United States
SECURITIES 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, 2003.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
  
  59-3359111(State or Other Jurisdiction of
  Incorporation or Organization)
  
  (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:   None
Securities 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, 2003 was
$128,960,428. As of March 1, 2004, there were 9,920,865
shares of the Registrants Common Stock, $.10 Par Value, outstanding. DOCUMENTS
INCORPORATED BY REFERENCE Document
  
  Incorporated inProxy
  Statement for Registrants
  Annual Shareholders Meeting to
  be held on June 2, 2004.
  
  Part III    FPIC Insurance Group, Inc.
2003 Annual Report on Form 10-K
Index
PagePart IItem 1.
  Business
  3Item 2.
  Properties
  20Item 3.
  Legal
  Proceedings
  21Item 4.
  Submission
  of Matters to a Vote of Security Holders
  21Part
  IIItem 5.
  Market
  for Registrants Common Equity and Related Shareholder Matters
  21Item 6.
  Selected
  Financial Data
  22Item 7.
  Managements
  Discussion and Analysis of Financial Condition and Results of Operations
  23Item 7A.
  Quantitative
  and Qualitative Disclosures about Market Risk
  47Item 8.
  Financial
  Statements and Supplementary Data
  50Item 9.
  Changes in
  and Disagreements with Accountants on Accounting and Financial Disclosure
  106Item 9A.
  Controls and
  Procedures
  106Part IIIItem 10.
  Directors
  and Executive Officers of the Registrant
  106Item 11.
  Executive
  Compensation
  106Item 12.
  Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters
  106Item 13.
  Certain
  Relationships and Related Transactions
  107Item 14.
  Principal
  Accountant Fees and Services
  107Part IVItem 15.
  Exhibits,
  Financial Statement Schedules and Reports on Form 8-K
  107Signatures
  114Part 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 CompaniesInsurance
  
  Specializes in
  professional liability insurance products and related risk management
  services for physicians, dentists, and other healthcare providers.
  FPIC subsidiaries (FPIC,
  the holding company, is also grouped within the insurance segment.):
  First Professionals
  The Tenere Group, Inc. (Tenere)
  Intermed Insurance Company
  (Intermed)
  Interlex Insurance Company
  (Interlex)
  Insurance Services, Inc.
  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.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
  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.3
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).
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, 2003,
2002 and 2001:
Direct and
  Assumed Premiums Written by State2003
  
  % of 
  Total
  
  2002
  
  % of 
  Total
  
  2001
  
  % of 
  TotalFlorida
  
  $
  210,155
  
  
  61.7
  %
  
  
  186,455
  
  
  54.1
  %
  
  
  134,587
  
  
  54.8
  %Tennessee
  
  
  25,791
  
  
  7.6
  %
  
  
  20,185
  
  
  5.9
  %
  
  
  6,961
  
  
  2.8
  %Missouri
  
  
  24,701
  
  
  7.2
  %
  
  
  32,814
  
  
  9.5
  %
  
  
  23,468
  
  
  9.6
  %Pennsylvania
  
  
  17,886
  
  
  5.2
  %
  
  
  14,212
  
  
  4.1
  %
  
  
  13,578
  
  
  5.5
  %New York
  
  
  15,423
  
  
  4.5
  %
  
  
  17,472
  
  
  5.1
  %
  
  
  15,654
  
  
  6.4
  %Georgia
  
  
  13,049
  
  
  3.8
  %
  
  
  12,445
  
  
  3.6
  %
  
  
  6,303
  
  
  2.6
  %Texas
  
  
  8,323
  
  
  2.4
  %
  
  
  20,452
  
  
  5.9
  %
  
  
  26,318
  
  
  10.7
  %Arkansas
  
  
  7,632
  
  
  2.2
  %
  
  
  6,827
  
  
  2.0
  %
  
  
  24
  
  
  0.0
  %Ohio
  
  
  5,728
  
  
  1.7
  %
  
  
  10,349
  
  
  3.0
  %
  
  
  3,039
  
  
  1.2
  %Alabama
  
  
  4,945
  
  
  1.5
  %
  
  
  4,054
  
  
  1.2
  %
  
  
  1,669
  
  
  0.7
  %All other
  
  
  7,108
  
  
  2.2
  %
  
  
  19,462
  
  
  5.6
  %
  
  
  13,802
  
  
  5.7
  %All states
  
  $
  340,741
  
  
  100.0
  %
  
  
  344,727
  
  
  100.0
  %
  
  
  245,403
  
  
  100.0
  %Florida and Missouri represent the core
states for direct insurance business. 
New York primarily represents assumed reinsurance from PRI.  Insurance business in 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 through those ceded reinsurance agreements
all or most of the insurance or underwriting risks.  This does not mean the fronting programs are risk free to
us.  First Professionals and APAC do
remain primarily liable to the policyholders under fronting programs should the
assuming insurers or reinsurers not meet their obligations to us under the
programs.
4
Net
premiums written, including premiums under fronting programs, are net of
reinsurance ceded 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 after all the reinsurance ceded to others for the years ended December
31, 2003, 2002 and 2001:
Net
  Premiums Written by State2003
  
  % of 
  Total
  
  2002
  
  % of 
  Total
  
  2001
  
  % of 
  TotalFlorida
  
  $
  91,570
  
  
  64.0
  %
  
  
  72,319
  
  
  51.6
  %
  
  
  99,069
  
  
  67.4
  %Missouri
  
  
  17,014
  
  
  11.9
  %
  
  
  27,506
  
  
  19.6
  %
  
  
  18,418
  
  
  12.5
  %New York
  
  
  15,423
  
  
  10.8
  %
  
  
  17,472
  
  
  12.5
  %
  
  
  15,653
  
  
  10.6
  %Georgia
  
  
  5,585
  
  
  3.9
  %
  
  
  4,558
  
  
  3.2
  %
  
  
  4,075
  
  
  2.8
  %Texas
  
  
  4,653
  
  
  3.3
  %
  
  
  4,387
  
  
  3.1
  %
  
  
  2,190
  
  
  1.5
  %Arkansas
  
  
  2,786
  
  
  1.9
  %
  
  
  3,015
  
  
  2.1
  %
  
  
  2
  
  
  0.0
  %All other
  
  
  2,734
  
  
  1.9
  %
  
  
  3,873
  
  
  2.8
  %
  
  
  3,409
  
  
  2.3
  %Ohio
  
  
  1,826
  
  
  1.3
  %
  
  
  3,099
  
  
  2.2
  %
  
  
  1,656
  
  
  1.1
  %Kansas
  
  
  1,543
  
  
  1.0
  %
  
  
  4,019
  
  
  2.9
  %
  
  
  2,612
  
  
  1.8
  %All states
  
  $
  143,134
  
  
  100.0
  %
  
  
  140,248
  
  
  100.0
  %
  
  
  147,084
  
  
  100.0
  %Our
principal products and services are described in the following sections.
MPL Insurance.Our primary product is MPL insurance for
physicians, dentists and other healthcare providers as individual practitioners
or as members of practice groups.  Our
insurance protects policyholders against losses arising from professional
liability claims and the related defense costs as a result of patient injuries
in which it is alleged that medical error or malpractice has occurred.  The policy limits or amounts of coverage we
offer are predominantly $250,000, $500,000 or $1,000,000 per claim with
aggregate coverage for all claims within a policy period of up to $750,000,
$1,500,000 and $3,000,000, respectively. 
Optional coverage is available for the professional corporations under
which physicians or dentists practice.
Direct
premiums written for our core MPL insurance, excluding premiums written under
fronting programs, were $267.1 million, $251.6 million and $154.4 million for
the years ended December 31, 2003, 2002 and 2001, respectively.
Claims-Made Policy Forms.  A
substantial majority of our MPL 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.
5
We
also offer tail coverage, which covers claims reported after the expiration of
our claims-made policies for 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, or his or her estate, in
the event of death, disability or retirement. 
To qualify for the free retirement coverage at First Professionals and
APAC, a claims-made policyholder must have been insured for at least five
consecutive years prior to retirement. 
At Intermed, policyholders must be at least fifty years of age and have
been insured for at least three years.
Assumed MPL Reinsurance from PRI.Our largest
insurance subsidiary, First Professionals, has assumed reinsurance from PRI under
two contracts.  One contract is an excess cessions contract under which
First Professionals assumes all of the risks under occurrence form excess
professional liability insurance policies with coverage of $1,000,000 per claim
and $3,000,000 in aggregate in excess of $1,300,000 per claim and $3,900,000 in
aggregate issued by PRI to insureds requesting excess limits.  The second
contract is a 100% quota share reinsurance agreement under which First
Professionals assumes all of PRIs risks under covered extended reporting
endorsements issued under claims-made policies in the event of death, disability
or retirement of the insured.
Assumed
premiums written under these reinsurance contracts were $15.4 million, $17.5
million and $15.9 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
Fronting Programs.Fronting programs represent business under
eight different arrangements whereby First Professionals and APAC have issued
MPL and workers compensation insurance and transferred, through ceded
reinsurance, all or substantially all of the insured risks to other insurers or
reinsurers in exchange for a fee.  The
fronting fees earned by our companies generally ranged from 4% to 7% of the
underlying premiums written.  Most of
these programs have been entered into with related parties of ours, including
PRI, which we manage, or in connection with services provided by our reciprocal
management and TPA segments.
Direct
premiums written under fronting programs were $57.8 million, $72.6 million and
$60.7 million for the years ended December 31, 2003, 2002 and 2001,
respectively.   Ceded premiums under
fronting programs were $56.9 million, $71.4 million and $58.0 million for the
years ended December 31, 2003, 2002 and 2001, respectively.
As
a result of the hardening of our core insurance markets, we began to exit our
fronting programs in 2002 in order to free up capital and capacity to
accommodate our core MPL business.  Of the eight original fronting programs,
only one continues to be active and is scheduled to expire by June 30,
2004.  The remaining seven inactive
programs are now in run-off.
Just
like our core insurance and ceded reinsurance programs, our companies remain
primarily liable to the underlying policyholders should one or more of the
companies for which we have fronted insurance business fail to fulfill their
corresponding reinsurance obligations to us. 
To mitigate this risk, we obtain collateral under the reinsurance agreements
in the form of irrevocable letters of credit or investment securities held in
trust corresponding with our net assets recoverable under these programs.
Other Products.In addition to our direct MPL insurance and
assumed reinsurance, we have also written LPL insurance, small group accident
and health (A&H), and workers compensation insurance in the past.  We sold the renewal rights to our LPL book
of business, which was formerly written by our subsidiary, Interlex, effective
October 3, 2002.  In 2001, we exited the
small group A&H and workers compensation lines, both of which were also
marketed to physicians, dentists and their practices.
Direct
and assumed premiums written under these products, which we have exited, were
$0.4 million, $3.4 million and $12.2 million for the years December 31, 2003,
2002 and 2001, respectively.
6
Ceded Reinsurance.  FPICs insurance subsidiaries
reinsure portions of their business. 
The following table summarizes our ceded reinsurance programs for the years
ended December 31, 2003, 2002 and 2001.
Ceded
  Premiums Written
  ($ in Thousands)Ceded Reinsurance
  Program and Description
  
  2003
  
  2002
  
  2001Excess
  of Loss Reinsurance
  
  $
  (56,490
  )
  
  (47,540
  )
  
  (40,313
  )Net
  Account Quota Share Reinsurance
  
  $
  (84,255
  )
  
  (85,531
  )
  
  Fronting
  Programs
  
  $
  (56,862
  )
  
  (71,408
  )
  
  (58,006
  )Total
  Ceded Premiums - All Reinsurance Programs
  
  $
  (197,607
  )
  
  (204,479
  )
  
  (98,319
  )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 risks ceded.  The placement of reinsurance with a number
of individual companies and syndicates mitigates the concentration of credit
risks under our excess of loss reinsurance programs.  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 under its excess
of loss and net account quota share agreements are rated A- or better by A.M.
Best Company (A.M. Best).  Reinsurers
that are not authorized or accredited, which are primarily those under fronting
programs, 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.
Excess of Loss Reinsurance.  Our
excess of loss ceded reinsurance program is used to limit the amount of risks
with respect to individual and aggregate MPL claims to pre-determined
retentions.   The reinsurance of claims
in excess of our retention is intended to protect us from larger losses.  It also helps reduce volatility in our
underwriting results.
During
most years, including 2003 and 2002, our retention generally has been $500,000
per loss.  Our
retention on our anesthesiologists MPL insurance generally has been $375,000 per loss because
we already ceded a 25% quota share portion of this business to American
Professional Assurance, Ltd. (APAL), of which we own 9.8%.  We did not renew our 25% quota share
reinsurance agreement with APAL for 2004, so our retention on all our MPL
business will be $500,000 per loss. 
During 2001 and 2000, our retention
was $250,000 per loss ($187,500 per loss on anesthesiologists MPL insurance), but
with large annual aggregate deductibles in both years ($12.9 million and $9.0 million, in
2001 and 2000, respectively.)
Business is ceded under our excess of loss program to a group of large
foreign and domestic reinsurers and several Lloyds of London syndicates.
Our
excess of loss program also covers extra contractual obligations (ECO) and
excess policy limit (XPL) losses that can occur in certain situations and
represent individual losses in excess of the underlying policy limit.  Our excess of loss program also contains a
second ECO/XPL supplement, which is an awards made contract.  The supplement 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 and up to
$10.0 million.  If a covered loss occurs,
the supplement allows for one reinstatement of coverage during the policy
period and calls for the payment of a reinstatement premium equal to the
original premium.
On November 25, 2003, FPIC received $23.5 million in exchange
for commuting its reinsurance treaties with Gerling Global Reinsurance
Corporation of America (Gerling), one of its reinsurers.  The amount
collected includes payments for commutation of Gerlings quota share treaty for
facultative reinsurance coverage on non-standard risks, Gerlings portion of
the excess of loss reinsurance program and payments for estimated future claims
under the Gerling treaties.  Gerling participated in our excess of loss
reinsurance programs in 2000 at 15%, and in 2001 and 2002 at 20%.  
We replaced Gerlings participation in our reinsurance programs effective with
our renewal as of January 1, 2003.  No gain or loss was recognized on the
commutation transaction.  As a result of the commutation, we have no
reinsurance recoverable from Gerling as of December 31, 2003.
7
Net Account Quota Share Reinsurance.  Effective July 1, 2002, First Professionals
entered into a net account quota share reinsurance agreement with two
subsidiaries of Hannover Re.  The
agreement, which calls for First Professionals to cede quota share portions of
its written premiums, contains adjustable features, including sliding scale
ceding commissions and a cap on the amount of losses that may be ceded to the
reinsurer, all of which serve to make it what is commonly referred to as a
finite-type reinsurance contract.  The
original agreement also contained a loss corridor on business ceded through
March 31, 2003, which was removed along with other modifications made in
connection with the amendment and extension of the agreement discussed
below.   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 accounting principles generally
accepted in the United States of America (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.  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 reinsurer, would be
retained by First Professionals.  At
December 31, 2003 and 2002, this charge would have been $7.1 million and $3.6
million, respectively.
On May 6, 2003, we entered into an amendment
to the Hannover Re agreement that, effective April 1, 2003, extends its
expiration date to include policies written and renewed through December 31,
2004.  The agreement has also been
amended to remove the loss corridor on business written and ceded, beginning
April 1, 2003, and to reduce the lower end of the sliding scale ceding
commission range from 27.5% to 20%.  A
provision has also been added that will allow First Professionals to reduce the
quota share amount of premiums to be ceded under the agreement in 2004.  Cancellation provisions have also been
added; one that gives First Professionals the option to cancel the agreement on
or after January 1, 2004, with 30 days notice, and one that gives Hannover Re
the option to cancel the agreement as of the effective date of any decrease in
First Professionals base rate for its MPL insurance policies that exceeds 5%.
The
Hannover Re group of companies to which we cede a significant amount of
business under both our excess of loss and net account quota share reinsurance
agreements comprise one of the largest international reinsurers. The Hannover
Re group of companies are rated A (Excellent) by A.M. Best. Their rating was
lowered by A.M. Best from A+ to A on October 30, 2003.  In addition, we withhold substantially all
amounts due to Hannover Re under the net account quota share reinsurance agreement in a funds
withheld account and maintain other collateral covering substantially all of
our reinsurance assets associated with the net account quota share reinsurance
agreement. Under the
terms of the agreement, Hannover Re receives an interest credit of 5.5%
annually on the funds withheld.  At December
31, 2003 and 2002, the funds withheld balance was $118.4 million and $60.2
million, respectively.
Ceded Reinsurance
Under Fronting Programs.  Under various fronting programs, we write direct business and
cede most of or the entire premium to other insurance or reinsurance carriers.
As such, we retain little or no underwriting risk after reinsurance on these
programs.  For additional information,
see the discussion under Fronting Programson page 6.
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.
8
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 have experienced
significant 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 began
accepting applications from new policyholders once again in February 2003,
although our intention has been to manage the number of our 2003 policyholders
to approximate year-end 2002 levels. 
Through the end of 2003, we have achieved this goal and have also
successfully reduced our policyholder counts in non-core markets, which frees
up additional capacity for us.
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 the number of competitors.  Although the number of companies offering
MPL insurance products in our core markets declined during 2001
and 2002, more competitors may enter our markets in the future and affect our position
in those markets.  A handful of smaller,
start-up companies have been formed in Florida and Missouri in 2003.  In addition, some of our competitors are
larger and have greater resources than we do and some have higher rating agency ratings.  The number of healthcare entities that allow
or tolerate self-insurance for their practicing physicians has also
increased.  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 independent agency system.
In
Florida, name recognition, service reputation, medical society endorsements,
physician involvement, healthcare activism, agency force and program
development have all contributed to helping FPIC, through our subsidiaries
First Professionals and APAC, 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 to maintain a relatively high-quality book of insured
business.
First
Professionals and APAC are also 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.
9
In both Missouri and Kansas, Intermed competes with regional and national
companies.  In 2002, the last year for
which statistics were available from the Missouri Department of Insurance,
there were twenty-one companies writing MPL insurance for physicians and
surgeons in the state.  The top four
writers had 70% of the market.  Intermed
was the largest writer in the state in 2002 and had a market share of 25%.

The environment and market conditions have changed significantly in
Missouri and Kansas in recent years. 
Although the claims environment overall in Missouri and Kansas still
compares relatively favorably with larger states, there have been significant
increases in claims severity based on our own experience and industry
data.  We implemented an 83% rate
increase in Missouri, effective August 1, 2003, and other carriers there have
raised their rates.  We believe our
rates are the highest or among the highest of the carriers writing business in
Missouri currently.
As a result of the market conditions in Missouri, and our price
increases in 2003, we have lowered our planned retention in Missouri and
rededicated the capacity created to our Florida business at First
Professionals.  The numbers of our
policyholders in Missouri and Kansas have declined, accordingly.  We will continue to closely analyze the
Missouri and Kansas environment during 2004, including our longer-term
prospects and strategic outlook for these markets.
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 has engaged to provide a
rating 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.
In
October 2002, A.M. Best lowered its financial strength 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 significant growth in premiums in 2002 and
2001 in the face of its serious concerns about overall loss trends and reserve
adequacy in the MPL insurance sector. 
The B++ (Very Good) financial strength rating of our insurance companies was re-affirmed by A.M. Best on
March 2, 2004, with a stable outlook.
Additional information about our rating may be purchased directly from
A.M. Best.
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.
10
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 subject to regulations 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, Missouri and other 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 not more 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 minimum capital and surplus levels for companies,
prescribing or permitting required statutory accounting and financial reporting
rules,  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 principles 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 in certain
material respects 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 principles for insurance
companies.
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 assess member insurers on the basis of
written premiums in their states.
During
2003, the State of Florida enacted legislation specifically directed at MPL
insurance reforms.  Among the more
significant aspects of this legislation were caps on non-economic damages and
reforms to bad faith statutes with respect to MPL insurance claims.  The legislation also contained a requirement
that insurers freeze their rates as of July 1, 2003, and file new rates or
re-file those rates for formal approval. 
In addition, the legislation called for the State of Florida to
engage an outside actuarial consultant to estimate the benefits to be derived
from the legislative reforms and a presumed factor for such benefit to be
included in the rate filings to be made by the companies.  That presumed factor was a net reduction of
approximately 7.8%, of which the consultant attributed 5.3% to the cap on
non-economic damages and 2.5% to bad faith reforms.
11
First
Professionals and APAC filed new rates to be effective January 1, 2004, which
included the presumed factor.  First
Professionals received a net overall increase of 8%, which became effective for
new business on January 1, 2004, and for renewals beginning as of March 1,
2004.  APAC received a net overall
increase of 10%, effective for all business beginning April 1, 2004.

We
were very much involved in the legislative process that resulted in the 2003
Florida MPL tort reforms.  Our overall
assessment of the effectiveness on those reforms remains neutral at this
point and so we have not made any further downward adjustments to our pricing
in excess of the presumed factor, nor have we adjusted our claims estimates or
reserves at this point.  We also believe
that because the legislation involved many political compromises, it is
possible that additional tort reforms may be considered in the future.
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 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 provides or
participates in comprehensive risk management programs for 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 Processing. 
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, 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
settled 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 CWIP ratio and the average amounts paid for losses and loss adjustment
expenses (LAE) per claim have improved.
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 2003, approximately 21% of
the fair value of the fixed income portfolio was invested in tax-exempt securities
and approximately 79% in taxable securities.
Our fixed income investment securities, which
include bonds and other debt securities and comprise a substantial portion of
our invested assets, are managed by outside professional investment management
firms.  Two of these firms act as the
custodians of our fixed income securities. 
Each of the managers has discretionary authority to make investment
decisions within investment policy guidelines provided to them by the
company.  These investment policy guidelines,
which have been approved by FPICs board of directors, contain descriptions of
types, classes and qualities of securities that may be selected by the
managers, minimum and maximum amounts that may be invested among the various
classes authorized, and other investment guidelines.
All of our investments in debt and marketable
equity securities are classified as available-for-sale and reported at
estimated fair values, with the changes in fair values during the period
excluded from earnings and recorded net of tax as a component of other
comprehensive income.  Realized
investment gains and losses are recorded when investments are 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 ultimate losses and LAE 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.
13
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.

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.  During 2002, our
MPL insurance companies began utilizing the in-house actuarial staff of First
Professionals to perform the actuarial projections used in estimating loss and
LAE reserves at all of our insurance subsidiaries.  Prior to this, management utilized and integrated within our
reserves estimation process the actuarial calculations performed by our
independent actuaries.  Our aggregate
liability for losses and LAE as of December 31, 2003, was recorded at our best
estimate, determined primarily based upon actuarial studies performed by our
in-house actuarial staff.  In
establishing the aggregate best estimate of our loss and LAE reserves as of
December 31, 2003, our in-house actuarial staff calculated and selected a point
estimate within an estimated range of reasonable values around the aggregate
point estimate. The estimated range of values as of December 31, 2003 was
$276.4 million to $321.2 million, net of reinsurance.
Our
independent actuary also performed actuarial studies
of the loss and LAE reserves for our insurance companies as of December 31,
2003 and 2002, and issued his reports thereon, which have been filed with state insurance regulators
along with the statutory annual statements of our insurance companies.
14
The
following table sets forth (in thousands) the development of our liability for
losses and LAE, net and gross of reinsurance, for the 10-year period ended
December 31, 2003 (1):
Year Ended December 31,
  
  1993
  
  1994
  
  1995
  
  1996
  
  1997
  
  1998
  
  1999
  
  2000
  
  2001
  
  2002
  
  2003Statement of Financial Position
  Liability
  
  $
  132,190
  
  
  143,415
  
  
  155,318
  
  
  161,124
  
  
  173,971
  
  
  200,763
  
  
  214,692
  
  
  223,597
  
  
  238,073
  
  
  272,007
  
  
  298,763Re-estimated Liability As of:One year later
  
  
  121,543
  
  
  129,472
  
  
  140,322
  
  
  146,009
  
  
  159,639
  
  
  182,208
  
  
  221,212
  
  
  232,208
  
  
  240,489
  
  
  272,489Two years later
  
  
  105,704
  
  
  114,193
  
  
  116,151
  
  
  127,529
  
  
  142,369
  
  
  182,498
  
  
  222,281
  
  
  231,617
  
  
  250,079Three years later
  
  
  91,929
  
  
  90,666
  
  
  106,937
  
  
  112,770
  
  
  141,850
  
  
  183,389
  
  
  221,270
  
  
  238,823Four years later
  
  
  72,854
  
  
  86,154
  
  
  104,684
  
  
  106,557
  
  
  140,707
  
  
  183,491
  
  
  231,870Five years later
  
  
  73,753
  
  
  87,807
  
  
  103,402
  
  
  105,949
  
  
  141,437
  
  
  192,612Six years later
  
  
  75,032
  
  
  85,881
  
  
  103,454
  
  
  106,825
  
  
  144,379Seven years later
  
  
  74,376
  
  
  85,854
  
  
  104,326
  
  
  109,683Eight years later
  
  
  74,206
  
  
  86,710
  
  
  105,691Nine years later
  
  
  75,058
  
  
  85,378Ten years later
  
  
  74,003Cumulative Paid As of:One year later
  
  
  24,794
  
  
  28,701
  
  
  35,562
  
  
  33,103
  
  
  49,697
  
  
  76,291
  
  
  91,269
  
  
  95,890
  
  
  96,496
  
  
  89,044Two years later
  
  
  45,162
  
  
  52,832
  
  
  60,464
  
  
  62,612
  
  
  90,165
  
  
  121,199
  
  
  152,862
  
  
  163,850
  
  
  162,880Three years later
  
  
  57,597
  
  
  63,738
  
  
  78,291
  
  
  88,649
  
  
  115,336
  
  
  153,200
  
  
  185,126
  
  
  200,792Four years later
  
  
  62,630
  
  
  73,296
  
  
  94,882
  
  
  98,027
  
  
  127,774
  
  
  168,522
  
  
  206,430Five years later
  
  
  68,052
  
  
  82,840
  
  
  100,294
  
  
  102,355
  
  
  134,272
  
  
  179,504Six years later
  
  
  72,509
  
  
  85,047
  
  
  102,122
  
  
  105,689
  
  
  137,564Seven years later
  
  
  74,138
  
  
  85,221
  
  
  103,310
  
  
  106,251Eight years later
  
  
  73,986
  
  
  86,184
  
  
  103,053Nine years later
  
  
  74,819
  
  
  85,376Ten years later
  
  
  74,003Net cumulative redundancy /
  (deficiency)
  
  $
  58,187
  
  
  58,037
  
  
  49,627
  
  
  51,441
  
  
  29,592
  
  
  8,151
  
  
  (17,178
  )
  
  (15,226
  )
  
  (12,006
  )
  
  (482
  )% redundancy / (deficiency)
  
  
  44.0
  %
  
  40.5
  %
  
  32.0
  %
  
  31.9
  %
  
  17.0
  %
  
  4.1
  %
  
  -8.0
  %
  
  -6.8
  %
  
  -5.0
  %
  
  -0.2
  %Gross liability - end of year
  
  $
  138,745
  
  
  152,268
  
  
  164,506
  
  
  172,738
  
  
  188,086
  
  
  242,377
  
  
  273,092
  
  
  281,295
  
  
  318,483
  
  
  440,166
  
  
  574,529Reinsurance recoverables - end of
  year
  
  
  6,555
  
  
  8,853
  
  
  9,188
  
  
  11,614
  
  
  14,115
  
  
  41,614
  
  
  58,400
  
  
  57,698
  
  
  80,410
  
  
  168,159
  
  
  275,766Net liability - end of year
  
  $
  132,190
  
  
  143,415
  
  
  155,318
  
  
  161,124
  
  
  173,971
  
  
  200,763
  
  
  214,692
  
  
  223,597
  
  
  238,073
  
  
  272,007
  
  
  298,763Gross re-estimated liability -
  latest
  
  $
  97,472
  
  
  95,906
  
  
  116,380
  
  
  118,926
  
  
  161,386
  
  
  221,775
  
  
  285,023
  
  
  314,671
  
  
  351,900
  
  
  484,738Reinsurance recoverables - latest
  
  
  23,469
  
  
  10,528
  
  
  10,689
  
  
  9,243
  
  
  17,007
  
  
  29,163
  
  
  53,153
  
  
  75,848
  
  
  101,821
  
  
  212,249Net re-estimated liability - latest
  
  $
  74,003
  
  
  85,378
  
  
  105,691
  
  
  109,683
  
  
  144,379
  
  
  192,612
  
  
  231,870
  
  
  238,823
  
  
  250,079
  
  
  272,489(1) Data presented in this table represents consolidated information of all
our insurance subsidiaries commencing from their respective dates of
acquisition.  Data presented from 1993
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 2003 reflects all of FPICs insurance
subsidiaries.
The
top portion of the preceding table ending with the subtotal Net cumulative
redundancy /(deficiency) demonstrates how our net loss and LAE reserves as of
the end of each of the last ten calendar years compares with net paid losses
and re-estimates of those net reserves after the end of each of these years.  A net redundancy 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 net deficiency 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
cumulative net reserves carried at the end of calendar years 1993 through 1998
have been higher than subsequent payments and re-estimates.  In contrast, the cumulative net reserves at
the end of calendar years 1999 through 2002 have been increased by $17.2
million, $15.2 million, $12.0 million and $0.5 million, respectively.  The development in 1999 through 2001
was primarily due to unexpected increases in severity, particularly in
Missouri.  This development was offset
by expected improvement in the 2002 accident year resulting from significant
rate increases.
15
The
bottom portion of the preceding table presents the original cumulative gross reserves,
reinsurance recoverables and net reserves as of the end of each calendar year
together with summaries of the corresponding latest cumulative re-estimated
amounts as of December 31, 2003.  The
effects on our results of operations of a cumulative redundancy or deficiency
in our gross reserves as depicted in the bottom portion of the table in excess
of the development in our reserves, net of reinsurance, for those years are
entirely offset by corresponding decreases or increases in reinsurance recoverables.  Included in the upward gross reserve development for 2002, 2001
and 2000, were reserves in the amounts of $6.7 million, $3.8 million, and $3.8
million, respectively, in the reinsured reserve layers of APAC. APAC was integrated under the management of
First Professionals, and these bulk reserves were added to conform its gross
reserves to those carried by First Professionals.   There was no effect on results of operations as a result of
these increases.  The increases were
entirely attributable to the excess reserve layers of this book of business,
which are reinsured, and thus, there was an offsetting increase in
corresponding amounts of reinsurance recoverables.
The
following table rolls forward (in thousands) FPICs aggregate liability for
losses and LAE reserves, net of reinsurance, showing the changes for the period
beginning January 1, 2001 and ending December 31, 2003.
2003
  
  2002
  
  2001Net loss and
  LAE reserves, January 1
  
  $
  272,007
  
  
  238,073
  
  
  223,597Incurred
  related to:Current year
  
  
  118,492
  
  
  137,155
  
  
  119,734Prior years
  
  
  482
  
  
  2,416
  
  
  8,612Total incurred
  
  
  118,974
  
  
  139,571
  
  
  128,346Paid related
  to:Current year
  
  
  13,455
  
  
  9,130
  
  
  17,980Prior years
  
  
  101,989
  
  
  96,507
  
  
  95,890Total paid
  
  
  115,444
  
  
  105,637
  
  
  113,870Gerling
  commutation
  
  
  23,226
  
  
  
  
  
  Net loss and
  LAE reserves, December  31
  
  $
  298,763
  
  
  272,007
  
  
  238,073Gross loss
  and LAE reserves, December 31
  
  $
  574,529
  
  
  440,166
  
  
  318,483Reinsurance
  recoverables, December 31
  
  
  275,766
  
  
  168,159
  
  
  80,410Net loss and
  LAE reserves, December 31
  
  $
  298,763
  
  
  272,007
  
  
  238,073As a result of the commutation of our ceded
reinsurance to Gerling, we now retain the corresponding insured risks and
losses and LAE we formerly ceded to it. 
We received $23.5 million in exchange for the release of Gerling
from its reinsurance obligations to us, which we added to our net
reserves.  No gain or loss was
recognized on the transaction.
As discussed in the portions of this section preceding the above tables
and elsewhere within our disclosures, our loss and LAE reserves are estimates
that are subject to inherent uncertainties and re-estimation over time.  The re-estimated amounts and related
redundancies or deficiencies presented or depicted in the above tables are
likewise subject to further changes. 
Therefore, readers should take into account such uncertainties when
considering this information for purposes of projecting future trends or making
predications about them.
For additional information, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations.
16
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. We do not own PRI, or have a controlling
financial interest in PRI, nor is PRI considered a variable interest entity
under FASB Interpretation No. 46 (revised December 2003),  Consolidation of Variable Interest
Entities, (FIN 46R) and so PRIs financial statements are not consolidated
or included in ours.  Instead, PRI is
similar to a mutual insurer and the risks and rewards of ownership vest with
the policyholders 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.  These
risks include, but are not limited to, rate adequacy, adverse loss experience,
and the effects of changes in market interest rates that it can earn on
invested assets.  PRI files information
about its rates annually with the New York State Insurance Department
(the NYSID).  PRI implemented an
8.5% rate increase effective July 1, 2003 following several years of level
rates.  Growth at PRI is also
subject to surplus constraints; however, as a reciprocal, PRI is able to
operate with lower surplus and at higher leverage ratios than non-reciprocals
such as our insurance subsidiaries. 
PRIs policyholders surplus exceeds the minimum amount required under New York insurance laws
and regulations.
New York insurance laws and regulations do not impose risk-adjusted capital
requirements.  Further, as allowed under
New York insurance laws, PRI has requested and received permission from the
NYSID to follow the permitted practice of discounting its loss and LAE
reserves.  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 NYSID.
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. 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.   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 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 NYSID.
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 80% owned subsidiary, PMA.  PRI owns 10% of PMA.  PMA is licensed as an insurance broker in
New York and Pennsylvania. 
As a program manager, PMA is responsible for the underwriting, marketing
and accounting for the programs that it administers.
First
Professionals also assumes reinsurance from PRI, which generates significant
revenues for our insurance segment in exchange for reinsuring risks as one of
PRIs reinsurers.  For additional
information, refer to the preceding section of Item 1, Business, Insurance
Segment, Reinsurance, and Item 7, Managements Discussion and Analysis, for
discussions on assumed reinsurance from PRI. Additional information is also
contained in Note 22, Related Party Transactions, of the audited consolidated
financial statements contained elsewhere in this Form 10-K.
17
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 and
estimated 55% of the MPL market, and PRI, with an estimated 25% market share
based on premiums written.  While MLMIC
is substantially larger and has a B rating by A.M. Best, PRI has no
rating.  We believe, as exhibited by
historical experience, that PRIs long-standing position in the New York market,
name recognition, service and reputation contribute to its ability to maintain
its market share.  Furthermore, the
rates charged by all MPL insurers in New York are mandated by the NYSID, which
in addition to added rate regulation relative to other states, also results in
more moderate price differences between carriers.
Marketing.  AFP markets PRI
policies in New York to physicians, podiatrists, chiropractors, dentists and
healthcare facilities through its in-house marketing representatives and
through independent brokers.  As of
December 31, 2003, PRI wrote 57% of its business directly and 43% of its
business through brokers.  AFP also
offers certain other insurance coverages 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.
Regulation.  Both AFP, as reciprocal
manager and attorney-in-fact, and PRI are subject to regulatory oversight by
the NYSID.  In addition, PRI is subject
to examination by the NYSID and is required to file an annual statement and
audited financial statements by the same independent certified public
accountant that audits AFP.  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.

18
Third Party
Administration (TPA) Segment
Principal Business.  EMI provides TPA services
for group A&H, 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 as part of these services; instead, each employer assumes this
risk as the self-insured.  We also 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 a large 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 division.
We provided TPA services to forty-eight clients at December 31, 2003,
five of which accounted for approximately 46% or $6.5 million of the claims
administration fees generated by the TPA segment.  Approximately 21% or $3.0 million was derived from our single
largest client.  EMI also manages one
workers compensation program for APAC, which has the corresponding fronting
program (set to expire by June 30, 2004).
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.



The insurance industry and alternative risk markets such as those of
EMI, are under continuous review by Congress, state legislatures and state and
federal regulatory agencies.  From time
to time, regulatory and legislative changes are proposed for our 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
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.
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.  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.
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.  Many of our larger
competitors, such as insurance companies, have such provider networks.  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.
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 utilizing 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.

19
Employees
At
December 31, 2003, FPIC employed 597 people. 
None of our employees are covered by a collective bargaining
agreement.  We believe our relationships
with our employees are very important. 
We also believe that the significant number of long-term employees we
have is indicative of good employee relations.
Additional Information with Respect to FPICs Business
The
amounts of operating revenue and identifiable assets attributable to the
aforementioned business segments are included in Notes 1 and 20 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 4 to FPICs
consolidated financial statements. 
Information concerning transactions with related parties, including PRI, which we manage,
is included in Item 7, MD&A and in Note 22 to FPICs consolidated financial
statements.
FPIC will provide its annual report on Form 10-K, its quarterly reports
on Form 10-Q and current reports on Form 8-K, including exhibits and amendments
to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable, after electronically filing
such material with or furnishing it to, the Securities and Exchange Commission
(SEC).  Such materials will be
provided without charge by FPIC through its Internet website at www.fpic.com. 
FPIC will also furnish a copy of any exhibit, upon payment of a reasonable fee to cover the cost
of copying and mailing the requested materials. Requests for such materials should be directed to
 the attention of Investor Relations, FPIC Insurance Group,
Inc., 225 Water Street, Suite 1400, Jacksonville, FL 32202 or via e-mail at ir@fpic.comor by calling Investor Relations at (904) 354-2482, extension 3287.
Any materials FPIC files with or furnishes to the SEC may also be
reviewed and copied by investors and the public generally at the SECs public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.  Additional information is available
regarding the SECs operation of the public reference room by calling the SEC
at 1-800-SEC-0330.  The SEC also
maintains an Internet site, which contains reports, proxy and other information
regarding issuers, including FPIC, that file electronically with the SEC.  The SECs Internet website address for such
materials is www.sec.gov.

Item 2. 
Properties
The
physical properties used by FPIC and its subsidiaries are summarized below:
Business
  
  Location
  
  Type ofProperty
  
  Ownedor Leased
  
  ApproximateSquare FootageCorporate headquarters
  
  
  Jacksonville,
  FL
  
  
  Offices
  
  
  Leased
  
  
  8,900First Professionals
  
  
  Jacksonville,
  FL
  
  
  Offices
  
  
  Owned
  
  
  34,000First Professionals
  
  
  Plantation,
  FL
  
  
  Offices
  
  
  Leased
  
  
  2,700First Professionals
  
  
  Tampa,
  FL
  
  
  Offices
  
  
  Leased
  
  
  1,200First Professionals
  
  
  Sanford,
  FL
  
  
  Offices
  
  
  Leased
  
  
  600First Professionals
  
  
  Maitland,
  FL
  
  
  Offices
  
  
  Leased
  
  
  350Tenere
  
  
  Springfield,
  MO
  
  
  Offices
  
  
  Leased
  
  
  13,300AFP
  
  
  Manhasset,
  NY
  
  
  Offices
  
  
  Leased
  
  
  55,575EMI
  
  
  Stuart, FL
  
  
  Offices
  
  
  Leased
  
  
  13,300EMI
  
  
  Jacksonville, FL
  
  
  Offices
  
  
  Leased
  
  
  18,00020
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, 2003, 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 case
arising in 1993, no such coverage is available and an estimate of possible loss
above the amount currently reserved 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, 2003, 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 2003.
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. 
Information presented on our website is not incorporated by reference in this Form 10-K.
The following table sets forth, for
the periods indicated, the high and low trades as reported.  Such quotations reflect inter-dealer bids
and offers, without retail mark-up, markdown, or commission.
2003
  
  2002High Trade
  
  Low Trade
  
  High Trade
  
  Low TradeFirst
  quarter
  
  $
  8.35
  
  
  4.22
  
  
  15.90
  
  
  10.70Second
  quarter
  
  $
  14.94
  
  
  6.80
  
  
  16.00
  
  
  11.90Third
  quarter
  
  $
  17.00
  
  
  13.50
  
  
  15.07
  
  
  7.65Fourth
  quarter
  
  $
  25.97
  
  
  14.77
  
  
  8.97
  
  
  3.50We estimate that as of March 10, 2004
there were approximately 2,213 shareholders of record of FPIC common stock.


FPIC did not pay cash dividends on
its common stock during 2003 or 2002. FPIC does not anticipate paying any cash dividends
in the foreseeable future. In addition, a limitation is placed on the payment of dividends
in certain circumstances by the terms of FPICs junior subordinated debentures. For
information regarding these limitations on FPICs ability to pay dividends, see Note
13, Long Term Debt, Revolving Credit Facility and Term Loan, to the consolidated financial
statements.


As a holding company with no direct
operations, we rely on cash dividends and other permitted payments from our subsidiaries.
State insurance laws limit the amounts that may be paid to us by our insurance
subsidiaries. For information regarding restrictions on the ability of FPICs
insurance subsidiaries to transfer funds to FPIC in the form of cash dividends and other
permitted payments, see Note 21 Statutory Accounting, to the consolidated financial
statements.

21
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 in Item 8, herein. For additional
information with respect to FPICs business see Item 7, Managements Discussion
and Analysis of Financial Condition and Result of Operations.
(In
  thousands)Balance Sheet
  Data:
  
  2003
  
  2002
  
  2001
  
  2000
  
  1999Total cash
  and investments
  
  $
  622,701
  
  
  538,720
  
  
  441,966
  
  
  423,955
  
  
  353,419Total assets
  
  $
  1,183,130
  
  
  1,026,431
  
  
  770,822
  
  
  663,682
  
  
  587,433Liability
  for losses and LAE
  
  $
  574,529
  
  
  440,166
  
  
  318,483
  
  
  281,295
  
  
  273,092Long term
  debt
  
  $
  46,083
  
  
  
  
  
  
  
  
  
  
  
  Revolving
  credit facility
  
  $
  
  
  
  37,000
  
  
  37,000
  
  
  67,219
  
  
  62,719Term loan
  
  $
  
  
  
  10,208
  
  
  16,042
  
  
  
  
  
  Total
  liabilities
  
  $
  996,473
  
  
  860,518
  
  
  596,248
  
  
  491,155
  
  
  421,054Shareholders
  equity
  
  $
  186,657
  
  
  165,913
  (1)
  
  174,574
  
  
  172,527
  
  
  166,379(In thousands, except per share amounts)Income
  Statement Data:
  
  2003
  
  2002
  
  2001
  
  2000
  
  1999Direct and
  assumed premiums written
  
  $
  340,741
  
  
  344,727
  
  
  245,403
  
  
  197,280
  
  
  148,216Net premiums
  written
  
  $
  143,134
  
  
  140,248
  
  
  147,084
  
  
  161,931
  
  
  122,433Net premiums
  earned
  
  $
  131,665
  
  
  151,684
  
  
  131,058
  
  
  120,454
  
  
  118,072Total
  revenues
  
  $
  201,724
  
  
  221,940
  
  
  197,582
  
  
  182,089
  
  
  170,504Income
  before cumulative effect of accounting change
  
  $
  16,572
  
  
  14,876
  
  
  2,930
  
  
  614
  
  
  21,869Cumulative
  effect of accounting change, net of tax
  
  $
  
  
  
  (29,578
  )(1)
  
  
  
  
  
  
  
  Net income
  (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930
  
  
  614
  
  
  21,869Diluted
  earnings per share before cumulative effect of accounting change
  
  $
  1.71
  
  
  1.58
  
  
  0.31
  
  
  0.06
  
  
  2.19Basic
  earnings (loss) per share
  
  $
  1.75
  
  
  (1.57
  )
  
  0.31
  
  
  0.06
  
  
  2.24Diluted
  earnings (loss) per share
  
  $
  1.71
  
  
  (1.56
  )
  
  0.31
  
  
  0.06
  
  
  2.19(1) Adoption
of FAS 142 resulted in a one-time, non cash charge of $29,578, net of income
tax benefit of $18,784.

22
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
Insurance Group, Inc.s (FPIC) 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:
i)
  Risks
  factors, including the effect on reserves and underwriting results,
  associated with changing market conditions that result from fluctuating cyclical
  patterns of property and casualty insurance business;ii)
  The
  uncertainties of the loss reserving process;iii)
  The
  occurrence of insured or reinsured events with a frequency or severity
  exceeding our estimates;iv)
  The impact
  of surplus constraints on growth;v)
  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;vi)
  The actual
  amount of new and renewal business;vii)
  Business
  risks that result from FPICs size and geographic concentration;viii)
  Developments
  in reinsurance markets that could affect our reinsurance programs;ix)
  The ability
  to collect reinsurance recoverables;x)
  The
  dependence of the reciprocal management segment upon a single major customer,
  Physicians Reciprocal Insurers (PRI), for the preponderance of its revenue
  and consequently, the effect of rates and claims experience on PRIs ability
  to maintain or grow its premium base;xi)
  Developments
  in global financial markets that could affect our investment portfolio and
  financing plans;xii)
  Risk factors
  associated with the impact of rising interest rates on the market value of
  FPICs investments;xiii)
  Risks
  factors associated with the impact of rising interest rates on FPICs
  interest costs associated with its long term debt;xiv)
  Adverse
  changes in securities markets;xv)
  The ability
  to achieve cost savings associated with integration of Anesthesiologists
  Professional Assurance Companys (APAC) into First Professionals Insurance
  Company (First Professionals)operations;xvi)
  Risk factors
  associated with financing and refinancing, including the willingness of
  credit institutions to provide financing and the availability of credit
  generally;xvii)
  Rates,
  including rates on excess policies, being subject to or mandated by legal
  requirements and regulatory approval, which could affect our business or
  reinsurance arrangements;xviii)
  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);xix)
  Legal
  developments, including claims for extra-contractual obligations or in excess
  of policy limits in connection with the administration of insurance claims;xx)
  Business and
  financial risks associated with the unpredictability of court decisions;xxi)
  The loss of
  the services of any of our executive officers;xxii)
  Risks of
  impairment of assets, generally, including the risk of impairment or inability
  to continue to recognize deferred acquisition costs, deferred tax assets,
  goodwill and other deferred or intangible assets;xxiii)
  General
  economic conditions, either nationally or in our market areas, that are worse
  than expected;xxiv)
  Changes in
  our financial ratings resulting from one or more of these uncertainties or
  other factors and the potential impact on our agents ability to place
  insurance business on behalf of FPIC; 
  andother risk factors discussed
elsewhere within this document.

23
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 and Estimates
Our discussion and analysis of financial condition, results of
operations and liquidity and capital resources is 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.  We
generally base our estimates on historical experience or other appropriate
assumptions that we believe are reasonable and relevant under the circumstances
and evaluate them on an on-going basis. 
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 critical
accounting policies discussed in remainder of this section of our
Managements Discussion and Analysis (MD&A) affect our more significant
judgments and estimates used in preparation of the consolidated financial
statements.  These are further commented
upon in applicable sections on Results of Operations, Financial Position and
Liquidity and Capital Resources that follow.  
Information about the significant accounting policies we use in the
preparation of our consolidated financial statements is included in Note 2 to
our consolidated financial statements included in Item 8 of this Form 10-K and
should also be considered.
Liability for Losses
and Loss Adjustment Expenses ( LAE)
Our liability for losses and LAE (also referred to as our loss and LAE
reserves) is the largest liability of our Company and the most sensitive
financial statement item to estimation and judgment.  Medical professional liability (MPL) insurance, including
business written directly and reinsurance assumed, is our primary line of
business and accounted for $549.8 million and $425.4 million, or 96% and 97%,
of our total consolidated liability for losses and LAE as of December 31, 2003
and 2002, respectively.  The remainder
of our reserves represent other smaller lines and products.
The primary factors affecting our estimates of how much we will pay and
therefore reserve for insurance claims, defense costs and other related costs
are:

  Frequency
  and severity trends (numbers of claims and how much we will pay for each
  claim on average for one or more periods);
  Frequency of
  claims closed with indemnity payments (the percentage of claims received that
  ultimately result in a loss payment versus those that are settled and closed
  without a loss payment);
  The timing
  or pattern of future payments;
  The amount of
  defense cost we will pay for each claim or group of claims; and
  Inflationary
  trends that are expected to bear on future loss and LAE payments.These factors,
in turn, can be affected by the judicial environment and tort-related trends
over time.  It is also important to note
that one or more of the actuarial methods used by us do not rely on specific
assumptions for these factors; rather, these assumptions are developed as a
by-product of the application of the methods, which may then be monitored and
factored into the final judgmental considerations of the selection of the point
estimate and range of reasonable values around the point estimate from among
the methods.  All of the above-mentioned
factors individually can and will generally vary from one period to the next
over time but are estimated to approximate their ultimate values in setting
reserve estimates.

24
In addition, due to the relatively small number of claims and the
average cost per claim, any change in the trends assumed in the ultimate values
for these factors may be expected to result in a significant change in the
reserve estimates.  Because our
aggregate loss and LAE reserves are so large, this also means that virtually
any change in the level of our carried reserves will be material to results of
operations and may be material to our financial position.  As an example, a 1% increase or decrease in
carried reserves, net of reinsurance, as of December 31, 2003, would result in
an after-tax addition or reduction in reported net income of nearly $2 million,
or 12% of our consolidated net income for the year ended December 31,
2003.   A typical range of reasonable
values for MPL reserve estimates is considered to be as wide as 15%; thus, our
results of operations and financial position are very sensitive to our reserve
estimates and judgments, in addition to the performance of the business
itself.
Reinsurance
Reinsurance does not relieve us from our primary obligations to
policyholders.  Therefore, the failure
of reinsurers to honor their obligations could result in losses to us.  The amounts recoverable from reinsurers on
our unpaid losses and LAE are calculated by applying the terms of the
respective ceded reinsurance contracts to our estimates of the underlying loss
and LAE reserves that are subject to reinsurance.  Thus, to the extent our reinsured reserves change or are
adjusted, so will the related reinsurance recoverable amounts and our
exposure.
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 applicable departments of insurance of the states that have jurisdiction
over the underlying business.
Income Taxes
Deferred tax assets and liabilities are estimated and 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.
A valuation allowance against deferred tax assets is estimated and
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. We estimate and believe it is more likely than not
that our deferred tax assets will be fully realized.  In the event that actual results differ from our estimates or
those estimates are adjusted in future periods, we may need to establish a
valuation allowance, which would impact our financial position and results of
operations.
Goodwill and Intangible Assets
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.
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 January 1, 2002.
We
have obtained independent appraisals annually since the adoption of FAS 142,
the most recent of which was performed as of December 31, 2003, which indicate
that our goodwill and other intangible assets are fully recoverable.  Our remaining goodwill and intangible assets
of $19.7 million will continue to be subject to impairment testing through
independent appraisal or otherwise at least annually, and potentially more often
should a triggering event occur.  A triggering
event under FAS 142 might include such things as a significant
adverse change in legal factors or business climate, an adverse action or
assessment by a regulator, unanticipated competition, or a loss of key
personnel.
25
Investments
Our invested assets comprise our largest single asset class and consist
mostly of investment securities in the form of fixed income investments in
bonds and notes.  Our fixed income
investment securities are carried at their market values and accounted for
$528.6 million and $437.0 million or 85% and 81% of our total cash and invested
assets, and 45% and 43% of our total assets, respectively as of December 31,
2003 and 2002.  Unrealized gains or
losses in their market values are recorded directly in shareholders equity,
net of tax effects, as a component of other comprehensive income.
There is an exception to the treatment noted above if and when an
investment security considered to be available for sale is deemed to be
other-than-temporarily impaired.  An
other than temporary impairment may occur when the market value of a security
falls below its cost by a material amount for an extended period of time
(generally one year but can be less under certain circumstances) or when other
creditworthiness issues arise with regard to an issuer.   If and when a security is deemed to be
other than temporarily impaired it is written down to its estimated market
value with a corresponding realized investment loss recognized in net income.
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.
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 the 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 2003 or 2002. 
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.
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 Reciprocal
Insurers (PRI) for the year ended December 31, 2001 and prior, contained
adjustable premiums based upon loss experience.  Our financial statements for the year ended December 31, 2001,
included estimated adjustments accrued based on our loss experience under these
agreements.  These agreements have since
been non-renewed, amended or commuted.  The
assumed reinsurance agreements with PRI for periods since then are fixed
premium contracts with no such adjustable features.  See the following MD&A section.

26
Business with PRI
Reciprocal Management Agreement
Administrators for the Professions, Inc. (AFP) has a 10-year
management agreement with PRI, under which it receives a management fee
annually equal to 13% of PRIs direct premiums written.  The current term of the management agreement
runs through December 31, 2008.  Under
the terms of the management agreement, AFP receives this fee in exchange for
performing services necessary to conduct and manage the entire operation of
PRI.  Such services include all or
substantially all marketing, underwriting, policy issuance, policy
administration, investment management, claims handling, and general and
administrative functions, including human resources, accounting, financial
reporting, and others, on an on-going basis over the life of the agreement.   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.

The management fees are estimated, billed and collected on a monthly
basis.  Our entitlement to such fees is
ultimately based upon the provision of all of the services necessary to run PRI
over the term of the contract.  Revenues
are recognized as earned when they are billed as this accounting treatment
reasonably approximates and accomplishes a recognition pattern that corresponds
with the provision of the required services during the quarters and the year.  The fees estimated and billed, which are
recognized in income, are reduced by an estimated provision for return
premiums.


See the MD&A section, Contractual
Obligations, Commitments and Off-Balance Sheet Arrangements that follows for a discussion
and analysis of an additional commitment and related contingent liability assumed by AFP
as a result of an amendment to its management agreement with PRI, effective January 1,
2002.

AFP also has two subsidiaries, FPIC Intermediaries (FPIC
Intermediaries) and Group Data Corporation (Group Data).  FPIC Intermediaries acts as a reinsurance co-broker
and intermediary for our insurance subsidiaries. Group Data acts as a co-agent
and co-broker for our internal insurance needs and for the purchase of
structured settlements from time to time for settled MPL claims for PRI.  The reciprocal management segment also
includes FPICs 80% owned subsidiary Professional Medical Administrators
(PMA), which acts as co-broker, intermediary and manager of reinsurance
programs for PRIs program business in Pennsylvania, whereby PRI assumes the
premiums and risks insured. PRI also owns 10% of PMA and until August 2003, our
subsidiary, First Professionals acted as the fronting carrier for PRI for the
program business managed on its behalf by PMA. 
Since then, PRI has used an outside carrier to act as its fronting carrier.
The financial results for these business arrangements make up our
reciprocal management segment and are presented and discussed in the following
applicable sections of this MD&A. 
Additional financial information and disclosures about our reciprocal
management segment and business can be found in Note 1, Organization and Nature
of Operations, Note 16, Commitments and Contingencies, Note 20, Segment Information, and Note 22, Related Party
Transactions, to our consolidated financial statements.
Reinsurance with PRI
Our insurance subsidiary, First Professionals, assumes reinsurance from
PRI.  As discussed above, program
business assumed by PRI in Pennsylvania was written on First Professionals
policy forms, as fronting carrier, through July 31, 2003.  Effective August 1, 2003, PRI engaged an
unrelated fronting carrier for this business and, with the exception of tail
coverage, no new or renewal business is being written on First Professionals
policy forms.
The assumed reinsurance and fronting fees on PRI business of First
Professionals are included in the Insurance Segment and are also discussed
further in the following applicable sections of this MD&A.  Additional financial information and
disclosures about our assumed reinsurance and fronting fees from PRI can be
found in Note 22, Related Party Transactions to our consolidated financial
statements.

27
PRI is a Major Client of Ours
In addition to their contributions to our results of operations, our
agreements and business arrangements with PRI as a major client of ours also
means that our revenues and results of operations are financially sensitive to
its revenues and financial condition.  
We do not own PRI, or have a controlling financial interest in PRI, nor
is PRI considered a variable interest entity under FIN 46R, Consolidation of
Variable Interest Entities (as Revised), and so PRIs financial statements are
not consolidated or included in ours. 
Instead, PRI is similar to a mutual insurer and the risks and rewards of
ownership vest with the policyholders of PRI.
PRI and our subsidiary, AFP, are regulated by the New York State
Insurance Department (the NYSID).  PRI
files its annual and quarterly statements with the NYSID containing its
statutory-basis financial statements and other data.  AFP and PRI are required to file audited financial statements
annually with the NYSID obtained from the same qualified independent accounting
firm.


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. These risks include, but are not limited to, rate adequacy, adverse loss
experience, and the effects of changes in market interest rates that it can earn on
invested assets. PRI files information about its rates annually with the New York State
Insurance Department. PRI implemented an 8.5% rate increase
effective July 1, 2003 following several years of level rates. Growth at PRI is also
subject to surplus constraints; however, as a reciprocal, PRI is able to operate with
lower surplus and at higher leverage ratios than non-reciprocals such as our insurance
subsidiaries. PRIs policyholders surplus exceeds the minimum amount required
under New York insurance laws and regulations. New York insurance laws and regulations do
not impose risk-adjusted capital requirements. Further, as allowed under New York
insurance laws, PRI has requested and received permission from the NYSID to follow the
permitted practice of discounting its loss and LAE reserves.


The NYSID mandates the insurance rates PRI and other New York carriers
are allowed to charge their policyholders. 
These include the rates charged for the policies in excess of $1.3
million and for covered extended reporting endorsements for death, disability
and retirement, which have been reinsured to First Professionals.   Under New York insurance statutes, the
NYSID is also authorized to surcharge PRIs policyholders in the event it is
determined that those rates were deficient in one or more prior years as a
result of adverse loss development.  The
amount of the surcharge may be up to 8% of PRIs policyholders premiums
annually until such deficiency is recovered.
Despite the unique aspects of the business and regulatory environments
PRI operates in, as an MPL insurer, it is still subject to many of the same types
of risks as those of other MPL and property-casualty insurers, including
similar risks to many of those described under Safe Harbor Disclosure.
Results of Operations - Consolidated Overview
The three years ended December 31, 2003 was a period of significant
activity and progress for our company.
Net income in 2003 increased to $16.6 million, or $1.71 per diluted
share, up 11% and 8%, respectively over income before accounting change of
$14.9 million and $1.58 per diluted share for 2002.  Income before accounting change for 2002 was up over 400%
compared with 2001 net income of $2.9 million, or $0.31 per diluted share.  All three of our business segments were
profitable in 2003.  The year 2003 was
the third year in a row of significant improvements in insurance pricing.  In addition, our reciprocal management
and third party administration (TPA) segments have reported improved
profits.
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 ($48.4 million pre-tax) charge for the cumulative effect of
accounting change related to the adoption of FAS 142 on goodwill and other
intangible assets.  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.

28
During 2003, we completed the placement of $10.0 million in senior
notes and created three trusts that issued 30-year trust preferred securities
for which the proceeds
from such issuances together with cash previously contributed to the trusts
were used to purchase junior subordinated debentures
from FPIC totaling $36.1 million. 
We used the proceeds along with other internally generated funds to
retire our bank term loan and revolving credit facility.  We also completed the integration of APAC
operations and transitioned the management of APAC and Intermed Insurance
Company (Intermed) into First Professionals. 
During the fourth quarter 2003, we negotiated and completed the
commutation of our reinsurance with Gerling Global Reinsurance Corporation of
America (Gerling).  We also negotiated
our primary excess of loss reinsurance program renewal for 2004 at a reduced
cost for the first time in several years. 
Finally, we played an active part in tort reform on behalf of our
policyholders, as well as the healthcare economy and the citizens of the State
of Florida.
Our revenues and expenses were lower in 2003 than 2002.  Most of the decline was by design and the
result of growth management initiatives we put in place in 2002, designed to
level the amount of growth in our policyholder counts following an
unprecedented period of growth at our insurance subsidiaries in 2001 and
2002.  Our MPL insurance markets have
hardened significantly since 2000.  Net
investment income was also lower in 2003. 
While the equity markets recovered in 2003, interest rates fell to
record lows during 2003 and for the third straight year, although rates did
recover somewhat by the end of 2003 and exceeded 2002 year end levels.
Our total revenues
for the year ended December 31, 2002 increased 12% to $221.9 million from
$197.6 million for the year ended December 31, 2001.  The increase in revenues was 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 increased when compared with the prior year.

Our total expenses
for the year ended December 31, 2002 increased less than 1% to $198.2 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 $11.2 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 that were ceded under the net account
quota share reinsurance agreement with Hannover Re (Hannover Re
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 net account quota share 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.
Hannover
Re Net Account Quota Share Reinsurance Agreement
One of the most
significant financial developments for us in 2002 was our entering into the
Hannover Re agreement.  It is
supplemental to our other reinsurance programs and represents a very large
reinsurance cession for us.
Future
Plans
We plan to continue to focus on growing our
insurance capital base and
to work to reduce the additional reinsurance we are now carrying so that we can retain
and grow this business for our own account.
A great deal of the progress we made has been possible in large part
because of favorable market conditions we experienced since the end of
2000.  Therefore, one of the most
obvious risks to our ability to continue this level of performance would
be an unexpected increase in competition resulting in a softening of the market
and leading to downward pressure on our insurance rates and profits.  There can be no assurance as to how long the
current stable market conditions will continue.
29
Results of Operations -Insurance
Segment
Our insurance
segment is made up of our four insurance subsidiaries, First Professionals,
APAC and The Tenere Group, Inc. (Tenere) companies Intermed and Interlex.  FPIC operations are also included in the
insurance segment due to the segments size and prominence and the substantial
attention the holding company devotes to the segment.  Financial
and selected other data of our insurance segment for the years ended December
31, 2003, 2002 and 2001 is summarized in the table below.  Dollar amounts are in thousands.
Insurance Segment Results and Selected
Other Information
2003
    
    Percentage
        Change
    
    2002
    
    Percentage
        Change
    
    2001Direct
        and assumed premiums written
    
    $
    340,741
    
    
    -1
    %
    
    344,727
    
    
    40
    %
    
    245,403Net
        premiums written
    
    $
    143,134
    
    
    2
    %
    
    140,248
    
    
    -5
    %
    
    147,084Net
        premiums earned
    
    $
    131,665
    
    
    -13
    %
    
    151,684
    
    
    16
    %
    
    131,058Net
        investment income
    
    
    18,285
    
    
    -12
    %
    
    20,793
    
    
    -9
    %
    
    22,874Commission
        income
    
    
    
    
    
    -100
    %
    
    8
    
    
    -87
    %
    
    62Net
        realized investment gains
    
    
    2,052
    
    
    -56
    %
    
    4,688
    
    
    228
    %
    
    1,429Finance
        charge and other income
    
    
    945
    
    
    -24
    %
    
    1,251
    
    
    71
    %
    
    731Intersegment
        revenue
    
    
    1,966
    
    
    -16
    %
    
    2,351
    
    
    14
    %
    
    2,059Total
        revenues
    
    
    154,913
    
    
    -14
    %
    
    180,775
    
    
    14
    %
    
    158,213Net
        losses and LAE
    
    
    118,974
    
    
    -15
    %
    
    139,571
    
    
    9
    %
    
    128,346Other
        underwriting expense
    
    
    11,219
    
    
    -41
    %
    
    19,155
    
    
    -26
    %
    
    25,883Interest
        expense on debt
    
    
    5,886
    
    
    24
    %
    
    4,762
    
    
    6
    %
    
    4,491Other
        expenses
    
    
    5,445
    
    
    241
    %
    
    1,596
    
    
    49
    %
    
    1,073Intersegment
        expense
    
    
    4,291
    
    
    26
    %
    
    3,414
    
    
    -7
    %
    
    3,652Total
        expenses
    
    
    145,815
    
    
    -13
    %
    
    168,498
    
    
    3
    %
    
    163,445Income
        (loss) from operations before income taxes and cumulative effect of accounting
        change
    
    
    9,098
    
    
    -26
    %
    
    12,277
    
    
    335
    %
    
    (5,232
    )Less:
        Income tax expense (benefit)
    
    
    2,635
    
    
    -39
    %
    
    4,316
    
    
    198
    %
    
    (4,385
    )Income
        (loss) before cumulative effect of accounting change
    
    
    6,463
    
    
    -19
    %
    
    7,961
    
    
    1040
    %
    
    (847
    )Less:
        Cumulative effect of accounting change
    
    
    
    
    
    0
    %
    
    
    
    
    0
    %
    
    Net
        income (loss)
    
    $
    6,463
    
    
    -19
    %
    
    7,961
    
    
    1040
    %
    
    (847
    )Selected
        Insurance Segment InformationNet
        paid losses and LAE on professional liability claims
    
    $
    112,443
    
    
    22
    %
    
    92,497
    
    
    7
    %
    
    86,535Average
        net paid loss per professional liability claim closed with indemnity payment
    
    $
    213
    
    
    16
    %
    
    184
    
    
    5
    %
    
    176Total
        professional liability claims and incidents reported during the period
    
    
    3,063
    
    
    -4
    %
    
    3,191
    
    
    42
    %
    
    2,251Total
        professional liability claims with indemnity payment (includes claims
        that were not closed)
    
    
    283
    
    
    -3
    %
    
    293
    
    
    -5
    %
    
    310Total
        professional liability claims and incidents closed without indemnity payment
    
    
    1,965
    
    
    -7
    %
    
    2,104
    
    
    46
    %
    
    1,442Total
        professional liability claims and incidents that remained open
    
    
    5,507
    
    
    18
    %
    
    4,676
    
    
    20
    %
    
    3,907Professional
        liability policyholders (excludes policyholders under fronting arrangements)
    
    
    13,919
    
    
    -18
    %
    
    16,915
    
    
    21
    %
    
    14,010Professional
        liability policyholders under fronting arrangements
    
    
    2,136
    
    
    -53
    %
    
    4,544
    
    
    1
    %
    
    4,48230
Insurance
Overview
Insurance segment
net income decreased 19% for the year ended December 31, 2003.  The decrease for the year was the result of
lower net realized investment gains, lower net investment income, higher
debt-related costs, and higher net intersegment expenses, comprised mainly of
commissions payable to the reciprocal management segment.  The holding company, which is grouped with the insurance
segment for reporting purposes, incurred debt-related costs of $1.5 million
after income taxes ($2.5 million before income taxes) during 2003 as a result
of unwinding interest rate swap agreements in the second and fourth quarters in
connection with the repayment and retirement of our term loan and revolving
credit facility.  Our improved
underwriting margin (defined as net premiums earned less net losses and LAE and
other underwriting expenses) of $5.2 million after tax ($8.5 million before
income taxes) is mostly attributable to pricing improvements.  Approximately $1.3
million of the after-tax improvement ($2.2 million, pre-tax) in 2003 is
attributable to the Hannover Re agreement.
Insurance segment net income increased $8.8 million for the year ended
December 31, 2002, from a net loss of ($0.8) million for the year ended
December 31, 2001, primarily due to price improvements on our MPL business and
growth in the number of policyholders. 
In addition, net losses and LAE for 2001 reflect adverse development and
a corresponding prior year reserve charge (approximately $8.8 million) that did
not recur in 2002.  Net investment
income declined 9% to $20.8 million for the year ended December 31, 2002 from
$22.9 million for the year ended December 31, 2001.
Effective October
3, 2002, we sold the renewal rights of Interlexs LPL 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.
Insurance
Underwriting Results (Premiums, Losses and LAE, and Underwriting Expenses)
Net premiums
earned, net losses and LAE incurred and other underwriting expenses, all
declined (-13%, -15% and 41%, respectively) for the year 2003, primarily as a
result of the reinsurance ceded under the Hannover Re agreement, which became
effective July 1, 2002, and other growth management initiatives put into place
in 2002.
Direct
and Assumed Premiums Written
Direct and assumed premiums written decreased 1% to $340.7 million for
the year ended December 31, 2003 from $344.7 million for the year ended
December 31, 2002.  The small decrease
primarily reflects the offsetting trends of price improvements at all our
insurance companies and growth in our core MPL book of business in Florida,
offset by lower premiums on fronted business and LPL business and lower MPL
premiums in certain other states.
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 31, 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 for new and renewal
policies 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 our group accident and health
(A&H) programs, which were discontinued in November of 2001.

Net
Premiums WrittenNet premiums written increased 2% to $143.1
million for the year ended December 31, 2003 from $140.2 million for the year
ended December 31, 2002. The small
increase in net premiums written is attributable to the growth management initiatives
put into place during 2002, and is basically the result of planned reductions
in our overall numbers of policyholders in 2003, and continuing pricing
improvements, which have largely offset one another.

31
Ceded written premiums under the Hannover Re agreement were $84.3
million and $85.5 million for the years ended December 31, 2003 and 2002,
respectively. Thus, while the Hannover
Re agreement did have a significant impact on the change in net premiums earned
and our underwriting results between 2003 and 2002, it did not have a
significant impact on the overall change in net premiums written between 2002
and 2003.
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 Hannover Re agreement effective July 1, 2002 between
our largest subsidiary, First Professionals, and two companies of the Hannover
Re group.
Hannover
Re Net Account Quota Share Reinsurance AgreementNet
premiums earned, net losses and LAE incurred, and other underwriting expenses
incurred were reduced by amounts ceded under the Hannover Re agreement of $87.3
million, $71.0 million and $22.1 million, respectively, for the year ended
December 31, 2003, and by $48.2 million, $39.0 million and $12.8 million,
respectively, for the year ended December 31, 2002. Before the amounts ceded under the Hannover Re agreement, net
premiums earned, net losses and LAE and other underwriting expenses increased
in 2003 by $19.1 million (10%), $11.3 million (6%), and $1.4 million (4%),
respectively.
The Hannover Re net
account quota share reinsurance cession resulted in improvements to our net
underwriting margin of $5.8 million in 2003 and $3.6 million in 2002 ($3.5
million and $2.2 million, respectively after income taxes). The agreement resulted in an increase in our
insurance segments total income from operations before income taxes and
cumulative effect of accounting change of $1.3 million ($0.8 million after
income taxes) for the year 2003 and $2.5 million ($1.6 million after income
taxes) in 2002 (excluding the effects of net investment income we earned on
funds withheld.) Finance charges
associated with the Hannover Re agreement are included in other expenses and
were $4.5 million in 2003 and $1.1 million in 2002. The increase in these charges was due to growth in the funds
withheld account under the agreement.
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, in 2002.
The agreement, which calls for First Professionals to cede quota share
portions of its written premiums, contains adjustable features including sliding
scale ceding commissions and a cap on the amount of losses that may be ceded to
the reinsurer, all of which serve to make it what is commonly referred to as a
finite-type reinsurance contract. The
original agreement also contained a loss corridor on business ceded through
March 31, 2003, but it was removed and other modifications were made in
connection with the amendment and extension of the agreement discussed
below. 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 strain on our capital.
On May 6, 2003, we entered into an amendment
to the Hannover Re agreement that, effective April 1, 2003, extends its
expiration date to include policies written and renewed through December 31,
2004. The agreement has also been
amended to remove the loss corridor on business written and ceded, beginning
April 1, 2003, and to reduce the lower end of the sliding scale ceding
commission range from 27.5% to 20%. A
provision has also been added that will allow First Professionals to reduce the
quota share amount of premiums to be ceded under the agreement in 2004. Cancellation provisions have also been
added; one that gives First Professionals the option to cancel the agreement on or after January 1,
2004, with 30 days notice, and one that gives Hannover Re the option to cancel
the agreement as of the effective date of any decrease in First Professionals
base rate for its MPL insurance policies that exceeds 5%.
32
Net
Premiums EarnedThe growth in net premiums earned and related
increases in loss costs and other underwriting expenses in 2003 before the
Hannover Re agreement were primarily the result of pricing improvements. The year 2003 marks the third consecutive
year that First Professionals, APAC and Intermed have implemented significant
rate increases. These price
improvements also contributed to the increase in net premiums earned, excluding
the Hannover Re agreement, in contrast to the significant decline in the number
of professional liability policyholders for all companies combined by nearly
3,000, or 18%, to 13,919 as of December 31, 2003 from 16,915 as of December 31,
2002. Of this decline, the sale of the
renewal rights to the Interlex legal professional liability book of business in
2002 accounted for approximately 1,800 fewer policies. The remaining declines occurred in non-core
states and in Missouri as we freed up capacity, with a view towards using it
for First Professionals core MPL business in Florida. The declines in Missouri were expected as we
implemented a very large rate increase in 2003.
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.
Losses and LAE IncurredOur loss and LAE ratio for the year ended December 31, 2003 was 90%, a
decrease of 2% from 92% for the year ended December 31, 2002. Our loss and LAE ratios before the effects
of the Hannover Re agreement were 87% and 89% for 2003 and 2002, respectively. A loss ratio is defined as the ratio of loss and LAE incurred to net
premiums earned. The 2% decrease in
our loss and LAE ratio for 2003 is smaller than the level of pricing improvements we have made.
This is because the significant price increases at our smaller
companies, APAC and Intermed, occurred relatively recently and there is a
corresponding time lag before the underlying written premiums are earned and
the resulting underwriting improvements would be recognized. Intermed experienced higher than expected
losses in 2003 and took an 83% rate increase in August 2003. APAC also experienced a smaller,
unanticipated increase in its loss experience in 2003. In addition, the overall costs of our ceded
excess of loss reinsurance increased in 2003, which also had the effect of
reducing net premiums earned and increasing our loss and LAE ratios,
accordingly.
The negative effects on the loss and LAE ratios of
our smaller companies, however, were offset by the more significant
improvements in the loss and LAE costs incurred relative to net premiums earned
at First Professionals. In addition to
being much larger than Intermed and APAC, First Professionals began
implementing significant pricing improvements earlier and has continued
to do so over a longer period.
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 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. 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 Hannover Re agreement (3%).

Selected Loss and LAE DataThe increases in net paid losses and LAE during 2003 and 2002 (22% and
7%, respectively) are in line overall with growth in our business in 2002 and
2001, taking into account the time lag inherent in claims processing
and differences in reinsurance terms on business written in 2001 and 2000. Adjusted for the effects
of these factors, our average net paid losses and overall severity trends were in line with those assumed
in our carried reserves. For the years ended December 31, 2002 and
2001, the consolidated number of our professional liability policyholders grew
approximately 21% and 29%, respectively.
Our loss and LAE reserves, net of reinsurance, also grew by 14% and 6%,
respectively, in 2002 and 2001.

33
The growth in our business in 2002 and 2001 was also
the significant factor in the growth in newly reported claims and incidents in
2002 and our total inventory of unpaid professional liability claims and
incidents in 2003 and 2002. Newly
reported claims and incidents declined slightly in 2003 as we reduced our book
of professional liability business in 2003.
This decrease was offset to some extent by an acceleration of claims and
incidents at First Professional that occurred as a result of the Florida tort
reform legislation, which became effective September 15, 2003. As a result, we received approximately 150
to 200 newly reported claims that we believe were accelerated from future
periods to meet the new Florida Tort legislation deadline. We have since experienced an offsetting
trend in the form of a reduction in newly reported claims.
The number of claims with an indemnity payment
(CWIP) during 2003 also decreased 3% from 2002s CWIP claims. The percentage of CWIP to all closed claims
for 2003 was 13%, or 1 percentage point higher than the 2002 CWIP percentage of
12%. Our 2003 and 2002 CWIP percentages
are significantly lower than 2001s CWIP percentage of 18%. This significant improvement is largely the
result of claims management initiatives implemented beginning in 2001, and the
implementation of more restrictive underwriting and risk selection
criteria. The average net paid loss per
indemnity claim closed with payment increased 16% in 2003, which although
higher than our assumed loss trend, can be attributed to the effects of the
annual aggregate deductibles under our 2000 and 2001 excess of loss reinsurance
treaties and the impact of now retaining a portion of our excess of loss
reinsurance as a result of the Gerling commutation. It should also be noted that all of our loss and LAE data
presented above is calendar year information and, thus can fluctuate above and
below the long-term coverage year assumptions used in estimating our loss and
LAE reserves from period to period.
Other Underwriting ExpensesOur other underwriting expenses were $11.2 million, or 41% lower in 2003
than 2002. The ceding commission under
the Hannover Re agreement, which is a credit to other underwriting expenses,
increased $9.8 million from $13.2 million in 2002 to $23.1 million in 2003. Other underwriting expenses, excluding the
effects of the Hannover Re agreement, increased $1.4 million, or 4%. This increase compares favorably with the
corresponding increase in net premiums earned and is indicative of an overall
gain in productivity. The ratio of
other underwriting expenses to net premiums earned before the effects of the
Hannover Re agreement decreased from 16% to 15%.
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 Hannover Re agreement 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.
Investment ResultsNet investment incomeOur net investment income declined 12% to $18.4 million for the year
ended December 31, 2003 from $21.0 million for the year ended December 31,
2002. These declines in our net
investment income are primarily the result of the prolonged status of
prevailing interest rates at historically low levels. As a result, we continue to invest current funds primarily in
fixed income securities with shorter maturities and durations and maintain
significant short-term invested cash.
While these holdings reduce our exposure to losses should the interest
environment change and rates begin to rise, they also produce lower current
income.

Net investment income declined 9% to $20.8 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 was 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. The effects of historically low yields have been offset at least to
some extent by growth in cash and invested assets.

34
Realized investment gains and lossesWe realized gains of $11.2 million and losses of
$4.1 million on investment securities sold during the year 2003, resulting in
net realized investment gains on sales of debt and equity securities of $7.1
million for the year ended December 31, 2003.
We also realized gains of $0.2 million on the sale of real estate during
the first quarter of 2003.
Also included in 2003 net realized gains and losses were charges of
$5.3 million for other-than-temporary impairments (OTTI) of two private
equity holdings. Included in the OTTI
charge was $4.5 million related to our investment in American Professional
Assurance, Ltd. (APAL). Plans were
put into place during the second quarter of 2003 to transition management of
our APAC insurance subsidiary to First Professionals and to non-renew our
existing management agreement with APA Management, Inc. (APAM) and our 25%
quota share reinsurance agreements with APAL effective December 31, 2003. The 25% quota share reinsurance agreements
with APAL comprise a significant component of its revenues. In addition to this anticipated decline in
future revenues, APAL reported net losses and declines in shareholders equity
in its most recent financial statements provided to FPIC during the second
quarter of 2003.
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. 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, which
result in realized investment gains or losses.
However our investment strategy remains focused on high quality, fixed
income securities held for the long-term.
The increase in net realized investment gains in 2002 is a reflection of
this strategy.
Unrealized
investment gains and lossesAs of December 31, 2003, our consolidated
investment portfolios of bonds and U.S. Government securities and equity
securities had net unrealized gains of $6.5 million (comprised of gross
unrealized gains of $9.5 million and gross unrealized losses of $3.0
million.) As of December 31, 2002, our
consolidated investment portfolios of bonds and U.S. Government securities and
equity securities had net unrealized gains of $11.8 million (comprised of gross
unrealized gains of $13.3 million and gross unrealized losses of $1.5
million.)
Other  Finance Charges and Other Income,
Interest Expense, Other Expenses and Income Tax Expenses
Finance charges and
other incomeFinance charges and other income decreased 24% to
$0.9 million for the year ended December 31, 2003 from $1.3 million for the
year ended December 31, 2002. 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 fluctuation of finance changes and other
income related to the inclusion of $0.4 million received as a result of the
sale of the renewal rights on Interlexs LPL business during 2002.
Interest expense on debtThe increase in interest expense on debt
for the year 2003 as compared with 2002 is primarily due to charges of $2.5
million included in 2003 expense to unwind swap agreements associated with the
pay down and retirement of our former bank credit facility. This was offset by the lower total borrowing
costs, as compared with the former bank credit facility, of FPICs newly issued
junior subordinated debentures and unsecured senior notes and the recapture of
the amortization of unrealized losses of previous interest rate swap
agreements.

The increase in other expenses in 2003 is due to growth of the funds
withheld by us under the Hannover Re agreement and the corresponding finance
cost in the form of interest credited to Hannover Re on those funds of $4.5
million and $1.1 million for the year ended December 31, 2003 and 2002,
respectively. Other expenses increased
49% to $1.6 million for the year ended December 31, 2002 from $1.1 million for
the year ended December 31, 2001. The increase in other expenses is due to the
interest related to the Hannover Re agreement, partially offset by a decline in
amortization expense 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.

35
The decrease in income
tax expense for the year ended December 31, 2003 is primarily due to the
decrease in income before income taxes and cumulative effect of accounting
change when compared with the prior year and additional tax expense
recognized in 2002 associated with the examination of FPICs 1998 and 1999
Federal income tax returns by the Internal Revenue Service.
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 2001 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.
36
Results of Operations -Reciprocal
Management Segment
Our reciprocal
management segment is made up of AFP, our New York subsidiary, and its two
wholly owned subsidiaries, FPIC Intermediaries and 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. FPIC Intermediaries acts as a reinsurance broker and intermediary
in the placement of reinsurance for PRI and FPIC. Group Data acts as a broker in the placement
of annuities for structured settlements.
The segment also includes the business of PMA, an 80% owned subsidiary
(70% owned prior to January 1, 2003.)
PMA provides brokerage and administration services to PRI for professional
liability insurance programs. PRI owns
10% of PMA. Additional
information about our management agreement and other business with PRI appears
in the preceding section of this MD&A, Business with PRI. Financial and selected other data for the reciprocal
management segment for the years ended December
31, 2003, 2002, and 2001 is summarized in the table below. Dollar amounts are in thousands.
Reciprocal Management Segment Results and
Selected Other Information
2003
  
  Percentage
  Change
  
  2002
  
  Percentage
  Change
  
  2001Claims administration and management fees
  
  $
  26,582
  
  
  9
  %
  
  
  24,341
  
  
  6
  %
  
  
  22,959Net investment income
  
  
  116
  
  
  -18
  %
  
  
  141
  
  
  -59
  %
  
  
  344Commission income
  
  
  5,496
  
  
  47
  %
  
  
  3,732
  
  
  50
  %
  
  
  2,483Other income
  
  
  94
  
  
  13
  %
  
  
  83
  
  
  -79
  %
  
  
  399Intersegment revenue
  
  
  4,316
  
  
  28
  %
  
  
  3,381
  
  
  9
  %
  
  
  3,111Total revenues
  
  
  36,604
  
  
  16
  %
  
  
  31,678
  
  
  8
  %
  
  
  29,296Claims administration and
  management expenses
  
  
  19,687
  
  
  4
  %
  
  
  18,940
  
  
  3
  %
  
  
  18,420Other expenses
  
  
  213
  
  
  -14
  %
  
  
  248
  
  
  -89
  %
  
  
  2,172Intersegment expense
  
  
  1,554
  
  
  -1
  %
  
  
  1,577
  
  
  4
  %
  
  
  1,518Total expenses
  
  
  21,454
  
  
  3
  %
  
  
  20,765
  
  
  -6
  %
  
  
  22,110Income from operations
  before income taxes and cumulative effect of accounting change
  
  
  15,150
  
  
  39
  %
  
  
  10,913
  
  
  52
  %
  
  
  7,186Less: Income tax expense
  
  
  5,971
  
  
  39
  %
  
  
  4,309
  
  
  52
  %
  
  
  2,838Income before cumulative
  effect of accounting change
  
  
  9,179
  
  
  39
  %
  
  
  6,604
  
  
  52
  %
  
  
  4,348Less: Cumulative effect of accounting change
  
  
  
  
  
  -100
  %
  
  
  24,363
  
  
  100
  %
  
  
  Net income (loss)
  
  $
  9,179
  
  
  152
  %
  
  
  (17,759
  )
  
  -508
  %
  
  
  4,348Selected Reciprocal
  Management Segment InformationReciprocal premiums
  written under management
  
  $
  205,557
  
  
  10
  %
  
  
  186,924
  
  
  4
  %
  
  
  180,539Reciprocal statutory
  assets under management
  
  $
  860,463
  
  
  5
  %
  
  
  821,396
  
  
  -2
  %
  
  
  834,138Professional liability
  policyholders under management
  
  
  11,149
  
  
  6
  %
  
  
  10,547
  
  
  6
  %
  
  
  9,950Reciprocal Management OverviewThe increase in reciprocal management income before
cumulative effect of accounting change during the year ended December 31, 2003
was primarily due to higher management fees, commission income and intersegment
revenues. The growth in these revenues
was the result of growth in 2003 of premiums written at PRI and higher ceded
premiums at PRI and our insurance companies, which are co-brokered by FPIC
Intermediaries. Intersegment revenues
and expenses primarily relate to commission income from First Professionals for the placement of
reinsurance and the management of the Pennsylvania fronting program; and
the holding companys overhead allocation, respectively. These amounts are eliminated in the
consolidated financial statements.
37
Reciprocal management income before cumulative effect of accounting
change increased during the year ended December 31, 2002, primarily due to
higher management fees and commission income.
The growth in these revenues was the result of growth in 2002 of premiums
written at PRI and higher ceded premiums at PRI and our insurance companies,
which are co-brokered by FPIC Intermediaries.
Also contributing to the higher 2002 income before cumulative effect of
accounting change were lower total expenses due to ceasing the amortization of
goodwill, previously recognized in other expenses, in accordance with the
adoption of FAS 142 during the first quarter of 2002.
The reciprocal management segment recorded a transitional impairment
charge of $24.4 million, after income taxes, during the first quarter of 2002,
as a result of the adoption of FAS 142.
This transitional impairment charge is accounted for as a 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.
Reciprocal Management RevenuesManagement fees earned by AFP are classified with
claims administration and management fees in our statements of income. They are comprised entirely of management
fees from PRI and the increase for the years ended December 31, 2003 and 2002
are due to the corresponding increase in the direct 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.
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.
AFP also 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.
Additional information about our management agreement with PRI appears
in the preceding section of this MD&A, Business with PRI.
The increase in
commission income for the years ended December 31, 2003 and 2002 is primarily
due to increases in co-brokerage commissions earned by FPIC
Intermediaries from third party reinsurers for the placement of reinsurance and
by PMA based on growth in the insurance program it manages for PRI in
Pennsylvania. FPIC Intermediaries
brokerage commissions are determined as a percentage of reinsurance premiums
ceded and have increased significantly as the underlying ceded premiums have
grown at both our insurance subsidiaries and PRI, for which FPIC Intermediaries
participates in the placement of reinsurance.
In addition, commission income of approximately $0.5 million was
recognized in 2002 as a result of a brokerage fee earned from Hannover Re
related to the placement of our net account quota share reinsurance
agreement. Additional information
about FPIC Intermediaries and its business with PRI appears in the preceding
section of this MD&A, Business with PRI.
The increase in intersegment revenues in 2003 was driven by an
increase in reinsurance rates that increased the commissions earned on
reinsurance treaties brokered for First Professionals.
Reciprocal Management ExpensesThe increase reported in reciprocal management
expenses for the year ended December 31, 2003 is due to the combination of an
increase in operating expenses at AFP to manage growth at PRI and an increase
in operating and commission expenses at PMA associated with an increase in
premiums written and placed on behalf of PRI.
The increase in reciprocal 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 described above, the
management agreement between AFP and PRI was amended in 2002. As part of the amended agreement, PRI is to
reimburse AFP for 50% of risk management department expenses. Additional information about our management
agreement with PRI appears in the preceding section of this MD&A, Business
with PRI.
38
Results of Operations
- Third Party Administration (TPA) SegmentOur TPA segment represents the business of our subsidiary EMI. Financial and selected other data for
our TPA segment for the years ended December 31, 2003, 2002, and 2001 is
summarized in the table below. Dollar
amounts are in thousands.
TPA Segment Results and Selected Other
Information
2003
    
    Percentage
        Change
    
    2002
    
    Percentage
        Change
    
    2001Claims
        administration and management fees
    
    $
    14,313
    
    
    
    13
    %
    
    
    12,693
    
    
    
    1
    %
    
    
    12,545Net
        investment income
    
    
    13
    
    
    
    -70
    %
    
    
    43
    
    
    
    -73
    %
    
    
    159Commission
        income
    
    
    2,162
    
    
    
    -13
    %
    
    
    2,475
    
    
    
    -1
    %
    
    
    2,503Net
        realized investment losses
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    100
    %
    
    
    Other
        income
    
    
    1
    
    
    
    -88
    %
    
    
    8
    
    
    
    -78
    %
    
    
    36Intersegment
        revenue
    
    
    25
    
    
    
    -70
    %
    
    
    83
    
    
    
    -89
    %
    
    
    741Total
        revenues
    
    
    16,514
    
    
    
    8
    %
    
    
    15,302
    
    
    
    -4
    %
    
    
    15,984Claims
        administration and management expenses
    
    
    14,411
    
    
    
    3
    %
    
    
    13,958
    
    
    
    -6
    %
    
    
    14,784Other
        expenses
    
    
    
    
    
    
    100
    %
    
    
    
    
    
    
    -100
    %
    
    
    1,327Intersegment
        expense
    
    
    462
    
    
    
    -44
    %
    
    
    824
    
    
    
    11
    %
    
    
    741Total
        expenses
    
    
    14,873
    
    
    
    1
    %
    
    
    14,782
    
    
    
    -12
    %
    
    
    16,852Income
        (loss) from operations before income taxes and cumulative effect of accounting
        change
    
    
    1,641
    
    
    
    216
    %
    
    
    520
    
    
    
    160
    %
    
    
    (868
    )Less:
        Income tax expense (benefit)
    
    
    711
    
    
    
    240
    %
    
    
    209
    
    
    
    170
    %
    
    
    (297
    )Income
        (loss) before cumulative effect of accounting change
    
    
    930
    
    
    
    199
    %
    
    
    311
    
    
    
    154
    %
    
    
    (571
    )Less:
        Cumulative effect of accounting change
    
    
    
    
    
    
    -100
    %
    
    
    5,215
    
    
    
    100
    %
    
    
    Net
        income (loss)
    
    $
    930
    
    
    
    119
    %
    
    
    (4,904
    )
    
    
    -759
    %
    
    
    (571
    )Selected
        TPA Segment InformationCovered
        lives under employee benefit programs
    
    
    106,927
    
    
    
    -2
    %
    
    
    109,171
    
    
    
    31
    %
    
    
    83,637Covered
        lives under workers compensation programs
    
    
    38,400
    
    
    
    1
    %
    
    
    38,100
    
    
    
    1
    %
    
    
    37,700TPA
OverviewOur TPA segments income before cumulative effect of
accounting change increased during the year ended December 31, 2003, primarily
due to higher claims administration fees and improved operating margins. Growth in the number of covered members
serviced by the ambulance service organization to which we provide
administrative services along with cost savings and productivity initiatives
helped improve our margins in 2003.
TPA income before cumulative effect of accounting change increased
during the year ended December 31, 2002, primarily due to improved operating
margins and lower total expenses.
Operating margins improved through a combination of cost saving and
productivity initiatives and pricing improvements. Total expenses for the year ended December 31, 2002 decreased
primarily due to ceasing the amortization of goodwill, previously recognized in
other expenses, in accordance with the adoption of FAS 142 during the first
quarter of 2002. The TPA segment
recorded a transitional impairment charge of $5.2 million, after income taxes,
during the first quarter of 2002, as a result of the adoption of FAS 142. This transitional impairment charge is
accounted for as a cumulative effect of accounting change. 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.

39
TPA
RevenuesClaims administration fees earned by EMI are
classified with claims administration and management fees in our consolidated
statements of income. The increase in
claims administration fees in 2003 is primarily due to an increase in the
number of members serviced by the ambulance service organization to which we
provide administrative services and to a lesser extent, improvements in
pricing.
The decline in commission income earned for the period ended December
31, 2003 is the result of a change in contract terms with a major
client. The contract was changed from
receiving commission income based on a percentage of premiums to a fixed fee
for service basis.
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 and claims
administration and management expenses increased $2.7 million and $2.3 million,
respectively for the year ended December 31, 2002, when compared with the year
ended December 31, 2001. These
increases reflect the revenues and costs incurred as a result of growth in new
business.
TPA ExpensesThe lower increase in claims administration and
management expenses for the year ended December 31, 2003 when compared with the
increase in claims administration and management fees for the same period in
2002 is the result of certain expense saving initiatives and productivity
improvements achieved by servicing growth in covered lives with our existing
personnel and service platforms. These
initiatives and others have also accounted for the improved margins in 2003
versus 2002.
Other expenses for the year ended December 31, 2003 decreased primarily
due to ceasing the amortization of goodwill in accordance with the adoption of
FAS 142, as described above. In
addition, the year 2001 results include a restructuring charge of approximately
$0.6 million, before income taxes, in connection with the disposition of the
Brokerage Services, Inc. division of EMI in Albuquerque, New Mexico, which did
not recur in 2002. 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.
Managements
Discussion & Analysis of Financial Position: December 31, 2003
Compared to December 31, 2002
Cash and InvestmentsCash and investments increased $84.0 million to
$622.7 million as of December 31, 2003 from $538.7 million as of December 31,
2002. The increase in cash and investments is primarily due to growth in
insurance premiums and the cash received from the commutation of reinsurance
formerly placed with Gerling, which helped generate net operating cash flows of
$89.9 million for the year ended December 31, 2003.
Other invested assets declined $6.0 million to $4.8 million as of
December 31, 2003 from $10.8 million as of December 31, 2002. We sold our investment in American
Physicians Insurance Services, Inc. (APS) to its majority shareholder for
approximately $2.05 million and recognized a small gain on the transaction
(less than $0.1 million). We also
recognized other than temporary impairments on two privately held investments
totaling $5.3 million in 2003. One of
these was our 9.8% investment in APAL, which we wrote down by $4.5 million to
$0.8 million in 2003. Partially
offsetting the decline were investments in three wholly owned trusts of
approximately $1.1 million, in aggregate, established for the sole purpose of
issuing our trust preferred securities.

40
Insurance Assets (Premium Receivables,
Reinsurance Recoverable, Ceded Unearned Premiums, and Deferred Policy
Acquisition Costs)Insurance assets, including premiums receivable,
reinsurance recoverable and related assets, increased as a group as of December
31, 2003 when compared with December 31, 2002.
The growth in our insurance assets is primarily the result of continued
growth in the insurance premiums of our core MPL business during 2003.
Due from reinsurers on unpaid losses increased $107.6 million to $275.8
million as of December 31, 2003 from $168.2 million as of December 31,
2002. Approximately $64.9 million of
the increase in due from reinsurers on unpaid losses is attributable to
reserves ceded under the Hannover Re agreement during the year 2003. Of the remaining increase, approximately
$34.0 million represents the growth in reinsurance recoverable under our
primary excess of loss reinsurance program covering our core business.
In keeping with our growth management strategy, we have exited all but
one remaining fronting program as of December 31, 2003 or prior. Therefore, we expect the insurance assets
and liabilities associated with former fronting programs to level off and begin
to decline in the future.
Commutation of
Gerling Global ReinsuranceIn the fourth quarter of 2003, we successfully
negotiated and completed the commutation of reinsurance formerly placed with
Gerling. Gerling ceased writing and
renewing business voluntarily in the United States during 2002 and we replaced
Gerlings participation in our reinsurance programs beginning in 2003. A. M. Best downgraded Gerling several times
during 2003 and ultimately ceased assigning them a rating.
Under the terms of the commutation, we received $23.5 million
in exchange for a complete release of Gerling from their reinsurance
obligations to us under our 2002, 2001 and 2000 primary excess of loss
reinsurance programs, in which Gerling participated at 20%, 20% and 15%, respectively,
and its assumption of non-standard risks under a small special facultative
reinsurance program. The related assets
for amounts due from Gerling on reinsured unpaid losses and ceded unearned
premiums were eliminated and the remaining funds received were accounted for as
an increase in our loss and LAE reserves in the form of bulk reserves. No gain or loss was recognized on the
transaction. This transaction resulted
in a reduction from the amounts due from reinsurers on unpaid losses,
offsetting some of the growth in this asset for 2003.
Deferred TaxesOur net deferred tax asset (DTA) remained level
as of December 31, 2003 when compared with December 31, 2002. Increases in our net DTA resulting from
growth in our business and the related additional discounting of loss and LAE
reserves, the 20% reduction in unearned premiums, and other temporary
differences that generate DTAs, were essentially offset by the continued
amortization of tax deductible goodwill, for which a DTA is realized and reduced
annually.
Insurance Liabilities (Liability for Losses
and LAE, Unearned Premiums, Reinsurance Payable and Paid in Advance Premiums)The
increases in our insurance liabilities as of December 31, 2003, including the
liability for losses and LAE, unearned premiums and reinsurance payable are
attributable to growth in our core MPL insurance business.
We
conducted in-house actuarial studies of our loss and LAE reserves as of
December 31, 2003 and also during the third quarter using data as of June 30,
2003. The results of our most recent
actuarial study and review confirm that our aggregate loss and LAE reserves as
of December 31, 2003, are adequate.

The
implied range of reasonable loss and LAE reserves, net of reinsurance,
estimated by FPIC as of December 31, 2003, was $276.4 million to $321.2
million. Our consolidated loss and LAE
reserves, net of reinsurance, were $298.8 million in aggregate as of December
31, 2003, which represents managements best estimate and was approximately
equal to our in-house actuarys point estimate within his range. Our independent actuary has also tested the
loss and LAE reserves of each of our individual insurance subsidiaries as of
December 31, 2003 and has issued his reports thereon, which have been filed
with the Florida and Missouri insurance departments.

41
One
item of note was the acceleration of claims (estimated at approximately 150 to
200 claims) at First Professionals as a result of tort reform legislation
adopted in Florida, which had the effect of increasing the actuarial point
estimate as of December 31, 2003.
For additional information about these 2003 developments, please refer
to the applicable preceding insurance segment sections of the MD&A, Insurance Underwriting
Results (Premiums, Losses and LAE, and Underwriting Expenses), Losses and LAE
Incurred and Selected Loss and LAE Data.
Approximately $58.2 million of the increase in reinsurance payable for
the year ended December 31, 2003 was the result of business ceded under the
Hannover Re net account quota share agreement.
This increase in reinsurance payable was partially offset by the payment
of premiums due under FPICs primary reinsurance agreement.
Long Term DebtDuring 2003, we completed the placement of $10.0
million in senior notes and created three trusts that issued 30-year trust
preferred securities for which the proceeds
from such issuances together with cash previously contributed to the trusts
were used to purchase junior
subordinated debentures from FPIC totaling $36.1 million. We used the proceeds along with other
internally generated funds to retire our bank term loan and revolving credit
facility, make a capital contribution to our insurance operations and unwind
hedge agreements related to the revolving credit facility and term loan. The new securities issued mature in 30 years
and are described more fully under the section, Liquidity and Capital
Resources, below.
Other Assets and LiabilitiesThe significant decreases in other assets and
accrued expenses and other liabilities of approximately $38.2 million and $37.9
million, respectively, as of December 31, 2003, are primarily attributable to
purchase and sale transactions involving investment securities, which were
entered into prior to December 31, 2002, but for which settlements occurred in
January 2003. We did not have similar
investment transactions at the end of 2003.
Shareholder EquityOur shareholders equity increased $20.8 million
to $186.7 million as of December 31, 2003 from $165.9 million as of December
31, 2002. Our book value per share
increased 8% to $19.10 from $17.67.
Net income contributed $16.6 million to the growth in our shareholders
equity, while accumulated other comprehensive income (OCI) declined
approximately $1.2 million. The decline
in accumulated OCI as of December 31, 2003 versus December 31, 2002, was caused by an increase in prevailing market interest rates
on fixed income securities, offset
by the elimination of unrealized losses of $1.5 million resulting from the
termination interest rate swaps associated with our prior bank term loan
and revolving credit facility, and the corresponding decrease in the unrealized gains on our investment
securities, which are included in accumulated OCI, net of income tax
effects. The remaining increase of
$5.4 million was due to the exercise of stock options by directors and
employees during 2003 and the associated payments made to FPIC upon exercise of
these options.
Refer to the applicable section in Liquity and Capital Resources for
information about the restricted net assets of our insurance subsidiaries.

Contractual
Obligations, Commitments and Off-Balance Sheet ArrangementsFPIC has various contractual obligations, which are
recorded as liabilities in our consolidated financial statements. FPIC also has items
that represent contractual obligations, commitments and contingent liabilities that are not
recorded on its balance sheet or that are considered to possess off-balance
sheet risks beyond their respective amounts otherwise reflected in the balance sheet. These include:
 (1) derivative
financial instruments, which are used to hedge interest rate risk, (2)
guarantees by us of trust preferred securities issued by separately created,
unconsolidated trusts, (3) a contingent liability under an amendment made to
AFPs management agreement with PRI, effective January 1, 2002, and (4) an
irrevocable letter of credit issued in favor of the lessor under an operating
lease.

42
FPIC uses interest rate collars as a hedge to maintain the total
borrowing costs of its long term debt (interest expense on the debt
instruments, plus or minus cash flows under the interest rate collar
instruments) to within specified ranges.
FPICs all in borrowing costs on long term debt combined with the
corresponding cash flows under the related interest rate collars can fluctuate
between $2.3 million to $3.8 million annually, until such time as the interest
rate collars expire. The interest rate
collars are set to expire on dates corresponding with the first dates under the
respective long-term debt agreements at which they can be retired by us at our
option, which is five years from the date of issue in each case.
FPIC also had interest rate swaps in effect as hedging instruments for
the adjustable rate interest obligations under its former bank credit
facility. During 2003, the bank credit
facility was retired and the related remaining portions of the interest rate
swap agreements were settled. As a
result, charges of approximately $2.5 million in aggregate were recognized in
2003, of which $0.9 million was recognized in the fourth quarter of 2003.
See Note 14, Derivative Financial Instruments, to the consolidated
financial statements for additional disclosures about FPICs derivative
financial instruments.
FPIC guarantees the floating rate interest and principal obligations
under the trust preferred securities issued by its separately created,
unconsolidated trusts, which have been established solely for the purpose of
issuing the securities. The total
principal balance of these trust preferred securities was $35 million as of
December 31, 2003. FPIC also carries
corresponding junior subordinated debentures on its balance sheet, which
debentures were issued to these trusts in exchange for the proceeds raised by
the trusts upon their respective issuances of the trust preferred
securities. The junior subordinated
debentures of FPIC are comprised of the same maturities, floating interest
rates and other applicable terms and are the instruments by which FPIC funds
the related interest and principal obligations of the unconsolidated
trusts. See Note 13, Long Term Debt,
Revolving Credit Facility and Term Loan, to the consolidated financial
statements for additional disclosures about FPICs trusts and junior
subordinated debentures.
AFP has a 10-year management agreement with PRI, under which it
receives a management fee annually equal to 13% of PRIs direct premiums
written. The current term of the
management agreement runs through December 31, 2008. Under the terms of the management agreement, AFP receives this
fee in exchange for performing services necessary to conduct and manage the
entire operation of PRI. 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. As of December 31, 2003, and based on PRIs operating
results, no amounts were payable under this provision of the amended management
agreement. See Note 22, Related Party
Transactions, to the consolidated financial statements for additional
information about the management agreement with PRI.
FPIC has issued an irrevocable letter of credit in the amount of
$500,000 as collateral under the operating lease for the building occupied by AFP and PRI in Manhasset, New York. See Note 16, Commitments and Contingencies,
to the consolidated financial statements for additional information about this
irrevocable letter of credit.

In addition to the above-mentioned letter of credit, FPIC issues
irrevocable letters of credit or places assets in trust under its assumed
reinsurance contracts with PRI. These
assets in trust or letters of credit serve as collateral to corresponding
insurance liabilities recorded on our balance sheet and are not considered to
be off-balance sheet obligations.
In addition, FPIC is contractually committed to make certain minimum
lease payments for the use of property under operating and capital lease
agreements.

43
The following table summarizes our significant contractual obligations
and commitments as of December 31, 2003 and the future periods in which such
obligations are expected to be settled in cash. In addition, the table reflects the timing of principal payments
on outstanding borrowings. Additional
information regarding these obligations is provided in Note 13, Long Term Debt,
Revolving Credit Facility and Term Loan and Note 16, Commitments and
Contingencies to the consolidated financial statements. The table below does not include
contractual obligations with respect to our employee benefit plans, which are described more fully in
Note 19, Employee Benefit Plans to the consolidated financial statements.

Payment
        Due By PeriodContractual
        Obligations
    
    Total
    
    Less
        Than 
        One Year
    
    One
        To 
        Three 
        Years
    
    Three
        To 
        Five 
        Years
    
    More
        Than Five 
        YearsLong
        term debt obligations
    
    $
    46,083
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,083Capital
        lease obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating
        lease obligations
    
    
    12,627
    
    
    
    2,608
    
    
    
    4,637
    
    
    
    3,722
    
    
    
    1,660Purchase
        obligations
    
    
    1,279
    
    
    
    1,269
    
    
    
    10
    
    
    
    
    
    
    
    Other
        long term liabilities
    
    
    1,805
    
    
    
    361
    
    
    
    722
    
    
    
    722
    
    
    
    Total
    
    $
    61,794
    
    
    
    4,238
    
    
    
    5,369
    
    
    
    4,444
    
    
    
    47,743Stock Repurchase PlansUnder our stock repurchase program, we may repurchase shares
at such times, and in such amounts, as management deems appropriate. We did not repurchase any shares during the
year 2003 and a total of 365,500 shares remain available to be repurchased
under the program. On November 10,
2003, we repaid the remaining outstanding balance of our revolving credit
facility and retired the credit facility.
We are therefore no longer subject to the credit facilitys covenants
and restrictions, including the previous restrictions on stock
repurchases.
However, under certain circumstances,
limitations are placed on FPICs ability to purchase its capital stock by the terms
of agreements relating to its junior subordinated debentures. For information regarding
these limitations, refer to Note 13, Long Term Debt, Revolving Credit Facility and Term
Loan to the consolidated financial statements.
For additional
information, see also the discussion of Liquidity and Capital Resources, below.
Liquidity and Capital ResourcesThe payment of losses
and LAE, insurance operating expenses (including reinsurance costs), claims
administration and management expenses, non-insurance 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. The principal sources of cash from our operations to meet our
on-going liquidity requirements are the premiums collected for the insurance
sold by our insurance subsidiaries, income on the investment of those funds,
and claims administration and management fees and reinsurance brokerage and
other commission income earned by our non-insurance subsidiaries.
Net Cash Provided By Operating ActivitiesCash provided
by operations has been sufficient during each of the three years in the period
ended December 31, 2003, to meet our liquidity needs. As reported in the consolidated statement of cash flows, we
generated positive net cash from operating activities of $89.9 million, $98.1
million and $33.2 million for the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2003, we
had cash and cash equivalents of $85.1 million and held fixed maturity debt
securities with a fair value of approximately $15.0 million with scheduled
maturities during the next twelve months.
We believe that our cash and cash equivalents as of December 31, 2003,
combined with cash flows from operating activities and the scheduled maturities
of investments in 2004, will be sufficient to meet our cash needs for operating
purposes for at least the next twelve months.

44
Our
net cash flows from operating activities during the last three years, and in
particular, during 2003 and 2002, grew to high levels relative to our
historical operating cash flows mainly as the result of unprecedented
growth in our insurance business in terms of both increased numbers of MPL
policyholders and pricing improvements. As a result of growth management initiatives we have implemented,
we do not expect to sustain net cash flows from operating activities at the
levels achieved in 2003 and 2002.
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; andvi)
  Unexpected changes in liquidity provided by
  our reciprocal management and TPA segments.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 effect 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 capital and reinsurance;(ii)
  Monitor our reserves 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).Long Term DebtDuring 2003, we completed the placement of $10.0
million in senior notes and created three trusts that issued 30-year trust
preferred securities for which the proceeds
from such issuances together with cash previously contributed to the trusts were used to purchase junior
subordinated debentures from FPIC totaling $36.1 million. We used the proceeds along with other
internally generated funds to retire our bank term loan and revolving credit
facility, make a capital contribution to our insurance operations and unwind
hedge agreements related to the revolving credit facility and term loan.
We established three wholly owned, but not consolidated, trusts, FPIC
Capital Trust I, FPIC Capital Statutory Trust II and FPIC Capital Statutory
Trust III for the sole purpose of issuing the trust preferred securities. The proceeds received by the three trusts
were used to purchase junior subordinated debentures from FPIC of the same
amounts, maturities and other applicable terms and features. The debentures issued by FPIC, which are
reported as long term debt in the consolidated statements of financial
position, to the three trusts are subordinated to all senior indebtedness,
including the senior notes, and are equal in standing to one another.
The securities are uncollateralized and bear a floating interest rate
equal to the three-month LIBOR plus a spread ranging from 3.85% to 4.2% (the
floating interest rates ranged from 5.01% to 5.37% as of December 31,
2003). The floating interest rate will
be adjustable quarterly with changes in the three-month LIBOR, and in the case
of the first two offerings, the maximum rate that may be charged under the
securities within the first five years is 12.5%. We have also purchased hedging instruments designed to maintain
the ultimate floating rate interest cost on all of these securities within a
stated range for five years from closing.
We have the option to call the trust preferred securities at par or its
equivalent beginning five years from closing.
The trust preferred securities also contain features that allow us the
option, under certain conditions, to defer interest payments for up to 20
quarters and to redeem the securities before the first optional call date in
five years. In the case of the
potential earlier call date, the redemption or call price payable by us may be
different than par. The securities have
stated maturities of thirty years and are due in May and October 2033.
45
Issuance costs for all three offerings in the aggregate amount of
approximately $1.4 million were capitalized and will be amortized over their
respective stated maturity periods of thirty years. In addition, hedge agreements were purchased that effectively
place floors and caps on the three-month LIBOR floating interest of
approximately 1.0% to 1.20% and 4.40% to 4.65%, respectively, on notional
principal corresponding with the principal amounts of each offering, for 5
years. These instruments will
effectively serve to hedge our total floating interest rate borrowing costs
under the securities to within a range of 4.85% to 8.6% for five years and
until such time that we have the right to call the securities. The initial costs of the hedge instruments acquired for this
purpose of $1.1 million, in aggregate, have been capitalized and will be
amortized over their respective five year maturity periods.
Retirement of Bank Credit FacilityThe net proceeds from the trust preferred securities
and senior notes, the application of liquid collateral previously set aside
under the terms of our bank debt, and other internally generated funds were
used to fully pay down and ultimately retire our bank credit facility and
related interest rate swap agreements in the fourth quarter of 2003.
Among the internally generated funds used were the proceeds from the
sale of FPICs 20% interest in APS. We
completed the sale of our investment in APS, at a small gain, to that companys
majority shareholder on October 30, 2003, and received the total consideration
of $2.05 million in cash. With the
repayment and retirement of the bank credit facility, FPIC and its subsidiaries
have been released from the corresponding liens on their assets that served as
collateral under the bank credit facility and from their respective guarantee
agreements. We are also no longer
subject to the bank credit facilitys covenants and restrictions.
Holding Company (FPIC Insurance Group, Inc.) Sources of Liquidity
The sources of liquidity to FPIC, the holding company,
for the payment of its operating expenses, taxes and debt-related expenses are
management fees from First Professionals (and APAC, effective January 1, 2004),
overhead allocations to the non-insurance subsidiaries for which FPIC receives
reimbursement and dividends from subsidiaries.
FPIC has management agreements with First Professionals and, effective
January 1, 2004, APAC, under which it provides substantially all management and
administrative services to these subsidiaries.
The management agreement with APAC replaces the former management agreement
between APAC and APAM, which expired as of December 31, 2003. Under the terms of the agreements, FPIC
receives management fees equal to 115% of the costs incurred to manage the two
subsidiaries. The additional 15%
provision in the First Professionals and APAC management fees is intended to
cover overhead, corporate expenses and profit and is eliminated in the
consolidated financial statements. In
the case of the new agreement with APAC, the total annual management fees are
also to be limited to an amount not to exceed those that would have been paid
under the terms of its former management agreement with APAM.
Dividends from Subsidiaries.Shareholder
dividends available from our insurance subsidiaries are subject to certain
limitations imposed by Florida and Missouri laws. As of December 31, 2003, the insurance subsidiaries are
permitted, within insurance regulatory guidelines, to pay FPIC dividends of
approximately $13.4 million during 2004 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, 2003, our insurance subsidiaries maintained adjusted surplus in excess of
their required RBC thresholds.
46
Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board (FASB) issued
FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities.  FAS 149  (1) clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a
derivative discussed in paragraph 6(b) of FAS 133,  (2) clarifies when a derivative contains a financing component,
(3) amends the definition of an underlying derivative to conform it to language
used in FASB Interpretation 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (4) amends certain other existing pronouncements.  FAS 149 became effective for contracts and
hedging relationships entered into or modified after June 30, 2003, with
certain exceptions.  All provisions of
FAS 149 are to be applied prospectively.  
We have reviewed FAS 149 and complied with the reporting requirements
therein for the period ended December 31, 2003. Adopting the provisions of FAS
149 did not have a significant impact on our consolidated financial statements.
In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity.  FAS 150 establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer.  The issuer will be required
to classify as liabilities three types of freestanding financial instruments,
which are: mandatory redeemable financial instruments, obligations to
repurchase the issuers equity shares by transferring assets, and certain
obligations to issue a variable number of shares.  FAS 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. 
We have reviewed FAS 150 and complied with the reporting requirements
therein for the period ended December 31, 2003. Adopting the provisions of FAS
150 did not have a significant impact on our consolidated financial statements.
In December 2003, the FASB issued Revised FASB Interpretation No. 46
(FIN 46R or the Interpretation), Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin (ARB) No. 51. The primary
objective of the Interpretation is to provide guidance on the identification
of, and financial reporting for, entities over which control is achieved
through means other than voting rights; such entities are known as
variable-interest entities (VIEs). FIN 46R is the guidance that determines (1)
whether consolidation is required under the controlling financial interest
model of ARB No. 51, Consolidated Financial Statements, or (b) other existing
authoritative guidance, or, alternatively, (2) whether the variable-interest
model under FIN 46R should be used to account for existing and new
entities.  We have adopted FIN 46R.  The result of adoption was the
deconsolidation of the three trusts that we created during 2003
in connection with the issuance of trust preferred securities.  This resulted in offsetting increases in
other assets and long term debt of approximately $1.1 million each.
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, 2003.  Our market risk sensitive instruments are
entered into for purposes other than trading.

47
The fair value of all our investment securities as of December 31, 2003
was approximately $533.4 million.  Our
investment portfolio was invested primarily in fixed maturity securities, which
comprised $528.6 million, or 99%, of the fair value of all our investment
securities.  The fixed maturity
portfolio currently maintains an average Moodys credit quality of
AA1/AA+.  We invest in securities with
investment grade credit ratings, with the intent to minimize credit risks.  Approximately 61% of the fixed income
portfolio is invested in securities rated AAA or its equivalent by investment
rating services, 14% is AA, 16% is A, and 8% is BBB.  We purchased collateralized 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 21% of our fixed income portfolio is allocated to the
municipal sector in the form of tax-exempt securities.  The balance is diversified through
investments in treasury, agency, and corporate and mortgage-backed securities.
Generally, we do not invest in derivatives and do not currently use
hedging strategies in our investment portfolio.  However, we do have investments in hedging instruments designed
to maintain the ultimate floating rate interest cost on the mandatorily
redeemable trust preferred securities and senior notes within a stated range.
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 investment 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 2003 and 2002 relative to tax-exempt holdings in 2001 and
prior, 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) in such a way so as to minimize the likelihood of having to
liquidate investments at a loss before their maturity.  Effective duration is a standard measure of
interest rate sensitivity that 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 consolidated fixed income investment portfolio as of
December 31, 2003 was 5.2 years.
The following table summarizes the effects on the estimated fair value of our fixed
income portfolio assuming a
range of increases and decreases in market interest rates.  For purposes of this interest rate analysis,
each market interest rate change is assumed to be uniform across the portfolio.  As shown in this table, if prevailing market
interest rates on investments in debt securities comparable to those we held as
of December 31, 2003 were to uniformly increase 100 or 200 basis points, the
fair value of our fixed maturity securities would have decreased approximately
$27.1 million or $53.1 million, respectively. 
Dollar amounts are shown in thousands.
Hypothetical
  Decrease
  - (200 bps)
  
  Hypothetical
  Decrease
  - (100 bps)
  
  Current
  Market
  
  Hypothetical
  Increase
  + 100 bps
  
  HypotheticalIncrease
  + 200 bpsFair Value
  
  $
  586,635
  
  
  556,853
  
  
  528,647
  
  
  501,563
  
  
  475,584Fair
  Value/Reported Value
  
  
  111
  %
  
  105
  %
  
  100
  %
  
  95
  %
  
  90
  %Computations of prospective effects
of hypothetical interest rate changes are based on numerous assumptions, including the
maintenance of the existing level and composition of fixed income security assets, and
should not be relied on as indicative of future results.


48
The following table presents the projected cash flows for our assets
and liabilities associated with financial instruments and operating
leases.  It does not reflect operating
cash flows, including investment income and interest expense earned or accrued
as expense under these instruments. 
Thus, 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 fair value of the interest rate collars
is estimated using quotes from the financial institution that acted as the
broker in obtaining them and represents the cash requirement if the existing
agreement had been settled at year-end. 
The projected cash flows of long-term debt and operating leases are
estimated to approximate their fair values as of December 31, 2003.  Interest expense on debt is
excluded from this table as is interest income on investments.  However, weighted average interest rates
earned on our fixed income securities and interest expense on our long term
debt are presented in the last section of the table. Weighted average variable rates are
based on implied forward rates.


Projected
  Cash Flows (in thousands)2004
  
  2005
  
  2006
  
  2007
  
  2008
  
  Thereafter
  
  Total
  
  December 31, 2003
  Fair ValueAssetsFixed maturity securities,Available for
  sale
  
  $
  14,820
  
  
  18,960
  
  
  36,979
  
  
  30,269
  
  
  46,605
  
  
  348,632
  
  
  496,265
  
  
  
  528,647Interest rate
  collars
  
  $
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  1,051LiabilitiesLong term debt
  
  $
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  (46,083
  )
  
  (46,083
  )
  
  
  (46,083
  )Operating leases
  
  $
  (2,608
  )
  
  (2,498
  )
  
  (2,139
  )
  
  (1,887
  )
  
  (1,835
  )
  
  (1,660
  )
  
  (12,627
  )
  
  
  (12,627
  )Weighted
  Average Interest RateFixed maturity
  securities
  
  
  3.95
  %
  
  5.90
  %
  
  5.71
  %
  
  5.18
  %
  
  4.35
  %
  
  5.60
  %Interest rate
  collars
  
  
  0.00
  %
  
  0.00
  %
  
  0.00
  %
  
  0.00
  %
  
  0.42
  %
  
  0.77
  %Long term debt
  
  
  5.55
  %
  
  6.52
  %
  
  7.65
  %
  
  8.44
  %
  
  8.95
  %
  
  9.31
  %49
Item 8.  Financial Statements and Supplementary Data
Report
of Independent Certified Public Accountants
To the Board of Directors and Shareholders of
FPIC Insurance Group, Inc.:
In our opinion, the accompanying consolidated statements of financial
position and the related consolidated statements of income (loss) and
comprehensive income (loss), 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, 2003 and 2002, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2003 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 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; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits.  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 9 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 LLPJacksonville, Florida
March 9, 2004
50
FPIC INSURANCE GROUP, INC.Consolidated Statements of Financial Position
As of December 31, 2003 and  2002
(in thousands, except common share data)
Dec
        31,
        2003
    
    Dec
        31,
        2002AssetsCash
        and cash equivalents
    
    $
    85,064
    
    
    86,589Bonds
        and U.S. Government securities, available for sale
    
    
    528,647
    
    
    436,970Equity
        securities, available for sale
    
    
    9
    
    
    6Other
        invested assets ((Includes related party amounts of $788 and $7,398) Note 22)
    
    
    4,774
    
    
    10,801Real
        estate, net
    
    
    4,207
    
    
    4,354Total
        cash and investments
    
    
    622,701
    
    
    538,720Premiums
        receivable, net ((Includes related party amounts of $8,608 and $7,023)
        Note 22)
    
    
    101,262
    
    
    108,494Accrued
        investment income
    
    
    6,153
    
    
    5,998Reinsurance
        recoverable on paid losses (Notes 12 and 22)
    
    
    15,950
    
    
    6,529Due
        from reinsurers on unpaid losses and advance premiums ((Includes related
        party amounts of $82,474 and $72,256) Note 22)
    
    
    275,766
    
    
    168,159Ceded
        unearned premiums ((Includes related party amounts of $16,486 and $17,123)
        Note 22)
    
    
    71,435
    
    
    78,889Property
        and equipment, net
    
    
    5,248
    
    
    4,334Deferred
        policy acquisition costs ((Includes related party amounts of $3,500 and
        $3,274) Note 22)
    
    
    6,209
    
    
    4,452Deferred
        income taxes
    
    
    34,819
    
    
    34,653Prepaid
        expenses
    
    
    5,363
    
    
    1,744Goodwill
    
    
    18,870
    
    
    18,870Intangible
        assets
    
    
    782
    
    
    1,034Federal
        income tax receivable
    
    
    2,179
    
    
    Other
        assets (Note 22)
    
    
    16,393
    
    
    54,555Total
        assets
    
    $
    1,183,130
    
    
    1,026,431Liabilities
        and Shareholders EquityLosses
        and loss adjustment expenses ((Includes related party amounts of $20,555
        and $17,314) Note 22)
    
    $
    574,529
    
    
    440,166Unearned
        premiums ((Includes related party amounts of $47,240 and $43,506) Note
        22)
    
    
    177,435
    
    
    173,421Reinsurance
        payable ((Includes related party amounts of $11,761 and $4,508) Note 22)
    
    
    138,082
    
    
    96,470Paid
        in advance and unprocessed premiums
    
    
    11,766
    
    
    14,060Long
        term debt
    
    
    46,083
    
    
    Revolving
        credit facility
    
    
    
    
    
    37,000Term
        loan
    
    
    
    
    
    10,208Deferred
        credit ((Related party) Note 22)
    
    
    7,729
    
    
    8,749Deferred
        ceding commission
    
    
    3,126
    
    
    4,669Federal
        income tax payable
    
    
    
    
    
    120Accrued
        expenses and other liabilities (Note 22)
    
    
    37,723
    
    
    75,655Total
        liabilities
    
    
    996,473
    
    
    860,518Commitments
        and contingencies (Note 16)Common
        stock, $0.10 par value, 50,000,000 shares authorized; 9,770,843 and 9,390,795
        shares issued and outstanding at December 31, 2003 and December 31, 2002,
        respectively
    
    
    977
    
    
    939Additional
        paid-in capital
    
    
    43,705
    
    
    38,322Accumulated
        other comprehensive income
    
    
    4,276
    
    
    5,525Retained
        earnings
    
    
    137,699
    
    
    121,127Total
        shareholders equity
    
    
    186,657
    
    
    165,913Total
        liabilities and shareholders equity
    
    $
    1,183,130
    
    
    1,026,431The
accompanying notes are an integral part of the consolildated financial
statements.
51
FPIC INSURANCE GROUP, INC.Consolidated Statements of Income (Loss) and
Comprehensive Income (Loss)
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands, except common share data)
2003
  
  2002
  
  2001RevenuesNet premiums
  earned (Note 22)
  
  $
  131,665
  
  
  151,684
  
  
  131,058Claims
  administration and management fees (Note 22)
  
  
  40,895
  
  
  37,034
  
  
  35,504Net
  investment income
  
  
  18,414
  
  
  20,977
  
  
  23,377Commission
  income
  
  
  7,658
  
  
  6,215
  
  
  5,048Net realized
  investment gains (Note 4)
  
  
  2,052
  
  
  4,688
  
  
  1,429Finance
  charges and other income (Note 22)
  
  
  1,040
  
  
  1,342
  
  
  1,166Total
  revenues
  
  
  201,724
  
  
  221,940
  
  
  197,582ExpensesNet losses
  and loss adjustment expenses (Note 22)
  
  
  118,974
  
  
  139,571
  
  
  128,346Other
  underwriting expenses (Note 22)
  
  
  11,219
  
  
  19,155
  
  
  25,883Claims
  administration and management expenses
  
  
  34,098
  
  
  32,898
  
  
  33,204Interest
  expense on debt (Note 22)
  
  
  5,886
  
  
  4,762
  
  
  4,491Other
  expenses (Note 22)
  
  
  5,658
  
  
  1,844
  
  
  4,572Total
  expenses
  
  
  175,835
  
  
  198,230
  
  
  196,496Income from
  operations before income taxes and cumulative effect of accounting change
  
  
  25,889
  
  
  23,710
  
  
  1,086Less:  Income tax expense (benefit)
  
  
  9,317
  
  
  8,834
  
  
  (1,844
  )Income
  before cumulative effect of accounting change
  
  
  16,572
  
  
  14,876
  
  
  2,930Less:  Cumulative effect of accounting change
  (net of an $18,784 income tax benefit) (Note 9)
  
  
  
  
  
  29,578
  
  
  Net income
  (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Basic
  earnings (loss) per common share before cumulative effect of accounting
  change
  
  $
  1.75
  
  
  1.58
  
  
  0.31Cumulative
  effect of accounting change
  
  
  
  
  
  (3.15
  )
  
  Basic
  earnings (loss) per common share
  
  $
  1.75
  
  
  (1.57
  )
  
  0.31Diluted
  earnings (loss) per common share before cumulative effect of accounting
  change
  
  $
  1.71
  
  
  1.58
  
  
  0.31Cumulative
  effect of accounting change
  
  
  
  
  
  (3.14
  )
  
  Diluted
  earnings (loss) per common share
  
  $
  1.71
  
  
  (1.56
  )
  
  0.31Basic
  weighted average common shares outstanding
  
  
  9,483
  
  
  9,387
  
  
  9,383Diluted
  weighted average common shares outstanding
  
  
  9,665
  
  
  9,432
  
  
  9,468Comprehensive Income (Loss)Net income
  (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Other
  comprehensive (loss) income:Cumulative
  effect of accounting change
  
  
  
  
  
  
  
  
  124Minimum
  pension liability adjustment, net
  
  
  (140
  )
  
  
  
  
  Unrealized
  holding (losses) gains on debt and equity securities
  
  
  (4,564
  )
  
  8,966
  
  
  1,198Unrealized
  holding gains (losses) and amortization on derivative financial instruments
  
  
  499
  
  
  (183
  )
  
  (2,819
  )Income tax
  benefit (expense) related to unrealized gains and losses
  
  
  1,424
  
  
  (3,232
  )
  
  503Settlement
  of derivative financial instruments, net
  
  
  1,532
  
  
  
  
  
  Other
  comprehensive (loss) income
  
  
  (1,249
  )
  
  5,551
  
  
  (994
  )Comprehensive
  income (loss)
  
  $
  15,323
  
  
  (9,151
  )
  
  1,936The accompanying notes are an integral part of the consolildated
financial statements.
52
FPIC INSURANCE GROUP, INC.
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
Common
        Stock
    
    Additional
        Paid-in
        Capital
    
    Unearned
        Compensation
    
    Accumulated
        Other
        Comprehensive
        Income
    
    Retained
        Earnings
    
    TotalBalances,
        December 31, 2000
    
    $
    938
    
    
    37,827
    
    
    (105
    )
    
    
    968
    
    
    
    132,899
    
    
    172,527Net
        income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,930
    
    
    2,930Cumulative
        effect of accounting change (Note 2)
    
    
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    124Compensation
        earned on issuance of stock options
    
    
    
    
    
    
    
    
    105
    
    
    
    
    
    
    
    
    
    
    105Unrealized
        gain on debt and equity securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    778
    
    
    
    
    
    
    778Unrealized
        loss on derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    (1,896
    )
    
    
    
    
    
    (1,896
    )Repurchase
        of shares, net
    
    
    (4
    )
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    6Balances,
        December 31, 2001
    
    
    934
    
    
    37,837
    
    
    
    
    
    
    (26
    )
    
    
    135,829
    
    
    174,574Net
        loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14,702
    )
    
    (14,702
    )Unrealized
        gain on debt and equity securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    5,565
    
    
    
    
    
    
    5,565Unrealized
        loss on derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    (270
    )
    
    
    
    
    
    (270
    )Amortization
        of unrealized loss on derivative financial instrument
    
    
    
    
    
    
    
    
    
    
    
    
    256
    
    
    
    
    
    
    256Issuance
        of shares
    
    
    5
    
    
    433
    
    
    
    
    
    
    
    
    
    
    
    
    
    438Income
        tax reductions relating to exercise of stock options
    
    
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    
    
    52Balances,
        December 31, 2002
    
    
    939
    
    
    38,322
    
    
    
    
    
    
    5,525
    
    
    
    121,127
    
    
    165,913Net
        income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,572
    
    
    16,572Minimum
        pension liability adjustment, net
    
    
    
    
    
    
    
    
    
    
    
    
    (140
    )
    
    
    
    
    
    (140
    )Unrealized
        loss on debt and equity securities, net
    
    
    
    
    
    
    
    
    
    
    
    
    (2,835
    )
    
    
    
    
    
    (2,835
    )Unrealized
        gain on derivative financial instruments, net
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    
    
    
    486Settlement
        of derivative financial instrument, net
    
    
    
    
    
    
    
    
    
    
    
    
    1,532
    
    
    
    
    
    
    1,532Amortization
        of unrealized loss on derivative financial instrument
    
    
    
    
    
    
    
    
    
    
    
    
    (292
    )
    
    
    
    
    
    (292
    )Issuance
        of shares
    
    
    38
    
    
    4,385
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,423Income
        tax reductions relating to exercise of stock options
    
    
    
    
    
    998
    
    
    
    
    
    
    
    
    
    
    
    
    
    998Balances,
        December 31, 2003
    
    $
    977
    
    
    43,705
    
    
    
    
    
    
    4,276
    
    
    
    137,699
    
    
    186,657The accompanying notes are an integral part of the consolidated
financial statements.
53
FPIC INSURANCE GROUP, INC.Consolidated Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003
  
  2002
  
  2001Cash flows
  from operating activities:Net income (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Adjustments to reconcile net income (loss) to cash provided by
  operating activities:Cumulative effect of accounting change, net of deferred tax benefit
  
  
  
  
  
  29,578
  
  
  124Depreciation, amortization and accretion
  
  
  3,383
  
  
  7,960
  
  
  14,398Net realized gain on sale of investments
  
  
  (2,052
  )
  
  (4,688
  )
  
  (1,429
  )Realized loss (gain) on sale of property and equipment
  
  
  135
  
  
  93
  
  
  (17
  )Net (gain) loss from equity investments
  
  
  (59
  )
  
  110
  
  
  511Bad debt expense
  
  
  95
  
  
  668
  
  
  191Deferred income tax expense (benefit)
  
  
  385
  
  
  844
  
  
  (973
  )Noncash compensation
  
  
  
  
  
  
  
  
  105Other changes in assets and liabilities:Premiums receivable, net
  
  
  7,136
  
  
  (35,800
  )
  
  (37,073
  )Accrued investment income
  
  
  (155
  )
  
  (1,393
  )
  
  1,327Reinsurance recoverable on paid losses
  
  
  (9,421
  )
  
  776
  
  
  614Due from reinsurers on unpaid losses and advance premiums
  
  
  (107,607
  )
  
  (87,749
  )
  
  (22,712
  )Ceded unearned premiums
  
  
  7,454
  
  
  (38,095
  )
  
  (30,687
  )Deferred policy acquisition costs
  
  
  (7,764
  )
  
  (5,403
  )
  
  (12,292
  )Prepaid expenses
  
  
  (3,619
  )
  
  (80
  )
  
  (2
  )Federal income taxes
  
  
  (1,302
  )
  
  5,443
  
  
  3,246Other assets
  
  
  (102
  )
  
  (3,155
  )
  
  (2,698
  )Losses and loss adjustment expenses
  
  
  134,363
  
  
  121,683
  
  
  37,188Unearned premiums
  
  
  4,014
  
  
  26,660
  
  
  46,695Reinsurance payable
  
  
  41,612
  
  
  69,781
  
  
  20,171Paid in advance and unprocessed premiums
  
  
  (2,294
  )
  
  4,118
  
  
  3,796Deferred ceding commission
  
  
  7,717
  
  
  10,691
  
  
  Accrued expenses and other liabilities
  
  
  1,439
  
  
  10,786
  
  
  9,829Net cash provided by operating activities
  
  
  89,930
  
  
  98,126
  
  
  33,242Cash flows
  from investing activities:Proceeds from sale or maturity of bonds and U.S. Government
  securities
  
  
  607,201
  
  
  313,313
  
  
  221,596Purchase of bonds and U.S. Government securities
  
  
  (696,418
  )
  
  (395,070
  )
  
  (182,930
  )Proceeds from sale of equity securities
  
  
  
  
  
  
  
  
  566Purchase of equity securities
  
  
  
  
  
  
  
  
  (53
  )Proceeds from sale of other invested assets
  
  
  2,598
  
  
  2,682
  
  
  477Purchase of other invested assets
  
  
  (1,083
  )
  
  (48
  )
  
  Proceeds from sale of real estate investments
  
  
  291
  
  
  
  
  
  Purchase of real estate investments
  
  
  (220
  )
  
  (385
  )
  
  (112
  )Proceeds from sale of property and equipment
  
  
  3
  
  
  22
  
  
  165Purchase of property and equipment
  
  
  (3,498
  )
  
  (1,876
  )
  
  (2,527
  )Net cash (used in) provided by investing activities
  
  $
  (91,126
  )
  
  (81,362
  )
  
  37,182Continued.
The accompanying notes are an integral part of the consolidated
financial statements.
54
FPIC INSURANCE GROUP, INC.Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003
  
  2002
  
  2001Cash flows
  from financing activities:Receipt of proceeds from issuance of long term debt
  
  $
  46,083
  
  
  
  
  
  Receipt of proceeds from revolving credit facility and term loan
  
  
  
  
  
  
  
  
  54,500Payment on revolving credit facility and term loan
  
  
  (47,208
  )
  
  (5,833
  )
  
  (68,677
  )Purchase of derivative financial instruments
  
  
  (1,134
  )
  
  
  
  
  Settlement of derivative financial instruments
  
  
  (2,493
  )
  
  
  
  
  Issuance of common stock
  
  
  4,423
  
  
  438
  
  
  238Buyback of common stock
  
  
  
  
  
  
  
  
  (232
  )Net cash used in financing activities
  
  
  (329
  )
  
  (5,395
  )
  
  (14,171
  )Net (decrease) increase in cash and cash equivalents
  
  
  (1,525
  )
  
  11,369
  
  
  56,253Cash and cash equivalents at beginning of period
  
  
  86,589
  
  
  75,220
  
  
  18,967Cash and cash equivalents at end of period
  
  $
  85,064
  
  
  86,589
  
  
  75,220Supplemental
  disclosure of cash flow activities:Interest paid on debt
  
  $
  3,363
  
  
  4,718
  
  
  4,190Federal income taxes paid
  
  $
  9,450
  
  
  6,293
  
  
  540Federal income tax refunds received
  
  $
  346
  
  
  4,958
  
  
  3,300The accompanying notes are an integral part of the consolidated
financial statements.
55
FPIC Insurance Group, Inc.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 (FPIC,
        the holding company, is also grouped within the insurance segment.):Insurance
    
    
    First Professionals
    The Tenere Group, Inc.
        (Tenere)
    Intermed Insurance
        Company (Intermed)
    Interlex Insurance
        Company (Interlex)
    Insurance Services,
        Inc.
    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.
    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.Reciprocal
    
    FPIC subsidiaries:Management
    
    
    Administrators For
        The Professions, Inc. (AFP)
    FPIC Intermediaries,
        Inc. (FPIC Intermediaries)
    Group Data Corporation
    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.)
    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.TPA
    
    FPIC subsidiaries:
    EMI
    Professional Strategy
        Options, Inc.
    FPIC Services, Inc.56
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
The
main sources of revenue for FPIC are dividends, return of capital 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 reduce revenues or 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 reduce revenues or create costs for FPIC as compared with
those currently reflected in the consolidated financial statements.  This risk is concentrated in Florida,
Missouri and New York, where FPIC has written or assumed most 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.
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 and such differences
could be material.
57
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
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 an original maturity of three months
or less when acquired.
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 and reported
at estimated fair values on the consolidated statements of financial position,
with the change in fair values during the period excluded from earnings and
recorded net of tax as a component of other comprehensive income. Fair values
for debt and marketable equity securities are based on quoted market prices.
Other invested assets include investments in three limited partnerships
and a non-controlling interest in a corporation.  The carrying values for these investments approximate their fair
values.  In addition, other invested
assets include investments in three wholly owned trusts established for the
sole purpose of issuing trust-preferred securities in three separate private
offerings.  The proceeds received by the
trusts were used to purchase junior subordinated debentures from FPIC as
discussed in Note 13, Long Term Debt, Revolving Credit Facility and Term Loan.
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.
Real estate investments consist of a building, a condominium unit 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 ceded 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.
58
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
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 our
insurers from their 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, funds withheld or trust accounts
for amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the domiciliary Departments of Insurance.
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.

59
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

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 $29,578 net of an $18,784 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 Note 9, Goodwill and Note 10, Intangible Assets for a discussion of
goodwill and intangible assets.
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 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 a 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.

60
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

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.

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 (DD&R reserves).  These DD&R reserves, 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.
The liabilities for losses and LAE, DD&R reserves, 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 could be material.
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.In
December 2002, the Financial Accounting Standards Board (FASB) issued FAS
148, Accounting for Stock-Based Compensation, Transition and Disclosure to
provide transition guidance for a voluntary change to the fair value based
method of accounting for stock-based employee compensation and to amend the
disclosure requirements of FAS 123 Accounting for Stock-Based Compensation
for both annual and interim financial statements.  FAS 148 requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee compensation
be displayed more prominently and in a tabular format.  The transition and annual disclosure
requirements of FAS 148 were effective for fiscal years ended after
December 15, 2002.  The interim
disclosure requirements of FAS 148 are effective for interim periods beginning
after December 15, 2002.  The
adoption of the provisions of FAS 148 did not have an impact on FPICs consolidated
financial statements; however, we have modified the disclosures as provided for
in the new standard.
FPIC elected to adopt FAS 123 on a disclosure basis only and measure
stock-based compensation in accordance with Accounting Principles Board 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 FAS 148.  In accordance with APB
25 and related interpretations, compensation expense for stock options is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock.  Generally, the exercise price for stock options granted to an
employee equals the fair market value of FPIC common stock at the date of
grant, thereby resulting in no recognition of compensation expense.  For awards that generate compensation expense
as defined under APB 25, FPIC calculates the amount of compensation expense and
recognizes the expense over the vesting period of the award.
61
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
Had compensation cost for FPICs stock option plans been determined
based on the fair value method set forth in FAS 123, FPICs net income (loss)
and basic and diluted earnings (loss) per common share would have been impacted
as follows for the years ended December 31, 2003, 2002 and 2001:
2003
  
  2002
  
  2001Pro forma net income (loss):Net income
  (loss), as reported
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Stock-based
  compensation expense determined under fair value based method, net of income
  taxes
  
  
  (1,060
  )
  
  (1,053
  )
  
  (1,031
  )Pro forma
  net income (loss)
  
  $
  15,512
  
  
  (15,755
  )
  
  1,899Basic earnings (loss) per common share:Net income
  (loss), as reported
  
  $
  1.75
  
  
  (1.57
  )
  
  0.31Stock-based
  compensation expense determined under fair value based method, net of income
  taxes
  
  
  (0.11
  )
  
  (0.11
  )
  
  (0.11
  )Pro forma
  net income (loss)
  
  $
  1.64
  
  
  (1.68
  )
  
  0.20Diluted earnings (loss) per common share:Net income
  (loss), as reported
  
  $
  1.71
  
  
  (1.56
  )
  
  0.31Stock-based
  compensation expense determined under fair value based method, net of income
  taxes
  
  
  (0.11
  )
  
  (0.11
  )
  
  (0.11
  )Pro forma
  net income (loss)
  
  $
  1.60
  
  
  (1.67
  )
  
  0.20See Note 18, Stock Options and
Employee Stock Purchase Plans, for discussion about the methods and assumptions used in
estimating the fair value of stock options used in preparation of the pro-forma
information presented in the above tabular presentation.

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 Collars and Swaps.We
account for our interest rate collars and 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 and FAS 149, Amendment of Statement 133 on Derivative Instruments
and Hedging Activities. FPIC uses derivative financial instruments to manage
market risks related to the effects of changes in interest rates on its
floating rate long-term debt.  The cost
of these contracts is being amortized over their respective maturities.  In addition, the remaining balances are
adjusted and carried at their estimated fair values, with the changes therein
reported as unrealized gains or losses in other comprehensive income.  The differential, if any, 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 14 for additional information related to the interest rate
collars and swaps.  FPIC does not
currently hold and has not issued any other derivative financial instruments.
Reclassification.
Certain amounts for 2002 and 2001 have been reclassified to conform to the 2003
presentation.
62
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
New Accounting Pronouncements.
In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities.  FAS 149  (1) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of FAS 133,  (2) clarifies when a derivative contains a
financing component, (3) amends the definition of an underlying derivative to
conform it to language used in FASB Interpretation 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
and (4) amends certain other existing pronouncements.  Those changes will result in more consistent reporting of
contracts as either derivative or hybrid instruments.   FAS 149 is effective for contracts and hedging relationships
entered into or modified after June 30, 2003, with certain exceptions.  All provisions of FAS 149 should be applied
prospectively.   We have reviewed FAS
149 and complied with the reporting requirements therein. Adopting the
provisions of FAS 149 did not have a significant impact on our consolidated
financial statements.
In May 2003, the FASB issued FAS 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity.  FAS 150 establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity.  It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in
some circumstances) because that financial instrument embodies an obligation of
the issuer.  The issuer will be required
to classify as liabilities three types of freestanding financial instruments,
which are: mandatory redeemable financial instruments, obligations to
repurchase the issuers equity shares by transferring assets, and certain
obligations to issue a variable number of shares.  FAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003.  We have reviewed FAS 150 and complied with the reporting
requirements therein.   Adopting the
provisions of FAS 150 did not have a significant impact on our consolidated
financial statements.
In December 2003, the FASB issued Revised FASB Interpretation No. 46
(FIN 46R or the Interpretation), Consolidation of Variable Interest Entities,
an Interpretation of Accounting Research Bulletin (ARB) No. 51. The primary
objective of the Interpretation is to provide guidance on the identification
of, and financial reporting for, entities over which control is achieved
through means other than voting rights; such entities are known as
variable-interest entities (VIEs). FIN 46R is the guidance that determines (1)
whether consolidation is required under the controlling financial interest
model of ARB No. 51, Consolidated Financial Statements, or (b) other existing
authoritative guidance, or, alternatively, (2) whether the variable-interest
model under FIN 46R should be used to account for existing and new entities.   We have adopted FIN 46R.  The result of adoption was the
deconsolidation of the three trusts that we created during 2003
in connection with the issuance of trust preferred securities.  This resulted in offsetting increases in
other assets and long term debt by approximately $1,083.
3. 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. 
Quoted market prices are used where available.  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.
63
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
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.
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 prices from a third
  party institution providing administrative services for investments.
  Other
  invested assets  Carrying value approximates the fair value.
  Interest
  rate collars  Fair value was estimated using quotes from an institutional
  broker and represents the cash requirement if the existing agreement had been
  settled at year-end.
  Long term
  debt  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 an institutional
  broker and represents the cash requirement if the existing agreement had been
  settled at year-end.The following table presents the carrying
values and estimated fair values of FPICs financial instruments as of December
31, 2003 and 2002.
December
  31, 2003
  
  December
  31, 2002Carrying
  Value
  
  Estimated
  Fair Value
  
  Carrying
  Value
  
  Estimated
  Fair ValueFinancial
  assetsCash and cash equivalents
  
  $
  85,064
  
  
  85,064
  
  
  86,589
  
  
  86,589Bonds
  
  
  528,647
  
  
  528,647
  
  
  436,970
  
  
  436,970Equity securities
  
  
  9
  
  
  9
  
  
  6
  
  
  6Other invested assets
  
  
  4,774
  
  
  4,774
  
  
  10,801
  
  
  10,801Interest rate collars
  
  
  1,051
  
  
  1,051
  
  
  
  
  
  Total financial assets
  
  $
  619,545
  
  
  619,545
  
  
  534,366
  
  
  534,366Financial
  liabilitiesLong term debt
  
  $
  46,083
  
  
  46,083
  
  
  
  
  
  Revolving credit facility
  
  
  
  
  
  
  
  
  37,000
  
  
  37,000Term loan
  
  
  
  
  
  
  
  
  10,208
  
  
  10,208Interest rate swaps
  
  
  
  
  
  
  
  
  3,383
  
  
  3,383Total financial liabilities
  
  $
  46,083
  
  
  46,083
  
  
  50,591
  
  
  50,59164
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
4. Investments
The amortized cost and estimated fair value of investments in debt and
equity securities as of December 31, 2003 and 2002 were as follows:
2003
  
  Amortized
  Cost
  
  Gross
  Unrealized
  Gains
  
  Gross
  Unrealized
  Losses
  
  Fair
  ValueBondsCorporate securities
  
  $
  154,533
  
  
  3,305
  
  
  1,159
  
  
  156,679United States Government agencies and authorities
  
  
  147,531
  
  
  2,291
  
  
  1,058
  
  
  148,764States, municipalities and political subdivisions
  
  
  108,719
  
  
  2,714
  
  
  284
  
  
  111,149Mortgage-backed securities
  
  
  111,369
  
  
  1,142
  
  
  456
  
  
  112,055Total bonds
  
  
  522,152
  
  
  9,452
  
  
  2,957
  
  
  528,647Equity
  securitiesCommon stocks
  
  
  7
  
  
  2
  
  
  
  
  
  9Total equity securities
  
  
  7
  
  
  2
  
  
  
  
  
  9Total
  securities available-for-sale
  
  $
  522,159
  
  
  9,454
  
  
  2,957
  
  
  528,6562002
  
  Amortized
  Cost
  
  Gross
  Unrealized
  Gains
  
  Gross
  Unrealized
  Losses
  
  Fair
  ValueBondsCorporate securities
  
  $
  166,161
  
  
  5,722
  
  
  894
  
  
  170,989United States Government agencies and authorities
  
  
  104,604
  
  
  3,196
  
  
  50
  
  
  107,750States, municipalities and political subdivisions
  
  
  86,849
  
  
  2,746
  
  
  497
  
  
  89,098Mortgage-backed securities
  
  
  67,563
  
  
  1,647
  
  
  77
  
  
  69,133Total bonds
  
  
  425,177
  
  
  13,311
  
  
  1,518
  
  
  436,970Equity
  securitiesCommon stocks
  
  
  7
  
  
  
  
  
  1
  
  
  6Total equity securities
  
  
  7
  
  
  
  
  
  1
  
  
  6Total
  securities available-for-sale
  
  $
  425,184
  
  
  13,311
  
  
  1,519
  
  
  436,976The amortized cost and estimated fair value of debt securities at
December 31, 2003 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
  ValueDue in one
  year or less
  
  $
  14,928
  
  
  15,036Due after
  one year through five years
  
  
  133,305
  
  
  136,199Due after
  five years through ten years
  
  
  183,665
  
  
  184,850Due after
  ten years
  
  
  78,885
  
  
  80,507410,783
  
  
  416,592Mortgage-backed
  securities
  
  
  111,369
  
  
  112,055$
  522,152
  
  
  528,64765
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
As of December 31, 2003, investments in
securities and cash with an amortized cost of $15,836 and a market value of
$16,354 were on deposit with the insurance departments in various states as
required by law.  Investments in
securities and cash with an amortized cost of $135,639 and a market value of
$136,851 were held in trusts 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, 2003, 2002
and 2001 was as follows:
2003
  
  2002
  
  2001Bonds
  
  $
  19,083
  
  
  20,714
  
  
  21,722Equity
  securities
  
  
  
  
  
  
  
  
  6Real estate
  
  
  540
  
  
  534
  
  
  772Short-term
  investments
  
  
  409
  
  
  805
  
  
  1,407Other
  invested assets
  
  
  129
  
  
  102
  
  
  (138
  )Cash on hand
  and on deposit
  
  
  204
  
  
  416
  
  
  75220,365
  
  
  22,571
  
  
  24,521Less:
  investment expense
  
  
  (1,951
  )
  
  (1,594
  )
  
  (1,144
  )Net investment income
  
  $
  18,414
  
  
  20,977
  
  
  23,377Proceeds from sales and maturities of bonds were $607,201, $313,313 and
$221,596, for the years ended December 31, 2003, 2002 and 2001,
respectively.  Proceeds from sales of
equity securities were $566 for the year ended December 31, 2001.  Gross gains of $11,211, $8,769 and $4,530
were realized on sales of debt and equity securities for the years ended
December 31, 2003, 2002 and 2001, respectively.  Gross losses of $4,059, $4,092 and $3,101 were realized on sales
of debt and equity securities for the years ended December 31, 2003, 2002
and 2001, respectively. Included in net realized investment gains for the year
ended December 31, 2002 is a gain of $37 recognized on the sale of one of our limited
partnerships and a loss of $27 on the sale of another of our invested
assets.
Also included in 2003 net realized gains and losses were charges of
$5,301 for other-than-temporary impairments (OTTI) of two private equity
holdings and gains of $201 on the sale of real estate.  Included in the OTTI charge was $4,539
related to our investment in American Professional Assurance, Ltd.
(APAL).  Plans were put into place
during the second quarter of 2003 to transition management of our APAC
insurance operations to First Professionals and to non-renew our existing
management agreement with APA Management, Inc. 
(APAM) and our 25% quota share reinsurance agreements with APAL
effective December 31, 2003.  The 25%
quota share reinsurance agreements with APAL comprise a significant component
of its revenues.  In addition to this
anticipated decline in future revenues, APAL reported net losses and declines
in shareholders equity in its most recent financial statements provided to
FPIC during the second quarter of 2003.
At December 31, 2003, FPICs other invested assets included investments
in three limited partnerships and one private corporation.  These assets were recorded at an aggregate
value of $3,692 and $8,782 at December 31, 2003 and 2002, respectively.  FPIC sold its investment in APS Insurance
Services, Inc. (APS)  for a total
consideration of $2,050 during the fourth quarter of 2003.  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, a private investment, Renaissance LLP, and recorded a note receivable in
the amount $2,037, all of which has been collected in 2003.
66
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
5. Real Estate Investments
At December 31, 2003 and 2002, real estate investments consisted of the
following:
2003
  
  2002Land and
  building
  
  $
  5,887
  
  
  5,667Condominium
  unit
  
  
  131
  
  
  261Other
  
  
  38
  
  
  386,056
  
  
  5,966Less:
  accumulated depreciation
  
  
  (1,849
  )
  
  (1,612
  )Net real estate investments
  
  $
  4,207
  
  
  4,354Total depreciation expense on real estate investments was $277, $286
and $256 in 2003, 2002 and 2001, respectively.
6. Property and Equipment
At December 31, 2003 and 2002, property and equipment consisted of the
following:
2003
  
  2002Furniture,
  fixtures and equipment
  
  $
  3,428
  
  
  3,333Data
  processing equipment and software
  
  
  10,727
  
  
  8,393Leasehold
  improvements
  
  
  1,573
  
  
  1,351Automobiles
  
  
  304
  
  
  25116,032
  
  
  13,328Less:
  accumulated depreciation
  
  
  (10,784
  )
  
  (8,994
  )Net property and equipment
  
  $
  5,248
  
  
  4,334Total depreciation expense on property and equipment was $2,448, $2,154
and $1,930 in 2003, 2002 and 2001, respectively.
7. Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs
for the years ended December 31, 2003, 2002 and 2001 were as follows:
2003
  
  2002
  
  2001Beginning
  balance
  
  $
  4,452
  
  
  9,001
  
  
  5,967Additions
  
  
  7,765
  
  
  6,707
  
  
  12,293Amortization
  expense
  
  
  (6,008
  )
  
  (9,952
  )
  
  (9,259
  )Other
  reduction
  
  
  
  
  
  (1,304
  )
  
  Ending balance
  
  $
  6,209
  
  
  4,452
  
  
  9,001During 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 $1,304.
67
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
8. Income Taxes
FPICs provision for income taxes for 2003, 2002 and 2001 consisted of
the following:
2003
  
  2002
  
  2001Current
  expense (benefit)Federal
  
  $
  7,538
  
  
  6,605
  
  
  (1,205
  )State
  
  
  1,394
  
  
  1,385
  
  
  334Total
  
  
  8,932
  
  
  7,990
  
  
  (871
  )Deferred
  expense (benefit)Federal
  
  
  (11
  )
  
  767
  
  
  (1,149
  )State
  
  
  396
  
  
  77
  
  
  176Total
  
  
  385
  
  
  844
  
  
  (973
  )Net income
  tax expense (benefit)
  
  $
  9,317
  
  
  8,834
  
  
  (1,844
  )The provision for income taxes differs from
the statutory corporate tax rate of 35% for 2003, 2002 and 2001 as follows:
2003
  
  2002
  
  2001Computed
  expected tax expense (benefit)
  
  $
  9,061
  
  
  8,298
  
  
  380Municipal
  bond interest
  
  
  (1,130
  )
  
  (1,309
  )
  
  (2,416
  )State income
  taxes, net of Federal benefit
  
  
  1,164
  
  
  950
  
  
  332Prior year
  adjustments upon IRS examination
  
  
  
  
  
  544
  
  
  Other, net
  
  
  222
  
  
  351
  
  
  (140
  )Actual income tax expense (benefit)
  
  $
  9,317
  
  
  8,834
  
  
  (1,844
  )68
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
At December 31, 2003 and 2002, the significant components of the net
deferred tax asset were as follows:
2003
  
  2002Deferred tax
  assets arising from:Goodwill and intangible assets
  
  $
  14,321
  
  
  15,231Loss reserve discounting
  
  
  12,252
  
  
  9,399Unearned premium reserves
  
  
  7,558
  
  
  9,044Net operating loss carry forward
  
  
  2,149
  
  
  2,221Deferred ceding commission
  
  
  1,206
  
  
  1,801Unrealized losses on securities
  
  
  
  
  
  2,069Realized loss on securities
  
  
  1,751
  
  
  Benefit plans
  
  
  1,096
  
  
  1,188Other
  
  
  358
  
  
  1,251Total deferred tax assets
  
  
  40,691
  
  
  42,204Deferred tax
  liabilitites arising from:Unrealized gains on securities
  
  
  2,470
  
  
  4,413Deferred policy acquisition costs
  
  
  2,464
  
  
  2,626Other
  
  
  938
  
  
  512Total deferred tax liabilities
  
  
  5,872
  
  
  7,551Net deferred tax asset
  
  $
  34,819
  
  
  34,653Net 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.
FPIC has remaining net operating loss
carry forwards of approximately $6,140 as of December 31, 2003 that may be used
to offset taxable income in future years subject to an annual limitation
imposed by the Internal Revenue Code. 
These net operating loss carry forwards expire in the years 2018 and
2019.
FPIC is currently undergoing an audit of its tax returns by the
Internal Revenue Service (IRS) for the years ended December 31, 2000 and
2001.  Management believes that its
positions on issues raised in the examination thus far are meritorious and that
its current and deferred tax amounts are appropriate.  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.
During 2002, FPIC concluded examinations by the 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.

69
FPIC Insurance Group, Inc.Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
9. Goodwill
The changes in the carrying amount of
goodwill for the years ended December 31, 2003, 2002 and 2001 are as follows:
2003
    
    2002
    
    2001Beginning
        balance
    
    $
    18,870
    
    
    67,232
    
    
    70,754Transitional
        impairment charge under
        FAS 142
    
    
    
    
    
    (48,362
    )
    
    Amortization
        expense
    
    
    
    
    
    
    
    
    (3,522
    )Ending
        balance
    
    $
    18,870
    
    
    18,870
    
    
    67,232FPIC 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
conducted in the first quarter of 2002, 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 an 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, after 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:
Insurance
  
  Reciprocal
  Management
  
  Third
  PartyAdministration
  
  TotalBalance as
  of December 31, 2001
  
  $
  10,833
  
  
  
  49,140
  
  
  
  
  7,259
  
  
  
  67,232Impairment
  charge
  
  
  
  
  
  
  (41,103
  )
  
  
  
  (7,259
  )
  
  
  (48,362
  )Balance as
  of December 31, 2002
  
  $
  10,833
  
  
  
  8,037
  
  
  
  
  
  
  
  
  18,87070
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

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 2003, 2002 and 2001.
2003
  
  2002
  
  2001Net
  income (loss):Net income (loss), as
  reported
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Cumulative effect of
  accounting change
  
  
  
  
  
  29,578
  
  
  Net income, adjusted
  
  
  16,572
  
  
  14,876
  
  
  2,930Goodwill amortization, net
  of tax
  
  
  
  
  
  
  
  
  2,157Net income, comparative
  
  $
  16,572
  
  
  14,876
  
  
  5,087Basic
  earnings (loss) per common share:Net income (loss), as
  reported
  
  $
  1.75
  
  
  (1.57
  )
  
  0.31Cumulative effect of
  accounting change
  
  
  
  
  
  3.15
  
  
  Net income, adjusted
  
  
  1.75
  
  
  1.58
  
  
  0.31Goodwill amortization, net
  of tax
  
  
  
  
  
  
  
  
  0.23Net income, comparative
  
  $
  1.75
  
  
  1.58
  
  
  0.54Diluted
  earnings (loss) per common share:Net income (loss), as
  reported
  
  $
  1.71
  
  
  (1.56
  )
  
  0.31Cumulative effect of
  accounting change
  
  
  
  
  
  3.14
  
  
  Net income, adjusted
  
  
  1.71
  
  
  1.58
  
  
  0.31Goodwill amortization, net
  of tax
  
  
  
  
  
  
  
  
  0.23Net income, comparative
  
  $
  1.71
  
  
  1.58
  
  
  0.54As required by FAS 142, we completed
annual impairment testing of our remaining goodwill as of December 31, 2003 and 2002
during the first quarters of 2004 and 2003, respectively, including obtaining reports from
independent valuation consultants. Based on the results of such testing, we determined
that the fair value of the goodwill exceeded the carrying value and that no impairment
exists.


71
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

10. Intangible Assets
At December 31, 2003, 2002 and 2001 identifiable intangible assets consisted
of the following:
As of
  December 31, 2003
  
  As of
  December 31, 2002
  
  As of
  December 31, 2001Gross
  Balance
  
  Accumulated
  Amortization
  
  Gross
  Balance
  
  Accumulated
  Amortization
  
  Gross
  Balance
  
  Accumulated
  AmortizationTrade secrets
  
  $
  1,500
  
  
  825
  
  
  
  1,500
  
  
  
  675
  
  
  
  1,500
  
  
  
  525Non-compete agreements
  
  
  500
  
  
  393
  
  
  
  500
  
  
  
  321
  
  
  
  500
  
  
  
  250Other
  
  
  305
  
  
  305
  
  
  
  305
  
  
  
  275
  
  
  
  305
  
  
  
  213Total
  
  $
  2,305
  
  
  1,523
  
  
  
  2,305
  
  
  
  1,271
  
  
  
  2,305
  
  
  
  988Aggregate amortization
  expense:2001
  
  $
  2822002
  
  $
  2832003
  
  $
  252Estimated amortization
  expense:2004
  
  $
  2212005
  
  $
  1862006
  
  $
  1502007
  
  $
  1502008
  
  $
  7511. Liability
for Losses and LAE
Activity in the liability for losses and LAE for the years ended December
31, 2003, 2002 and 2001 was as follows:
2003
  
  2002
  
  2001Gross balance, January 1
  
  $
  440,166
  
  
  318,483
  
  
  281,295Less reinsurance
  recoverables
  
  
  168,159
  
  
  80,410
  
  
  57,698Net balance, January 1
  
  
  272,007
  
  
  238,073
  
  
  223,597Incurred related to:Current year
  
  
  118,492
  
  
  137,155
  
  
  119,734Prior years
  
  
  482
  
  
  2,416
  
  
  8,612Total incurred
  
  
  118,974
  
  
  139,571
  
  
  128,346Paid related to:Current year
  
  
  13,455
  
  
  9,130
  
  
  17,980Prior years
  
  
  101,989
  
  
  96,507
  
  
  95,890Total paid
  
  
  115,444
  
  
  105,637
  
  
  113,870Gerling commutation
  
  
  23,226
  
  
  
  
  
  Net balance, December 31
  
  
  298,763
  
  
  272,007
  
  
  238,073Plus reinsurance
  recoverables
  
  
  275,766
  
  
  168,159
  
  
  80,410Gross balance, December 31
  
  $
  574,529
  
  
  440,166
  
  
  318,483Incurred
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.

72
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

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 2001.
Refer to Note 12, Reinsurance for information regarding the Gerling
commutation.
12. Reinsurance
FPIC cedes business 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
2003 and 2002, FPIC reinsured under its primary 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 was ceded to APAL, a Cayman Island
insurance company of which FPIC owns 9.8%.)  
In 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 program included an annual aggregate deductible, which was 10.73% of
subject written premium or approximately $12.9 million.

The effect of reinsurance
on premiums written and earned and losses and LAE incurred for the years ended
December 31, 2003, 2002 and 2001, was as follows:
2003
    
    2002
    
    2001Written
    
    Earned
    
    Written
    
    Earned
    
    Written
    
    EarnedDirect
        and assumed premiums
    
    $
    340,741
    
    
    336,727
    
    
    344,727
    
    
    318,068
    
    
    245,403
    
    
    198,691Ceded
        premiums
    
    
    (197,607
    )
    
    (205,062
    )
    
    (204,479
    )
    
    (166,384
    )
    
    (98,319
    )
    
    (67,633
    )Net
        premiums
    
    $
    143,134
    
    
    131,665
    
    
    140,248
    
    
    151,684
    
    
    147,084
    
    
    131,0582003
    
    2002
    
    2001Losses and LAE incurred
    $
    323,141
    
    
    253,015
    
    
    180,086Reinsurance
      recoveries
    $
    (204,167
    )
    
    (113,444
    )
    
    (51,740
    )Net losses
      and LAE incurred
    $
    118,974
    
    
    139,571
    
    
    128,346Net Account Quota Share Reinsurance
Effective July 1, 2002, our largest insurance subsidiary, First
Professionals, entered into a net account quota share 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 written premiums, contains adjustable
features, including sliding scale ceding commissions and a cap on the amount of
losses that may be ceded to the reinsurer. 
The original agreement also contained a loss corridor on business ceded
through March 31, 2003, which was removed along with other modifications made
in connection with the amendment and extension of the agreement discussed
below.  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.

73
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(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 be paid to the reinsurers, would be retained by First
Professionals.  At December 31,
2003 and 2002, this charge would have been $7,131 and $3,592,
respectively.  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.
On May 6, 2003, we entered into an amendment to the Hannover Re
agreement that, effective April 1, 2003, extends its expiration date to include
policies written and renewed through December 31, 2004.  The agreement has also been amended to
remove the loss corridor on business written and ceded, beginning April 1,
2003, and to reduce the lower end of the sliding scale ceding commission range
from 27.5% to 20%.  A provision has also
been added that will allow First Professionals to reduce the quota share amount
of premiums to be ceded under the agreement in 2004.  Cancellation provisions have also been added; one that gives First
Professionals the option to cancel the agreement on or after January 1, 2004,
with 30 days notice, and one that gives Hannover Re the option to cancel the
agreement as of the effective date of any decrease in First Professionals base
rate for its MPL insurance policies that exceeds 5%.

Reinsurance Recoverable on Paid and Unpaid
Losses and LAE and Ceded Unearned Premiums
As of December 31, 2003, we had reinsurance recoverable on paid losses,
due from reinsurers on unpaid losses, and ceded unearned premiums in the amounts of
$15,950, $275,766 and $71,435, respectively, or $363,151, in aggregate.
The portion of our total aggregate reinsurance recoverables under the
excess of loss programs was $115,722 as of December 31, 2003.  Of this amount, $101,484, is due from
authorized reinsurers under applicable state insurance regulations, and thus,
we do not hold collateral for these recoverables.  For the amounts due from unauthorized reinsurers, we hold
collateral in the form of securities in trust, irrevocable letters of credit or
other funds held. Most of the excess of loss reinsurers are rated at least A-
by the A. M. Best and, in managements opinion these recoverables are fully
collectible or realizable.
Reinsurance recoverables under the Hannover Re agreement, totaled
$138,071, in aggregate, as of December 31, 2003.  The two companies with which we place this reinsurance are part
of the Hannover Ruckversicherungs Group, which is rated A by A. M. Best, but
these two subsidiaries are not authorized reinsurers under applicable state
insurance regulations.  Under the terms
of the agreement, we have funds withheld in the amount of $118,356.  In addition we hold irrevocable letters of
credit totaling $25,571 as collateral for these amounts.  Hannover Re also participates in our excess
of loss program.  We do not hold
collateral on balances due from the parent company because it is an authorized
reinsurer.
As of December 31, 2003, $90,169 of our aggregate reinsurance
recoverables are associated with program business under fronting agreements
with related parties and others.  Of
this amount, $40,330 is due from PRI, the New York insurance reciprocal managed
by our subsidiary, AFP, and for which we hold collateral of $40,578 in the form
of securities held in trust. 
Reinsurance recoverables of $25,804 are due from segregated portfolios
or cells of APAL (SPC) Ltd., a subsidiary of APAL, a Cayman Islands insurer in
which we have a 9.8% interest, and are collateralized by securities in trust,
an irrevocable letter of credit and other funds held totaling $28,018.
The remaining portion of our reinsurance recoverables as of December
31, 2003, $19,188, is due from APAL under a 25% quota share reinsurance
agreement we had, and is collateralized by securities in trust, an irrevocable
letter of credit and other funds held totaling $16,846.  Subsequent to year-end, $1,806 was collected
from APAL in cash on amounts due, reducing exposure in excess of collateral to $536.
We believe these amounts are recoverable.


74
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

For additional information on the above transactions that are with
related parties, refer to Note 22, Related Party Transactions, which is
presented below.


Commutation of Gerling Global Reinsurance
On November 25, 2003, FPIC received $23,500 in exchange
for commuting its reinsurance treaties with Gerling Global Reinsurance
Corporation of America (Gerling), one of its reinsurers.  The amount
collected includes payments for commutation of Gerlings quota share treaty for
facultative reinsurance coverage on non-standard risks, Gerlings portion of
the excess of loss reinsurance program and payments for estimated future claims
under the Gerling treaties.   Gerling participated in our excess of
loss reinsurance programs in 2000 at 15%, and in 2001 and 2002 at
20%.   We replaced Gerlings participation in our reinsurance
programs, effective with our renewal as of January 1, 2003.  No gain or
loss was recognized on the commutation transaction.  As a result of the
commutation, we have no reinsurance recoverable from Gerling as of December 31,
2003.

13. Long Term Debt, Revolving Credit Facility and Term Loan
Our outstanding debt, as of December 31, 2003 and 2002, consisted of
the following:
As
        of
        Dec 31, 2003
    
    As
        of
        Dec 31, 2002Junior
        subordinated debentures due May 15, 2033 (callable by FPICbeginning May 15,
        2008); uncollateralized and bearing floating rateinterest at three-month
        LIBOR plus 4.1% (5.28% at December 31, 2003).
    
    $
    15,464
    
    
    Junior
        subordinated debentures due May 23, 2033 (callable by FPIC beginning May 23,
        2008); uncollateralized and bearing floating rateinterest at three-month
        LIBOR plus 4.2% (5.37% at December 31, 2003).
    
    
    5,155
    
    
    Senior
        notes due May 23, 2033 (callable by FPIC beginning May 23, 2008);
        uncollateralized and bearing floating rate interest at three-month LIBOR
        plus 4.2% (5.37% at December 31, 2003).
    
    
    10,000
    
    
    Junior
        subordinated debentures due October 29, 2033 (callable by FPICbeginning
        October 29, 2008); uncollateralized and bearing floating rateinterest
        at three-month LIBOR plus 3.85% (5.01% at December 31, 2003).
    
    
    15,464Revolving
        credit and term loan agreement with five banks fully repaid November 10,
        2003; collateralized and bearing variable interest atthree-month LIBOR
        plus 3.00% at December 31, 2002 (6.25% atDecember 31, 2002; 4.38% at
        January 2, 2003).
    
    
    
    
    
    47,208Total
    
    $
    46,083
    
    
    47,208Long Term Debt
During 2003, we completed the placement of $10,000 in senior notes and
created three trusts that issued 30-year trust preferred securities for which
the proceeds
from such issuances together with
cash previously contributed to the trusts were used to purchase junior subordinated
debentures from FPIC totaling $36,083.
We used the proceeds
along with other internally generated funds to retire our bank term loan and
revolving credit facility, make a capital contribution to our insurance operations
and unwind hedge agreements related to the revolving credit facility and term
loan.

75
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

We established three wholly owned, but not consolidated, trusts, FPIC
Capital Trust I, FPIC Capital Statutory Trust II and FPIC Capital Statutory
Trust III, for the sole purpose of issuing the trust preferred securities.  The proceeds received by the three trusts
were used to purchase junior subordinated debentures from FPIC of the same
amounts, maturities and other applicable terms and features.  The debentures issued by FPIC, which are
reported as long term debt in the consolidated statements of financial
position, to the three trusts are subordinated to all senior indebtedness,
including the senior notes, and are equal in standing to one another.
The securities are uncollateralized and bear a floating interest rate
equal to the three-month LIBOR plus a spread ranging from 3.85% to 4.2% (the
total interest rates ranged from 5.01% to 5.37% as of December 31, 2003).  The floating interest rate will be
adjustable quarterly with changes in the three-month LIBOR, and in the case of
the first two offerings, the maximum rate that may be charged under the
securities within the first five years is 12.5%.  We have also purchased hedging instruments designed to maintain
the ultimate floating rate interest cost on all of these securities within a
stated range for five years from closing. 
We have the option to call the trust preferred securities at par or its
equivalent beginning five years from closing. 
The trust preferred securities also contain features that allow us the
option, under certain conditions, to defer interest payments for up to 20 quarters and to redeem the securities before the first
optional call date in five years.  In
the case of the potential earlier call date, the redemption or call price
payable by us may be different than par. 
The securities have stated maturities of thirty years and are due in May
and October 2033.

For additional information on FPICs hedging instruments and interest
costs, see the discussion below under Note 14, Derivative Financial
Instruments.
Issuance costs for all three offerings in the aggregate amount of
approximately $1,404 were capitalized and will be amortized over their
respective stated maturity periods of thirty years.


Indenture agreements, relating to
FPICs junior subordinated debentures and trust preferred securities contain
limitations, under certain circumstances, as to (i) the declaration or payment of
dividends, or distributions thereon, or the redemption, purchase, acquisition or
liquidation with respect to any capital stock of FPIC or its affiliates; (ii) the payment,
in certain circumstances, of principal of, premium or interest on, or the repayment,
repurchase or redemption of, debt securities of FPIC or its affiliates that rank in equal
standing with or are junior in interest to the debentures; or (iii) the payment, in
certain circumstances, under any guarantees of FPIC or its affiliates that rank equal in
standing with or junior in interest to capital securities guarantees relating to the
issuance of the debentures. Circumstances that would result in such limitations include a
continuing event of default, as defined by the indenture agreements, a default with
respect to payment of any obligations under capital securities guarantees, or a continuing
interest deferral election by FPIC.

Bank Credit Facility
On November 10, 2003, we repaid the remaining outstanding balance of
our revolving credit facility and retired the credit facility using the
proceeds of the third private placement offering and internally generated
funds, including proceeds from the sale of FPICs 20% interest in American
Physicians Insurance Services, Inc., a Texas corporation (APS).  We also used a portion of the proceeds to
unwind the remainder of the interest rate swap agreement used as a hedge for
the credit facilitys floating rate interest. 
A corresponding charge to interest expense of approximately $884 was recognized in the fourth quarter of 2003
for the termination of
the interest rate swap agreement.  With
the repayment and retirement of the credit facility, FPIC and its subsidiaries
have been released from the corresponding liens on their assets that served as
collateral under the credit facility and from their respective guarantee
agreements.  We are also no longer
subject to the credit facilitys covenants and restrictions.

76
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

14. Derivative
Financial Instruments
As of December 31, 2003, FPIC had four interest rate collars.  The collars are designed to maintain FPICs
ultimate floating rate interest costs on its trust preferred securities and
unsecured senior notes within a specified interest range for five years from
the closing date of those liabilities. 
The initial costs of the hedge instruments acquired for this purpose of
$1,134, in aggregate, have been capitalized and will be amortized over their
respective five year maturity periods.
The rate collars and terms as of December 31, 2003 are presented below
with their corresponding effects on the floating rate interest costs associated
with the trust preferred securities and senior notes.
Notional
        Amount
    
    Maturity
        Date
    
    LIBOR
        Floor (1)
    
    LIBOR
        Cap (1)
    
    Floor
        Rate
    
    Cap
        Rate$
    15,000
    
    
    5/15/2008
    
    
    1.20%
    
    
    4.40%
    
    
    5.30%
    
    
    8.50%$
    5,000
    
    
    5/23/2008
    
    
    1.20%
    
    
    4.40%
    
    
    5.40%
    
    
    8.60%$
    10,000
    
    
    5/23/2008
    
    
    1.20%
    
    
    4.40%
    
    
    5.40%
    
    
    8.60%$
    15,000
    
    
    10/29/2008
    
    
    1.00%
    
    
    4.65%
    
    
    4.85%
    
    
    8.50%(1) Based on three-month LIBOR

The following is a summary of FPICs interest risk management strategy
and the effect of this strategy on FPICs consolidated financial statements:
The interest rate collars were purchased to effectively place floors
and caps on the three-month LIBOR floating interest of approximately 1.0% to
1.20% and 4.40% to 4.65%, respectively, on notional principal corresponding
with the principal amounts of each offering, for 5 years.  These instruments will effectively serve to
hedge our total floating interest rate borrowing costs under the securities to
within a range of 4.85% to 8.6% for five years and until such time that we
have the right to call the securities.
Under the interest rate collars, when the three-month LIBOR interest
rate exceeds the specified cap rate or falls below the specified floor rate, we
receive or pay, respectively, the related cash flow equal to the difference in
percentage times the notional principal under the respective contracts.  The two portions of each contract working
together, therefore, form a hedge against the effects of a rising three-month
LIBOR rate above the cap or a falling three-month LIBOR rate below the
floor.  The notional amounts referenced
in the interest rate collars equal the related trust preferred securities or
senior notes, as applicable.  The
notional amounts of the contract are not exchanged.  Therefore, working together the excess of the interest expense on
our securities over the cap rate, or the shortfall in interest expense under
the floor, are offset by related receipts of excess interest under the caps, or
the payment of the interest shortfall below the floor, respectively.  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.
The interest rate collar instruments 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 had interest rate swap
agreements that provided a hedge against changes in the amount of cash flows associated
with the variable interest expense associated with its former revolving credit facility
and term loan. These were terminated in connection with the paydown and retirement of
FPICs bank credit facility. As a result, charges of $2,493 were recognized as
interest expense and the related unrealized loss of $1,532 after income taxes was
eliminated from accumulated other comprehensive income. The fair value of the interest
rate

77
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

swaps was a loss of $3,383 and $2,943 at December 31, 2002 and 2001, respectively,
which was reported within other liabilities in the statements of financial position.

FPIC formally documents the relationships between the hedging
instruments and the underlying long-term debt instruments.  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 years ended December 31, 2003 and
2002, the net gain or loss on the ineffective portion of the swap agreements
was not material.
15. Deferred
Credit
At December 31, 2003, 2002 and 2001, FPICs deferred
credit consisted of the following:
2003
  
  2002
  
  2001Beginning balance
  
  $
  8,749
  
  
  10,007
  
  
  11,484Amortization expense
  
  
  (1,020
  )
  
  (1,258
  )
  
  (1,477
  )Ending balance
  
  $
  7,729
  
  
  8,749
  
  
  10,007Effective 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).  The benefit assumptions equate to coverage
for MPL claims and the related losses and LAE that may be brought against an
insured in the future based on insured counts that might occur anytime while
the insured is a PRI policyholder.  It
is therefore subject to inherent uncertainties as are our loss and LAE reserves
over time.  The DD&R reserves and
the related estimation methods are continually reviewed and revised, if
necessary, to reflect current conditions and trends.  The resulting adjustments are reflected in current year net
income.  While management believes the
DD&R reserves are adequate to cover the ultimate liability, the actual ultimate
loss costs may vary from the amounts presently estimated and such differences
could be material.
For additional information regarding the 100% quota share agreement
with PRI, see Note 22, Related Party Transactions.
16. Commitments
and Contingencies
The future minimum annual rentals under non-cancelable operating leases
are as follows:
2004
  
  $
  2,6082005
  
  
  2,4982006
  
  
  2,1392007
  
  
  1,8872008
  
  
  1,835Thereafter
  
  
  1,660Total
  
  $
  12,627Total rental
expense was $2,636, $2,581 and $2,410 for 2003, 2002 and 2001, respectively.

78
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

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, 2003, 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 case
arising in 1993, no such coverage is available and an estimate of possible loss
above the amount currently reserved 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, 2003, 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 2003 and
2002.  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.


Management agreement
between AFP and PRI


The management agreement between AFP
and PRI was amended 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 $3,584 for the
three years ended December 31, 2001. As of December 31, 2003, and based on PRIs
operating results, no amounts were payable under this provision of the amended management
agreement. See Note 22, Related Party Transactions, to the consolidated financial
statements for additional information about the management agreement with PRI. Also, FPIC
has issued an irrevocable letter of credit in the amount of $500,000 as collateral under
the operating lease for the building occupied by AFP and PRI in Manhasset, New York.


79
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

17. Reconciliation
of Basic and Diluted Earnings Per Share
Data with respect to FPICs basic and diluted earnings per common share
are shown below:
2003
  
  2002
  
  2001Net
  income (loss):Income before cumulative
  effect of accounting change
  
  $
  16,572
  
  
  14,876
  
  
  2,930Cumulative effect of
  accounting change
  
  
  
  
  
  (29,578
  )
  
  Net income (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Basic
  earnings (loss) per common share:Income before cumulative
  effect of accounting change
  
  $
  1.75
  
  
  1.58
  
  
  0.31Cumulative effect of
  accounting change
  
  
  
  
  
  (3.15
  )
  
  Net income (loss)
  
  $
  1.75
  
  
  (1.57
  )
  
  0.31Diluted
  earnings (loss) per common share:Income before cumulative
  effect of accounting change
  
  $
  1.71
  
  
  1.58
  
  
  0.31Cumulative effect of
  accounting change
  
  
  
  
  
  (3.14
  )
  
  Net income (loss)
  
  $
  1.71
  
  
  (1.56
  )
  
  0.31Basic weighted average
  shares outstanding
  
  
  9,483
  
  
  9,387
  
  
  9,383Common stock equivalents
  
  
  182
  
  
  45
  
  
  85Diluted weighted average
  shares outstanding
  
  
  9,665
  
  
  9,432
  
  
  9,468Diluted 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.

18. Stock Option and Employee Stock
Purchase 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.

80
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)


At December 31, 2003 and 2002, 578,380 and 558,641 shares of FPICs
common stock, respectively were reserved for issuance in connection with the
stock option plans.  A summary of the
status of FPICs stock options is presented below:
Shares
  
  Weighted-
  Average
  Exercise Price
  
  Exercisable
  
  Weighted-
  Average
  Exercise PriceBalance, December 31, 2000
  
  
  1,547,283
  
  
  $
  18.55
  
  
  
  867,049
  
  
  $
  22.52Granted
  
  
  311,750
  
  
  
  13.75
  
  
  
  
  
  
  
  Exercised
  
  
  (13,000
  )
  
  
  8.90
  
  
  
  
  
  
  
  Forfeited
  
  
  (173
  )
  
  
  14.38
  
  
  
  
  
  
  
  Balance, December 31, 2001
  
  
  1,845,860
  
  
  $
  17.81
  
  
  
  1,131,918
  
  
  $
  20.65Granted
  
  
  327,500
  
  
  
  8.49
  
  
  
  
  
  
  
  Exercised
  
  
  (23,833
  )
  
  
  8.63
  
  
  
  
  
  
  
  Forfeited
  
  
  (138,665
  )
  
  
  19.91
  
  
  
  
  
  
  
  Balance, December 31, 2002
  
  
  2,010,862
  
  
  $
  16.25
  
  
  
  1,355,515
  
  
  $
  18.93Granted
  
  
  291,500
  
  
  
  20.70
  
  
  
  
  
  
  
  Exercised
  
  
  (355,295
  )
  
  
  11.93
  
  
  
  
  
  
  
  Forfeited
  
  
  (294,379
  )
  
  
  24.11
  
  
  
  
  
  
  
  Balance, December 31, 2003
  
  
  1,652,688
  
  
  $
  16.57
  
  
  
  1,091,624
  
  
  $
  17.10The following table summarizes information for options outstanding and
exercisable at December 31, 2003:
Options
  Outstanding
  
  Options
  ExercisableRange of
  Prices per
  Share
  
  Number
  Outstanding
  
  Weighted-
  Average Remaining
  Contractual Life
  
  Weighted-
  Average
  Exercise Price
  
  Number
  Exercisable
  
  Weighted-Average
  Exercise Price$
  0.00-6.99
  
  
  220,832
  
  
  
  8.7
  years
  
  
  
  $
  6.80
  
  
  
  
  67,512
  
  
  
  $
  6.80$
  7.00-13.99
  
  
  443,169
  
  
  
  6.1
  years
  
  
  
  $
  10.78
  
  
  
  
  366,501
  
  
  
  $
  10.45$
  14.00-20.99
  
  
  459,112
  
  
  
  6.3
  years
  
  
  
  $
  14.80
  
  
  
  
  354,536
  
  
  
  $
  14.92$
  21.00-27.99
  
  
  396,000
  
  
  
  7.2
  years
  
  
  
  $
  23.16
  
  
  
  
  169,500
  
  
  
  $
  23.30$
  28.00-34.99
  
  
  70,000
  
  
  
  3.6
  years
  
  
  
  $
  31.38
  
  
  
  
  70,000
  
  
  
  $
  31.38$
  35.00-48.99
  
  
  63,575
  
  
  
  3.5
  years
  
  
  
  $
  46.34
  
  
  
  
  63,575
  
  
  
  $
  46.341,652,688
  
  
  
  6.6
  years
  
  
  
  $
  16.57
  
  
  
  
  1,091,624
  
  
  
  $
  17.10The fair value of options granted,
which is amortized to expense over the option vesting period in determining the pro-forma
information presented in Note 2, Significant Accounting Policies, to the consolidated
financial statements about stock-based compensation, is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions:

2003
  
  2002
  
  2001Expected
  life of options
  
  
  5 years
  
  
  5 years
  
  
  5 yearsRisk free
  interest rate
  
  
  3.02
  %
  
  3.31
  %
  
  4.60
  %Expected
  volatility of stock
  
  
  53.02
  %
  
  50.41
  %
  
  43.64
  %81
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

The weighted
average fair value of options granted during 2003, 2002 and 2001 are as
follows:
2003
  
  2002
  
  2001Fair value
  of options granted
  
  $
  10.14
  
  
  4.03
  
  
  6.12Total fair
  value of all options granted
  
  $
  2,955
  
  
  1,319
  
  
  1,676Expected
  dividends
  
  $
  
  
  
  
  
  
  Total number
  of options granted
  
  
  291,500
  
  
  327,500
  
  
  311,750In 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 and directors 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 also benefit other stockholders.
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, 2003 and 2002, 26,860 and
11,279, respectively, shares of FPICs common Stock were reserved for issuance in connection
with this plan.

19. 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.
FPIC
  Defined
  contribution profit sharing planFPIC
  Defined
  benefit planFPIC
  Supplemental
  executive retirement plan (SERP)Tenere
  Defined
  contribution profit sharing plan and trustTenere
  Money
  purchase pension planAFP
  Defined
  contribution profit sharing planAFP
  Defined
  benefit planEMI
  Defined
  contribution profit sharing planThe FPIC
defined contribution profit sharing plan is available to all employees of FPIC
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, 2003 and 2002, the fair market value of defined contribution
profit sharing plan assets was $8,174 and $5,121, respectively.  The expense for this plan amounted to
$1,189, $990 and $1,138 in 2003, 2002 and 2001, respectively.
The FPIC defined benefit plan is available to all eligible employees of
FPIC 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, 2003 and 2002, the fair market value of defined benefit
plan assets was $3,281 and $1,651, respectively.  FPIC had a net periodic pension cost of $463, $277 and $217 for
this plan in 2003, 2002 and 2001, respectively.  The expense for this plan amounted to $1,275, $183 and $143 in
2003, 2002 and 2001, respectively.

82
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

FPIC 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 $1,961 and $1,541
as of December 31, 2003 and 2002, respectively.  FPIC had a net periodic pension cost of $192, $258 and $386 under
this plan in 2003, 2002 and 2001, respectively.  Assumptions used in the accounting for the SERP liability are as
follows:  mortality rates are based on
the 1983 group annuity mortality table; withdrawal rates are based on a table
showing the probability of terminating service for reasons other than death,
disability or retirement within one year after attaining certain ages;
disability rates are included in the withdrawal rates; retirement age is 65;
marital status assumes 100% of employees are married, with males three years
older than females; social security projection assumes wage base of 3% per
annum; inflation rates are assumed to be 3% annum, compounded annually.
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 a portion 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, 2003 and 2002, the fair
market value of plan assets was $881 and $773, respectively.  The expense for this plan amounted to $62,
$76 and $66 in 2003, 2002 and 2001, respectively.

The Tenere money purchase plan is available to all employees of Tenere
upon meeting certain eligibility requirements. 
The plan is designed to provide benefits based on length of 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, 2003
and 2002, the fair market value of plan assets was $290 and $358,
respectively.  The expense for this plan
amounted to $71, $94 and $94 in 2003, 2002 and 2001, 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 $2,035, $1,221
and $957 to the plans in 2003, 2002 and 2001, respectively.  The invested assets of the plans consist of
investments in various types and categories of stocks and bonds.  At December 31, 2003 and 2002, the fair
market value of plan assets was $8,852 and $6,732, respectively.  Pension costs for the years 2003, 2002 and
2001 amounted to $1,905, $1,255 and $978, 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, 2003 and
2002, the fair market value of plan assets was $2,653 and $2,167.  The expense for this plan amounted to $87,
$94 and $147, for 2003, 2002 and 2001, respectively.

83
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

The actuarially computed net periodic pension cost for our two defined
benefit plans and SERP combined for the years ending December 31, 2003, 2002 and
2001, included the following:
2003
  
  2002
  
  2001Service cost of benefits
  earned during the period
  
  $
  1,470
  
  
  1,081
  
  
  949Interest cost on projected
  benefit obligation
  
  
  1,035
  
  
  826
  
  
  725Expected return on plan
  assets
  
  
  (556
  )
  
  (548
  )
  
  (541
  )Recognized net actuarial
  loss
  
  
  47
  
  
  235
  
  
  Net amortization and
  deferral
  
  
  568
  
  
  196
  
  
  447Net periodic pension cost
  
  $
  2,564
  
  
  1,790
  
  
  1,580Actuarial
  Present Value of Benefit ObligationAccumulated benefit
  obligations
  
  $
  (10,485
  )
  
  (7,484
  )
  
  (5,977
  )Projected benefit
  obligations for service rendered to date
  
  $
  (20,234
  )
  
  (15,293
  )
  
  (12,105
  )Plan assets at fair value
  
  
  12,133
  
  
  8,383
  
  
  7,769Projected benefit
  obligations in excess of plan assets
  
  
  (8,101
  )
  
  (6,910
  )
  
  (4,336
  )Unrecognized net loss from
  past experience different from that assumed
  
  
  6,525
  
  
  4,302
  
  
  2,161Prior service cost not yet
  recognized in net periodic pension cost
  
  
  171
  
  
  235
  
  
  281Unrecognized net
  obligations at inception recognized over 15.29 years
  
  
  131
  
  
  169
  
  
  49Accrued pension cost
  
  $
  (1,274
  )
  
  (2,204
  )
  
  (1,845
  )The following tables set forth the status of our two defined benefit
plans and SERP combined for the years ending December 31, 2003 and 2002,
respectively.
2003
  
  2002Change
  in Benefit ObligationBenefit obligation,
  January 1
  
  $
  15,293
  
  
  12,105Service cost
  
  
  1,470
  
  
  1,081Interest cost
  
  
  1,035
  
  
  826Actuarial loss
  
  
  2,815
  
  
  1,361Benefits paid
  
  
  (379
  )
  
  (80
  )Benefit obligation,
  December 31
  
  $
  20,234
  
  
  15,293Change
  in Plan AssetsFair value of plan assets,
  January 1
  
  $
  8,383
  
  
  7,769Actual return on plan
  assets
  
  
  636
  
  
  (662
  )Employer contributions
  
  
  3,493
  
  
  1,363Benefits paid
  
  
  (379
  )
  
  (87
  )Fair value of plan assets,
  December 31
  
  $
  12,133
  
  
  8,38384
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

Assumptions
used in the accounting for the net periodic pension cost and plan status for
our two defined benefit plans and SERP combined for the years ended December
31, 2003, 2002 and 2001, were as follows:
2003
  
  2002
  
  2001Discount
  rates
  
  
  6.47
  %
  
  6.59
  %
  
  6.59
  %Rate of
  increase in compensation levels
  
  
  5.18
  %
  
  5.04
  %
  
  5.04
  %Return on
  assets
  
  
  7.10
  %
  
  6.76
  %
  
  7.07
  %Assumptions used in the accounting for the benefit obligation for our
two defined benefit plans and SERP combined for the years ended December 31,
2003, 2002 and 2001, were as follows:
2003
  
  2002
  
  2001Discount
  rates
  
  
  5.83
  %
  
  6.47
  %
  
  6.59
  %Rate of
  increase in compensation levels
  
  
  5.17
  %
  
  5.18
  %
  
  5.04
  %Return on
  assets
  
  
  7.14
  %
  
  6.70
  %
  
  6.76
  %Both FPIC and
AFP maintain a diversified investment strategy in managing its defined benefit
plans and consider investment risk and return on assets.  This is accomplished by maintaining
portfolios of managed pooled separate accounts with their
administrator-investment providers, which include investments in equity and debt
securities, and to a limited extent real estate.  The plans assets are not invested in securities such as
derivatives or hedge funds.
At the present time, the target asset allocation for FPIC is
approximately 60% in debt securities and 40% in equity securities.  AFPs target asset allocation is
approximately 35% in debt securities, 20% in convertible debt securities, and
45% in equity securities.  Debt
securities in both FPIC and AFP include a combination of money market, bond and
mortgage backed investments.  Equity
securities are fairly evenly distributed in a diversified portfolio of large,
medium and small cap investments, with a modest international component.
FPIC and AFPs portfolios are
subject to review periodically and rebalanced
accordingly, if market conditions change or the portfolio needs to be
rebalanced to meet target allocations.

20. 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 and other healthcare providers. 
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.  PRI is a major
client of ours and our revenues and results of operations are financially
sensitive to its revenues and financial condition. We do not own PRI, or have a
controlling financial interest in PRI, nor is PRI considered a variable
interest entity under FIN 46R and so PRIs 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 provides administrative and claims management services
to self-insured employer groups for group accident and health, workers
compensation and general liability and property insurance plans.

85
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
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.
The following table provides a reconciliation of reportable segment
assets to FPICs consolidated assets:
2003
  
  2002
  
  2001Combined assets for
  reportable segments
  
  $
  1,430,380
  
  
  1,262,407
  
  
  1,023,855Investments in equity
  method investees
  
  
  (245,098
  )
  
  (233,069
  )
  
  (241,309
  )Intercompany receivables
  
  
  (2,152
  )
  
  (2,907
  )
  
  (11,724
  )Total consolidated assets
  
  $
  1,183,130
  
  
  1,026,431
  
  
  770,82286
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)


Selected financial information by segment follows:
For the year
  ended December 31, 2003Insurance
  
  Reciprocal
  Management
  
  TPA
  
  Total
  Segments
  
  Intersegment
  Eliminations
  
  ConsolidatedNet premiums earned
  
  $
  131,665
  
  
  
  
  
  
  
  
  131,665
  
  
  
  
  
  131,665Claims administration and
  management fees
  
  $
  
  
  
  26,582
  
  
  14,313
  
  
  40,895
  
  
  
  
  
  40,895Interest revenue
  
  $
  20,570
  
  
  116
  
  
  13
  
  
  20,699
  
  
  
  
  
  20,699Net investment income
  
  $
  18,285
  
  
  116
  
  
  13
  
  
  18,414
  
  
  
  
  
  18,414Total revenue
  
  $
  154,913
  
  
  36,604
  
  
  16,514
  
  
  208,031
  
  
  (6,307
  )
  
  201,724Depreciation and
  amortization
  
  $
  1,796
  
  
  1,194
  
  
  393
  
  
  3,383
  
  
  
  
  
  3,383Interest expense on debt
  
  $
  5,886
  
  
  
  
  
  
  
  
  5,886
  
  
  
  
  
  5,886Income tax expense
  
  $
  2,635
  
  
  5,971
  
  
  711
  
  
  9,317
  
  
  
  
  
  9,317Income before cumulative
  effect of accounting change
  
  $
  6,463
  
  
  9,179
  
  
  930
  
  
  16,572
  
  
  
  
  
  16,572Net income
  
  $
  6,463
  
  
  9,179
  
  
  930
  
  
  16,572
  
  
  
  
  
  16,572Identifiable assets
  
  $
  1,139,653
  
  
  39,634
  
  
  5,995
  
  
  1,185,282
  
  
  (2,152
  )
  
  1,183,130Goodwill
  
  $
  10,833
  
  
  8,037
  
  
  
  
  
  18,870
  
  
  
  
  
  18,870For the year ended December 31, 2002Insurance
  
  Reciprocal
  Management
  
  TPA
  
  Total
  Segments
  
  Intersegment
  Eliminations
  
  ConsolidatedNet premiums earned
  
  $
  151,684
  
  
  
  
  
  
  
  
  151,684
  
  
  
  
  
  151,684Claims administration and
  management fees
  
  $
  
  
  
  24,341
  
  
  12,693
  
  
  37,034
  
  
  
  
  
  37,034Interest revenue
  
  $
  22,672
  
  
  141
  
  
  43
  
  
  22,856
  
  
  (285
  )
  
  22,571Net investment income
  
  $
  20,793
  
  
  141
  
  
  43
  
  
  20,977
  
  
  
  
  
  20,977Total revenue
  
  $
  180,775
  
  
  31,678
  
  
  15,302
  
  
  227,755
  
  
  (5,815
  )
  
  221,940Depreciation and amortization
  
  $
  6,572
  
  
  885
  
  
  503
  
  
  7,960
  
  
  
  
  
  7,960Interest expense on debt
  
  $
  4,762
  
  
  
  
  
  
  
  
  4,762
  
  
  
  
  
  4,762Income tax expense
  
  $
  4,316
  
  
  4,309
  
  
  209
  
  
  8,834
  
  
  
  
  
  8,834Income before cumulative
  effect of accounting change
  
  $
  7,961
  
  
  6,604
  
  
  311
  
  
  14,876
  
  
  
  
  
  14,876Cumulative effect of
  accounting change, net of tax
  
  $
  
  
  
  (24,363
  )
  
  (5,215
  )
  
  (29,578
  )
  
  
  
  
  (29,578
  )Net income (loss)
  
  $
  7,961
  
  
  (17,759
  )
  
  (4,904
  )
  
  (14,702
  )
  
  
  
  
  (14,702
  )Identifiable assets
  
  $
  984,470
  
  
  38,585
  
  
  6,283
  
  
  1,029,338
  
  
  (2,907
  )
  
  1,026,431Goodwill
  
  $
  10,833
  
  
  8,037
  
  
  
  
  
  18,870
  
  
  
  
  
  18,870For the year ended December 31, 2001Insurance
  
  Reciprocal
  Management
  
  TPA
  
  Total
  Segments
  
  Intersegment
  Eliminations
  
  ConsolidatedNet premiums earned
  
  $
  131,058
  
  
  
  
  
  
  
  
  131,058
  
  
  
  
  
  131,058Claims administration and
  management fees
  
  $
  
  
  
  22,959
  
  
  12,545
  
  
  35,504
  
  
  
  
  
  35,504Interest revenue
  
  $
  24,165
  
  
  344
  
  
  159
  
  
  24,668
  
  
  (147
  )
  
  24,521Net investment income
  
  $
  22,874
  
  
  344
  
  
  159
  
  
  23,377
  
  
  
  
  
  23,377Total revenue
  
  $
  158,213
  
  
  29,296
  
  
  15,984
  
  
  203,493
  
  
  (5,911
  )
  
  197,582Depreciation and
  amortization
  
  $
  10,272
  
  
  2,829
  
  
  1,297
  
  
  14,398
  
  
  
  
  
  14,398Interest expense on debt
  
  $
  4,491
  
  
  
  
  
  
  
  
  4,491
  
  
  
  
  
  4,491Income tax (benefit) expense
  
  $
  (4,385
  )
  
  2,838
  
  
  (297
  )
  
  (1,844
  )
  
  
  
  
  (1,844
  )Income before cumulative
  effect of accounting change
  
  $
  (847
  )
  
  4,348
  
  
  (571
  )
  
  2,930
  
  
  
  
  
  2,930Net (loss) income
  
  $
  (847
  )
  
  4,348
  
  
  (571
  )
  
  2,930
  
  
  
  
  
  2,930Identifiable assets
  
  $
  704,075
  
  
  63,683
  
  
  14,788
  
  
  782,546
  
  
  (11,724
  )
  
  770,822Goodwill
  
  $
  10,833
  
  
  49,140
  
  
  7,259
  
  
  67,232
  
  
  
  
  
  67,23287
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
21. 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 2004, and based on the amounts of capital and surplus of our
insurance subsidiaries as of December 31, 2003, dividends of $13,407 may be
paid to FPIC, the holding company, without regulatory consent.
The restricted net assets for FPICs insurance subsidiaries at December
31, 2003, 2002 and 2001, are as follows:
2003
  
  2002
  
  2001First Professionals
  
  $
  106,967
  
  
  99,772
  
  
  82,513APAC
  
  $
  13,508
  
  
  13,151
  
  
  13,864Intermed
  
  $
  25,265
  
  
  24,743
  
  
  22,174Interlex
  
  $
  6,117
  
  
  5,822
  
  
  5,156The statutory
capital and surplus for FPICs insurance subsidiaries at December 31, 2003,
2002 and 2001, is shown in the table below.
2003
  
  2002
  
  2001First Professionals
  
  $
  118,873
  
  
  110,858
  
  
  91,682APAC
  
  
  15,009
  
  
  14,612
  
  
  15,405Intermed
  
  
  26,991
  
  
  24,743
  
  
  22,174Interlex
  
  
  6,797
  
  
  6,541
  
  
  5,729Combined statutory surplus
  
  
  167,670
  
  
  156,754
  
  
  134,990Less: Intercompany
  eliminations
  
  
  (33,788
  )
  
  (31,284
  )
  
  (27,903
  )Consolidated statutory
  surplus
  
  $
  133,882
  
  
  125,470
  
  
  107,087For the years
ended December 31, 2003, 2002 and 2001, the statutory net income or loss for
FPICs insurance subsidiaries was as follows:
2003
  
  2002
  
  2001First Professionals
  
  $
  2,524
  
  
  10,961
  
  
  (6,623
  )APAC
  
  
  1,032
  
  
  569
  
  
  (1,131
  )Intermed
  
  
  2,316
  
  
  1,295
  
  
  390Interlex
  
  
  287
  
  
  99
  
  
  (637
  )Total statutory income
  (loss)
  
  $
  6,159
  
  
  12,924
  
  
  (8,001
  )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.
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.  On a consolidated basis and at the subsidiary level, FPICs
statutory capital and surplus exceeded applicable regulatory and risk-based
capital requirements.
88
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
22. Related
Party Transactions
Following is a summary of the related party transactions of FPIC and its
consolidated subsidiaries included in the consolidated financial
statements as of December 31, 2003 and 2002, and for the twelve months ended
December 31, 2003, 2002 and 2001. Credit balances are presented parenthetically.

As of 
      Dec 31,
      2003
    
    As of 
      Dec 31,
      2002Amounts
      included within the Statements of Financial Position:Other
      invested assets
    $
    788
    
    7,398Premiums
      receivable
    $
    8,608
    
    7,023Reinsurance
      recoverable on paid losses
    $
    2,738
    
    1,398Reinsurance
      recoverable on unpaid losses and advance premiums
    $
    12,012
    
    10,042Reinsurance
      recoverable on unpaid losses and advance premiums,fronting
      arrangements (1)
    $
    70,462
    
    62,214Ceded
      unearned premiums
    $
    3,638
    
    2,978Ceded
      unearned premiums, fronting arrangements (2)
    $
    12,848
    
    14,145Deferred
      policy acquisition costs
    $
    4,035
    
    3,848Deferred
      policy acquisition costs, fronting arrangements
    $
    (535
    )
    (574
    )Other
      assets
    $
    4,171
    
    3,467Liability
      for losses and LAE
    $
    (20,555
    )
    (17,314
    )Unearned
      premiums
    $
    (47,240
    )
    (43,506
    )Reinsurance
      payable
    $
    (23
    )
    (1,054
    )Reinsurance
      payable, fronting arrangements
    $
    (11,738
    )
    (3,454
    )Deferred
      credit
    $
    (7,729
    )
    (8,749
    )Accrued
      expenses and other liabilities
    $
    (1,030
    )
    (890
    )(1)
  Corresponding liability for losses and LAE under fronting arrangements was
($71,620) and ($63,529) as of December 31, 2003 and 2002, respectively.(2)
  Corresponding unearned premiums under fronting arrangements was ($12,848) and
($14,145) as of December 31, 2003 and 2002, respectively.2003
    
    2002
    
    2001Amounts
      included within the Statements of Income:Net
      premiums earned
    $
    (3,478
    )
    (6,921
    )
    (15,574
    )Ceded
      net premiums earned, fronting arrangements (1)
    $
    45,729
    
    51,736
    
    34,318Claims
      administration and management fees
    $
    (26,582
    )
    (24,341
    )
    (22,959
    )Finance
      charge and other income
    $
    (64
    )
    (50
    )
    (367
    )Net
      losses and LAE
    $
    (2,289
    )
    (1,532
    )
    12,604Ceded
      losses and LAE, fronting arrangements (2)
    $
    (44,697
    )
    (27,000
    )
    (33,657
    )Other
      underwriting expenses
    $
    3,804
    
    2,774
    
    2,485Other
      underwriting expenses, fronting arrangements
    $
    (6,382
    )
    (4,417
    )
    (3,437
    )Other
      expenses
    $
    213
    
    248
    
    (1)
  Corresponding direct premiums earned under fronting arrangements were ($45,726), ($52,079) and ($35,374) for the twelve months
ended December 31, 2003, 2002 and 2001, respectively.(2)
  Corresponding direct losses and LAE incurred under fronting arrangements were $44,768, $27,290 and $34,713 for the twelve months
ended December 31, 2003, 2002 and 2001, respectively.89
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
Management Agreement with APAM and Consulting
Group of APA, Inc. (CGA)
Effective June 30, 1998, FPIC entered into a management services agreement with
APAM and CGA, 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 9.8% interest in APAL, which
owns 100% of APAM. 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 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.


As of December 31, 2003 the
management agreement with APAM and the CGA consulting agreement had expired.

The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the management agreements with
APAM and CGA.

2003
  
  2002
  
  2001Amounts included within the Statements of Income:Net losses and LAE:Claims handling fees
  incurred
  
  $
  1,115
  
  
  951
  
  
  710Other underwriting
  expenses:Management fees and
  consulting fees incurred
  
  $
  3,407
  
  
  2,732
  
  
  1,99025% Quota Share Reinsurance Agreement with APAL
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. The agreements were entered into in
connection with and at the time of FPICs acquisition of APAC.
Effective December 31, 2003, FPIC did not renew or extend the quota share
reinsurance agreement whereby First Professionals and APAC ceded 25% of their
anesthesiologists MPL business to APAL. As a result, no further written
premiums will be ceded to APAL, effective January 1, 2004 and business ceded
under this agreement through December 31, 2003, will be placed in run-off.
90
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the 25% quota share reinsurance
agreement with APAL.
As of 
      Dec 31,
      2003
    
    As of 
      Dec 31,
      2002Amounts
      included within the Statements of Financial Position:Reinsurance
      recoverable on paid losses
    $
    2,738
    
    1,398Reinsurance
      recoverable on unpaid losses andadvance
      premiums
    $
    12,012
    
    10,042Other
      assets
    $
    111
    
    176Ceded
      unearned premiums
    $
    3,638
    
    2,978Reinsurance
      payable
    $
    (23
    )
    (1,054
    )2003
    
    2002
    
    2001Amounts
      included within the Statements of Income:Net
      premiums earned:Ceded
      premiums earned
    $
    8,210
    
    7,046
    
    4,018Net
      losses and LAE:Ceded
      losses and LAE incurred
    $
    (8,001
    )
    (7,056
    )
    2,068Other
      underwriting expenses:Ceding
      commissions earned
    $
    (1,642
    )
    (1,412
    )
    (759
    )See Note
12, Reinsurance, for additional information on the collateral held under these
programs.
Fronting Programs with APAL (SPC) Limited
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s subsidiary APAC, has
developed alternative risk insurance programs, whereby segregated portfolio
corporations have been formed 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 irrevocable letters of credit
corresponding with applicable reinsurance recoverable balances.
All but one of these programs were terminated as of December 31, 2003 or prior,
and have been placed into run-off. The remaining program will expire on or
before June 30, 2004, at which time it will be placed into run-off.

91
FPIC
Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the fronting programs with APAL
(SPC) Limited. The corresponding direct business with non-related parties is
indicated as a footnote to the table.

As of 
      Dec 31,
      2003
    
    As of 
      Dec 31,
      2002Amounts
      included within the Statements of Financial Position:Reinsurance
      recoverable on unpaid losses andand
      advance premiums (1)
    $
    14,938
    
    4,976Ceded
      unearned premiums (2)
    $
    10,866
    
    8,973Reinsurance
      payable
    $
    (11,738
    )
    (3,454
    )2003
    
    2002
    
    2001Amounts included
      within the Statements of Income:Net
      premiums earned:Ceded
      premiums earned (3)
    $
    26,262
    
    17,998
    
    5,726Net
      losses and LAE:Ceded
      losses and LAE incurred (4)
    $
    (20,014
    )
    (7,427
    )
    (3,881
    )Other
      underwriting expenses:Fronting
      fee income earned
    $
    (2,020
    )
    (803
    )
    (356
    )(1)
  Corresponding
liability for losses and LAE was ($14,938) and ($4,976) as of December 31, 2003
and 2002, respectively.(2)
  Corresponding unearned premiums was ($10,866) and ($8,973) as of December 31, and 2003 and 2002, respectively.(3)
  Corresponding direct premiums earned were ($26,262), ($17,998) and ($5,726) for the twelve months ended December 31, 2003, 2002
and 2001, respectively.(4)
  Corresponding direct losses and LAE incurred were $20,014, $7,427 and $3,881 for the twelve months ended December 31, 2003, 2002
and 2001, respectively.See Note
12, Reinsurance, for additional information on the collateral held under these
programs.
Reinsurance Agreements with PRI
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 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.
92
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
Effective January 1, 2000, First Professionals entered into a 100% quota share
reinsurance agreement with PRI to assume PRIs DD&R 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 is being amortized into income over 20 years, represents
the difference between the GAAP valuation of the liability and the initial
premium received. The liability was calculated using benefit assumptions and
elements of pension actuarial models (i.e., mortality, morbidity, retirement,
interest and inflation rate assumptions). In connection with the agreement,
First Professionals recognized a 5% ceding commission expense, which is being
deferred and amortized as premiums are earned under the agreement.
The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the reinsurance agreements with
PRI.
As of
  Dec 31,2003
  
  As of
  Dec 31,2002Amounts included within
  the Statements of Financial Position:Premiums
  receivable
  
  $
  8,608
  
  
  7,023Deferred policy
  acquisition costs
  
  $
  4,035
  
  
  3,848Liability for
  losses and LAE
  
  $
  (20,555
  )
  
  (17,314
  )Unearned premiums
  
  $
  (47,240
  )
  
  (43,506
  )Deferred credit
  
  $
  (7,729
  )
  
  (8,749
  )2003
  
  2002
  
  2001Amounts included within
  the Statements of Income:Net premiums
  earned:Assumed premiums
  earned
  
  $
  (11,689
  )
  
  (13,966
  )
  
  (19,592
  )Net losses and
  LAE:Assumed losses
  and LAE incurred
  
  $
  4,598
  
  
  4,573
  
  
  9,825Other
  underwriting expenses:Assuming
  commissions incurred
  
  $
  2,584
  
  
  2,475
  
  
  2,618Deferred credit
  amortization
  
  $
  (1,020
  )
  
  (1,258
  )
  
  (1,477
  )Management Agreement with PRI and Reinsurance Services
AFP has an exclusive ten-year management agreement with PRI with the current
term ending December 31, 2008. During 2002, the management agreement between AFP
and PRI was amended to remove the sharing by AFP of 10% of PRIs statutory net
income or loss, effective January 1, 2002. 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. 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 is reimbursed for 50% of the costs associated with the risk
management department it maintains for PRI insureds. The management agreement
and amendments were reviewed and approved by the New York State Insurance
Department.
93
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

FPICs revenues and results of operations are financially sensitive to the
revenues and results of operations of PRI. We do not own or have a controlling
financial interest in PRI, nor is PRI considered a variable interest entity
under FIN 46R and so PRIs financial statements are not consolidated or included
in ours. Instead, PRI is similar to a mutual insurer and the risks and rewards
of ownership vest with the policyholders of PRI. PRI, as an MPL insurer, is
subject to many of the same types of risks as those of FPICs insurance
subsidiaries. In addition, PRI is regulated by the New York State Insurance
Department and files annual and quarterly statements with the department
containing its financial statements, prepared on the statutory-basis of
accounting, and other data.
The following table summarizes the related party assets as of December 31, 2003
and 2002 and revenues and expenses for the years ended December 31, 2003, 2002
and 2001 resulting from the management agreement with PRI.

As
        of
        Dec 31,2003
    
    As
        of
        Dec 31,2002Amounts
        included within the Statements of Financial Position:Other
        assets
    
    $
    4,046
    
    
    3,278Accrued
        expenses and other liabilities
    
    $
    (1,030
    )
    
    (890
    )2003
    
    2002
    
    2001Amounts
        included within in the Statements of Income:Claims
        administration and management fees:Management
        fees
    
    $
    (26,582
    )
    
    (24,341
    )
    
    (22,959
    )Finance
        charge and other income:Profit
        income
    
    $
    
    
    
    
    
    
    (317
    )Other
        expenses:Loss
        sharing
    
    $
    
    
    
    35
    
    
    Interest
        expense
    
    $
    213
    
    
    213
    
    
    In addition to the management agreement with PRI, AFP through its subsidiary
FPIC Intermediaries provides brokerage, administration and intermediary services
for insurance and reinsurance programs to PRI with the brokerage commissions
being paid by the reinsuring company. As a result of its relationship with PRI,
FPIC Intermediaries earned brokerage placement commissions of $1,718, $1,744 and
$1,335 for the years ended December 31, 2003, 2002 and 2001 for the placement
reinsurance on behalf of PRI with other reinsurance carriers. FPIC
Intermediaries also earned brokerage commissions of $1,008, $952 and $1,012 from
First Professionals for the years ended December 31, 2003, 2002 and 2001 for the
placement of reinsurance with First Professionals from PRI. The brokerage
commissions from First Professionals are eliminated in the consolidated
financial statements.
For a summary of all revenues and expenses associated with the PRI management
agreement and related brokerage and reinsurance intermediary services performed
for it, refer to the selected financial information presented for the reciprocal
management segment in Note 20, Segment Information, preceding.




94
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
Fronting Program with PRI
Effective July 1, 2000, First Professionals entered into an agreement with PRI
whereby, First Professionals, through PMA, manages an MPL insurance program in
Pennsylvania for PRI. 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.
Effective August 1, 2003, PRI engaged an unrelated fronting carrier and no new
or renewal business is being written on First Professionals policy forms.

The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the fronting program with PRI.
The corresponding direct business with non-related parties is indicated as a
footnote to the table.

As of
  Dec 31,2003
  
  As of
  Dec 31,2002Amounts included within
  the Statement of Financial Position:Reinsurance recoverable on
  unpaid losses and advance premiums(1)
  
  $
  37,296
  
  
  19,360Ceded unearned premiums
  (2)
  
  $
  1,982
  
  
  2,126Deferred policy acquistion
  costs
  
  $
  (535
  )
  
  (574
  )2003
  
  2002
  
  2001Amounts included within
  the Statements of Income:Net premiums earned:Ceded premiums earned (3)
  
  $
  16,145
  
  
  11,418
  
  
  8,531Net losses and LAE :Ceded losses and LAE
  incurred (4)
  
  $
  (21,005
  )
  
  (10,221
  )
  
  (9,508
  )Other underwriting
  expenses:Ceding commissions earned
  
  $
  (4,358
  )
  
  (3,045
  )
  
  (2,133
  )(1)
  Corresponding liability for losses and LAE was ($38,454) and ($20,676) as of December 31, 2003 and 2002.(2)
  Corresponding unearned premiums was ($1,982) and ($2,126) as of December 31, 2003 and 2002.(3)
  Corresponding direct premiums earned were ($16,143), ($11,762) and ($9,587) for the twelve months ended December 30, 2003, 2002
and 2001.(4)
  Corresponding direct losses and LAE incurred were $21,076, $10,511 and $10,565 for the twelve months ended December 31, 2003, 2002
and 2001.See Note 12, Reinsurance, for additional information on the
collateral held under these programs.

95
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)

Fronting Program
with American Physicians Insurance Exchange (APIE)
FPIC had an insurance program with APIE, a Texas medical professional liability
insurance exchange, whereby, through December 31, 2002, business was written on
First Professionals policy forms and substantially all the underlying insurance
risks and premiums were ceded to APIE for a fronting fee. We owned 20% of the
outstanding common stock of APS, which serves as the exclusive management
company for APIE until October 1, 2003, at which time we sold our 20% investment
to the majority (80%) owner for $2,050 in cash. A small gain was recognized on
this transaction. One of our senior officers also served on the APS board of
directors. This program was terminated effective December 31, 2002.


The APIE fronting program expired December 31, 2002, at which time we ceased
writing business for APIE on our policy forms and placed the existing business
in run-off. As of December 31, 2003, there are no more active policies in this
program.

The following table summarizes the related party assets and liabilities as of
December 31, 2003 and 2002 and revenues and expenses for the years ended
December 31, 2003, 2002 and 2001 resulting from the fronting program with APIE.
The corresponding direct business with non-related parties is indicated as a
footnote to the table.
As of
  Dec 31,
  2003
  
  As of
  Dec 31,
  2002Amounts included within
  the Statements of Financial Position:Reinsurance recoverable on
  unpaid losses and advance premiums(1)
  
  $
  18,228
  
  
  37,878Ceded unearned premiums
  (2)
  
  $
  
  
  
  3,0462003
  
  2002
  
  2001Amounts included in the
  Statements of Income:Net premiums earned:Ceded premiums earned (3)
  
  $
  3,321
  
  
  22,319
  
  
  20,061Net losses and LAE:Ceded losses and LAE
  incurred (4)
  
  $
  (3,678
  )
  
  (9,352
  )
  
  (20,268
  )Other underwriting
  expenses:Fronting fee income
  
  $
  (3
  )
  
  (569
  )
  
  (948
  )(1)
  Corresponding liability for losses and LAE was ($18,228) and ($37,878) as of December 31, 2003 and 2002.(2)
  Corresponding unearned premiums was ($3,046) as of December 31, 2002.(3)
  Corresponding direct premiums earned were ($3,321), ($22,319) and ($20,061) for the twelve months ended December 31, 2003, 2002
and 2001, respectively.(4)
  Corresponding direct losses and LAE incurred were $3,678, $9,352 and $20,268 for the twelve months ended December 31, 2003, 2002
and 2001, respectively.See Note 12, Reinsurance, for additional information on the
collateral held under these programs.

96
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
Other Related Party Transactions
The principal individual owner of one of FPICs insurance agents and brokers
serves as a director of FPIC. This directors firm also acts as FPICs agent in
purchasing its internal insurance. The commissions paid by FPIC to the
directors firm were approximately $338, $227 and $112 during the years ended
December 31, 2003, 2002 and 2001, respectively. In addition, FPIC obtains
corporate legal services from time to time from an outside law firm, a partner
of which is also a director of FPIC. Costs incurred during the years ended
December 31, 2003 and 2002 by FPIC with respect to these legal services were
$136 and $11, respectively.
FPIC had two management agreements with APAM to provide investment management
and information technology support services, which terminated on December 31,
2003. Total revenues earned by FPIC from these agreements totaled approximately
$64, $50 and $50 for the years ended December 31, 2003, 2002 and 2001,
respectively.
23. 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 represented 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 2003, 2002 and 2001 was as follows:
Severance
  & Benefits
  
  Rental
  Facilities
  
  Other
  Expense
  
  TotalBalance,
  December 31, 2000
  
  $
  350
  
  
  63
  
  
  17
  
  
  430Fiscal
  2001 restructuring charge
  
  
  88
  
  
  446
  
  
  98
  
  
  632Amount
  utilized in 2001
  
  
  (350
  )
  
  (63
  )
  
  (30
  )
  
  (443
  )Balance,
  December 31, 2001
  
  $
  88
  
  
  446
  
  
  85
  
  
  619Amount
  utilized in 2002
  
  
  (87
  )
  
  (212
  )
  
  (55
  )
  
  (354
  )Balance,
  December 31, 2002
  
  $
  1
  
  
  234
  
  
  30
  
  
  265Amount
  utilized in 2003
  
  
  
  
  
  (147
  )
  
  (11
  )
  
  (158
  )Balance,
  December 31, 2003
  
  $
  1
  
  
  87
  
  
  19
  
  
  10797
FPIC Insurance Group, Inc.
Notes to the Consolidated Financial Statements
(Dollars in thousands, except per share amounts and elsewhere as noted)
24. Unaudited
Quarterly Results of Operations
The following is a summary of our unaudited quarterly consolidated
results of operations for the years ended December 31, 2003, 2002 and 2001:
2003
  
  First
  
  Second
  
  Third
  
  FourthDirect and assumed
  premiums written
  
  $
  104,535
  
  
  84,395
  
  
  87,808
  
  
  64,003Net premiums written
  
  $
  38,996
  
  
  35,871
  
  
  46,624
  
  
  21,643Net premiums earned
  
  $
  28,908
  
  
  31,870
  
  
  40,895
  
  
  29,992Net investment income
  
  $
  4,503
  
  
  4,719
  
  
  4,680
  
  
  4,512Total revenues
  
  $
  44,129
  
  
  49,141
  
  
  60,093
  
  
  48,361Net income
  
  $
  2,760
  
  
  3,498
  
  
  5,381
  
  
  4,933Basic earnings per share
  
  $
  0.29
  
  
  0.37
  
  
  0.56
  
  
  0.53Diluted earnings per share
  
  $
  0.29
  
  
  0.37
  
  
  0.56
  
  
  0.492002
  
  First
  
  Second
  
  Third
  
  FourthDirect and assumed
  premiums written
  
  $
  89,258
  
  
  90,426
  
  
  90,856
  
  
  74,187Net premiums written
  
  $
  56,196
  
  
  57,164
  
  
  (6,448
  )
  
  33,336Net premiums earned
  
  $
  39,342
  
  
  47,560
  
  
  30,435
  
  
  34,347Net investment income
  
  $
  4,888
  
  
  5,813
  
  
  5,688
  
  
  4,588Total revenues
  
  $
  53,416
  
  
  62,775
  
  
  50,407
  
  
  55,342Income before cumulative
  effect of accounting change
  
  $
  2,865
  
  
  2,609
  
  
  4,415
  
  
  4,987Cumulative effect of
  accounting change, net of tax
  
  $
  (29,578
  )
  
  
  
  
  
  
  
  Net (loss) income
  
  $
  (26,713
  )
  
  2,609
  
  
  4,415
  
  
  4,987Basic (loss) earnings per
  share
  
  $
  (2.85
  )
  
  0.28
  
  
  0.47
  
  
  0.53Diluted (loss) earnings
  per share
  
  $
  (2.82
  )
  
  0.26
  
  
  0.47
  
  
  0.532001
  
  First
  
  Second
  
  Third
  
  FourthDirect and assumed
  premiums written
  
  $
  55,173
  
  
  46,943
  
  
  73,004
  
  
  70,283Net premiums written
  
  $
  35,898
  
  
  29,318
  
  
  43,194
  
  
  38,674Net premiums earned
  
  $
  31,517
  
  
  34,802
  
  
  29,686
  
  
  35,053Net investment income
  
  $
  6,716
  
  
  5,940
  
  
  5,817
  
  
  4,904Total revenues
  
  $
  46,287
  
  
  49,461
  
  
  48,275
  
  
  53,559Net income (loss)
  
  $
  1,294
  
  
  1,862
  
  
  3,099
  
  
  (3,325
  )Basic earnings (loss) per
  share
  
  $
  0.14
  
  
  0.20
  
  
  0.33
  
  
  (0.36
  )Diluted earnings (loss)
  per share
  
  $
  0.14
  
  
  0.20
  
  
  0.33
  
  
  (0.36
  )98
SCHEDULE I
FPIC Insurance Group, Inc.
Summary of Investments Other Than Investments in Related Parties
As of December 31, 2003
(in thousands)
Cost or
  Amortized
  Cost
  
  Fair Value
  
  Amount in the
  Statement of
  Financial
  PositionBonds:Corporate securities
  
  $
  154,533
  
  
  156,679
  
  
  156,679United States Government
  agencies and authorities
  
  
  147,531
  
  
  148,764
  
  
  148,764States, municipalities and
  political subdivisions
  
  
  108,719
  
  
  111,149
  
  
  111,149Mortgage-backed securities
  
  
  111,369
  
  
  112,055
  
  
  112,055Total bonds
  
  
  522,152
  
  
  528,647
  
  
  528,647Equity securities:Industrial, miscellaneous,
  and other
  
  
  7
  
  
  9
  
  
  9Total equity securities
  
  
  7
  
  
  9
  
  
  9Real estate
  
  
  4,207
  
  
  4,207
  
  
  4,207Other invested assets
  
  
  5,400
  
  
  4,774
  
  
  4,774Total investments
  
  $
  531,766
  
  
  537,637
  
  
  537,637See
Accompanying Report of Independent Certified Public Accountants.
99
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statement of Financial Position 
As of December 31, 2003 and 2002
(in thousands, except common share data)
2003
  
  2002AssetsCash and cash equivalents
  
  $
  10,248
  
  
  4,722Investments in
  subsidiaries*
  
  
  214,298
  
  
  204,418Other invested assets
  
  
  1,871
  
  
  7,398Total cash and investments
  
  
  226,417
  
  
  216,538Property and equipment,
  net
  
  
  1,536
  
  
  1,571Due from subsidiaries,
  net*
  
  
  1,630
  
  
  1,768Deferred income taxes
  
  
  2,825
  
  
  2,630Prepaid expenses
  
  
  2,091
  
  
  936Federal income tax
  receivable
  
  
  2,179
  
  
  Other assets
  
  
  2,399
  
  
  501Total assets
  
  $
  239,077
  
  
  223,944Liabilities
  and Shareholders EquityLong term debt
  
  $
  46,083
  
  
  Revolving credit facility
  
  
  
  
  
  37,000Term loan
  
  
  
  
  
  10,208Federal income tax payable
  
  
  
  
  
  120Accrued expenses and other
  liabilities
  
  
  6,337
  
  
  10,703Total liabilities
  
  
  52,420
  
  
  58,031Common stock, $.10 par
  value, 50,000,000 shares authorized;9,770,843 and 9,390,795
  shares issued and outstanding atDecember 31, 2003 and
  2002, respectively
  
  
  977
  
  
  939Additional paid-in capital
  
  
  43,705
  
  
  38,322Accumulated other
  comprehensive income
  
  
  4,276
  
  
  5,525Retained earnings
  
  
  137,699
  
  
  121,127Total shareholders equity
  
  
  186,657
  
  
  165,913Total liabilities and
  shareholders equity
  
  $
  239,077
  
  
  223,944*Eliminated
in consolidation
See
Accompanying Report of Independent Certified Public Accountants.
100
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statement of Earnings (Losses)
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003
  
  2002
  
  2001RevenuesManagement fees from
  subsidiaries, net*
  
  $
  26,970
  
  
  23,693
  
  
  24,278Net investment loss
  
  
  (404
  )
  
  (19
  )
  
  (183
  )Net realized investment
  loss
  
  
  (4,629
  )
  
  
  
  
  Other income
  
  
  92
  
  
  55
  
  
  50Total revenues
  
  
  22,029
  
  
  23,729
  
  
  24,145ExpensesManagement fees due to
  subsidiaries*
  
  
  30
  
  
  30
  
  
  23Other underwriting
  expenses
  
  
  21,974
  
  
  19,776
  
  
  20,132Interest expense on debt
  
  
  5,886
  
  
  4,762
  
  
  4,491Other expenses
  
  
  22
  
  
  173
  
  
  592Total expenses
  
  
  27,912
  
  
  24,741
  
  
  25,238Loss before income taxes
  
  
  (5,883
  )
  
  (1,012
  )
  
  (1,093
  )Less: Income tax (benefit)
  expense
  
  
  (1,895
  )
  
  364
  
  
  (426
  )Loss before equity in
  undistributed earnings of subsidiaries
  
  
  (3,988
  )
  
  (1,376
  )
  
  (667
  )Equity in undistributed
  earnings (loss) of subsidiaries*
  
  
  20,560
  
  
  (13,326
  )
  
  3,597Net income (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930*Eliminated
in consolidation
See
Accompanying Report of Independent Certified Public Accountants.
101
SCHEDULE II
FPIC Insurance Group, Inc.
Condensed Financial Information of Registrant
FPIC Insurance Group, Inc. (Parent Only)
Condensed Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
(in thousands)
2003
  
  2002
  
  2001Cash flows from operating
  activities:Net income (loss)
  
  $
  16,572
  
  
  (14,702
  )
  
  2,930Adjustments to reconcile
  net income to cash provided by operating activities:Equity in undistributed
  earnings of subsidiaries*
  
  
  (20,560
  )
  
  13,326
  
  
  (3,597
  )Common stock dividend from
  subsidiaries*
  
  
  3,650
  
  
  6,590
  
  
  5,892Return of capital from
  subsidiaries*
  
  
  8,550
  
  
  8,260
  
  
  13,100Capital contribution to
  subsidiaries*
  
  
  (4,200
  )
  
  (10,860
  )
  
  Depreciation and
  amortization
  
  
  509
  
  
  942
  
  
  1,194Realized loss on
  investments
  
  
  4,629
  
  
  
  
  
  Realized loss on sale of
  property and equipment
  
  
  
  
  
  
  
  
  9Noncash compensation
  
  
  
  
  
  
  
  
  105Net (gain) loss from
  equity investments
  
  
  (195
  )
  
  (222
  )
  
  319Deferred income tax
  benefit
  
  
  (1,253
  )
  
  (1,047
  )
  
  (79
  )Other changes in assets
  and liabilities:Due from subsidiaries*
  
  
  138
  
  
  (2,217
  )
  
  (3,505
  )Prepaid expenses
  
  
  (1,155
  )
  
  55
  
  
  (641
  )Federal income tax
  receivable
  
  
  (1,774
  )
  
  6,341
  
  
  3,247Other assets
  
  
  (875
  )
  
  2,474
  
  
  (3,076
  )Accrued expenses and other
  liabilities
  
  
  1,389
  
  
  325Net cash provided by
  operating activities
  
  
  5,425
  
  
  9,265
  
  
  15,898Cash flows from investing
  activities:Proceeds from sale of
  other invested assets
  
  
  2,266
  
  
  
  
  
  326Purchase of other invested
  assets
  
  
  (1,083
  )
  
  
  
  
  Purchase of property and
  equipment
  
  
  (753
  )
  
  (607
  )
  
  (631
  )Net cash provided by (used
  in) investing activities
  
  
  430
  
  
  (607
  )
  
  (305
  )Cash flows from financing
  activities:Receipt of long term debt
  
  
  46,083
  
  
  
  
  
  Receipt of revolving
  credit facility
  
  
  
  
  
  
  
  
  54,500Payment of revolving
  credit facility
  
  
  (47,208
  )
  
  (5,833
  )
  
  (68,677
  )Purchase derivative
  financial instrument
  
  
  (1,134
  )
  
  
  
  
  Settlement of derivative
  financial instrument
  
  
  (2,493
  )
  
  
  
  
  Issuance of common stock
  outstanding
  
  
  4,423
  
  
  438
  
  
  238Buyback of common stock
  
  
  
  
  
  
  
  
  (232
  )Net cash used in financing
  activities
  
  
  (329
  )
  
  (5,395
  )
  
  (14,171
  )Net increase in cash and
  cash equivalents
  
  
  5,526
  
  
  3,263
  
  
  1,422Cash and cash equivalents
  at beginning of period
  
  
  4,722
  
  
  1,459
  
  
  37Cash and cash equivalents
  at end of period
  
  $
  10,248
  
  
  4,722
  
  
  1,459Supplemental disclosure of
  cash flow informationInterest paid on debt
  
  $
  3,363
  
  
  4,718
  
  
  4,190Federal income taxes paid
  
  $
  9,450
  
  
  6,293
  
  
  540Federal income tax refunds
  received
  
  $
  346
  
  
  4,958
  
  
  3,300*Eliminated
in consolidation
See
Accompanying Report of Independent Certified Public Accountants.
102
SCHEDULE III
FPIC Insurance Group, Inc.
Consolidated Supplementary Insurance Information
For the years ended December 31, 2003, 2002 and 2001
(in thousands)
Segment
  
  Deferred
  Policy
  Acquisition
  Costs
  (DPAC)
  
  Loss
  Reserves
  
  Unearned
  Premiums
  
  Premium
  Revenue
  
  Net
  Investment
  Income
  
  Loss
  Expenses
  
  Amortization
  of
  DPAC
  
  Other
  Expenses
  
  Net
  Written
  Premiums2003Medical professional and
  other liability
  
  $
  6,209
  
  574,529
  
  177,435
  
  131,655
  
  
  18,414
  
  118,974
  
  
  11,256
  
  
  10,657
  
  
  143,1342002Medical professional and
  other liability
  
  $
  4,452
  
  440,166
  
  173,421
  
  151,684
  
  
  20,977
  
  139,571
  
  
  10,798
  
  
  9,659
  
  
  140,2482001Medical professional and
  other liability
  
  $
  9,001
  
  318,483
  
  146,761
  
  131,058
  
  
  23,377
  
  128,346
  
  
  9,259
  
  
  17,622
  
  
  147,084See
Accompanying Report of Independent Certified Public Accountants.
103
SCHEDULE IV
FPIC Insurance Group, Inc.
Reinsurance 
For the years ended December 31, 2003, 2002 and 2001
(in thousands)
Type of
  Insurance
  
  Gross
  Amount
  
  Ceded
  Earned to
  Other
  Companies
  
  Assumed
  Earned
  From Other
  Companies
  
  Net
  Earned
  
  Percentage
  of
  Assumed
  to Net2003Medical professional and
  other liability
  
  $
  325,039
  
  
  205,062
  
  
  11,688
  
  
  131,665
  
  
  9
  %2002Medical professional and
  other liability
  
  $
  302,845
  
  
  166,384
  
  
  15,223
  
  
  151,684
  
  
  10
  %2001Medical professional and
  other liability
  
  $
  172,064
  
  
  67,633
  
  
  26,627
  
  
  131,058
  
  
  20
  %See
Accompanying Report of Independent Certified Public Accountants.
104
SCHEDULE V
FPIC Insurance Group, Inc.
Valuation and Qualifying Accounts 
For the years ended December 31, 2003, 2002 and 2001
(in thousands)
Description
  
  Balance at
  Beginning
  of Period
  
  Charged to
  Costs and
  Expenses
  
  Deductions
  
  Balance
  at End
  of PeriodDecember 31, 2003Allowance for doubtful
  accounts, net
  
  $
  400
  
  
  95
  
  
  95
  
  
  400December 31, 2002Allowance for doubtful
  accounts, net
  
  $
  734
  
  
  668
  
  
  1,002
  
  
  400December 31, 2001Allowance for doubtful
  accounts, net
  
  $
  1,659
  
  
  12
  
  
  937
  
  
  734See
Accompanying Report of Independent Certified Public Accountants.
105
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.
Item 9A . 
Controls and Procedures
An evaluation of FPICs disclosure controls and procedures (as defined
by Rule 13a-15(e) of the Securities Exchange Act of 1934 (the Act)) was
completed as of December 31, 2003, by FPICs Chief
Executive Officer and Chief Financial Officer.  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
Chief Executive Officer and Chief Financial Officer,
and other management, as appropriate, to allow for timely decisions regarding
required disclosure.  There have been no
changes in FPICs internal controls over financial reporting identified in
connection with such evaluation that occurred during the fourth quarter of 2003
that have materially affected or are reasonably likely to materially affect
FPICs internal controls over financial reporting.
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
2004 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 2004 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
Securities
authorized for issuance under equity compensation plans as of December 31, 2003
are provided below.
Plan
  Category
  
  Number of
  Securities to
  be Issued Upon Exercise
  of Outstanding Options,
  Warrants and Rights
  
  Weighted-Average
  Exercise Price of
  Outstanding Options,
  Warrants and Rights
  
  Number of
  Securities
  Remaining Available for
  Future Issuance Under
  Equity Compensation
  Plans (Excluding
  Securities Reflected in
  Column (a))(a)
  
  (b)
  
  (c)Equity Compensation Plans
  Approved by Security Holders
  
  
  1,652,688
  
  
  
  $
  16.57
  
  
  
  578,380Equity Compensation Plans
  Not Approved by Security Holders
  
  
  
  
  
  
  
  
  
  
  
  Total
  
  
  1,652,688
  
  
  
  $
  16.57
  
  
  
  578,380106
Other
information required herein will appear under the heading Security Ownership
of Certain Beneficial Owners and Management and Related Shareholder Matters in
FPICs Proxy Statement for the 2004 Annual Meeting of Shareholders, which
information is incorporated herein by reference.  See Item 8 and Note 18 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 2004
Annual Meeting of Shareholders, which information is incorporated herein by
reference.
Item 14. 
Principal Accountant Fees and Services
The
information required herein will appear under the heading Principal Accountant
Fees and Services in FPICs Proxy Statement for the 2004 Annual Meeting of
Shareholders, which information is incorporated herein by reference.
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 41.

(a)
    1.
    Financial Statements:FPIC Insurance Group,
        Inc.:
    Report of Independent
        Certified Public Accountants
    Consolidated Statements
        of Financial Position as of December 31, 2003 and 2002
    Consolidated Statements
        of Income (Loss) and Comprehensive Income (Loss) for the years ended December
        31, 2003, 2002 and 2001
    Consolidated Statements
        of Changes in Shareholders Equity for the years ended December 31,
        2003, 2002 and 2001
    Consolidated Statements
        of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    Notes to the Consolidated
        Financial Statements2.
    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 PartiesII
    Condensed Financial
        Information of RegistrantIII
    Supplementary Insurance
        InformationIV
    ReinsuranceV
    Valuation and Qualifying
        Accounts107
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, incorporated by reference to FPICs Form 10-Q (Commission File No.
  1-11983) filed on August 13, 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, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.108
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, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.10(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, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.10(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, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.10(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, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 30, 2001.10(u)(1)*
  Form of Amendment to Employment Agreement between the Registrant and
  Kurt Cetin dated December 14, 2001, incorporated by reference to FPICs Form
  10-K (Commission File No. 1-11983) filed on March 27, 2002.10(v)*
  Form of Employment Agreement dated May 1, 2000 between the Registrant
  and David L. Rader, incorporated by reference to FPICs Form 10-K (Commission
  File No. 1-11983) filed on March 30, 2001.10(v)(1)*
  Form of Amendment to Employment Agreement between the Registrant and
  David L. Rader dated December 16, 2000, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.10(w)*
  Form of Employment Agreement dated May 1, 2000 between the Registrant
  and Gary M. Dallero, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 30, 2001.10(w)(1)*
  Form of Amendment to Employment Agreement between the Registrant and
  Gary M. Dallero dated December 16, 2000, incorporated by reference to FPICs
  Form 10-K (Commission File No. 1-11983) filed on March 27, 2002.109
10(x)*
  Form of Severance Agreement dated June 19, 2000 between the
  Registrant and Charles Divita, III, incorporated by reference to FPICs Form
  10-K (Commission File No. 1-11983) filed on March 30, 2001.10(y)*
  Form of Indemnity Agreement dated July 15, 2000 between the
  Registrant and Messrs. Dallero and Divita, incorporated by reference to
  FPICs Form 10-K (Commission File No. 1-11983) filed on March 30, 2001.10(z)*
  Form of Indemnity Agreement dated December 16, 2000 between the
  Registrant and Roberta G. Cown, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 30, 2001.10(aa)*
  Form of Severance Agreement dated December 16, 2000 between the
  Registrant and Roberta G. Cown, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 30, 2001.10(bb)*
  Form of Severance Agreement dated December 22, 2000 between the
  Registrant and Pamela D. Deyo, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 30, 2001.10(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,
  incorporated by reference to FPICs Form 10-K (Commission File No. 1-11983)
  filed on March 30, 2001.10(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, incorporated by
  reference to FPICs Form 8-K (Commission File No. 1-11983) filed on September
  6, 2001 as Exhibit 10(ff).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, incorporated by reference to FPICs Form 8-K (Commission File No.
  1-11983) filed on September 6, 2001 as Exhibit 10(gg).10(ff)*
  Form of Indemnity Agreement dated June 6, 2001 between the Registrant
  and John K. Anderson, Jr. , incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 27, 2002.10(gg)*
  Form of Indemnity Agreement dated June 6, 2001 between the Registrant
  and M.C. Harden, III, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 27, 2002.10(hh)*
  Form of Indemnity Agreement dated July 14, 2001 between the
  Registrant and Gene C. Witherspoon, incorporated by reference to FPICs Form
  10-K (Commission File No. 1-11983) filed on March 27, 2002.10(ii)*
  Form of Indemnity Agreement dated September 18, 2001 between the
  Registrant and Lori A. Mackey, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 27, 2002.10(jj)*
  Form of Employment Agreement dated December 14, 2001 between the
  Registrant and Roberta G. Cown, incorporated by reference to FPICs Form 10-K
  (Commission File No. 1-11983) filed on March 27, 2002.10(kk)
  Amendment No. 1 to Revolving Credit and Term Loan Agreement dated
  March 25, 2002, incorporated by reference to FPICs Form 10-K (Commission
  File No. 1-11983) filed on March 27, 2002.10(ll)
  First Professionals Insurance Company, Inc. Net Account Quota Share
  Reinsurance Agreement dated July 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,
  incorporated by reference to FPICs Form 10-Q (Commission File No. 1-11983)
  filed on August 13, 2002.110
10(nn)*
  Consulting Agreement dated as of November 1, 2002 between FPIC
  Insurance Group, Inc. and David L. Rader, incorporated by reference to FPICs
  Form 8-K filed on October 15, 2002.10(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, incorporated by reference to FPICs Form 8-K filed on October
  29, 2002.10(pp)
  Amendment of the Management Agreement between AFP and PRI dated
  January 1, 1999, incorporated by reference to FPICs Form 10-Q
  (Commission File No. 1-11983) filed on November 13, 2002.10(qq)
  Collateral Assignment Of Certificate Of Deposit dated November 13,
  2002, incorporated by reference to FPICs Form 10-Q (Commission File No.
  1-11983) filed on November 13, 2002.10(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, incorporated
  by reference to FPICs Form 8-K filed on November 22, 2002.10(ss)
  Form of Assignment Agreement dated January 1, 2003 between Anthony
  Bonomo, FPIC Insurance Group, Inc. and Physicians Reciprocal Insurers,
  incorporated by reference to Form 10-K for the year ended December 31,
  2002, filed on March 28, 2003.10(tt)
  FPIC Insurance Group, Inc. Medical Malpractice Liability Excess of
  Loss Reinsurance Agreement effective January 1, 2003 to January 1, 2004,
  incorporated by reference to Form 10-K for the year ended December 31,
  2002, filed on March 28, 2003.10(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., incorporated by reference to
  Form 10-K for the year ended December 31, 2002, filed on March 28,
  2003.10(vv)
  FPIC Insurance Group, Inc.
  Casualty Awards Made Excess of Loss Reinsurance Agreement  2003 Final
  Reinsurance Placement Slip, incorporated by reference to
FPICs Form 10-Q (Commission File No. 1-11983) filed on May 14, 2003.10(ww)
  First Professionals
  Insurance Company, Inc. Net Account Quota Share Reinsurance Agreement
  Amendment No. 1 to the 2002 Final Placement Slip, incorporated by reference to
FPICs Form 10-Q (Commission File No. 1-11983) filed on May 14, 2003.10(xx)
  Placement
  Agreement dated April 25, 2003, among FPIC Insurance Group, Inc. and its
  financing subsidiary, FPIC Capital Statutory Trust II, together as offerors,
  and FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., as
  placement agents, incorporated by reference to FPICs Form 8-K (Commission
  File No. 1-11983) filed on May 16, 2003.10(yy)
  Subscription
  Agreement dated May 15, 2003 among FPIC Insurance Group, Inc. and FPIC
  Capital Statutory Trust II, together as offerors, and I-Preferred Term
  Securities II, Ltd., as purchaser, incorporated by reference to FPICs Form
  8-K (Commission File No. 001-11983) filed on May 16, 2003.10(zz)
  Amended and
  Restated Declaration of Trust of FPIC Capital Statutory Trust II dated May
  15, 2003 by and among FPIC Insurance Group, Inc., as sponsor, U.S. Bank
  National Association, as institutional trustee, and Kim D. Thorpe, Roberta
  Goes Cown and Pamela D. Deyo, as administrators, incorporated by reference to
  FPICs Form 8-K (Commission File No. 1-11983) filed on May 16, 2003.10(aaa)
  Guarantee
  Agreement dated May 15, 2003 by and between FPIC Insurance Group, Inc., as
  guarantor, and U.S. Bank National Association, as guarantee trustee,
  incorporated by reference to FPICs Form 8-K (Commission File No. 1-11983)
  filed on May 16, 2003.111
10(bbb)
  Indenture
  dated May 15, 2003 between FPIC Insurance Group, Inc. and U.S. Bank National
  Association, as debenture trustee, incorporated by reference to FPICs Form
  8-K (Commission File No. 1-11983) filed on May 16, 2003.10(ccc)
  Amendment
  No. 3 to Revolving Credit and Term Loan Agreement dated April 10, 2003 by and
  among FPIC Insurance Group Inc., as the borrower, and several banks and other
  financial institutions from time to time party thereto, as lenders, and
  SunTrust Bank, as administrative agent and collateral agent for the lenders,
  and joined by certain subsidiaries of the borrower as subsidiary guarantors,
  incorporated by reference to FPICs Form 8-K (Commission File No. 1-11983)
  filed on May 16, 2003.10(ddd)
  Placement
  Agreement dated May 13, 2003 among FPIC Insurance Group, Inc. and its
  financing subsidiary, FPIC Capital Trust I, together as offerors, and Sandler
  ONeill & Partners, L.P., as placement agent, incorporated by reference
  to FPICs Form 8-K (Commission File No. 1-11983) filed on May 29, 2003.10(eee)
  Capital
  Securities Subscription Agreement dated May 13, 2003 among FPIC Insurance
  Group, Inc. and FPIC Capital Trust I, together as offerors, and InCapS
  Funding I, Ltd., as purchaser, incorporated by reference to FPICs Form 8-K
  (Commission File No. 1-11983) filed on May 29, 2003.10(fff)
  Amended and
  Restated Declaration of Trust of FPIC Capital Trust I dated May 22, 2003 by
  and among FPIC Insurance Group, Inc., as sponsor, Wilmington Trust Company,
  as Delaware trustee, Wilmington Trust Company, as institutional trustee, and
  Kim D. Thorpe, Roberta Goes Cown and Pamela D. Deyo, as administrators,
  incorporated by reference to FPICs Form 8-K (Commission File No. 1-11983)
  filed on May 29, 2003.10(ggg)
  Guarantee
  Agreement dated as of May 22, 2003 by and between FPIC Insurance Group, Inc.,
  as guarantor, and Wilmington Trust Company, as guarantee trustee,
  incorporated by reference to FPICs Form 8-K (Commission File No. 1-11983)
  filed on May 29, 2003.10(hhh)
  Indenture
  dated as of May 22, 2003 between FPIC Insurance Group, Inc., as issuer and
  Wilmington Trust Company, as trustee, incorporated by reference to FPICs
  Form 8-K (Commission File No. 1-11983) filed on May 29, 2003.10(iii)
  Placement
  Agreement dated May 13, 2003 between FPIC Insurance Group, Inc., as offeror,
  and Sandler ONeill & Partners, L.P., as placement agent, incorporated by
  reference to FPICs Form 8-K (Commission File No. 1-11983) filed on May 29,
  2003.10(jjj)
  Senior Notes
  Subscription Agreement dated May 13, 2003 between FPIC Insurance Group, Inc.
  and InCapS Funding I, Ltd., as purchaser, incorporated by reference to FPICs
  Form 8-K (Commission File No. 1-11983) filed on May 29, 2003.10(kkk)
  Indenture
  dated as of May 22, 2003 between FPIC Insurance Group, Inc., as issuer, and
  Wilmington Trust Company, as trustee, incorporated by reference to FPICs
  Form 8-K (Commission File No. 1-11983) filed on May 29, 2003.10(lll.1)
  Employee
  Stock Purchase Plan, as amended on June 4, 2003 by shareholder approval,
  incorporated herein by reference to FPIC Insurance Group, Inc.s Definitive
  Proxy Materials (Commission File No. 1-11983) filed on April 30, 2003.10(lll.2)
  Placement
  Agreement dated October 16, 2003 among FPIC Insurance Group, Inc. and its
  financing subsidiary, FPIC Capital Statutory Trust III, together as offerors,
  and FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc., as
  placement agents, incorporated by reference to FPICs Form 8-K (Commission
  File No. 1-11983) filed on November 3, 2003.10(mmm)
  Subscription
  Agreement dated October 29, 2003 among FPIC Insurance Group, Inc. and FPIC
  Capital Statutory Trust III, together as offerors, and I-Preferred Term
  Securities III, Ltd., as purchaser, incorporated by reference to FPICs Form
  8-K (Commission File No. 1-11983) filed on November 3, 2003.112
10(nnn)
    Amended and Restated
        Declaration of Trust of FPIC Capital Statutory Trust III dated October
        29, 2003 among FPIC Insurance Group, Inc., as sponsor, U.S. Bank National
        Association, as institutional trustee, and Kim D. Thorpe, Roberta Goes
        Cown and Pamela D. Deyo, as administrators, incorporated by reference
        to FPICs Form 8-K (Commission File No. 1-11983) filed on November
        3, 2003.10(ooo)
    Guarantee Agreement
        dated October 29, 2003 between FPIC Insurance Group, Inc., as guarantor,
        and U.S. Bank National Association, as guarantee trustee, incorporated
        by reference to FPICs Form 8-K (Commission File No. 1-11983) filed
        on November 3, 2003.10(ppp)
    Indenture dated October
        29, 2003 between FPIC Insurance Group, Inc. and U. S. Bank National Association,
        as debenture trustee, incorporated by reference to FPICs Form 8-K
        (Commission File No. 1-11983) filed on November 3, 2003.10(qqq)
    Amendment No. 4 to
        Revolving Credit and Term Loan Agreement dated October 10, 2003 among
        FPIC Insurance Group, Inc., as borrower, and several banks and other financial
        institutions from time to time party thereto, as lenders, and SunTrust
        Bank, as administrative agent and collateral agent for the lenders, and
        joined by certain subsidiaries of the borrower as subsidiary guarantors,
        incorporated by reference to FPICs Form 8-K (Commission File No.
        1-11983) filed on November 3, 2003.10(rrr)
    Confidentiality Agreement
        dated October 27, 2003 between FPIC Insurance Group, Inc., on the one
        hand, and Stilwell Value Partners III., L.P., Stilwell Associates, L.P.,
        Stilwell Value, LLC, Joseph Stilwell, and John G. Rich, on the other.10(sss)
    Form of Indemnity Agreement
        dated June 5, 2002 between the Registrant and Kenneth M. Kirschner.10(ttt)
    Form of Indemnity Agreement
        dated June 5, 2002 between the Registrant and Joan D. Ruffier.10(uuu)
    Form of Indemnity Agreement
        dated June 4, 2003 between the Registrant and Terence P. McCoy, M.D.10(vvv)
    Form of Indemnity Agreement
        dated November 10, 2003 between the Registrant and John G. Rich.10(www) *
    Form of Letter Agreement
        regarding additional compensation dated February 5, 2003 between Administrators
        for the Professions, Inc. and Anthony J. Bonomo .14.1
    FPIC Insurance Group,
        Inc. Code of Ethics.21
    Subsidiaries of the
        Registrant23
    Consent of PricewaterhouseCoopers
        LLP31.1
    Certification of John
        R. Byers, President and Chief Executive Officer, pursuant to Section 302
        of the Sarbanes-Oxley Act of 2002 .31.2
    Certification of Kim
        D. Thorpe, Executive Vice President and Chief Financial Officer, pursuant
        to Section 302 of the Sarbanes-Oxley Act of 2002.32
    Certification of John
        R. Byers, President and Chief Executive Officer, and Kim D. Thorpe, Executive
        Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section
        1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
    Management contract
        or compensatory plan or arrangement.(b)
    Reports
        on Form 8-K:
    On November 3, 2003,
        FPIC furnished a Form 8-K notifying the SEC that FPIC completed a $15
        million placement of trust preferred securities.
    On November 10, 2003,
        FPIC furnished a Form 8-K notifying the SEC of the appointment of John
        G. Rich as a director.
    On November 12, 2003,
        FPIC furnished a Form 8-K notifying the SEC of FPICs repayment and
        early retirement of its commercial bank credit facility.113
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 15th day of
March, 2004.
FPIC Insurance Group, Inc.By
  /s/ John R. ByersJohn R. ByersPresident and
  Chief Executive Officer114
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
  
  President, Chief Executive
  Officer and
  
  March 15, 2004Director (Principle
  Executive Officer)John R. Byers/s/ Kim D. Thorpe
  
  Executive Vice President
  and Chief Financial
  
  March 15, 2004Officer (Principal
  Financial Officer and PrincipalKim D. Thorpe
  
  Accounting Officer)/s/ Robert O. Baratta
  
  Chairman of the Board
  
  March 15, 2004Robert
  O. Baratta, M.D./s/ David M. Shapiro
  
  Vice Chairman
  
  March 15, 2004David M. Shapiro, M.D./s/ John K. Anderson, Jr.
  
  Director
  
  March 15, 2004John K. Anderson, Jr./s/ Richard J. Bagby
  
  Director
  
  March 15, 2004Richard J. Bagby, M.D./s/ James W. Bridges
  
  Director
  
  March 15, 2004James W. Bridges, M.D./s/ Kenneth M. Kirschner
  
  Director
  
  March 15, 2004Kenneth
  M. Kirschner/s/ M.C. Harden, III
  
  Director
  
  March 15, 2004M. C. Harden, III/s/ Terence P. McCoy
  
  Director
  
  March 15, 2004Terence P. McCoy, M.D./s/ John G. Rich
  
  Director
  
  March 15, 2004John G. Rich/s/ Joan D. Ruffier
  
  Director
  
  March 15, 2004Joan
  D. Ruffier/s/ Guy T. Selander
  
  Director
  
  March 15, 2004Guy T. Selander, M.D./s/ James G. White
  
  Director
  
  March 15, 2004James G.
  White, M.D.115