government agencies    |                       
|and authorities                      |                        | 104,604    |                                          
|States, municipalities and political |                       
|subdivisions                         |                        | 86,849     |                                          
|Mortgage-backed securities           |                        | 67,563     |                                          
|                                     |                        |           
|Total bonds                          |                        | 425,177    |                                          
|Equity securities:                   |                       
|Industrial, miscellaneous, and other |                        | 7          |                                          
|                                     |                        |           
|Total equity securities              |                        | 7          |                                          
|Real estate                          |                        | 5,966      |                                          
|Other invested assets                |                        | 11,277     |                                          
|                                     |                        |           
|Total investments                    |                        | $ 442,427  |                                          
|                                     |                        |           

|See Accompanying Report of
Independent Certified Public Accountants.


77
|-------------------------------------------------------------------------

|SCHEDULE II


FPIC Insurance Group,
Inc.  Condensed Financial Information of Registrant
         FPIC Insurance Group, Inc. (Parent Only)Condensed Statements
of Financial Position (in thousands, except common share data)As
of December 31, 2002 and 2001
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                            | 2002 | 2001      
|----------------------------------------------------------- | ---- | ----------
|Assets                                                      |      |           
|Cash and cash equivalents                                   |      | $    4,722
|Investments in subsidiaries*                                |      | 200,403   
|Other invested assets, at equity                            |      | 2,018     
|Other invested assets, at cost                              |      | 5,380     
|                                                            |      |           
|Total cash and investments                                  |      | 212,523   
|Property and equipment, net                                 |      | 1,571     
|Due from subsidiaries, net*                                 |      | 1,768     
|Deferred income taxes                                       |      | 2,650     
|Prepaid expenses                                            |      | 936       
|Goodwill                                                    |      | 2,961     
|Intangible assets                                           |      | 1,034     
|Federal income tax receivable                               |      |          
|Other assets                                                |      | 501       
|                                                            |      |           
|Total assets                                                |      | $ 223,944 
|                                                            |      |           
|Liabilities and Shareholders Equity                        |     
|Revolving credit facility                                   |      | $  37,000 
|Term loan                                                   |      | 10,208    
|Federal income tax payable                                  |      | 120       
|Accrued expenses and other liabilities                      |      | 10,703    
|                                                            |      |           
|Total liabilities                                           |      | 58,031    
|                                                            |      |           
|Common stock, $.10 par value, 50,000,000 shares authorized; |     
|9,390,795 and 9,337,755  shares issued and outstanding at   |     
|December 31, 2002 and 2001, respectively                    |      | 939       
|Additional paid-in capital                                  |      | 38,322    
|Accumulated other comprehensive income (loss)               |      | 5,525     
|Retained earnings                                           |      | 121,127   
|                                                            |      |           
|Total shareholders equity                                  |      | 165,913   
|                                                            |      |           
|Total liabilities and shareholders equity                  |      | $ 223,944 
|                                                            |      |           

|*Eliminated in consolidation



See Accompanying Report of
Independent Certified Public Accountants.


78
|---------------------------------------------------------------------------------------------------------

|SCHEDULE II


FPIC Insurance Group,
Inc.            Condensed Financial Information of RegistrantFPIC Insurance
Group, Inc. (Parent Only)Condensed Statements of Net (Loss) Income
       For the Years Ended December 31, 2002, 2001 and 2000  (in thousands)
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                         | 2002 | 2001      | 2000
|-------------------------------------------------------- | ---- | --------- | ----
|Revenues                                                 |      |           |     
|Management fees from subsidiaries, net*                  |      | $ 23,693  |     
|Net investment (loss) income                             |      | (19       | )   
|Other income                                             |      | 55        |     
|                                                         |      |          
|Total revenues                                           |      | 23,729    |     
|                                                         |      |          
|Expenses                                                 |     
|Management fees due to subsidiaries*                     |      | 30        |     
|Other underwriting expenses                              |      | 19,776    |     
|Interest expense                                         |      | 4,762     |     
|Other expenses                                           |      | 456       |     
|                                                         |      |          
|Total expenses                                           |      | 25,024    |     
|                                                         |      |          
|Loss before income taxes                                 |      | (1,295    | )   
|Less: Income tax expense (benefit)                       |      | 364       |     
|                                                         |      |          
|Loss before equity in undistributed earnings             |     
|of subsidiaries                                          |      | (1,659    | )   
|Equity in undistributed (loss) earnings of subsidiaries* |      | (13,043   | )   
|                                                         |      |          
|Net (loss) income                                        |      | $ (14,702 | )   
|                                                         |      |          

|*Eliminated in consolidation


See Accompanying Report of
Independent Certified Public Accountants.
79
|------------------------------------------------------------------------------------------------------

|SCHEDULE II


FPIC Insurance Group,
Inc.     Condensed Financial Information of RegistrantFPIC
Insurance Group, Inc. (Parent Only) Condensed Statements of Cash Flows (in
Thousands)For the Years Ended December 31, 2002, 2001 and 2000
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                        | 2002 | 2001      | 2000
|------------------------------------------------------- | ---- | --------- | ----
|Cash flows from operating activities:                   |      |           |     
|Net income                                              |      | $ (14,702 | )   
|Adjustments to reconcile net income to cash provided by |     
|operating activities:                                   |     
|Equity in undistributed earnings of subsidiaries*       |      | 13,043    |     
|Common stock dividend from subsidiaries*                |      | 6,590     |     
|Return of capital from subsidiaries*                    |      | 8,260     |     
|Capital contribution to subsidiaries*                   |      | (10,860   | )   
|Depreciation and amortization                           |      | 1,225     |     
|Realized loss on sale of property and equipment         |      |          |     
|Noncash compensation                                    |      |          |     
|Net (earnings) loss from equity investments             |      | (222      | )   
|Deferred income tax benefit                             |      | (1,047    | )   
|Changes in assets and liabilities:                      |     
|Due from subsidiaries*                                  |      | (1,320    | )   
|Prepaid expenses                                        |      | 55        |     
|Other assets                                            |      | 2,475     |     
|Federal income tax receivable                           |      | 5,443     |     
|Accrued expenses and other liabilities                  |      | 325       |     
|                                                        |      |          
|Net cash provided by operating activities               |      | 9,265     |     
|                                                        |      |          
|Cash flows from investing activities:                   |     
|Proceeds from sale of other invested assets             |      |          |     
|Purchase of other invested assets                       |      |          |     
|Purchase of property and equipment                      |      | (607      | )   
|Purchase of subsidiarys net other assets and stock     |      |          |     
|                                                        |      |          
|Net cash used in investing activities                   |      | (607      | )   
|                                                        |      |          
|Cash flows from financing activities:                   |     
|Receipt of revolving credit facility                    |      |          |     
|Payment of revolving credit facility                    |      | (5,833    | )   
|Issuance of common stock                                |      | 438       |     
|Buyback of common stock                                 |      |          |     
|                                                        |      |          
|Net cash (used in) provided by financing activities     |      | (5,395    | )   
|                                                        |      |          
|Net increase (decrease) in cash and cash equivalents    |      | 3,263     |     
|Cash and cash equivalents at beginning of period        |      | 1,459     |     
|                                                        |      |          
|Cash and cash equivalents at end of period              |      | $   4,722 |     
|                                                        |      |          
|Supplemental disclosure of cash flow information        |     
|Interest paid                                           |      | $   4,718 |     
|                                                        |      |          
|Federal income taxes paid                               |      | $   6,293 |     
|                                                        |      |          
|Federal income tax refunds received                     |      | $   4,598 |     
|                                                        |      |          

|*Eliminated in consolidation


See Accompanying Report of
Independent Certified Public Accountants.
80
|------------------------------------------------------------------------------------------------------

|SCHEDULE III


FPIC Insurance Group,
Inc.                     Consolidated Supplementary Insurance Information (in thousands)
                   For the years ended December 31, 2002, 2001 and 2000
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Segment                                  | Deferred
Policy
Acquisition
Costs
(DPAC) | Loss
Reserves | Unearned
Premiums | Premium
Revenue | Net
Investment
Income | Loss
Expenses | Amortization
of
DPAC | Other
Expenses | Net
Written
|---------------------------------------- | ------------------------------------------ | ------------- | ----------------- | --------------- | --------------------- | ------------- | -------------------- | -------------- | -----------
|2002                                     |                                            |               |                   |                 |                       |               |                      |                |            
|Medical professional and other liability |                                            | $ 4,452       |                   | 440,166         |                       | 173,421       |                      | 151,684        |            
|2001                                     |                                           
|Medical professional and other liability |                                            | $ 9,001       |                   | 318,483         |                       | 146,761       |                      | 131,058        |            
|2000                                     |                                           
|Medical professional and other liability |                                            | $ 5,967       |                   | 281,295         |                       | 100,066       |                      | 120,454        |            

|See Accompanying Report of
Independent Certified Public Accountants.
81
|-----------------------------------------------------------------------

|SCHEDULE IV


FPIC Insurance Group,
Inc.Reinsurance (in thousands)      For the years
ended December 31, 2002, 2001 and 2000
|----------------------------------------------------------------------------------------------------------------------------

|Type of Insurance                        | Gross
Amount | Ceded
Earned to
Other
Companies | Assumed
Earned
From Other
Companies | Net
Earned | Percentage
of
Assumed
to Net
|---------------------------------------- | ------------ | ------------------------------- | ----------------------------------- | ---------- | ----------------------------
|2002                                     |              |                                 |                                     |            |                             
|Medical professional and other liability |              | $ 302,845                       |                                     | 166,384    |                             
|2001                                     |             
|Medical professional and other liability |              | $ 172,064                       |                                     | 67,633     |                             
|2000                                     |             
|Medical professional and other liability |              | $ 122,857                       |                                     | 33,523     |                             

|See Accompanying Report of
Independent Certified Public Accountants.
82
|-----------------------------------------------------------------------

|SCHEDULE V


FPIC Insurance Group,
Inc.  Valuation and Qualifying Accounts (in thousands)
              For the years ended December 31, 2002, 2001 and 2000
|------------------------------------------------------------------------------------------------------------------------------------------------------------

|Description                     | Balance at
Beginning
of Period | Charged to
Costs and
Expenses | Deductions | Balance
at End
of Period
|------------------------------- | ------------------------------ | ----------------------------- | ---------- | ------------------------
|December 31, 2002               |                                |                               |            |                         
|Allowance for doubtful accounts |                                | $   734                       |            | 668                     
|December 31, 2001               |                               
|Allowance for doubtful accounts |                                | $ 1,659                       |            | 12                      
|December 31, 2000               |                               
|Allowance for doubtful accounts |                                | $ 1,247                       |            | 961                     

|See Accompanying Report of
Independent Certified Public Accountants.
83
|-----------------------------------------------------------------------

|Item 9. Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure


There were no changes in or
disagreements with accountants on accounting and financial disclosure matters.


Part III


Item 10. Directors and
Executive Officers of the Registrant


Information required hereunder with
respect to directors and executive officers will appear under the heading Executive
Compensation in FPICs Proxy Statement for the 2003 Annual Meeting of
Shareholders, which information is incorporated herein by reference.


Item 11. Executive
Compensation


The information required herein will
appear under the heading Executive Compensation in FPICs Proxy Statement
for the 2003 Annual Meeting of Shareholders, which information is incorporated herein by reference.


Item 12. Security
Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters


The information required herein will
appear under the heading Security Ownership of Certain Beneficial Owners, Directors,
Nominees and Executive Officers in FPICs Proxy Statement for the 2003 Annual
Meeting of Shareholders, which information is incorporated herein by reference. See Item 5
and Item 8, Note 19 for information about FPICs equity compensation plans.


Item 13. Certain
Relationships and Related Transactions


The information required herein will
appear under the heading Certain Relationships and Related Transactions in
FPICs Proxy Statement for the 2003 Annual Meeting of Shareholders, which information
is incorporated herein by reference.


Item 14. Controls and
Procedures


An evaluation of FPICs
disclosure controls and procedures (as defined by Rule 13a-14(c) of the Securities
Exchange Act of 1934 (the Act)) was completed as of February 20, 2003, the
Evaluation Date (as defined by Rule 13a-14(b)(4)(ii) of the Act), by
FPICs Chief Executive Officer and Chief Financial Officer, as Certifying
Officers (as defined by Rule 13a-14(a) of the Act). Based on such evaluation,
FPICs disclosure controls and procedures were found to be effective in ensuring that
material information, relating to FPIC and its consolidated subsidiaries, as required to
be disclosed by FPIC in its periodic reports filed with the Securities and Exchange
Commission, is accumulated and made known to the Certifying Officers, and other
management, as appropriate, to allow for timely decisions regarding required disclosure.
There have been no significant changes in FPICs internal controls or in other
factors that could significantly affect such controls subsequent to the Evaluation Date
and up to and including the date of this report, and no corrective actions with regard to
significant deficiencies or material weaknesses were required to be performed.


Part IV


Item 15. Exhibits,
Financial Statement Schedules, and Reports on Form 8-K


FPICs financial statements and
schedules are included in Item 8. Financial Statements and Supplementary Data, beginning
on page 40.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(a) | 1.  Financial Statements:     FPIC Insurance Group, Inc.:
|--- | ---------------------------------------------------------

| |  | Report
of Independent Certified Public Accountants
| | - | --------------------------------------------------

| |  | Consolidated
Statements of Financial Position as of December 31, 2002 and 2001
| | - | ------------------------------------------------------------------------------

| |  | Consolidated
Statements of (Loss) Income and Comprehensive (Loss) Income for the years ended December
31, 2002, 2001 and 2000
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
 Statements  of Changes in  Shareholders  Equity for the years ended  December  31,
2002,                 2001 and 2000
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| |  | Consolidated
Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000
| | - | ------------------------------------------------------------------------------------------

| |  | Notes
to the Consolidated Financial Statements
| | - | ----------------------------------------------

|84
|--

|2. | Financial
Statement Schedules:
|-- | ------------------------------

| | (Schedules
other than those listed are omitted for the reason that they are not required or are not
applicable or the required information is shown in the financial statements or notes
thereto.)
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | I | Summary
of Investments - Other than Investments in Related Parties
| | - | ------------------------------------------------------------------

| | II | Condensed
Financial Information of Registrant
| | -- | ---------------------------------------------

| | III | Supplementary
Insurance Information
| | --- | -----------------------------------

| | IV | Reinsurance
| | -- | -----------

| | V | Valuation
and Qualifying Accounts
| | - | ---------------------------------

|3. | Exhibits:
|-- | ---------

| | 3.1 | Restated
Articles of Incorporation of FPIC Insurance Group, Inc., incorporated by
                    reference to FPICs Form 10-Q (Commission File No. 1-11983) filed on
August 16, 1999.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | Amended
and Restated Bylaws of FPIC Insurance Group, Inc. dated July 20, 2002.
| | --- | ------------------------------------------------------------------------------

| | 10(a) | Form
of Employment Agreement dated December 30, 1992, amended November 4, 1995,           and
amended February 28, 1996 and extended on November 7, 1998, between FPIC and
          William R. Russell, incorporated by reference to FPICs Registration
          Statement on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996
          and FPICs Form 10-Q, incorporated by reference to FPICs definitive
          proxy statement (Commission File No. 1-11983) filed on May 7, 1999.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(b) | Form
of Severance Agreements dated February 28, 1996, between FPIC and William           R.
Russell, incorporated by reference to FPICs Registration Statement on
          Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(c) | Form
of Indemnity Agreement dated February 28, 1996 between the Registrant and           Drs.
Acosta-Rua, Gause, Shapiro, Selander, White, Bagby, Baratta, Murray,           Bridges,
Hagen, Van Eldik, Yonge; Messrs. Russell, Rosenbloom, Sabia, Carey,           Driscoll
and Ms. Whitter, incorporated by reference to FPICs Registration
          Statement on Form S-4 (Registration No. 333-02040) first filed on March 7,
1996.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(d) | Omnibus
Incentive Plan, as amended, incorporated by reference to FPICs           definitive
proxy statement (Commission File No. 1-11983) filed on April 30,           2002.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(e) | Director
Stock Option Plan, as amended, incorporated by reference to           FPICs
definitive proxy statement (Commission File No. 1-11983) filed on           April 30,
2002.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(f) | Supplemental
Executive Retirement Plan, as amended, incorporated by reference           to FPICs
Form 10-Q (Commission File No. 1-11983) filed on May 17, 1999.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(g) | Excess
Benefit Plan, incorporated by reference to FPICs Registration           Statement
on Form S-4 (Registration No. 333-02040) first filed on March 7, 1996.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(h) | Deferred
Compensation Plan, incorporated by reference to FPICs           Registration
Statement on Form S-1 (Registration No. 333-04585) first filed on           May 24, 1996.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(i) | Agreement
and Plan of Merger dated as of April 14, 1998 among FPIC,           Anesthesiologists
Professional Assurance Association, Inc., the APAA Liquidating           Trust and
Anesthesiologists Professional Assurance Company, incorporated by           reference to
FPICs filing on Form 10-K (Commission File No. 1-11983) filed           on March
31, 1999.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(j) | Stock
Purchase Agreement dated as of November 25, 1998 and First Amendment to           Stock
Purchase Agreement dated as of December 23, 1998 among FPIC and the
          Shareholders of Administrators For the Professions, Inc., incorporated by
          reference to FPICs filing on Form 8-K, first filed on January 21, 1999.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(k) | Agreement
and Plan of Merger dated as of October 2, 1998 and First Amendment to           Agreement
and Plan of Merger dated as of January 1999 and Second Amendment to           Agreement
and Plan of Merger dated as of March 17, 1999 among First           Professionals
Insurance Company, Inc., TGI Acquisition Corporation and Tenere           Group, Inc.,
incorporated by reference to FPICs filing on Form 10-K           (Commission File
No. 1-11983) filed on March 31, 1999.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(l) | Form
of Severance Agreement dated January 1, 1999 between the Registrant and           John R.
Byers incorporated by reference to FPICs Form 10-Q (Commission           File No.
1-11983) filed on May 17, 1999.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(l)(1) | Form
of Amendment to Severance Agreement between the Registrant and John R.           Byers
dated December 14, 2001.
| | -------- | --------------------------------------------------------------------------------------------------------------------

|85
|--

| | 10(m) | Form
of Employment Agreement dated January 1, 1999 between the Registrant and           John
R. Byers incorporated by reference to FPICs Form 10-Q (Commission           File
No. 1-11983) filed on May 17, 1999.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(m)(1) | Form
of Amendment to Employment Agreement between the Registrant and John R.           Byers
dated December 14, 2001.
| | -------- | ---------------------------------------------------------------------------------------------------------------------

| | 10(n) | Form
of Employment Agreement dated November 22, 1999 between the Registrant and           Kim
D. Thorpe incorporated by reference to FPICs Form 10-K (Commission           File
No.1-11983) filed on March 30, 2000.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(n)(1) | Form
of Amendment to Employment Agreement between the Registrant and Kim D.           Thorpe
dated December 14, 2001.
| | -------- | ---------------------------------------------------------------------------------------------------------------------

| | 10(o) | Form
of Severance Agreement dated November 22, 1999 between the Registrant and           Kim
D. Thorpe incorporated by reference to FPICs Form 10-K (Commission           File
No.1-11983) filed on March 30, 2000.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(o)(1) | Form
of Amendment to Severance Agreement between the Registrant and Kim D.           Thorpe
dated December 14, 2001.
| | -------- | --------------------------------------------------------------------------------------------------------------------

| | 10(p) | Form
of Indemnity Agreements dated January 1, 1999 between the Registrant and           Frank
Moya, M.D. and John R. Byers incorporated by reference to FPICs Form           10-K
(Commission File No.1-11983) filed on March 30, 2000.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(q) | Form
of Indemnity Agreements dated May 8, 1999 between the Registrant and Ms.           Deyo,
Parks and Ryan incorporated by reference to FPICs Form 10-K           (Commission
File No.1-11983) filed on March 30, 2000.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(r) | Form
of Indemnity Agreement dated August 22, 1999 between the Registrant and           Steven
Coniglio incorporated by reference to FPICs Form 10-K (Commission           File
No.1-11983) filed on March 30, 2000.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(s) | Form
of Indemnity Agreements dated November 6, 1999 between the Registrant and
          Messrs. Cetin and Thorpe incorporated by reference to FPICs Form 10-K
          (Commission File No.1-11983) filed on March 30, 2000.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(t) | Reinsurance
agreement between Physicians Reciprocal Insurers and First           Professionals
Insurance Company, Inc. incorporated by reference to FPICs           Form 10-Q
(Commission File No. 1-11983) filed on May 15, 2000.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(u) | Form
of Employment Agreement dated November 6, 1999 between the Registrant and           Kurt
Cetin.
| | ----- | ----------------------------------------------------------------------------------------------------

| | 10(u)(1) | Form
of Amendment to Employment Agreement between the Registrant and Kurt Cetin
          dated December 14, 2001.
| | -------- | ------------------------------------------------------------------------------------------------------------------

| | 10(v) | Form
of Employment Agreement dated May 1, 2000 between the Registrant and David           L.
Rader.
| | ----- | ---------------------------------------------------------------------------------------------------

| | 10(v)(1) | Form
of Amendment to Employment Agreement between the Registrant and David L.           Rader
dated December 16, 2000.
| | -------- | ----------------------------------------------------------------------------------------------------------------------

| | 10(w) | Form
of Employment Agreement dated May 1, 2000 between the Registrant and Gary           M.
Dallero.
| | ----- | ----------------------------------------------------------------------------------------------------

| | 10(w)(1) | Form
of Amendment to Employment Agreement between the Registrant and Gary M.           Dallero
dated December 16, 2000.
| | -------- | -----------------------------------------------------------------------------------------------------------------------

| | 10(x) | Form
of Severance Agreement dated June 19, 2000 between the Registrant and           Charles
Divita, III.
| | ----- | ---------------------------------------------------------------------------------------------------------

| | 10(y) | Form
of Indemnity Agreement dated July 15, 2000 between the Registrant and           Messrs.
Dallero and Divita.
| | ----- | ----------------------------------------------------------------------------------------------------------------

| | 10(z) | Form
of Indemnity Agreement dated December 16, 2000 between the Registrant and
          Roberta G. Cown.
| | ----- | ---------------------------------------------------------------------------------------------------------

| | 10(aa) | Form
of Severance Agreement dated December 16, 2000 between the Registrant and
          Roberta G. Cown.
| | ------ | ---------------------------------------------------------------------------------------------------------

| | 10(bb) | Form
of Severance Agreement dated December 22, 2000 between the Registrant and
          Pamela D. Deyo.
| | ------ | --------------------------------------------------------------------------------------------------------

| | 10(cc) | Waiver
and Modification Agreement dated as of March 30, 2001, by and among FPIC
          Insurance Group, Inc., and The Banks Listed Herein, and SunTrust Bank, as
          Issuing Bank, Administrative Agent and as Collateral Agent.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|86
|--

| | 10(dd) | Revolving Credit
and Term Loan Agreement dated August 31, 2001 among FPIC           Insurance Group, Inc.,
as Borrower, the Lenders named therein, and SunTrust           Bank, as Administrative
Agent and Collateral Agent.
| | ------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(ee) | International
Swap Dealers Association, Inc. Master Agreement dated June 15,           1998 between
FPIC Insurance Group, Inc. and SunTrust Bank, Atlanta, as amended           by the
Confirmations of Interest Rate Transactions dated August 29, 2001.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(ff) | Form
of Indemnity Agreement dated June 6, 2001 between the Registrant and John           K.
Anderson, Jr.
| | ------ | ---------------------------------------------------------------------------------------------------------

| | 10(gg) | Form
of Indemnity Agreement dated June 6, 2001 between the Registrant and M.C.
          Harden, III.
| | ------ | -----------------------------------------------------------------------------------------------------

| | 10(hh) | Form
of Indemnity Agreement dated July 14, 2001 between the Registrant and Gene           C.
Witherspoon.
| | ------ | ---------------------------------------------------------------------------------------------------------

| | 10(ii) | Form
of Indemnity Agreement dated September 18, 2001 between the Registrant and           Lori
A. Mackey.
| | ------ | ---------------------------------------------------------------------------------------------------------

| | 10(jj) | Form
of Employment Agreement dated December 14, 2001 between the Registrant and
          Roberta G. Cown.
| | ------ | ----------------------------------------------------------------------------------------------------------

| | 10(kk) | Amendment
No. 1 to Revolving Credit and Term Loan Agreement dated March 25,           2002.
| | ------ | -------------------------------------------------------------------------------------------

| | 10(ll) | First
Professionals Insurance Company, Inc. Net Account Quota Share Reinsurance
          Agreement dated August 1, 2002, incorporated by reference to FPICs Form
          8-K filed on August 7, 2002.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(mm) | Form
of employment agreement dated January 1, 1999 between the Administrators           for
the Professions, Inc. and Anthony Bonomo, as amended.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(nn) | Consulting
Agreement dated as of November 1, 2002 between FPIC Insurance Group,           Inc. and
David L. Rader.
| | ------ | ------------------------------------------------------------------------------------------------------------------

| | 10(oo) | Forbearance
of covenant violation dated October 24, 2002 on behalf of FPIC           Insurance Group,
Inc. pursuant to the terms and conditions of Section 5.12 of           the Revolving
Credit and Term Loan Agreement dated as of August 31, 2001 by and           among FPIC
Insurance Group, Inc., as Borrower, and several banks and financial
          institutions, as Lenders, as amended by Amendment No. 1 dated as of March 25,
          2002.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(pp) | Amendment
of the Management Agreement between AFP and PRI.
| | ------ | ----------------------------------------------------------

| | 10(qq) | Collateral
Assignment Of Certificate Of Deposit.
| | ------ | ------------------------------------------------

| | 10(rr) | Amendment
No. 2 to the Revolving Credit and Term Loan Agreement entered into as           of
November 21, 2002, by and among FPIC, the several banks and other financial
          institutions from time to time party thereto (the Lenders),
SunTrust           Bank, in its capacity as Administrative Agent for the Lenders and in
its           capacity as Collateral Agent for the Lenders and joined by certain
subsidiaries           of the Borrower as Subsidiary Guarantors.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(ss) | Form
of Assignment Agreement dated January 1, 2003 between Anthony Bonomo, FPIC
          Insurance Group, Inc. and Physicians Reciprocal Insurers.
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | 10(tt) | FPIC
Insurance Group, Inc. Medical Malpractice Liability Excess of Loss           Reinsurance
Agreement effective January 1, 2004.
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------

| | 10(uu) | Form of Second Amendment to the Management Agreement effective
        January 1, 2002 among Anesthesiologists Professional Assurance Company, APA Management Inc. and FPIC Insurance Group, Inc.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 21 | Subsidiaries
of the Registrant
| | -- | ------------------------------

| | 23 | Consent
of PricewaterhouseCoopers LLP
| | -- | -------------------------------------

| | 99.1 | Certification
of John R. Byers pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 99.2 | Certification
of Kim D. Thorpe pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
                    Section 906 of the Sarbanes-Oxley Act of 2002.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|87
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|(b) | Reports
on Form 8-K:
|--- | --------------------

| |  | On
October 14, 2002, FPIC filed a Form 8-K with the Securities and Exchange Commission
(SEC) announcing that FPIC had entered into a consulting agreement with David L. Rader,
whereby Mr. Rader will provide consulting services to FPIC, effective November 1, 2002.
Mr. Rader retired from his position as President and Chief Executive Officer of First
Professionals effective October 31, 2002. Mr. Robert E. White, Jr., who served as
Executive Vice President and Chief Operating Officer of First Professionals, became
President of First Professionals effective November 1, 2002.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
October 29, 2002, FPIC filed a Form 8-K notifying the SEC that A.M. Best Company had
announced its decision to change FPICs group rating from A- (Excellent) with a
negative outlook to B++ (Very Good) with a stable outlook. As a result of the rating
change, FPIC was in non-compliance with its loan agreement. As a result of such
non-compliance, FPIC requested and received from its Lenders a forbearance dated October
24, 2002  under which the Lenders agreed not to take any
action with regard to this covenant violation for a 30-day period, until November 23,
2002, to allow adequate time for FPIC and its Lenders to agree and finalize appropriate
revisions to the Loan Agreement.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On
November 21, 2002, FPIC filed a Form 8-K notifying the SEC that FPIC had reached an
agreement with its lenders regarding an amendment to its Revolving Credit and Term Loan
Agreement dated August 31, 2001, as amended.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|88
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|SIGNATURES


Pursuant to the requirements of
Sections 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on this the 27th day of March, 2003.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | FPIC Insurance
Group, Inc.By   /s/ John R. Byers       
       John R. Byers       President and Chief
Executive Officer
| |  | --------------------------------------------------------------------------------------------------------------------------------------

|Pursuant to the requirements of the
Securities Exchange Act of 1934, the following persons on behalf of the registrant and in
the capacities and on the dates indicated have signed this report below.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Signature | Title | Date
|--------- | ----- | ----

|/s/ John R. Byers
John R. Byers | President, Chief Executive Officer and Director (Principal Executive Officer) | March 27, 2003
|--------------------------------------------- | ----------------------------------------------------------------------------- | --------------

|/s/ Kim D. Thorpe
Kim D. Thorpe | Executive Vice President
                                         and Chief Financial Officer
                                                     (Principal Financial Officer and
                                                     Principal Accounting Officer) | March 27, 2003
|--------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------

|/s/ Robert O. Baratta
Robert O. Baratta, M.D. | Chairman of the Board | March 27, 2003
|----------------------------------------------------------- | --------------------- | --------------

|/s/ David M. Shapiro
David M. Shapiro, M.D. | Vice Chairman | March 27, 2003
|--------------------------------------------------------- | ------------- | --------------

|/s/ Gaston J. Acosta-Rua
Gaston J. Acosta-Rua, M.D. | Director | March 27, 2003
|----------------------------------------------------------------- | -------- | --------------

|/s/ John K. Anderson, Jr.
John K. Anderson, Jr. | Director | March 27, 2003
|------------------------------------------------------------- | -------- | --------------

|/s/ Richard J. Bagby
Richard J. Bagby, M.D. | Director | March 27, 2003
|--------------------------------------------------------- | -------- | --------------

|/s/ James W. Bridges
James W. Bridges, M.D. | Director | March 27, 2003
|--------------------------------------------------------- | -------- | --------------

|/s/ Kenneth M. Kirschner
Kenneth M. Kirschner | Director | March 27, 2003
|----------------------------------------------------------- | -------- | --------------

|/s/ M.C. Harden, III
M.C. Harden, III | Director | March 27, 2003
|--------------------------------------------------- | -------- | --------------

|/s/ Louis C. Murray
Louis C. Murray, M.D. | Director | March 27, 2003
|------------------------------------------------------- | -------- | --------------

|/s/ Joan D. Ruffier
Joan D. Ruffier | Director | March 27, 2003
|------------------------------------------------- | -------- | --------------

|/s/ Guy T. Selander
Guy T. Selander, M.D. | Director | March 27, 2003
|------------------------------------------------------- | -------- | --------------

|/s/ James G. White
James G. White, M.D. | Director | March 27, 2003
|----------------------------------------------------- | -------- | --------------

|/s/ Gene C. Witherspoon
Gene C. Witherspoon | Director | March 27, 2003
|--------------------------------------------------------- | -------- | --------------

|89
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