<PAGE>   1


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark one)
   [X]        ANNUAL REPORT PERSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the fiscal year ended December 31, 1998

                                       OR

   [ ]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

        For the transition period ______ to ______
        Commission file number ________

                           FPIC INSURANCE GROUP, INC.
              (Exact name of registrant as specified in its charter)

            FLORIDA                                   59-3359111
(State or other jurisdiction of                   (I.R.S.) Employer
 incorporation or organization)                   Identification No.)

    1000 RIVERSIDE AVENUE, SUITE 800                    32204
(Address of principal executive offices)              (zip code)

      (Registrant's telephone number, including area code): (904) 354-5910

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
                                (Title of Class)


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 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 the 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.

The Aggregate market value of the Registrant's Common Stock (its only voting
stock) held by non-affiliates of the Registrant as of March 12, 1999 was
approximately $367,403,823.

As of March 12, 1999, there were 9,796,363 shares of the Registrant's Common
Stock $.10 Par value, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's Proxy Statement for the 1999 Annual Shareholders'
Meeting are incorporated by reference into Part III, Items 10, 11, 12 and 13 of
this Report. Such Proxy Statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" for the
purposes of this Report on Form 10-K.


<PAGE>   2


                           FPIC INSURANCE GROUP, INC.
                        1998 ANNUAL REPORT ON FORM 10-K

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                       PAGE
                                                                                       ----
                                     PART I

<S>                                                                                     <C>
Item 1.   Business                                                                      1
    
Item 2.   Properties                                                                    13
    
Item 3.   Legal Proceedings                                                             13
    
Item 4.   Submission of Matters to a Vote of Security Holders                           13
    
                                    PART II
    
Item 5.   Market for the Registrants' Common Stock and
          Related Stockholder Matters                                                   13
    
Item 6.   Selected Financial Data                                                       14
    
Item 7.   Management's Discussion and Analysis of Financial
          Condition and Results of Operations                                           14
    
Item 8.   Financial Statements and Supplemental Data                                    26
    
Item 9.   Changes in and Disagreements with Accountants on
          Accounting and Financial Disclosure                                           26
    
                                    PART III

ITEM 10.  Directors and Executive Officers of the Registrant                            26

ITEM 11.  Executive Compensation                                                        27

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management                27

ITEM 13.  Certain Relationships and Related Transactions                                27

                                    PART IV

ITEM 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K               27
</TABLE>

<PAGE>   3

                                     PART I

Item 1. Business

Forward-Looking Statements

The statements that are not historical facts contained in this report are
forward-looking statements that involve certain risks and uncertainties. These
forward-looking statements include the plans and objectives of management for
future operations relating to the products and future economic performance of
the Company. These forward-looking statements also address the current views of
management regarding the Company's future acquisitions.

The forward-looking statements are based on assumptions that the Company will
continue to: (i) price and market its insurance products competitively; (ii)
reserve appropriately for losses and LAE; (iii) maintain its successful handling
of claims; and (iv) retain existing agents and key management personnel. The
forward-looking statements are also based upon assumptions that (i) competitive
conditions within the MPL insurance business will not change materially or
adversely; (ii) demand for MPL insurance will remain strong; (iii) the market
will accept the Company's new products and services; and (iv) the Company's
reinsurers will remain solvent. In addition, if the Company does acquire one or
more businesses, management's ability to identify suitable businesses to acquire
and to effectively integrate the combined operations of such businesses with the
Company may cause the Company's actual results to differ materially from the
results anticipated in these forward-looking statements. Assumptions relating to
the foregoing are difficult or impossible to predict accurately and many are
beyond the control of the Company. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of
such information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be achieved.

Overview

FPIC Insurance Group, Inc. (the Company) was formed in 1996. On June 11, 1996,
the shareholders of Florida Physicians Insurance Company, Inc. (FPIC) approved
the formation of a holding company structure (the Reorganization) that resulted
in FPIC becoming a subsidiary of the Company. In connection with the
Reorganization, FPIC's shareholders became the shareholders of the Company and
received five shares of the Company's common stock for each of their shares of
FPIC's common stock. As of December 31, 1998, the Company's principal
subsidiaries are: FPIC, Anesthesiologists' Professional Assurance Company (APAC)
and McCreary Corporation (McCreary). For developments since 1998, see Item 7,
Management's Discussion and Analysis.

The Company, through FPIC and APAC, is the largest provider of medical
professional liability (MPL) insurance in Florida, based on the number of
physicians and dentists insured. For more than 20 years, the Company has
provided MPL insurance to Florida's medical community. MPL insurance insures the
physician, dentist, hospital or other healthcare providers against liabilities
arising from the rendering of or failure to render professional healthcare
services. Under the typical MPL insurance policy, the insurer also pays the
legal costs of defending the claim. The Company has the exclusive endorsement of
both the Florida Medical Association and the Florida Dental Association.

The MPL premium in Florida accounts for approximately 88% of the Company's total
premiums written in Florida. As of December 31, 1998, the Company was also
licensed in Alabama, Arkansas, Georgia, Kentucky, Michigan, Mississippi, Ohio,
Pennsylvania, Tennessee, Texas,


                                                                               1
<PAGE>   4

Virginia and West Virginia. The Company has begun or will begin marketing in
each of these states when it determines that an opportunity exists to write
profitable business.

The Company's two significant industry segments are insurance and third party
administration services. For financial information relating to the Company's
operations and the Company's significant industry segments, see Management's
Discussion and Analysis and the notes to the Consolidated Financial Statements,
which are incorporated herein by reference.

Insurance

The Company has developed a variety of insurance products for participants in
the healthcare industry. These products include: MPL insurance for medical
professionals, managed care liability insurance, professional and comprehensive
general liability insurance for healthcare facilities, AHCA/OSHA insurance
coverage, provider stop loss insurance, workers' compensation, and group
accident and health coverage. The following table summarizes by product the
direct premium written and assumed for the periods indicated.

<TABLE>
<CAPTION>
                                                                   FOR THE YEAR ENDED DECEMBER 31,
                                                               1998               1997           1996
                                                               ----               ----           ----
                                                                            (IN THOUSANDS)
<S>                                                       <C>             <C>                <C>
Medical professional liability for physicians                $94,769         $71,056            $58,860
Medical professional liability for dentists                    4,238           3,726              3,539
Managed care                                                     141             130                330
Professional and comprehensive general liability               1,226             814                627
AHCA/OSHA                                                      1,104           1,056                936
Workers' compensation                                            552               0                  0
Group accident and health                                     14,959             989                  0
                                                            --------         -------            -------
               Totals                                       $116,989         $77,771            $64,292
                                                            ========         =======            =======
</TABLE>

Medical Professional Liability. The principal product offered by the Company is
MPL insurance for physicians and dentists. The Company's MPL insurance is
offered to physicians and dentists in all types of settings, including solo
practices, group practices and hospitals. MPL insurance provides coverage
against the legal liability of an insured for such things as injury caused by or
as a result of treatment of a patient, failure to treat a patient and failure to
diagnose a patient.

The Company's MPL policies are issued on a "claims-made" basis. Coverage is
provided for claims reported to the Company during the policy period arising
from incidents that occurred at any time the insured was covered by the policy.
The Company also offers "tail coverage" for claims reported after the expiration
of the policy for occurrences during the coverage period. The price of tail
coverage is based on the length of time the insured has been covered under the
Company's claims-made form. The Company provides free tail coverage for insured
physicians who die or become disabled during the coverage period of the policy
and those who have been insured by the Company for at least five consecutive
years and retire completely from the practice of medicine. MPL insurance
policies offered by the Company are issued with liability limits up to $5.0
million per incident and $7.0 million in annual aggregate for physicians and
$1.0 million per incident and $3.0 million in annual aggregate for dentists. At
December 31, 1998, the Company had 6,383 physician insureds and 1,843 dentist
insureds. For the year ended December 31, 1998, the Company's $99 million in
direct and assumed premium from MPL insurance represents 85% of the Company's
total premium.

Managed Care. Managed care liability insurance provides coverage for liability
arising from the errors and omissions of a managed care organization, the
vicarious liability of a managed care


                                                                               2
<PAGE>   5

organization for acts or omissions by contracted and employed providers ("E&O")
and the liability of directors and officers of a managed care organization
("D&O"). These policies are issued on a claims-made basis. The typical limits of
coverage offered by the Company for E&O policies are $1.0 million per incident
and $1.0 million in annual aggregate. For D&O policies, the typical limits are
$3.0 million per incident and $3.0 million in annual aggregate.

Professional and Comprehensive General Liability. The Company also offers
professional and comprehensive general liability insurance to healthcare
facilities, such as ambulatory surgery centers and walk-in medical care clinics.
The policies issued to healthcare facilities provide both comprehensive general
liability and protection for professional liability related to the operation of
a healthcare facility and its various staff committees. Professional liability
insurance is offered by the Company to healthcare facilities on a claims-made
basis. Commercial general liability is available on a claims-made or occurrence
basis, although all policies issued as of December 31, 1998 were on a
claims-made basis. The limits of coverage for these policies available to
non-hospital healthcare facilities are $1.0 million per incident and $3.0
million in annual aggregate and to hospitals is $10.0 million per incident and
$10.0 million in annual aggregate. Higher liability limits are placed through
facultative reinsurance arrangements. As of December 31, 1998, the Company had
19 facility insureds.

AHCA/OSHA. The Company also offers defense coverage to physicians and dentists
for costs associated with investigations initiated by Florida's Agency for
Healthcare Administration ("AHCA") as well as the Occupational Safety and Health
Administration ("OSHA"). This coverage is offered to the Company's insureds for
investigations that are not related to an MPL claim; investigations related to
an MPL claim are provided to the Company's insureds as part of their policy
coverage. AHCA/OSHA coverage is also offered to physicians and dentists not
otherwise insured by the Company. Policy limits for this coverage are $25,000
per incident and $75,000 in annual aggregate. For the year ended December 31,
1997, the Company had $1.1 million in direct premium written from AHCA/OSHA
insurance.

Workers' Compensation. The Company began writing workers' compensation insurance
in 1998. Workers' compensation insurance covers the liability of the employer
for work-related injuries to employees, in accordance with the requirements of
law. The Company's workers' compensation insurance is primarily offered to
physicians and dentists, as well as to other professional occupations such as
accountants, architects, engineers, attorneys and insurance agents. The initial
focus has been to write in the state of Florida with a guaranteed cost product.
As the Company expands into other states with medical professional liability
insurance, the intent is to offer workers' compensation coverage to the existing
or potential customer base. The Company is utilizing McCreary for it claims
handling, policy administration and underwriting.

Group Accident and Health. The Company began writing and assuming group accident
and health (A&H) premium in 1997. Through its relationship with the Florida
Dental Association, the Company began underwriting a small employer, limited
risk, accident and health program for dentists. A&H insurance provides
comprehensive coverage for preventive care and medically necessary expenses at
various deductible, co-insurance and stop loss limits. For the year ended
December 31, 1998, the Company has $14.9 million in direct and assumed premium
from group accident and health, representing 13% of the Company's total premium.

Rates

The Company establishes, through its own actuarial staff and independent
actuaries, rates and rating classifications for its physician and dentist
insureds based on the loss and loss adjustment



                                                                               3
<PAGE>   6

expenses (LAE) experience it has developed over the past 20 years and upon rates
charged by its competitors. The Company uses risk factors, among other things,
based on geographic location, medical specialty and policy limits. The Company
has established its premium rates and rating classifications for healthcare
facilities and managed care organizations utilizing data publicly filed by other
insurers and guidelines provided by its reinsurers. All rates for liability
insurance are subject to review by the relevant insurance regulatory authority.
As part of its pricing strategy, the Company targets medical professionals with
low levels of previous MPL claims. The Company offers such medical professionals
a "claims-free" credit.

Marketing and Policyholder Services

The Company's insurance products are primarily marketed by independent agencies.
In addition, insurance products are sold by the Company directly. As of December
31, 1998, the Company's products were sold through 116 independent agencies.
During 1998, approximately 73% of the Company's MPL direct premium written was
produced by independent agents, five of which accounted for approximately 50% of
such premiums. The Company added 22 new independent agencies in 1998. The
insurance products that are sold by the Company directly are a result of direct
requests from physicians.

An integral part of the Company's marketing strategy is targeting sectors of the
MPL industry that it believes generate above average underwriting profits. The
Company has identified certain medical specialties and "claims-free" physicians
as sectors in which it wishes to increase its market share. This marketing
strategy includes sending targeted physicians personal mail solicitation
packages, encouraging agents to refer targeted physicians and providing an
expedited application process for those physicians. As a result of this
strategy, approximately 67% of the increase in direct premium written in 1998
was received from physicians in the targeted specialties.

The Company has also entered into endorsement and marketing agreements with
local medical associations and other provider-supported organizations that
provide rate credits and certain services for insureds of the programs. These
endorsement and marketing agreements gain the Company access to meetings of
these groups in order to make presentations and provide access to their
respective publications for advertisements. In addition, several local
associations have agreed to assist the Company in developing loss prevention
programs, monitoring proposed legislation and administrative regulations and
providing information on healthcare matters relating primarily to professional
liability.

The Company provides comprehensive risk management services designed to heighten
its insureds' awareness of situations giving rise to potential loss exposures,
to educate its insureds on ways to improve their medical practice procedures and
to assist its insureds in implementing risk modification measures. In addition,
the Company conducts surveys for hospitals and large medical groups to review
their practice procedures. Complete reports that specify areas of the insured's
medical practice that may need attention are provided to the policyholder. The
Company presents and participates in periodic seminars with medical societies
and other groups at which pertinent subjects are presented. These educational
offerings are designed to increase risk awareness and the effectiveness of
various medical professionals.

Underwriting

The underwriting of the Company's MPL insurance is performed internally by five
underwriters with over 40 years of combined experience underwriting MPL
insurance. The Company has


                                                                               4
<PAGE>   7

given its internal underwriting department complete authority for all initial
underwriting decisions. The Company's agents have no binding authority.

As part of the underwriting process, the Company utilizes the State of Florida's
database, which consolidates a record of all MPL claims-paid information that
insurers are required to report to the State. When applications are received
from physicians for MPL insurance, the Company reviews this database to verify
the physician's claims-paid record. If a physician has an excessive claims-paid
history, the application is denied. All other applicants are reviewed on the
basis of the physician's educational background, residency experience, practice
history and the comments received from personal references. Annually, the
Company's underwriting department also reexamines each insured before coverage
is renewed, including verifying that each insured's license is current and that
any reported claims for the insured were within acceptable limits.

The underwriting of the Company's other insurance products is conducted in
conjunction with external underwriters. With respect to these products, the
Company receives applications from prospective insureds. After a review of the
information contained in such applications, the Company forwards them to an
external underwriter. The external underwriter performs its review procedures
for each application and consults with the Company on the amount of premium to
charge each insured.

Claims

The Company's claims department is responsible for the supervision of claims
investigation, the establishment of case reserves, case management, development
of the defense strategy and the coordination and control of attorneys engaged by
the Company. The Company's claims department has 19 employees, including 4
supervisors and 5 field investigators who are located in Orlando, Tampa, Miami
and Jacksonville, Florida in order to provide localized and timely attention to
claims. Employees in the claims department with settlement authority have an
average of 16 years of experience with the Company.

The Company's claims department has complete settlement authority for most
claims filed against the Company's insureds. The Company's policy is and has
been to refuse settlement and to defend aggressively all claims that appear to
have no merit. In those instances where claims may have merit, the claims
department attempts to settle the case as expeditiously as possible. The Company
believes that it has developed relationships with attorneys in Florida who have
significant experience in the defense of MPL claims and who are able to defend
in an aggressive, cost-efficient manner the claims against the Company's
insureds.

Reinsurance

The Company follows customary industry practice by reinsuring a portion of its
risks. The Company cedes to reinsurers a portion of its risks and pays a fee
based upon premiums received on all policies subject to such reinsurance.
Insurance is ceded principally to reduce net liability on individual risks and
to provide protection against large losses. Although reinsurance does not
legally discharge the ceding insurer from its primary liability for the full
amount of the policies reinsured, it does make the reinsurer liable to the
insurer to the extent of risk ceded.

For MPL insurance and professional and comprehensive general liability
insurance, the Company has established a policy of reinsuring risks in excess of
$500,000 per loss. The Company reinsures risks associated with these policies
under treaties pursuant to which 


                                                                               5
<PAGE>   8

reinsurers agree to assume those risks insured by the Company in excess of its
individual risk retention level and up to its maximum individual policy limit
offered. For group accident and health insurance the Company has entered into a
separate excess of loss reinsurance treaty. Under this treaty, the reinsurers
bear losses in excess of $100,000 per person.

Reinsurance is placed under reinsurance treaties and agreements with a number of
individual companies and syndicates to mitigate concentration of credit risk.
General Reinsurance Corporation is one of the Company's largest reinsurers of
MPL insurance, with 25% of the ceded risks and 50% of the ceded risks for
professional and comprehensive general liability insurance. The Company relies
on reinsurance brokers and intermediaries to assist in the analysis of the
credit quality of its reinsurers. The Company also requires reinsurers that are
not authorized to do business in Florida to post an evergreen letter of credit
to secure their reinsurance recoverables.

Under Florida law, in the event the Company has the opportunity to settle a
claim within policy limits but fails to do so, and a judgment is rendered
against a policyholder for an amount exceeding the policy limit, the Company may
be charged with bad faith in failing to settle. The Company may be held
responsible for the amount exceeding the policy limit or extra contractual
damages. The Company's primary reinsurance contracts include coverage for
policies with limits equal to or greater than $1 million for which the claim
exceeds policy limits or extra contractual damage. In the past five years, the
Company has not paid a claim, including bad faith claims, in excess of $3.0
million.

Loss and LAE Reserves

The determination of loss reserves is a projection of ultimate losses through an
actuarial analysis of the claims history of the Company and other MPL insurers,
subject to adjustments deemed appropriate to the Company due to changing
circumstances. Included in its claims history are losses and LAE paid by the
Company in prior periods and case reserves for anticipated losses and LAE
developed by the Company's claims department as claims are reported and
investigated. The Company relies primarily on such historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss cost trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss and LAE reserves may be revised. Any increase in the amount of reserves,
including reserves for insured events of prior years, could have an adverse
effect on the Company's results for the period in which the adjustments are
made.

The uncertainties inherent in estimating ultimate losses on the basis of past
experience have grown significantly in recent years principally as a result of
judicial expansion of liability standards and expansive interpretations of
insurance contracts. These uncertainties may be further affected by, among other
factors, changes in the rate of inflation and changes in the propensities of
individuals to file claims. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance, including
MPL insurance, due primarily to the long-term nature of the resolution of
claims. The Company utilizes both its staff and independent actuaries in
establishing its reserves. The Company's independent actuaries review the
Company's loss and LAE reserves twice each year and prepare a report that
includes a recommended level of reserves. The Company considers this
recommendation as well as other factors, such as known, anticipated or estimated
changes in frequency and severity of losses, loss retention levels and premium
rates, in establishing the amount of its loss and LAE reserves. The Company
continually refines reserve estimates as experience develops and further 


                                                                               6
<PAGE>   9

claims are reported and settled. The Company reflects adjustments to reserves in
the results of the periods in which such adjustments are made. MPL insurance is
a long-tail line of business for which the initial loss and LAE estimates may be
adversely impacted by events occurring long after the reporting of the claim,
such as sudden severe inflation or adverse judicial or legislative decisions.


                                                                               7
<PAGE>   10


The following table sets forth the development of loss and LAE reserves of the
Company for the 10-year period ended December 31, 1998:

<TABLE>
<CAPTION>
Year Ended December 31                 1998        1997       1996       1995       1994      1993


<S>                                   <C>         <C>        <C>        <C>        <C>       <C>    
Balance Sheet Reserves (2)            242,377     188,086    172,738    164,506    152,268   138,745

Reestimated Liability (2)
  As Of:
    One year later                                180,686    154,066    140,322    137,746   128,333
    Two years later                                          127,845    130,137    113,682   111,028
    Three years later                                                   107,239    100,141    91,138
    Four years later                                                                85,945    82,049
    Five years later                                                                          73,264
    Six years later
    Seven years later
    Eight years later
    Nine years later
    Ten years later

Cumulative Paid (2)
   As Of:
    One year later                                 47,941     35,382     35,562     28,701    24,794
    Two years later                                           62,928     60,450     52,321    44,882
    Three years later                                                    78,593     63,213    56,806
    Four years later                                                                73,087    61,825
    Five years later                                                                          67,563
    Six years later
    Seven years later
    Eight years later
    Nine years later
    Ten years later

Redundancy (Deficiency) (1)                         7,400     44,893     57,267     66,323    65,481
% Redundancy (Deficiency)                           15.1%      26.0%      34.8%      43.6%     47.2%
</TABLE>

<TABLE>
<CAPTION>
Year Ended December 31                 1992       1991       1990       1989     1988


<S>                                  <C>        <C>        <C>        <C>      <C>   
Balance Sheet Reserves (2)            126,651    118,995    119,031    97,302   79,893

Reestimated Liability (2)
  As Of:
    One year later                     98,706    101,844    103,523   104,996   92,801
    Two years later                    89,182     80,716     86,133    89,427   96,179
    Three years later                  75,848     71,318     64,124    72,164   80,686
    Four years later                   67,535     66,276     56,127    56,695   77,714
    Five years later                   68,472     62,758     54,728    53,007   68,034
    Six years later                    69,988     61,993     53,826    52,714   66,199
    Seven years later                             63,156     52,619    52,412   65,894
    Eight years later                                        53,916    51,451   66,776
    Nine years later                                                   51,314   65,783
    Ten years later                                                             65,042

Cumulative Paid (2)
   As Of:
    One year later                     25,924     26,482     17,500    22,656   28,900
    Two years later                    42,401     44,542     37,283    34,656   47,038
    Three years later                  55,278     52,340     47,357    43,754   55,172
    Four years later                   59,538     56,633     49,655    49,298   61,111
    Five years later                   62,534     58,183     51,869    49,224   64,669
    Six years later                    65,860     58,497     51,504    50,407   63,810
    Seven years later                             60,434     51,593    50,493   64,830
    Eight years later                                        53,224    50,528   64,857
    Nine years later                                                   50,622   64,860
    Ten years later                                                             64,881

Redundancy (Deficiency) (1)            56,663     55,839     65,115    45,988   14,851
% Redundancy (Deficiency)               44.7%      46.9%      54.7%     47.3%    18.6%
</TABLE>


(1) There may be a difference of 1 (,000) in the redundancies due to rounding.
(2) Due to the adoption of SFAS No. 113 in 1993, amounts in the years 1993
    through 1998 are presented on a gross basis. Amounts in the years 1988
    through 1992 are presented net of reinsurance recoverables. Prior to the
    issuance of SFAS No. 113, the Company maintained its reinsurance records
    on a net basis. As detailed records on a gross basis are not available for
    years prior to 1993, the Company has not restated these years on a gross
    basis.


                                                                               8
<PAGE>   11



The following table sets forth an analysis of the Company's reserves for losses
and LAE and provides a reconciliation of beginning and ending loss and LAE
reserves, net of reinsurance for the periods presented:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                               1998             1997              1996
                                                               ----             ----              ----
                                                                            (in thousands)

<S>                                                           <C>              <C>               <C>     
Net reserve liability, at beginning of period                 $173,971         $161,124          $155,318
                                                              --------         --------          --------
Reserves of entity acquired                                     23,406                0                 0
Provisions for losses and LAE occurring
  in the current period                                         81,694           69,126            61,617
Decrease in estimated losses and
  LAE for claims occurring in prior periods                   (14,332)         (15,115)          (14,669)
                                                              --------         --------          --------
Total incurred during current period                            67,362           54,011            46,948
                                                                ------         --------          --------

Losses and LAE payments for claims occurring during:
  The current period                                            14,279            8,061             5,253
  Prior periods                                                 49,697           33,103            35,889
                                                                ------         --------          --------
Total paid during current period                                63,976           41,164            41,142
                                                                ------         --------          --------

Net reserve liability, at end of period                       $200,763         $173,971          $161,124
                                                               =======         ========          ========

Gross liability at end of period                              $242,377         $188,086          $172,738
Reinsurance recoverable at end of period                        41,614           14,115            11,614
                                                                ------         --------          --------
Net reserve liability at end of period                        $200,763         $173,971          $161,124
                                                              ========         ========          ========
</TABLE>

As shown above, as a result of the Company's review of reserves, which includes
a reevaluation of the adequacy of reserve levels for prior years' claims, the
Company reduced its reserves for claims occurring in prior periods by $14.3
million, $15.1 million and $14.7 million for the years ended December 31, 1998,
1997, and 1996, respectively. There can be no assurance concerning future
adjustments of reserves, positive or negative, for prior years' claims.

Investment Portfolio

The Company's investment strategy for its bond portfolio is to maintain a
diversified investment-grade fixed income portfolio, provide liquidity and
maximize after-tax yield. As of December 31, 1998 the Company's portfolio was
managed internally and the Company had $325.9 million of fixed income securities
at market value. All of the Company's fixed income and equity securities are
classified as available-for-sale.

The Company believes that its focus on income generation rather than capital
appreciation has reduced the portfolio's overall volatility. In addition, the
Company has invested a greater portion of its portfolio in municipal bonds,
which the Company believes generate a greater after-tax return than investments
in taxable fixed income securities of comparable risk, duration, and other
investment characteristics. All of the fixed maturity securities held in the
investment portfolio are publicly traded securities.


                                                                               9
<PAGE>   12

In addition to the fixed income portfolio, the Company invests in other
securities such as investment partnerships and certain strategic equity
investments. Aside from certain strategic investments, the Company's current
policy is to limit such investments to $10 million.

The Company generally does not invest in off-balance sheet derivative financial
investments. However, the Company has invested in one interest rate swap
contract in connection with its revolving credit facility. The contract is an
off-balance sheet instrument and serves to fix the Company's interest expense on
the revolving credit facility.

Competition

The MPL insurance market in Florida is highly competitive. Several companies in
the state offer products at lower premium rates than the Company and more
companies may enter the Florida market in the future. In addition, the Company
believes that the number of healthcare entities that insure their affiliated
physicians through self-insurance may begin to increase. Many of the MPL
insurers are substantially larger and have considerably greater resources than
the Company. Additionally, several of these insurers have received A.M. Best
ratings that are higher than the Company's insurance subsidiaries ratings of "A-
(Excellent)." In addition, because a substantial portion of the Company's
products are marketed through independent insurance agencies, all of which
represent more than one company, the Company faces competition within each
agency in its own agency system. However, the Company's name recognition,
medical society endorsements, physician board of directors, agency force and
program development have all contributed to helping the Company maintain its
number of insureds. The Company has been successful at target marketing groups
and specialties that exhibit above average profitability. The Company believes
that its marketing success has allowed it to improve the quality and
profitability of its overall business.

The Company believes that the principal competitive factors in its business in
Florida are service, name recognition and price, and that it is competitive in
Florida in all of these areas. The Company enjoys strong name recognition in
Florida by virtue of having been organized by, and operated for the principal
benefit of, Florida physicians. The services offered insureds of the Company as
well as the healthcare community in general are intended to promote name
recognition and to maintain and improve loyalty among the insureds of the
Company. MPL insurance offered by FPIC has the exclusive endorsement of both the
Florida Medical Association and the Florida Dental Association, and is also
endorsed by various county medical societies and various state medical specialty
societies.

In general, the MPL market in other states is dominated by local carriers who
have been able to maintain strong customer loyalty. The same targeted specialty
and loss-free approach developed in Florida is being used in these other states.
The Company is recruiting and developing an agency force to expand its market,
provide service and develop name recognition.

Insurance Ratings

FPIC and APAC currently have a financial condition rating from A.M. Best of "A-
(Excellent)". An A.M. Best rating is intended to provide an independent opinion
of an insurer's ability to meet its obligations to policyholders and should not
be considered an investment recommendation. A.M. Best's ratings are based upon a
comprehensive review of a company's financial performance that is supplemented
by certain data, including responses to A.M. Best's questionnaires, quarterly
National Association of Insurance Commissioners (NAIC) filings, state 


                                                                              10
<PAGE>   13

insurance department examination reports, loss reserve reports, annual reports
and reports filed with the Securities and Exchange Commission. A.M. Best
undertakes a quantitative evaluation based upon profitability, leverage and
liquidity and a qualitative evaluation based upon the composition of an
insurer's book of business or spread of risk, the amount, appropriateness and
soundness of reinsurance, the quality, diversification and estimated market
value of its assets, the adequacy of its loss reserves and policyholders'
surplus and the experience and competency of its management.

Regulation

The Company and its insurance subsidiaries are subject to extensive state
regulatory oversight in Florida and in the other jurisdictions in which they
conduct business.

Florida insurance law regulates insurance holding company structures, including
the Company and its subsidiaries. Each insurance company in a holding company
structure is required to register with the Florida Department of Insurance (the
"Department of Insurance") and furnish information concerning the operations of
companies within the holding company structure that may materially affect the
operations, management or financial condition of the insurers within the
structure. Pursuant to these laws, the Department of Insurance may examine the
Company, and/or FPIC and APAC at any time and require disclosure of and/or
approval of material transactions involving any insurance subsidiary of the
Company, such as extraordinary dividends from FPIC and APAC. All transactions
within the holding company structure affecting FPIC and APAC must be fair and
reasonable.

Florida insurance law provides that no person may acquire directly or indirectly
five percent or more of the voting securities of a Florida domiciled insurance
company unless such person has obtained the prior written approval of the
Department of Insurance for such acquisition. Any purchaser of five percent or
more of the Company's insurance subsidiaries, FPIC's and APAC's, outstanding
common stock will generally be presumed to have acquired control of FPIC or
APAC. In lieu of obtaining such prior approval, a purchaser owning less than 10%
of the outstanding shares of the Company or FPIC or APAC may file a disclaimer
of affiliation and control with the Department of Insurance.

Since FPIC and APAC are domiciled in Florida, the Department of Insurance is
their principal supervisor and regulator. However, FPIC and APAC are also
subject to supervision and regulation in the states in which they transact
business in relation to numerous aspects of their business and financial
condition. The primary purpose of such supervision and regulation is to insure
the financial stability of FPIC and APAC for the protection of policyholders.
The laws of the various states establish insurance departments with broad
regulatory powers relative to granting and revoking licenses to transact
business, regulating trade practices, required statutory financial statements
and prescribing the types and amount of investments permitted. Although premium
rate regulations vary among states and lines of insurance, such regulations
generally require approval by each state regulator of the rates and policies to
be used in its state.

Insurance companies are required to file detailed annual reports with the
supervisory agencies in each state in which they do business, and their business
and accounts are subject to examination by such agencies at any time.

The NAIC annually calculates 12 financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a 



                                                                              11
<PAGE>   14

"usual range" of results for each ratio, established by the NAIC. For the year
ended 1998, the Company's results were within the usual range for each of the 12
ratios.

In March 1998, the NAIC adopted the Codification of Statutory Accounting
Principles Project (the Codification) as the NAIC supported basis of accounting.
The Codification was approved with a provision allowing for commissioner
discretion 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.

The impact of the Codification on the Company's statutory financial statements
has not been determined. Because the Codification represents a new basis of
accounting for statutory financial statements, adoption of the Codification may
have a significant impact on the Company's statutory financial statements.

Although the NAIC has stated that the adoption date for the Codification is
January 1, 2001, the implementation date is dependent upon an insurer's state of
domicile. Accordingly, the Company's adoption date of the Codification is
dependent upon actions of the Insurance Department of the State of Florida and
the Florida State Legislature.

The insurance subsidiaries of the Company 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.

The insurance industry is under continuous review by Congress, state
legislatures and state and federal regulatory agencies. From time to time
various regulatory and legislative changes have been proposed for the insurance
industry, some of which could have an effect on insurers or reinsurers. Among
the proposals that have in the past been, or are at present being, considered
are the possible introduction of state and federal limits on certain damages for
MPL as well as federal regulation in addition to, or in lieu of, the current
system of state regulation of insurers. The Company is unable to predict whether
any of these proposals will be adopted, the form in which any such proposals
would be adopted, or the impact, if any, such adoption would have on the
Company, although such impact could be material.

Third Party Services

Through McCreary and its subsidiary, Employers Mutual, Inc. (EMI), the Company
offers third party administration services, and which operates as a separate
industry segment. McCreary specializes in the administration of self insurance
plans for large employers. The lines of insurance that McCreary primarily
administers are group health, workers' compensation, general liability and
property. The main product of EMI is administration for emerging managed care
organizations. The Company intends to offer these services to its existing and
potential customer base of healthcare facilities and managed care organizations
on both a self insured basis and a fully insured basis. For the year ended
December 31, 1998, McCreary contributed $12.2 million to the Company's total
revenue.

Employees


                                                                              12
<PAGE>   15

At December 31, 1998, the Company employed 314 persons. None of these employees
are covered by a collective bargaining agreement. Management considers the
Company's relationships with its employees to be good.

Item 2. Properties

The Company's corporate headquarters are located in Jacksonville, Florida. The
headquarters property is an 8-story, 70,000 sq. ft. office building owned by the
Company where 26,600 sq. ft. of space is occupied for its offices and 12,000 sq.
ft. is occupied by EMI. The Company and its subsidiaries lease additional
facilities that management believes are adequate for the Company's current
needs.

Item 3. Legal Proceedings

There are no material pending legal proceedings against the Company or its
subsidiaries other than litigation arising in connection with the settlement of
insurance claims.

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 1998.

                                     PART II

Item 5. Market for the Registrants' Common Equity and Related Stockholder
Matters

The Company's Common Stock has been publicly traded on the Nasdaq National
Market System since August 1, 1996 under the symbol FPIC. The following table
sets forth for the periods indicated the high and low bid quotations as
reported. Such quotations reflect inter-dealer bids and offers, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions.

<TABLE>
<CAPTION>
1998                     High Bid                Low Bid
----                     --------                -------
<S>                       <C>                     <C>   
First quarter             $32.37                  $26.00
Second quarter            $37.25                  $31.87
Third quarter             $37.25                  $24.75
Fourth quarter            $47.81                  $23.00
</TABLE>

<TABLE>
<CAPTION>
1997                     High Bid                Low Bid
----                     --------                -------
<S>                       <C>                     <C>   
First quarter             $19.13                  $13.63
Second quarter            $22.75                  $17.38
Third quarter             $29.50                  $22.25
Fourth quarter            $29.75                  $26.50
</TABLE>

As of March 19, 1999, the Company estimated that there were approximately 4,900
beneficial owners of the Company's common stock.

The Company presently intends to retain any future earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future.

Item 6. Selected Financial Data


                                                                              13
<PAGE>   16

The selected financial data presented below for the fiscal years ending December
31 should be read in conjunction with the Company's consolidated financial
statements and notes thereto, which are included elsewhere herein. All per share
amounts have been stated giving retroactive effect for the stock split that
occurred as a result of the Reorganization in June 1996.

Income Statement Data:
<TABLE>
<CAPTION>
                                                  1998              1997              1996              1995              1994
                                                  ----              ----              ----              ----              ----
                                                                     (in thousands, except per share amounts)

<S>                                             <C>                <C>               <C>               <C>               <C>    
Direct written premiums                         $116,989           $77,771           $64,292           $56,641           $52,454
Total revenues                                   120,321            93,216            76,982            69,531            52,306
Net income                                        20,693            16,557            13,324            11,686             5,877
Basic earnings per share                           $2.22             $1.83             $1.57             $1.47              $.76
Diluted earnings per share                         $2.11             $1.76             $1.53             $1.47              $.76
Cash dividend declared
  per share                                           $0                $0              $.10              $.10              $.10
</TABLE>


Balance Sheet Data:
<TABLE>
<CAPTION>
                                                  1998              1997              1996              1995              1994
                                                  ----              ----              ----              ----              ----
                                                                                   (in thousands)

<S>                                             <C>               <C>               <C>               <C>               <C>     
Total investments                               $345,004          $268,300          $238,497          $221,604          $192,867
Total assets                                     479,378           352,849           303,553           276,699           244,266
Loss and LAE reserves                            242,377           188,086           172,738           164,506           152,268
Total liabilities                                328,448           232,785           207,141           195,143           182,660
Shareholders' equity                             150,931           120,064            96,411            81,556            61,606
</TABLE>

Item 7. Management's Discussion & Analysis

The following discussion and analysis should be read in conjunction with the
consolidated financial statements and the notes appearing elsewhere in this
report. The consolidated financial statements include the results of two of the
Company's wholly owned subsidiaries, Anesthesiologists' Professional Assurance
Company and Sy.Med Development, Inc., since July 1, 1998. All amounts have been
rounded to the nearest $100,000.

General

FPIC Insurance Group, Inc. ("FIG" or the "Company") is, through its insurance
subsidiaries, the largest provider of medical professional liability (MPL)
insurance in Florida, based on the total number of physicians and dentists
insured. The Company was formed in 1996 in connection with a reorganization
pursuant to which it became the parent company of Florida Physicians Insurance
Company, Inc. ("FPIC") and McCreary Corporation ("McCreary"), a third party
administrator.

The Company, through its insurance subsidiaries, specializes in liability
insurance products and services for the healthcare community, with MPL insurance
for physicians and dentists as its primary product. The Company's MPL insurance
is written on a "claims-made" basis (as opposed to an "occurrence" basis)
providing protection to the insured only for those claims that arise out of
incidents occurring, and of which notice to the insurer is given, while coverage
is in effect. The advantage of a claims-made policy is that it allows the
insurer to accrue reserves in


                                                                              14
<PAGE>   17

the year that the claim is reported. Consequently, the insurer is able to
measure frequency of claims faster, and therefore estimate reserves, with
greater accuracy.

During 1997, (i) McCreary acquired Employers Mutual, Inc. ("EMI"), a third party
administrator, (ii) the Company acquired a 20% interest in APS Insurance
Services, Inc. ("APS"), a management company for a Texas MPL insurance
reciprocal, and (iii) FPIC acquired renewal rights with respect to Frontier
Insurance Company's Florida book of physician MPL business. On July 1, 1998, the
Company acquired Anesthesiologists' Professional Assurance Company (APAC), a
Florida-based MPL insurer. On January 6, 1999, the Company acquired
Administrators for the Professions, Inc. ("AFP"), the management company for
Physicians' Reciprocal Insurers ("PRI"), a New York MPL insurance reciprocal. On
March 17, 1999, FPIC acquired The Tenere Group, Inc. ("Tenere"), a Missouri
insurance holding company that owns Intermed Insurance Company ("Intermed"), a
Missouri MPL insurer, and Interlex Insurance Company ("Interlex"), a Missouri
legal professional liability insurer.

The Company's primary sources of revenues are dividends from its subsidiaries.
The dividends are derived from earned premiums and investment income generated
from the operations of the Company's insurance subsidiaries and fee and
commission income generated from the operations of the Company's other
subsidiaries.

The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Unexpected changes in loss trends for
the Company's insurance subsidiaries in any period could have a materially
adverse effect on the Company. In addition, reevaluations of loss and loss
adjustment expense (LAE) reserves for the Company's insurance subsidiaries could
result in an increase or decrease in reserves and a corresponding adjustment to
earnings. LAE are costs associated with the settlement of claims. The Company's
historical results of operations are not necessarily indicative of future
earnings.

Overview

Fiscal year 1998 was the strongest year for growth in the Company's history. Net
premiums earned by the Company's insurance subsidiaries grew 37%, from $65.5
million in 1997 to $89.6 million in 1998. Total revenues increased 29%, from
$93.2 million in 1997 to $120.3 million in 1998. Net income increased 25%, from
$16.6 million in 1997 to $20.7 million, and fully diluted earnings per share
increased 20%, from $1.76 per share in 1997 to $2.11 per share. During 1998, the
portion of the Company's revenues attributable to areas other than its core
physicians MPL market continued to increase. Excluding investment income,
revenues generated from non-core market sources grew to 28% of total revenues at
year end 1998, compared to 24% for 1997.

The 1998 net losses and loss adjustment expenses for the Company's insurance
subsidiaries rose 25%, from $54.0 million in 1997 to $67.4 million in 1998,
primarily due to the increase in premiums earned.

The Company believes that the premiums and earnings growth rates in 1999 should
be comparable to those achieved in 1998 as the result of the acquisitions that
have been completed. This growth could be further enhanced in the event of the
completion of any significant new acquisitions during 1999.

Insurance Operations

With respect to the Company's core MPL business, total insureds increased 25% in
1998, from 


                                                                              15
<PAGE>   18

6,831 in 1997 to 8,525. Of this increase, 11% is attributable to APAC and 10%
attributable to the growth in insureds in Texas. Physician insureds grew 31%
during 1998, from 4,872 in 1997 to 6,383. Dental insureds grew 4% in 1998, from
1,772 in 1997 to 1,843. All other MPL insureds grew 60% during 1998, from 187 in
1997 to 299 in 1998. Net premiums earned on the company's MPL business grew 18%
during 1998, from $63.5 million in 1997 to $74.8 million.

Growth was achieved during 1998 in other product areas such as legal defense for
healthcare provider licensure investigations, group accident and health
insurance coverage and errors & omissions and directors & officers liability
insurance for managed care organizations. Net premiums earned for these products
increased from $2.0 million in 1997 to $12.7 million in 1998, primarily as a
result of the increased health premium.

The Company experienced another solid year of underwriting results during 1998,
with the frequency of physician claims reported decreasing by 12% from 1997
levels. The decline in claims frequency over the past several years is a
positive sign for future claims development. The primary risk to future positive
development of the Company's claims expense is unanticipated increases in the
average claims payment, also known as severity. Loss experience on the 1996 and
prior report years is developing as expected and, in some instances, better than
expected. However, report years 1997 and 1998 are not mature enough to
accurately project at this time.

The Company's combined ratio for fiscal year 1998, calculated using generally
accepted accounting principles (GAAP), declined 5%, from 93.3% in 1997 to 89.2%
in 1998. This positive trend was primarily due to the increase in health and
workers' compensation premiums, which carry a lower combined ratio than the core
MPL business.

For 1998 the total return in the Company's fixed-income investment portfolio was
6.63%, equating to an 8.02% taxable equivalent yield when adjusted for the
municipal bond allocation. While the Company invests primarily in high grade
fixed-income securities with an average duration of less than five years, the
return on average investments dropped from 5.8% in 1997 to 5.7% in 1998
primarily due to a higher level of invested assets and a greater allocation to
federally tax-exempt securities. The total amount of the bond portfolio invested
in tax-free securities increased from 50% in 1997 to 58% in 1998. The current
investment policy permits increased allocations to tax-free securities when the
taxable equivalent yield exceeds that of taxable securities of comparable
credit, maturity and structure.

On a consolidated basis, the Company's total investment portfolio grew $76.7
million from $268.3 million in 1997 to $345.0 in 1998. APAC accounted for $33.0
million of the increase and the expiration of the Cologne reinsurance contract
contributed approximately $15.2 million to the increase. The growth in
investments also consisted of a net contribution from the reinvestment of net
interest income of $18.2 million and an increase in equities and other invested
assets of $10.3 million. Net investment income earned increased 9%, from $16.0
million in 1997 to $17.5 million in 1998.

Outlook for Florida MPL Market

The Company's assessment of the current Florida MPL market indicates that
premium growth may be flat for 1999 due to the continuation of intense
competition from both the large numbers of carriers already present and new
carriers entering the state. This competition is likely to keep downward
pressure on rates during 1999.


                                                                              16
<PAGE>   19

Effective January 1, 1999, FPIC instituted a rate increase averaging 6.2%
overall. Certain diagnostic and primary care specialties received much greater
rate increases. Within these specialties FPIC has continued to realize
deteriorating loss experience with loss ratios reaching levels that, over time,
could negatively impact earnings. The Company's strategy is to increase pricing
on these negatively developing medical specialties to the level where
contribution is being made toward covering related fixed expenses.

1998 Acquisitions and New Products

On July 1, 1998, the Company acquired APAC for $18 million in a combination of
cash, Company common stock and assumption of debt. APAC is a Florida-domiciled
insurer that writes MPL coverage for anesthesiologists. Net premiums earned by
APAC during 1998 totaled $1.5 million, and as of December 31, 1998 APAC had 736
insureds. APAC contributed little to the Company's 1998 operating results due to
preexisting reinsurance arrangements; however, the Company anticipates that APAC
will contribute to 1999 operating results. Also, on July 1, 1998, the Company
acquired a 9.9% equity interest in American Professional Assurance Ltd.
("APAL"), a Cayman Islands reinsurer, for $5.5 million in cash.

The total health business grew from $1.0 million in premium in 1997 to $ 14.9
million in premium in 1998. In November 1997 the Company began writing and
assuming group accident and health. The majority of this business is from the
Florida Dental Association group health plan. The Florida Dental Association
health plan was a unique opportunity for FPIC to enter the fully insured health
insurance market with limited risk through a rate stabilization fund. The rate
stabilization fund of $2.3 million, which acts as free reinsurance, allows the
Company access to funds to cover loss payments in the event combined ratios in
the plan exceed 100%. A benefit to FPIC and McCreary, which administer the plan,
is a 10% administrative fee.

The Florida Medical Association has also entered into agreements with FPIC to
administer its health plan in an arrangement similar to that with the Florida
Dental Association. The plan should begin in the second quarter of 1999.

During 1998, the Company continued its efforts to develop and provide
complementary products and services to its existing businesses and to create
opportunities to more efficiently distribute its products and services. In May
1998, the Company formed a new subsidiary, Professional Strategy Options, Inc.,
to provide consulting assistance to medical practices and organizations with
respect to risk sharing arrangements, developing provider sponsored
organizations and improving practice management. In July 1998 EMI acquired
Sy.Med Development, Inc., a Tennessee-based software development and consulting
company that specializes in developing products designed to reduce the
administrative burden for physician practices created by managed care. In August
1998, FPIC and Coastal Insurance Enterprises, Inc., an Alabama insurer, formed
and obtained equal equity interests in Polaris Insurance Group, Inc., which
markets their insurance products in the state of Georgia. In November 1998,
EMI's subsidiary, FPIC Services, Inc., together with Bexar County Medical
Society Management Holding Company, Inc. and Texas Medical Liability Trust,
formed and obtained equal equity interests in a Texas corporation, Bexar
Credentials Verification, Inc., which offers credential verification and other
related services to physicians.

1999 Acquisitions and Strategy

On January 6, 1999, the Company acquired Administrators for the Professions,
Inc. (AFP), which is the manager and attorney-in-fact for Physicians' Reciprocal
Insurers (PRI), a New York 


                                                                              17
<PAGE>   20

MPL insurance reciprocal. PRI, which is the second largest MPL carrier for
physicians in New York, insures over 7,000 physicians and has direct written
premiums of approximately $125 million and total assets of approximately $870
million. The purchase consideration paid by the Company for AFP consisted of $44
million in cash and 214,286 shares of the Company's common stock. AFP derives
its income from management fees paid by PRI. The Company anticipates that the
acquisition of AFP will positively impact the Company's 1999 operating results.
The amount of such impact will depend on the ability of the Company to implement
on a timely basis certain systems improvements, the streamlining and integration
of operations and cost saving measures for AFP, which are currently being
reviewed.

The Company is currently analyzing the possibility of PRI converting to a stock
insurer and being acquired by the Company. Such a transaction would be subject
to the approval of PRI's Board and policyholders and the New York Department of
Insurance. Such an acquisition would give the Company direct ownership of a
large northeastern MPL insurer and has the potential to further improve the
Company's operating results.

On March 17, 1999, FPIC acquired The Tenere Group, Inc. (Tenere), which is the
holding company for Intermed, a Missouri MPL insurer with approximately 1,700
insureds, and Interlex, a Missouri legal professional liability (LPL) insurer
with approximately 990 insureds. The purchase price for Tenere was approximately
$19.6 million in cash. The Company anticipates that the acquisition of Tenere
will positively impact the Company's 1999 operating results. The acquisition of
Tenere, Intermed and Interlex provides the Company with approximately $9.0
million of additional net premiums earned and increases the Company's presence
in the southern mid-west. The Company contemplates prudently expanding the LPL
business to the Company's other states of operation and to use the Company's
existing relationships with legal defense attorneys to help market this
business.

On July 1, 1997, the Company acquired a 20% equity interest in APS, a management
company for American Physicians Insurance Exchange ("APIE"), a Texas MPL
insurance reciprocal. During 1998, APS had net income of approximately $900,000.
In addition, the Company's equity interest in APS permits FPIC to directly write
MPL business in Texas for insureds of APIE who require an insurer strongly rated
by A.M. Best. During 1998, the Company received $7.3 million of direct written
premiums under this arrangement. In connection with the acquisition of the
initial 20% equity interest in APS, the Company obtained an option to acquire an
additional 35% equity interest in APS during 1999 for a per share purchase price
equal to ten times the average of the annual net earnings per share of APS for
1997 and 1998. The Company currently is awaiting receipt of APS' 1998 audited
financial statements prior to determining whether to exercise this option.

The Company continues to believe that the MPL industry is in a consolidation
phase and will ultimately be dominated by companies with a national presence.
During 1999, the Company will continue to work to implement its strategy of
growing nationally within the MPL industry through a series of geographically
strategic acquisitions. The Company views ideal acquisition candidates as
companies that are as strong or stronger than the Company on a relative basis
and seeks acquisitions that are expected to be immediately accretive to
earnings.

The acquisitions to date provide the Company with infrastructure to expand its
products and services to the southeast, northeast and southern midwest. The
Company's goal over the next few years is to acquire additional companies to
provide management support and operations in the rest of the country.
Accomplishing this goal will provide the Company with the resources to compete
nationally for physicians and healthcare facilities insurance business. The
Company 


                                                                              18
<PAGE>   21

views this expansion as the cornerstone of its strategy to meet the growing
needs of the consolidating healthcare marketplace.

A secondary acquisition strategy that the Company considers viable is the
acquisition and consolidation of operations of small to medium sized third party
administrators ("TPAs") for self-insured and fully-insured health plans. The
Company currently owns two TPAs, McCreary and EMI, and has identified a number
of other TPAs that are acquisition candidates. With the focus of the Company's
management and operations on the MPL business, additional management and
operational support would be necessary to implement this TPA acquisition
strategy. The Company currently is considering alternatives to provide this
additional support.

A number of capital sources are available to finance acquisitions, including
internally generated funds, bank credit facilities and newly issued debt and/or
equity securities.

Stock Repurchase Plan

On July 13, 1998, the Company's Board of Directors approved a stock repurchase
plan pursuant to which the Company is authorized to repurchase, at management's
discretion, up to 500,000 of its shares on the open market over a twelve month
period. As of December 31, 1998, 71,000 shares had been repurchased by the
Company pursuant to this plan at a cost of approximately $1,840,000.

Results of Operations - Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997

Premiums

Direct premiums written and assumed increased $39.2 million, or 50%, from $77.8
million in 1997 to $117.0 million in 1998. This increase was primarily
attributable to assumed premium of $22 million, of which $16 million was MPL
premium, the purchase of APAC, which added $2.8 million, and an average rate
increase of 5.5% on MPL premiums effective January 1, 1998. In addition, the
Company added direct premium written of $5.2 million in Texas and $8 million in
group accident and health coverage in 1998. Reinsurance premium ceded more than
doubled from $7.5 million in 1997 to $16 million in 1998 due to the increase in
premium written in Texas and the APAC premium. Net premiums earned increased
$24.1 million, or 37%, from $65.5 million in 1997 to $89.6 million in 1998 due
to the increase in direct premiums written and the assumed premium.

Net Investment Income

Net investment income increased $1.5 million, or 9%, from $16.0 million in 1997
to $17.5 million in 1998. The increase was primarily attributable to a higher
level of invested assets and the inclusion of APAC, which added approximately
$0.9 million of investment income. The increase was achieved despite an increase
in the overall allocation to tax-free securities from 50% in 1997 to 58% in
1998. The Company's primary investment objective is to acquire investment grade
fixed-income securities with an average duration of approximately five years.
Though interest rates declined in 1998, the average maturity of the portfolio
was not extended and the duration decreased slightly from 5.0 years in 1997 to
4.9 years in 1998.

Claims Administration Fees and Commission Income


                                                                              19
<PAGE>   22

This income is generated by McCreary and its subsidiary, EMI. Claims
administration fees are revenues generated by McCreary's core business, which is
the administration of self-insured programs for large employers, primarily in
the health and workers compensation areas. Neither McCreary nor the Company
assumes any risk on these products; the risk is assumed by each employer and any
excess coverage desired is placed by McCreary with various insurers and
reinsurers. All the commission income was generated from the placement of this
excess coverage by McCreary.

Claims administration fees and commission income increased $1.4 million, or 14%,
from $10.2 million in 1997 to $11.6 million in 1998. This increase is
attributable to the addition of new contracts.

Losses and LAE

Losses and LAE increased $13.4 million, or 25%, from $54.0 million in 1997 to
$67.4 million in 1998 reflecting, in part, the increase in premiums earned. The
GAAP loss ratios were 75.2% in 1998 and 82.5% in 1997. The lower loss ratio in
1998 reflects a change in the mix of business, particularly the group accident
and health product, which runs a lower loss ratio than the Company's MPL
business. In connection with the Company's bi-annual reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior years'
claims, the Company reduced its reserves for claims occurring in prior periods
by $14.3 million in 1998 and $15.1 million in 1997. There is no assurance that
reserve adequacy reevaluations will produce similar reserve reductions in the
future. Factors that could adversely affect the loss and LAE reserve estimate
and future redundancies include, but are not limited to, inflation, changes in
frequency and severity trends or changes in the judicial or legislative
environment. The Company cannot predict whether similar redundancies will be
experienced in future years.

The Company believes that its favorable loss and LAE reserve development has
primarily resulted from the following factors: (i) tort reform; (ii) the
Company's approach to establishing reserves; (iii) the Company's targeting of
medical specialties in which it believes it has developed substantial knowledge
and experience; and (iv) the Company's targeting of "claims-free" business.

Other Underwriting Expenses

Other underwriting expenses increased $5.4 million, or 76%, from $7.1 million in
1997 to $12.5 million in 1998. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written. In addition, the increase in assumed premium and the expansion into
other product lines, such as group accident and health, have higher acquisition
costs and added $3.8 million.

Claims Administration Expenses

Claims administration expenses increased $1.4 million, or 16%, from $8.5 million
in 1997 to $9.9 million in 1998. This increase was primarily attributed to the
addition of new contracts.

Income Tax

Income taxes increased $1.4 million, or 21%, from $6.8 million in 1997 to $8.2
million in 1998. This increase was due to additional income before tax.


                                                                              20
<PAGE>   23

Net Income

For the reasons stated above, net income increased $4.1 million, or 25%, from
$16.6 million in 1997 to $20.7 million in 1998.

Results of Operations - Year Ended December 31, 1997 Compared to Year Ended
December 31, 1996

Premiums

Direct premiums written and assumed increased $13.5 million, or 21%, from $64.3
million in 1996 to $77.8 million in 1997. This increase was primarily
attributable to growth in the number of insureds and a rate increase of 2.4% on
physician MPL premiums effective January 1, 1997. In addition, the Company added
$2.5 million of direct premium written in Texas and assumed $1.0 million in
group accident and health coverage in 1997. Reinsurance premium ceded increased
$1.8 million, or 32%, from $5.7 million in 1996 to $7.5 million in 1997 due to
the increase in premium written in Texas. Net premiums earned increased $9.4
million, or 17%, from $56.1 million in 1996 to $65.5 million in 1997 due to the
increase in direct premiums written and the assumed premium.

Net Investment Income

Net investment income increased $1.3 million, or 8.8%, from $14.7 million in
1996 to $16.0 million in 1997. The increase was primarily attributable to a
higher level of invested assets. The increase was achieved despite a shift in
the portfolio from 41% of tax free securities in 1996 to 50% of tax-free
securities in 1997. The Company's investment policy is to acquire investment
grade fixed income securities with an average duration of approximately five
years. Due to the falling interest rate environment, maturities in the portfolio
were extended and the average duration of the portfolio was increased from 4.2
years in 1996 to 5.0 years in 1997.

Claims Administration Fees and Commission Income

Claims administration fees and commission income nearly doubled, from $5.2
million in 1996 to $10.2 million in 1997. This increase is attributable to the
addition of new contracts and the inclusion of EMI, which was purchased in 1997
and added revenue of $4.6 million.

Losses and LAE

Losses and LAE increased $7.0 million, or 15%, from $47.0 million in 1996 to
$54.0 million in 1997 reflecting, in part, the increase in insureds. The Company
experienced GAAP loss ratios of 82.5% in 1997 and 83.7% in 1996. In connection
with the Company's bi-annual reserving review, which includes a reevaluation of
the adequacy of reserve levels for prior years' claims, the Company reduced its
reserves for claims occurring in prior periods by $15.1 million in 1997 and
$14.7 million in 1996.

Other Underwriting Expenses

Other underwriting expenses increased $0.7 million, or 11%, from $6.4 million in
1996 to $7.1 million in 1997. This increase was primarily attributable to
acquisition costs relating to the increase of insureds and the related premium
written, and the expansion into other product lines.



                                                                              21
<PAGE>   24

Claims Administration Expenses

Claims administration expenses more than doubled from $4.1 million in 1996 to
$8.5 million in 1997. These expenses are for McCreary and this increase was
primarily attributed to the inclusion of the EMI operations in the 1997
financial statements.

Income Tax

Income taxes increased $0.8 million, or 13%, from $6.0 million in 1996 to $6.8
million in 1997. This increase was lower than the percentage change in income
before tax, which increased 21% to $23.3 million, due to the shift in the
investment policy from taxable to tax-free securities.

Net Income

For the reasons stated above, net income increased $3.3 million, or 25%, from
$13.3 million in 1996 to $16.6 million in 1997.

Liquidity and Capital Resources

The payment of losses and LAE and operating expenses in the ordinary course of
business is the principal need for the Company's liquid funds. Cash used to pay
these items has been provided by operating activities. Cash provided from these
activities was sufficient during 1998 to meet the Company's needs. Management
believes these sources will be sufficient to meet the Company's cash needs for
operating purposes for at least the next twelve months. However, a number of
factors could cause increases in the dollar amount of losses and LAE and may
therefore adversely affect future reserve development and cash flow needs.
Management believes these factors include, among others, inflation, changes in
medical procedures, increasing use of managed care and adverse legislative
changes. In order to compensate for such risk, the Company: (i) maintains what
its management considers to be adequate reinsurance; (ii) conducts regular
actuarial reviews of loss reserves every six months; and (iii) maintains
adequate asset liquidity (by managing its cash flow from operations coupled with
its fixed income maturities).

The Company maintains a revolving credit facility with SunTrust Bank. As of
December 31, 1998, $27,165,000 had been borrowed under this agreement at an
interest rate of approximately 5.9%. In January 1999, the Company increased the
facility from $30,000,000 to $75,000,000. The new credit facility agreement
terminates on January 4, 2002 and bears interest at various rates. The interest
rates range from LIBOR plus 0.75% to Prime plus 0.50%. The Company is not
required to maintain compensating balances in connection with this credit
facility. Under the terms of the credit facility, the Company is required to
meet certain financial covenants. Significant covenants are as follows: a) The
Company's funded debt to total capital plus funded debt ratio cannot exceed
0.3:1 and b) Net premiums written to statutory capital and surplus ratio cannot
exceed 2.0:1. The credit facility is guaranteed by certain subsidiaries and
collateralized by the common stock of certain subsidiaries. On January 6, 1999,
an additional $33,000,000 was borrowed under this agreement at a rate of
approximately 6.1%.

At December 31, 1998, the Company held approximately $11.9 million in
investments scheduled to mature during the next twelve months, which combined
with net cash flows from operating activities, are expected to provide the
Company with sufficient liquidity and working capital. As highlighted in the
accompanying Consolidated Statements of Cash Flows, the Company generated
positive net cash from operations of $30.2 million in 1998.


                                                                              22
<PAGE>   25

Shareholder dividends payable by the Company's insurance subsidiaries are
subject to certain limitations imposed by Florida law. In 1999, these
subsidiaries are permitted, within insurance regulatory guidelines, to pay
dividends of approximately $18,300,000 without prior regulatory approval.

In recent years the NAIC has developed risk-based capital ("RBC") measurements
for insurers. The measurements provide state regulators with varying levels of
authority based on the adequacy of an insurer's RBC. At December 31, 1998, the
insurance subsidiaries statutory annual statements reported a total adjusted
surplus to policyholders of $117.3 million, which is $99 million more than the
NAIC's authorized RBC control level of $18.3 million. The authorized control
level permits an insurance regulator to take whatever regulatory actions are
considered necessary to protect the best interests of the policyholders and
creditors of the insurer, which may include placing the insurer under regulatory
control (i.e., rehabilitation or liquidation). The Florida Department of
Insurance has adopted the NAIC's RBC standards.

Accounting Pronouncements

Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting
Comprehensive Income" requires that all items that meet the definition of
components of comprehensive income be reported in the financial statements for
the period in which they are recognized. The Company adopted the provisions of
SFAS No. 130 for the period ended December 31, 1998.

SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted the provisions of SFAS No. 131 for the
period ended December 31, 1998.

SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes disclosure requirements for pensions and other post
retirement benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets that will
facilitate financial analysis, and eliminates certain disclosures that are no
longer useful. The Company adopted the provisions of SFAS No. 132 for the period
ended December 31, 1998.

Guaranty Fund Assessments

The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. (FIGA) as well as similar associations in other states where
it is licensed, for the provision of funds necessary for the settlement of
covered claims under certain policies of insolvent insurers. In addition to the
standard FIGA assessments, the Florida Legislature may levy special assessments
to settle claims caused by certain catastrophic losses. The Company would be
assessed on a basis of premium written. No provision for special assessments was
made in the 1998 financial statements. However, damages caused by future
catastrophes, such as hurricanes, could subject the Company to additional
assessments.

Item 7A. Disclosure About Market Risk


                                                                              23
<PAGE>   26

The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve various risks and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.

Market risk is the risk of loss arising from adverse changes in market rates and
conditions, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of the Company's primary market risk
exposures and how those exposures are currently managed as of December 31, 1998.
The Company's market risk sensitive instruments are entered into for purposes
other than trading.

The fair value of the Company's debt and equity investment portfolio as of
December 31, 1998 was $336,250,549. Approximately 97% of the portfolio was
invested in fixed maturity securities. The primary market risk to the investment
portfolio is interest rate risk associated with investments in fixed maturity
securities. The Company's exposure to equity risk is not significant.

The Company does not believe it has any foreign currency exposure. The Company
does not conduct any operations outside of the United States nor does the
Company own any non-U.S. dollar denominated securities.

Generally, the Company does not invest in derivatives and does not currently use
any hedging strategies in its investment portfolio. However, the Company has
invested in one interest rate swap contract to fix the interest rate in
connection with its revolving credit facility. As of December 31, 1998, the
Company's investments in Collateral Mortgage Obligations and Asset Backed
Securities represented approximately one percent of its investment portfolio.
The Company's investment portfolio is predominately fixed-income with
approximately 58% allocated to the municipal sector. The balance is diversified
through investments in Treasuries, agencies, corporates and mortgage-backed
securities. The three market risks that can most directly affect the investment
portfolio are changes in US interest rates, credit risks and legislative changes
impacting the tax-exempt status of municipal securities.

Adverse impacts to the Company resulting from changes in interest rates is
primarily controlled through limiting the duration, or average maturity, of the
overall portfolio. The Company manages the duration of its portfolio relative to
the duration of the anticipated liabilities of the Company. Credit risks are
controlled through investing in securities with above average credit ratings.
Approximately 68% of the portfolio is AAA, 16% is AA, 6% is A and 10% is BBB
rated. From time to time discussion arises in the United States Congress
relative to changing or modifying the tax-exempt status of municipal securities.
While the Company is diligent in its efforts to stay current on legislative acts
that could adversely impact the tax exempt status of municipal securities, and
while it is uncertain as to whether these changes would ultimately affect
valuation of municipal securities currently held in the portfolio, at present
there are no hedging or other strategies being specifically used to minimize
this risk. If interest rates were to rise 100 basis points, the fair value of
the Company's fixed maturity securities would decrease approximately $6,883,000.

There have been no significant changes to the Company's exposure to financial
market risks during the year nor does the Company anticipate any significant
changes in future reporting periods.


                                                                              24
<PAGE>   27

                              Projected Cash Flows
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                                                   December 31,
                                                                                                                        1998
                                       1999        2000       2001      2002      2003    Thereafter     Total      Fair Value

<S>                                   <C>         <C>       <C>        <C>       <C>       <C>          <C>          <C>     
Assets
Fixed maturity securities:
  Available for sale                  $11,826     $9,725    $17,987    $7,166    $5,630    $259,895     $312,229     $325,922
Liabilities:
  Credit facility                                                      27,165                                          21,590

Weighted Average Interest Rate:
  Fixed maturity securities             7.03%      6.05%      5.92%     6.64%     6.46%       6.22%
  Credit facility                                                       5.91%
</TABLE>

The amounts reported as cash flows in the above table for fixed maturities
represent par values at maturity date. The fair values of fixed maturities as
disclosed in the above table are based upon quoted market prices or dealer
quotes for comparable securities. The fair value of the credit facility is based
on the amount of cash flows discounted over the applicable term at the Company's
borrowing rate at December 31, 1998.

Year 2000

The Year 2000 poses significant issues for organizations across the country and
requires consideration of converting or replacing millions of lines of computer
code. The Year 2000 ("Y2K") issue exists due to program developers creating
databases and programs to store and process a year as a two-digit field.

The Company's Information Systems ("IS") management staff has performed a
thorough review of the Company's operations and the operations of each of its
subsidiaries. These reviews considered the readiness of software systems written
internally and those provided by third parties to process data and perform date
calculations correctly using dates beginning January 1, 2000 and beyond.
Hardware, including servers, PC workstations, network routers, and
communications equipment were reviewed to determine that firmware and operating
system software were Y2K compliant.

An action plan was created to resolve all known Y2K issues by July 1, 1999. The
Company fully expects its mission critical software and hardware systems to be
fully functional on January 1, 2000 and beyond. Third parties who provide
software and/or hardware to the Company have been requested to provide
statements of Y2K compliance. Any problems that may occur regarding Y2K are
expected to be minor in nature and not have an impact on the Company's ability
to provide service and products to customers. With respect to contingency plans
for mission critical systems, the Company believes that there are viable
alternatives if these systems are non-compliant. However, the Company has a
targeted completion of mission critical systems by June 30, 1999. The Company
will continue to reassess the need for formal contingency plans, based on
progress of Year 2000 efforts by the Company and third parties.

A reasonably possible worst case scenario involving Y2K issues would be if one
or more of the Company's policyholder systems was found to be non-compliant. In
such event, the Company could experience an interruption in services, although
no loss of current data is anticipated. In addition, if a third party system is
not Y2K compliant, the Company could experience an interruption in services.
Should the worst case scenario occur, it could, depending on its duration, have
a material impact on the Company's results of operations and financial position.


                                                                              25
<PAGE>   28

The cost to convert the Company to Y2K compliance is not expected to exceed
$150,000. The Company estimates that it has expended $111,000 through December
31, 1998. Regarding future acquisitions, the Company, as a part of its due
diligence, will determine Y2K compliance and its impact on the dynamics of the
acquisition.

Item 8. Financial Statements and Supplementary Data

The financial statements and schedules listed in Item 14(a)(1) and (2) are
included in this Report beginning on Page 38.

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

None.

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

Information required hereunder with respect to directors and the five highest
compensated officers will appear under the heading "Executive Compensation" in
the Company's Proxy Statement for the 1999 Annual Meeting of Shareholders, which
information is incorporated herein by reference.

Information regarding the Company's other executive officers is as follows:

<TABLE>
<CAPTION>
            Name                 Age            Capacity
            ----                 ---            --------

<S>                              <C>            <C>
John R. Byers                    44             Executive Vice President/General Counsel
R. Jeannie Whitter               48             Vice President
Charles W. Emanuel               48             Vice President and Secretary
Ray A. Carey                     60             Vice President
Kurt F. Driscoll                 48             Vice President
Paul T. Luckman                  42             Vice President
Donald J. Sabia                  40             Vice President and Controller
</TABLE>

John R. Byers has served the Company as Executive Vice President/General Counsel
since January 1999. Mr. Byers is a corporate/securities attorney with over 18
years of experience. For the 10 years prior to 1999, he served as a partner with
the law firm LeBeouf, Lamb, Greene & MacRae, L.L.P.

R. Jeannie Whitter has served as Vice President of the Company since its
formation in 1996 and as Vice President of FPIC since 1988. She has been
involved in the Company's underwriting since 1976.

Charles W. Emanuel has served as Vice President and Secretary of the Company
since its formation in 1996 and as Vice President and Assistant Secretary of
FPIC since 1988. Since 1982, Mr. Emanuel has been responsible for the Company's
management information systems.


                                                                              26
<PAGE>   29

Ray A. Carey has served as Vice President of the Company since its formation in
1996 and as Vice President of FPIC since 1992. Since 1978, Mr. Carey has been
involved in the Company's claims administration.

Kurt F. Driscoll has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since 1992 and was responsible for the
Company's risk management since from 1988 to 1998. Mr. Driscoll is currently
responsible for human resources administration and government and regulatory
relations.

Paul T. Luckman has served as Vice President of the Company since its formation
in 1996 and as Vice President of FPIC since March 1996 and is responsible for
the Company's marketing. Mr. Luckman served as Director of Hospitals and Managed
Care programs for MAG Mutual Insurance Company from 1993 to 1996. He served as
Director of Insurance and Risk Management for Crozar-Keytone Health System from
1992 to 1993. Mr. Luckman served as Associate Director of Risk Management for
Franciscan Health System from 1991 to 1992.

Donald J. Sabia has served as Vice President and Controller of the Company since
its formation in 1996 and as Controller of FPIC since 1995 and has been employed
by the Company since 1993. From 1986 to 1993, Mr. Sabia was an audit supervisor
for Coopers & Lybrand. Mr. Sabia is a Certified Public Accountant.

Item 11. Executive Compensation

The information required herein will appear under the heading "Executive
Compensation" in the Company's Proxy Statement for the 1999 Annual Meeting of
Shareholders, which information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required herein will appear under the heading "Principal
Shareholders and Securities Ownership of Management" in the Company's Proxy
Statement for the 1999 Annual Meeting of Shareholders, which information is
incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

The information required herein will appear under the heading "Certain
Relationships and Related Transactions" in the Company's Proxy Statement for the
1999 Annual Meeting of Shareholders, which information is incorporated herein by
reference.

                                     PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)    1.    Financial Statements and Schedules
                   FPIC Insurance Group, Inc.:
                      Independent Auditors' Report
                      Consolidated Balance Sheets at December 31, 1998 and 1997 
                      Consolidated Statements of Income for the years ended 
                        December 31, 1998, 1997 and 1996
                      Consolidated Statements of Comprehensive Income for the
                         years ended December 31, 1998, 1997 and 1996


                                                                              27
<PAGE>   30


                      Consolidated Statements of Changes in Stockholders' Equity
                         for the years ended December 31, 1998, 1997 and 1996
                      Consolidated Statements of Cash Flows for the years ended
                         December 31, 1998, 1997 and 1996

                      Notes to the Consolidated Financial Statements

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


                   I - Summary of Investments - Other than Related Party 
                       Investments
                  II - Condensed Financial Information of Registrant
                 III - Supplemental Insurance Information
                  IV - Reinsurance
                   V - Valuation and Qualifying Accounts

   3.  Exhibits
          Exhibit No.
                   3.1   Articles of Incorporation of FPIC Insurance Group, 
                         Inc., incorporated by reference to the Company's 
                         Registration Statement on Form S-4 (Registration No. 
                         333-02040) first filed on March 7, 1996.

                   3.2   Bylaws of FPIC Insurance Group, Inc.,
                         incorporated by reference to the Company's
                         Registration Statement on Form S-4
                         (Registration No. 333-02040) first filed on
                         March 7, 1996.

                   10(a) Form of Employment Agreements dated December
                         30, 1992, amended November 4, 1995, and amended
                         February 28, 1996, between FPIC and William R.
                         Russell and Steven R. Smith, incorporated by
                         reference to the Company's Registration
                         Statement on Form S-4 (Registration No.
                         333-02040) first filed on March 7, 1996.

                   10(b) Form of Severance Agreements dated February 28,
                         1996, between FPIC and William R. Russell,
                         Steven R. Smith, Steven M. Rosenbloom, and
                         Robert B. Finch, incorporated by reference to
                         the Company'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, Smith,
                         Rosenbloom, Finch, Sabia, Emanuel, Carey,
                         Driscoll and Ms. Whitter, incorporated by
                         reference to the Company's Registration
                         Statement on Form S-4 (Registration No.
                         333-02040) first filed on March 7, 1996).

                   10(d) Omnibus Incentive Plan, incorporated by
                         reference to the Company's Registration
                         Statement on Form S-4 (Registration No.
                         333-02040) first

                                                                              28
<PAGE>   31

                         filed on March 7, 1996. First Amendment to the 
                         Omnibus Incentive Plan dated as of March 16, 1996.
                         Second Amendment to Omnibus Incentive Plan  dated 
                         as of September 14, 1997.

                   10(e) Director Stock Option Plan, incorporated by
                         reference to the Company's Registration
                         Statement on Form S-4 (Registration No.
                         333-02040) first filed on March 7, 1996. First
                         Amendment to the Director Stock Option plan
                         dated as of March 16, 1996. Second Amendment to
                         the Director Stock Option Plan dated as of
                         September 14, 1997.

                   10(f) Supplemental Executive Retirement Plan, as
                         amended, incorporated by reference to the
                         Company's Third Quarter Statement on Form 10-Q
                         (Registration No. 0-28730) filed on November
                         14, 1996.

                   10(g) Excess Benefit Plan, incorporated by reference
                         to the Company'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 the Company'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 the Company, Anesthesiologists'
                         Professional Assurance Association, Inc., the
                         APAA Liquidating Trust and Anesthesiologists'
                         Professional Assurance Company.

                   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
                         the Company and the Shareholders of
                         Administrators For the Professions, Inc.,
                         incorporated by reference to the Company'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 Florida Physicians Insurance Company,
                         Inc., TGI Acquisition Corporation and Tenere
                         Group, Inc.

                   21    Subsidiaries of the Registrant.
                   23    Consent of KPMG since incorporated into Forms S-8.
                   27    Financial Data Schedule.

(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
1998. On January 21, 1999 the Company filed a Form 8-K with respect to the
acquisition of Administrators For the Professions, Inc. In Item 7 of that Form
8-K, the Company stated that financial information would be filed by amendment
no later than March 23, 1999. The Company subsequently determined that such
financial information is not required to be filed. Consequently, no amendment to
such Form 8-K will be filed.


                                                                              29
<PAGE>   32

                                   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 26th day
of March , 1999.

                                          FPIC Insurance Group, Inc.

                                          By   /s/ William R. Russell
                                             ------------------------------
                                            William R. Russell, President
                                             and Chief Executive Officer


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

<TABLE>
<CAPTION>
    Signature                                           Title                                           Date



<S>                                                     <C>                                             <C>     
     /s/ William R. Russell                             President, Chief Executive                      March 26, 1999
    ------------------------------------                Officer and Director
    William R. Russell                                  (Principal Executive Officer)



      /s/ Robert B. Finch                               Senior Vice President                           March 26, 1999
    ------------------------------------                and Chief Financial Officer
    Robert B. Finch                                     (Principal Financial Officer)



      /s/ Donald J. Sabia                               Vice President and                              March 26, 1999
    ------------------------------------                Controller
    Donald J. Sabia                                     (Principal Accounting Officer)



      /s/ James G. White                                Chairman of the Board                           March 26, 1999
    ------------------------------------
    James G. White, M.D.



      /s/ Guy T. Selander                               Vice Chairman                                   March 26, 1999
    ------------------------------------
    Guy T. Selander, M.D.



     /s/ Gaston J. Acosta-Rua                           Director                                        March 26, 1999
    ------------------------------------
    Gaston J. Acosta-Rua, M.D.
</TABLE>


                                                                              30
<PAGE>   33


<TABLE>
<S>                                                     <C>                                             <C>     
    /s/ Richard J. Bagby                                Director                                        March 26, 1999
    ------------------------------------
    Richard J. Bagby, M.D.



      /s/ Robert O. Baratta                             Director                                        March 26, 1999
    ------------------------------------
    Robert O. Baratta, M.D.



      /s/ James W. Bridges                              Director                                        March 26, 1999
    ------------------------------------
    James W. Bridges, M.D.



      /s/ Curtis E. Gause                               Director                                        March 26, 1999
    ------------------------------------
    Curtis E. Gause, D.D.S.



      /s/ J. Stewart Hagen                              Director                                        March 26, 1999
    ------------------------------------
    J. Stewart Hagen, M.D.



    /s/ Frank M. Moya                                   Director                                        March 26, 1999
    ------------------------------------
    Frank M. Moya, M.D.



      /s/ Louis C. Murray                               Director                                        March 26, 1999
    ------------------------------------
    Louis C. Murray, M.D.



      /s/ David M. Shapiro                              Director                                        March 26, 1999
    ------------------------------------
    David M. Shapiro, M.D.



      /s/ Dick L. Van Eldik                             Director                                        March 26, 1999
    ------------------------------------
    Dick L. Van Eldik, M.D.



      /s/ Henry M. Yonge                                Director                                        March 26, 1999
    ------------------------------------
    Henry M. Yonge, M.D.
</TABLE>
                                                                              31
<PAGE>   34
                          Independent Auditors' Report



The Board of Directors
FPIC Insurance Group, Inc.

We have audited the consolidated financial statements of FPIC Insurance Group, 
Inc. as listed in the accompanying index. In connection with our audits of the 
consolidated financial statements, we also have audited the financial statement 
schedules as listed in the accompanying index. These consolidated financial 
statements and financial statement schedules are the responsibility of the 
Company's management. Our responsibility is to express an opinion on these 
consolidated financial statements and financial statement schedules based on 
our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards 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. An audit 
also includes assessing the accounting principles used and significant 
estimates made by management, as well as evaluating the overall financial 
statement presentation. We believe that our audits provide a reasonable basis 
for our opinion.

In our opinion, the consolidated financial statements referred to above present 
fairly, in all material respects, the financial position of FPIC Insurance 
Group, Inc. as of December 31, 1998 and 1997, and the results of their 
operations and their cash flows for each of the years in the three-year period 
ended December 31, 1998 in conformity with generally accepted accounting 
principles. Also, in our opinion, the related financial statement schedules, 
when considered in relation to the basic consolidated financial statements 
taken as a whole, present fairly, in all material respects, the information set 
forth therein.

                                              KPMG LLP



Jacksonville, Florida
March 5, 1999


                                                                              32
<PAGE>   35
                           FPIC Insurance Group, Inc.
                          Consolidated Balance Sheets
                 as of December 31, 1998 and December 31, 1997

<TABLE>
<CAPTION>
                                                                                               12/31/98               12/31/97
                                                                                          =================        =============

<S>                                                                                      <C>                      <C>
ASSETS
     Bonds and U.S. Government securities:
         Available-for-sale, at fair value                                                    $325,922,559          $259,574,210
     Other invested assets                                                                       4,171,771             2,000,000
     Equity securities                                                                          10,327,990             2,540,735
     Real estate investments                                                                     4,581,671             4,184,768
                                                                                          -----------------        --------------

    TOTAL INVESTMENTS                                                                          345,003,991           268,299,713
                                                                                          -----------------        --------------

      Cash and cash equivalents                                                                  7,062,695             7,679,822
      Premiums receivable, net of allowance for doubtful
         accounts of $908,409 in 1998 and $681,175 in 1997                                      40,296,590            17,924,658
      Accrued investment income                                                                  4,981,612             3,740,979
      Reinsurance recoverable on paid losses                                                     3,190,042               866,149
      Due from reinsurers on unpaid losses and advance premiums                                 41,438,356            14,115,000
      Deposits with reinsurers                                                                     662,496            18,070,341
      Property and equipment, net of accumulated depreciation                                    2,614,686             2,369,595
      Deferred policy acquisition costs                                                          2,001,248             1,411,420
      Deferred income taxes                                                                      9,348,494             8,937,094
      Finance charge receivable                                                                    370,875               281,217
      Prepaid expenses                                                                             644,336               423,328
      Intangible assets                                                                         16,586,261             7,173,841
      Federal income taxes receivable                                                              271,029                     0
      Other assets                                                                               4,905,757             1,556,594
                                                                                          -----------------        --------------

     TOTAL ASSETS                                                                             $479,378,468          $352,849,751
                                                                                          =================        ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
       Loss and loss adjustment expense reserves                                              $242,377,000          $188,086,000
       Unearned premiums                                                                        44,309,691            28,217,537
       Paid in advance and unprocessed                                                           5,767,080             4,782,835
       Short term debt                                                                          27,165,000             2,000,000
       Federal income taxes payable                                                                      0             2,735,527
       Accrued expenses and other liabilities                                                    8,829,169             6,963,432
                                                                                          -----------------        --------------

     TOTAL LIABILITIES                                                                         328,447,940           232,785,331
                                                                                          -----------------        --------------

                                                                                          -----------------        --------------
       Commitments and contingencies (note 16)

SHAREHOLDERS' EQUITY
       Common stock, $.10 par value: 25,000,000 shares authorized;
       9,518,679 and 9,179,581 shares issued and outstanding
        in 1998 and 1997, respectively                                                             951,868               917,958
        Additional paid-in capital                                                              34,297,994            25,789,144
        Unearned compensation                                                                     (356,528)                    0
        Accumulated other comprehensive income                                                   5,621,533             3,634,299
        Retained earnings                                                                      110,415,661            89,723,019
                                                                                          -----------------        --------------

     TOTAL SHAREHOLDERS' EQUITY                                                                150,930,528           120,064,420
                                                                                          -----------------        --------------

     TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                               $479,378,468          $352,849,751
                                                                                          =================        ==============
</TABLE>

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

                                                                             33
<PAGE>   36

                           FPIC Insurance Group, Inc.
                       Consolidated Statements of Income
              for the years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                              1998                   1997               1996
                                                                         ==============       ================      ==============
<S>                                                                      <C>                  <C>                   <C>
REVENUES
     Net premiums earned                                                   $89,561,578            $65,503,675         $56,074,436
     Net investment income                                                  17,549,099             15,978,534          14,704,350
     Net realized investment gains (losses)                                    (39,226)                32,065             (71,288)
     Claims administration and management fees                               9,861,210              8,758,651           4,071,460
     Commission income                                                       1,740,005              1,465,282           1,120,455
     Finance charge and other income                                         1,648,144              1,477,824           1,082,102
                                                                         --------------       ----------------      --------------

                     TOTAL REVENUES                                        120,320,810             93,216,031          76,981,515
                                                                         --------------       ----------------      --------------


EXPENSES
     Net losses and loss adjustment expenses                                67,361,507             54,010,515          46,947,946
     Other underwriting expenses                                            12,548,943              7,079,238           6,589,743
     Claims administration expenses                                          9,936,558              8,461,264           4,124,404
     Other expenses                                                          1,609,586                320,791                   0
                                                                         --------------       ----------------      --------------

                      TOTAL EXPENSES                                        91,456,594             69,871,808          57,662,093
                                                                         --------------       ----------------      --------------


     Income before income taxes                                             28,864,216             23,344,223          19,319,422

     Income taxes                                                            8,171,574              6,787,538           5,995,697
                                                                         --------------       ----------------      --------------


                       NET INCOME                                          $20,692,642            $16,556,685         $13,323,725
                                                                         ==============       ================      ==============


                       BASIC EARNINGS PER COMMON SHARE                           $2.22                  $1.83               $1.56
                                                                         ==============       ================      ==============


                       DILUTED EARNINGS PER COMMON SHARE                         $2.11                  $1.76               $1.53
                                                                         ==============       ================      ==============


                      WEIGHTED AVERAGE SHARES OUTSTANDING                    9,808,664              9,407,093           8,723,967
                                                                         ==============       ================      ==============
</TABLE>


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

                                                                             34
<PAGE>   37


                           FPIC Insurance Group, Inc.
                 Consolidated Statements of Comprehensive Income
              for the years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                  1998                 1997                1996
                                                                             ===============     ===============     ===============

<S>                                                                          <C>                 <C>                 <C>
Net Income                                                                      $20,692,642         $16,556,685         $13,323,725
                                                                             ---------------     ---------------     ---------------

Other comprehensive income:
      Unrealized gains (losses) on securities:
           Unrealized holding gains (losses) arising during period                3,096,509           5,352,980          (2,269,630)
            Less:  reclassification adjustment for gains (losses)
                         included in net income                                     (39,226)             32,065             (71,288)
       Income tax expense related to unrealized gains and
            losses on securities                                                 (1,070,049)         (1,830,915)            795,912
                                                                             ---------------     ---------------     ---------------

        Other comprehensive income                                                1,987,234           3,554,130          (1,545,006)
                                                                             ---------------     ---------------     ---------------

Comprehensive Income                                                            $22,679,876         $20,110,815         $11,778,719
                                                                             ===============     ===============     ===============
</TABLE>


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


                                                                             35
<PAGE>   38
                           FPIC Insurance Group, Inc.
          Consolidated Statements of Changes in Shareholders' Equity
              for the years ended December 31, 1998, 1997 and 1996



<TABLE>
<CAPTION>                                                                                                      ACCUMULATED
                                                                           ADDITIONAL                             OTHER
                                                              COMMON        PAID-IN            UNEARNED       COMPREHENSIVE
                                                              STOCK         CAPITAL          COMPENSATION         INCOME
                                                            ---------------------------------------------------------------

<S>                                                          <C>           <C>                 <C>             <C>
BALANCES, DECEMBER 31, 1995                                   $813,964     $18,454,709             $0           $1,625,175

     Net income

     Payment of cash dividend

     Payment of prior year dividend

     Net unrealized loss on debt securities                                                                     (1,545,006)

     Purchase of shares outstanding

      Issuance of shares, net                                   38,203         (38,203)

      Shares issued and net proceeds received from IPO          50,000       4,028,205
                                                            ---------------------------------------------------------------

BALANCES, DECEMBER 31, 1996                                    902,167      22,444,711              0               80,169

     Net income

     Net unrealized gain on debt and equity securities                                                           3,554,130

     Retirement of treasury shares                              (1,957)       (180,034)

     Issuance of shares, net                                    17,748       3,524,467
                                                            ---------------------------------------------------------------

BALANCES, DECEMBER 31, 1997                                    917,958      25,789,144              0            3,634,299

     Net income

     Net unrealized gain on debt and equity securities                                                           1,987,234

     Unearned compensation                                                                   (356,528)

      Issuance of shares, net                                   33,910       8,508,850
                                                            ---------------------------------------------------------------

BALANCES, DECEMBER 31, 1998                                   $951,868     $34,297,994      ($356,528)          $5,621,533
                                                            ===============================================================
</TABLE>

<TABLE>
<CAPTION>
                                                               RETAINED       TREASURY
                                                               EARNINGS        STOCK             TOTAL
                                                            ---------------------------------------------

<S>                                                          <C>             <C>             <C>
BALANCES, DECEMBER 31, 1995                                   $60,662,574            $0       $81,556,422

     Net income                                                13,323,725                      13,323,725

     Payment of cash dividend                                    (813,965)                       (813,965)

     Payment of prior year dividend                                (6,000)                         (6,000)

     Net unrealized loss on debt securities                                                    (1,545,006)

     Purchase of shares outstanding                                            (181,991)         (181,991)

      Issuance of shares, net                                                                           0

      Shares issued and net proceeds received from IPO                                          4,078,205
                                                            ----------------------------------------------

BALANCES, DECEMBER 31, 1996                                    73,166,334      (181,991)       96,411,390

     Net income                                                16,556,685                      16,556,685

     Net unrealized gain on debt and equity securities                                          3,554,130

     Retirement of treasury shares                                              181,991                 0

     Issuance of shares, net                                                                    3,542,215
                                                            ----------------------------------------------

BALANCES, DECEMBER 31, 1997                                    89,723,019             0       120,064,420

     Net income                                                20,692,642                      20,692,642

     Net unrealized gain on debt and equity securities                                          1,987,234

     Unearned compensation                                                                       (356,528)

      Issuance of shares, net                                                                   8,542,760
                                                            ----------------------------------------------

BALANCES, DECEMBER 31, 1998                                  $110,415,661            $0      $150,930,528
                                                            ==============================================
</TABLE>

The accompanying notes are an integral part of the consolidated financial
statements.
                                                                             36
<PAGE>   39

                           FPIC Insurance Group, Inc.
                      Consolidated Statements of Cash Flows
              for the years ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>
                                                                                  1998                1997                1996
                                                                            ================     ===============    ================

<S>                                                                         <C>                  <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
     Net income                                                                 $20,692,642         $16,556,685         $13,323,725
     Adjustments to reconcile net income to net cash provided
          by operating activities:
                Depreciation and amortization expense                             2,256,019           2,108,350           1,757,526
                Realized (gains) losses on investments                               39,226             (32,065)             71,288
                Realized loss on sale of equipment                                   10,886               7,275                   0
                Noncash compensation                                                 20,972                   0                   0
                Bad debt expense                                                    227,234             297,595             147,422
                Net earnings in equity investment                                  (300,046)                  0                   0
                Deferred income taxes                                              (361,043)         (1,939,499)          1,355,093
                Changes in assets and liabilities:
                        Premiums receivable                                     (19,136,259)         (5,670,261)         (1,853,407)
                        Accrued investment income                                  (831,355)            (99,588)           (576,525)
                        Reinsurance recoverable on paid losses                   (2,207,575)           (792,276)            735,027
                        Due from reinsurers on unpaid losses
                                and advance premiums                            (11,319,478)         (2,094,761)         (2,539,962)
                        Deposits with reinsurers                                 18,606,551          (1,651,162)         (1,576,227)
                        Deferred policy acquisition costs                          (589,828)           (199,385)           (393,723)
                        Federal income tax receivable                              (271,029)                  0           1,665,764
                        Other assets                                             (1,620,628)           (784,846)             38,465
                        Prepaid expenses and finance charge receivable             (310,666)            (64,385)            (88,142)
                        Loss and loss adjustment expense reserves                14,880,897          15,348,000           8,232,000
                        Unearned premiums                                        11,372,617           4,758,896           2,510,756
                        Paid in advance and unprocessed                             348,712            (467,920)          1,268,612
                        FIGA accrual                                                      0          (1,345,244)         (1,686,990)
                        Federal income tax payable                               (2,735,527)          2,214,942             520,585
                        Accrued expenses and other liabilities                    1,456,300           2,973,378           1,153,818
                                                                            ----------------     ---------------    ----------------

                 Net cash provided by operating activities                       30,228,622          29,123,729          24,065,105

CASH FLOWS FROM INVESTING ACTIVITIES
     Proceeds from sale of short-term investments                                         0                   0             500,000
     Proceeds from sale or maturity of securities available-for-sale             44,017,742          81,416,058          80,865,600
     Purchase of securities available-for-sale                                  (83,056,363)       (102,081,907)       (101,186,056)
     Purchase of intangible assets                                              (11,559,043)         (5,407,588)         (1,000,000)
     Proceeds from sale of real estate investments                                        0             281,060                   0
     Purchase of real estate investments                                           (376,833)           (864,224)         (1,021,392)
     Purchase of other invested assets                                           (2,171,771)         (2,000,000)                  0
     Purchase of common stock                                                    (6,680,500)         (2,331,950)            (60,000)
     Proceeds from investment in common stock                                       300,000                   0                   0
     Purchase of preferred stock                                                 (1,000,000)                  0                   0
     Purchase of subsidiary's net other assets and stock                         (2,433,623)           (285,726)                  0
     Purchase of property and equipment, net                                     (1,215,618)         (1,174,941)           (270,505)
                                                                            ----------------     ---------------    ----------------

                Net cash used in investing activities                           (64,176,009)        (32,449,218)        (22,172,353)

CASH FLOWS FROM FINANCING ACTIVITIES
    Receipt of short term debt                                                   25,165,000           2,000,000                   0
    Issuance of common stock                                                      8,165,260           3,542,215           4,078,205
    Purchase of common stock-treasury                                                     0                   0            (181,991)
    Dividends paid on common stock                                                        0                   0            (819,965)
                                                                            ----------------     ---------------    ----------------

               Net cash provided by financing activities                         33,330,260           5,542,215           3,076,249
                                                                            ----------------     ---------------    ----------------

               Net (decrease) increase in cash and cash equivalents                (617,127)          2,216,726           4,969,001

Cash and cash equivalents, beginning of year                                      7,679,822           5,463,096             494,095
                                                                            ----------------     ---------------    ----------------

               CASH AND CASH EQUIVALENTS, END OF YEAR                            $7,062,695          $7,679,822          $5,463,096
                                                                            ================     ===============    ================

Supplemental disclosure of cash flow information:
    Federal income taxes paid                                                    $9,816,000          $6,071,204          $2,599,703
    Cash paid for interest                                                         $844,151             $65,962              $2,212
    Exchange of mortgage note for deed on real estate investment                         $0                  $0                  $0
    Retirement of treasury stock                                                         $0            $181,991                  $0
</TABLE>

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



                                                                             37

<PAGE>   40

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FPIC Insurance Group, Inc. (the Company) is an insurance holding company. The
Company's principal subsidiaries are: Florida Physicians Insurance Company, Inc.
(FPIC), Anesthesiologists' Professional Assurance Company, Inc. (APAC), FPIC
Insurance Agency, Inc. (the Agency), and McCreary Corporation and its subsidiary
(MCC). The subsidiary of MCC, Employer's Mutual, Inc. (EMI), includes its three
subsidiaries: FPIC Services, Inc., Sy.Med Development, Inc., and Professional
Strategy Options, Inc. FPIC is a licensed casualty insurance carrier and writes
professional liability insurance for physicians, dentists, hospitals and other
healthcare providers. APAC is a licensed casualty insurance carrier and writes
professional liability insurance for anesthesiologists. MCC and EMI are
third-party administrators of various lines of business in the insurance
segment. The subsidiaries of EMI provide various services and software programs
to assist physicians in the managed care environment. The Agency conducts
various insurance agency activities. All of the Company's principal subsidiaries
conduct business primarily in the state of Florida.

BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP). These financial
statements include the accounts of the Company, FPIC, APAC, the Agency, and MCC.
Less than majority-owned entities in which the company has at least a 20%
interest are reported on the equity basis. All significant intercompany
transactions and balances have been eliminated in consolidation.

NATURE OF OPERATIONS
The Company operates in the property and casualty insurance industry, is
licensed to write insurance in several states, and is subject to regulation by
the Departments of Insurance in these states. Following is a description of the
most significant risks facing property and casualty insurers and how the Company
mitigates those risks:

Legal/Regulatory Risk is the risk that changes in the legal or regulatory
environment in which an insurer operates will change and create additional loss
costs or expenses not anticipated by the insurer in pricing its products. That
is, regulatory initiatives designed to reduce insurer profits or new legal
theories may create costs for the insurer beyond those currently recorded in the
financial statements. This risk is concentrated in Florida, where the Company
writes approximately 75% of its business, but may expand to other states as it
begins writing in those states.

Credit Risk is the risk that issuers of securities owned by the Company will
default, or other parties, including reinsurers that owe the Company money, will
not pay. The Company minimizes this risk by adhering to a conservative
investment and reinsurance strategy. Financial instruments that potentially
expose the Company to concentrations of credit risk consist primarily of
premiums receivable and deposits with reinsurers. The Company has not
experienced significant losses related to premiums receivable from individual
policyholders or groups of policyholders in a particular industry or geographic
area. Management believes no additional credit risk beyond amounts provided for
collection losses is inherent in the Company's premiums receivable. The Company
typically requires that deposits with reinsurers be held in trust and, as a
result, has not experienced significant losses related to such deposits.

Market Risk is the risk that a change in interest rates will cause a decrease in
the value of an insurer's investments. The Company mitigates this risk by
following a conservative investment strategy. To the extent that liabilities
come due more quickly than assets mature, an insurer would have to sell assets
prior to maturity and recognize a gain or loss. Given the Company's liquidity
position and prior history, it is unlikely that it would need to liquidate its
investment portfolio prior to its scheduled maturity.

USE OF ESTIMATES
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses for the period.
Actual results could differ from these estimates.

The estimates most susceptible to change are those used in determining the
reserve for losses and loss adjustment expenses. Although considerable
variability is inherent in these estimates, management believes that these
reserves are adequate. The estimates are continually reviewed and adjusted as
necessary in current operations.


                                                                              38
<PAGE>   41

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INVESTMENTS
The Company accounts for its investments under Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". Under the provisions of SFAS No. 115, the Company is required to
classify investments in debt and equity securities into one of three categories:
held-to-maturity, available-for-sale, or trading.

Market values for debt and equity securities were based on quoted market prices
or dealer quotations. Where a quoted market price was not available, fair value
was measured utilizing quoted market prices for similar securities or by using
discounted cash flow methods.

Other invested assets include investments in three limited partnerships. Two of
the partnerships invest in stocks and other financial securities of both public
and non-publicly traded companies, primarily in the insurance and financial
services sector. The third partnership is a diversified real estate fund.

Income on investments is net of 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 were determined on
the specific identification basis. 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, which includes the Company's home
office, various rental units and vacant lots. Depreciation is computed over the
estimated useful lives of the property, using the straight-line method.
Estimated useful lives range from 27.5 to 39 years. Rental income and expenses
are included in net investment income.

CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company considers
all demand deposits, overnight investments and instruments with a maturity of
three months or less to be cash equivalents.

REINSURANCE
The Company records its reinsurance contracts under the provisions of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts". In the normal course of business, the Company seeks to
reduce the loss that may arise from events that cause unfavorable underwriting
results by reinsuring certain levels of risk in various areas of exposure with
other insurance enterprises or reinsurers. The Company retains a maximum of
$500,000 per occurrence. Amounts recoverable from reinsurers are estimated in a
manner consistent with the claim liability associated with the reinsured policy.
The Company evaluates the financial condition of reinsurers since failure of
reinsurers to honor their obligations could result in losses to the Company. The
Company generally obtains collateral in the form of letters of credit for
amounts recoverable from reinsurers that are not designated as authorized
reinsurers by the Florida Department of Insurance.

PROPERTY AND EQUIPMENT
Property and equipment are depreciated on a straight-line basis with estimated
useful lives ranging from five to fifteen years.

DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs, principally commissions, are amortized over
the term of the insurance contracts.

INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to 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.


                                                                              39
<PAGE>   42

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS
In general, the excess of cost over net assets purchased relating to business
acquisitions and the cost of insurance and renewal rights purchased is being
amortized into income over periods not exceeding forty years using the
straight-line method. The carrying value of the intangible assets is reviewed
regularly by management by determining whether the amortization of the
intangible assets can be recovered through undiscounted future operating cash
flows of the acquired operation.

RECOGNITION OF REVENUES
Premiums are recognized as revenues on a monthly pro rata basis over the terms
of the policies. Policy terms generally do not exceed one year.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As more fully described in Note 10, loss and loss adjustment expense reserves
are based on actuarial projections of the best estimate of ultimate losses and
loss adjustment expenses as interpreted by the Company's independent consulting
actuaries. The estimated liability is continually reviewed and any adjustments
that become necessary are included in current operations.

PER SHARE DATA
Basic and diluted earnings per common share are based upon the weighted average
number of common and common and common equivalent shares, respectively,
outstanding during each year. Earnings per share data for all years have been
stated giving retroactive effect for the stock split that occurred in June 1996
(see Note 15).

ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-based Compensation" requires the fair value
of stock options and other stock-based compensation issued to employees to
either be recognized as compensation expense in the income statement, or be
disclosed as a pro forma effect on net income and earnings per share in the
footnotes to the Company's financial statements. The Company elected to adopt
SFAS No.123 on a disclosure basis only. Accordingly, SFAS No. 123 does not have
an effect on the Company's consolidated balance sheet or income statement.

PENSION AND OTHER POSTRETIREMENT PLANS
The Company has a defined benefit plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
compensation during the years of service (maximum 15 years). The cost of this
program is being funded currently.

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.

REPORTING COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income" requires that all items that meet
the definition of components of comprehensive income be reported in the
financial statements for the period in which they are recognized. The Company
adopted the provisions of SFAS No. 130 for the period ended December 31, 1998.

SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. The Company adopted the provisions of SFAS No. 131 for the
period ended December 31, 1998 (see Note 19).

PENSION DISCLOSURE
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits" revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes disclosure requirements for pensions and other post
retirement benefits to the 


                                                                              40
<PAGE>   43

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures that are no longer useful. The
Company adopted the provisions of SFAS No. 132 for the period ending December
31, 1998.

INTEREST RATE SWAP AGREEMENT
The Company's operations involve managing market risks related to changes in
interest rates. The Company uses a derivative financial instrument, specifically
an interest rate swap, to reduce and manage those risks. The instrument is
off-balance-sheet and therefore has no carrying value. The Company does not
currently hold or issue derivative financial instruments for trading purposes.
The differential to be paid or received as interest rates change is accrued and
recognized as an adjustment on interest expense related to the debt. The related
amount payable to or receivable from the counterparty in included as an
adjustment to accrued interest.

RECLASSIFICATION
Certain amounts for 1997 and 1996 have been reclassified to conform with the
1998 presentation.

2. BUSINESS ACQUISITIONS
On July 1, 1995, MCC acquired the assets of McCreary Enterprises, Inc., a
Florida third party administrator, for $2,000,000 plus certain additional
payments based on earnings. On January 17, 1997, MCC acquired all of the
outstanding common stock of EMI, a Florida third party administrator, for
$1,250,000 plus certain additional payments based upon earnings. The acquisition
agreements specified additional payments, based upon earnings, to be made to the
sellers from the acquisition date through 2001. The remaining contingent
payments and the year of payment for these two acquisitions are as follows:

<TABLE>
<CAPTION>
                      MCC                  EMI
                      ---                  ---

<S>                 <C>                 <C>     
      1999          $700,000            $250,000
      2000           600,000             250,000
      2001                 0             250,000
</TABLE>

These payments are subject to adjustment in accordance with the agreements based
on attainment of projected annual earnings from the date of acquisition through
2001. No individual annual payment will exceed the annual earnings, and may be
reduced if the projected earnings are not attained for that year. The agreements
allow for additional final payments based on the aggregate earnings compared to
the aggregate projected earnings during the earnout periods. The effect of these
subsequent payments is to increase the original purchase price and the recorded
goodwill provided MCC and EMI meet their earnings targets. The Company made an
$800,000 and a $250,000 payment in 1998 to MCC and EMI, respectively, in
accordance with the acquisition agreements.

On July 1, 1997, the Company purchased 20% of the common stock of APS Insurance
Services, Inc. (APS), a Texas insurance service corporation, for $2,000,000. The
purchase agreement provides an option to purchase an additional 35% of the
common stock of APS in 1999, allowing the Company 55% ownership. This investment
is accounted for under the equity method. The market value of APS approximates
the book value at December 31, 1998.

On September 22, 1997, the Company entered into an agreement with Frontier
Insurance Group, Inc. (Frontier) pursuant to which, beginning December 1, 1997,
the Company's subsidiary, FPIC, began underwriting Frontier's Florida book of
business. The cost of the transaction was $3,200,000, payable in the Company's
common stock, with a cash adjustment based on actual results. The excess of the
purchase price over tangible assets is included in intangible assets and will be
amortized over the expected life of this book of business, considering the
Company's historical policy renewal rate. Based on the actual results achieved,
the Company is due a cash refund of approximately $1,500,000 from Frontier at
December 31, 1998. The effect is to reduce the original cost of the transaction
and intangible assets by the same amount.

On July 1, 1998, the Company purchased all of the outstanding common stock of
APAC, a medical malpractice insurance company, for $18,000,000. Additionally,
$3,500,000 was paid in non-compete agreements and other fees to certain key
employees. APAC insures over 700 anesthesiologists in over 30 states. The
purchase had the following impact for the six month period ended December 31,
1998, which is included in the consolidated financial statements:


                                                                              41
<PAGE>   44

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                             <C>       
      Revenues                  $2,364,285
      Expenses                     650,270
      Net income                   864,143
      Earnings Per Share               .09
</TABLE>

Had APAC been included in the consolidated results of operations for the Company
for the years ended December 31, 1998 and 1997, the following increases would
have resulted:

<TABLE>
<CAPTION>
                                1998                   1997
                                ----                   -----
                            (unaudited)             (unaudited)

<S>                          <C>                    <C>       
    Revenues                 $8,613,922             $7,707,314
    Expenses                  6,536,323              5,184,175
    Net income                1,346,450              1,810,412
    Earnings per share              .14                    .19
</TABLE>

Concurrent with the purchase of APAC on July 1, 1998, the Company purchased a
9.9% interest in American Professional Assurance Ltd. (APAL), a Cayman Islands
captive reinsurer, for $5,500,000. APAL is being accounted for under the cost
method.

On July 1, 1998, EMI purchased all of the outstanding stock of Sy.Med
Development, Inc. (Sy.Med), a software development and consulting company
located in Nashville, Tennessee, for a cost of $400,000, plus certain additional
payments based upon future earnings. The purchase agreement sets the initial
future earnout amounts at $175,000 for the six month period ended December 31,
1998 and $400,000, $500,000 and $600,000 for the fiscal years ending December
31, 1999 through 2001 and $325,000 for the six month period January 1, 2002
through June 30, 2002. These amounts are subject to adjustment depending on the
actual results attained. The December 31, 1998 earnings amount was not achieved
and therefore no payment was made. The earnings of Sy.Med are not material to
the consolidated results of the Company.

On November 6, 1998, the Company's subsidiary, FPIC Services, Inc. (Services), a
Florida corporation, formed a Texas corporation with one other Texas corporation
and a Texas self insurance trust association. Services' cost for its one-third
ownership was $900,000. The new corporation offers credential verification and
other related services and markets software programs related to those services.
The earnings of Services are not material to the consolidated results of the
Company.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company has an interest rate swap agreement to fix interest rates on
variable rate debt and reduce certain exposures to market fluctuations. The
interest rate swap has a notional principal amount of $30,000,000 with a fixed
interest rate of 5.59% at December 31, 1998. The agreement terminates on July 3,
2003. The Company is required to make payments to the counterparty at the
variable rate of LIBOR as stated in the agreement. The Company is exposed to
credit loss in the event the nonperformance by the counterparty to the swap
agreement. However, the Company does not anticipate nonperformance by the
counterparty.

The estimated fair value of the Company's financial instruments for the years
ended December 31, 1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                 December 31, 1998
                                                                 -----------------
                                                   Carrying                               Estimated
                                                     Value                               Fair Value
                                                     -----                               ----------
<S>                                              <C>                                     <C>         
Financial Instrument Assets:

Bonds                                            $ 325,922,559                           $325,922,559
Preferred stocks                                     1,000,000                              1,000,000
</TABLE>


                                                                              42
<PAGE>   45

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                              <C>                                     <C>         
Common stocks                                        9,327,990                              9,327,990
Real estate investments                              4,581,671                              4,581,671
Cash and short-term investments                      7,062,695                              7,062,695
Other invested assets                                4,171,771                              4,419,789
                                                  ------------                           ------------

Total financial instrument assets                $ 352,066,686                          $ 352,314,704
                                                 =============                          =============

Financial Instrument Liabilities:

Short term debt                                   $ 27,165,000                           $ 21,590,000
                                                   -----------                           ------------

Total financial instrument liabilities            $ 27,165,000                            $21,590,000
                                                  ============                            ===========

Off-balance-sheet instruments:

Interest rate swap                                          $0                               $262,919
                                                   ===========                            ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                 December 31, 1997
                                                                 -----------------
                                                    Carrying                             Estimated
                                                      Value                             Fair Value
                                                      -----                             ----------
<S>                                              <C>                                    <C>         
Financial Instrument Assets:

Bonds                                            $ 259,574,210                          $259,574,210
Common stocks                                        2,540,735                             2,540,735
Real estate investments                              4,184,768                             4,184,768
Cash and short-term investments                      7,679,822                             7,679,822
Other invested assets                                2,000,000                             2,091,538
                                                --------------                        --------------

Total financial instrument assets                $ 275,979,535                         $ 276,071,073
                                                 =============                         =============

Financial Instrument Liabilities:

Short term debt                                    $ 2,000,000                           $ 2,000,000
                                                    ----------                           -----------

Total financial instrument liabilities             $ 2,000,000                            $2,000,000
                                                   ===========                            ==========
</TABLE>

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:

Bonds, Preferred Stocks, and Common Stocks - The fair value was estimated based
on bid prices published in financial newspapers, bid quotations received from
securities dealers, or by using discounted cash flow methods.

Real Estate - The fair value of real estate was estimated using appraised
values.

Cash and Short-term Investments - The carrying value approximates the fair value
because of the short maturity of these instruments.

Other Invested Assets - The fair value was estimated based on audited financial
amounts of the limited partnerships.

Short term debt - The fair value was estimated based on the amount of cash flows
discounted over the applicable term at the Company's borrowing rate at December
31, 1998.

Off-balance-sheet instruments - The fair value of the interest rate swap
agreement is estimated using quotes from brokers and represents the cash
requirement if the existing agreement had been settled at year end.


                                                                              43
<PAGE>   46

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INVESTMENTS
The amortized cost and estimated fair value of investments in debt and equity
securities as of December 31, 1998 and 1997 were as follows:

<TABLE>
<CAPTION>
                                                                                      1998
                                                                                      ----
                                                                         GROSS              GROSS            ESTIMATED
                                                     AMORTIZED         UNREALIZED        UNREALIZED            FAIR
                                                       COST              GAINS              LOSSES             VALUE
                                                   -------------      ------------       ------------     --------------
<S>                                                <C>                 <C>               <C>              <C>
Securities Available-for-Sale:
   U.S. Treasury securities and obligations
      of U.S. Government corporations
      and agencies                                  $56,259,581        $2,033,736           $10,277          $58,283,040
   Debt securities issued by states
      and political subdivisions                    148,544,449         4,559,260            34,325          153,069,384
   Corporate securities                              46,072,483           702,508           684,079           46,090,912
   Mortgage-backed securities                        66,532,029         2,258,563           311,369           68,479,223
                                                     ----------         ---------           -------           ----------

        Total debt securities                       317,408,542         9,554,067         1,040,050          325,922,559
                                                    -----------         ---------         ---------          -----------

   Common stock                                       9,193,495           134,495                 0            9,327,990
   Preferred stock                                    1,000,000                 0                 0            1,000,000
                                                      ---------          --------           -------            ---------

        Total equity securities                      10,193,495           134,495                 0           10,327,990
                                                     ----------           -------           -------           ----------

Total Securities Available-for-Sale                $327,602,037        $9,688,562        $1,040,050         $336,250,549
                                                   ============        ==========        ==========         ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                         1997
                                                                                         ----
                                                                            GROSS              GROSS             ESTIMATED
                                                        AMORTIZED         UNREALIZED         UNREALIZED            FAIR
                                                          COST              GAINS              LOSSES              VALUE
                                                      --------------     ------------        -----------       -------------
<S>                                                   <C>                <C>                  <C>              <C>
Securities Available-for-Sale:
   U.S. Treasury securities and obligations
      of U.S. Government corporations
      and agencies                                     $ 56,716,848        $  997,833          $ 45,395         $ 57,669,286
   Debt securities issued by states
      and political subdivisions                        102,786,576         2,921,699            30,109          105,678,166
   Corporate securities                                  28,830,440           246,408            75,670           29,001,178
   Mortgage-backed securities                            65,672,904         1,903,177           350,501           67,225,580
                                                       ------------        ----------          --------         ------------

Total debt securities                                   254,006,768         6,069,117           501,675          259,574,210
                                                        -----------         ---------           -------          -----------

    Common stock                                          2,516,949            23,786                 0            2,540,735
                                                          ---------            ------          --------            ---------

Total equity securities                                   2,516,949            23,786                 0            2,540,735
                                                          ---------            ------           -------            ---------

Total Securities Available-for-Sale                   $ 256,523,717      $  6,092,903          $501,675        $ 262,114,945
                                                      =============      ============          ========        =============
</TABLE>


The Company's other invested assets include investments in limited partnerships.
These assets are recorded at a cost of $4,171,771 and $2,000,000 at December 31,
1998 and 1997, respectively. The market value of these assets at December 31,
1998 and 1997 was $4,419,789 and $2,091,538, respectively.

The amortized cost and estimated fair value of debt and equity securities at
December 31, 1998, 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.


                                                                              44
<PAGE>   47

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                              AMORTIZED                 ESTIMATED
                                                                 COST                   FAIR VALUE
                                                                 ----                   ----------
<S>                                                        <C>                        <C>          
Securities Available-for-Sale:
   Due in one year or less                                  $  11,929,511              $  11,991,426
   Due after one year through five years                       40,827,866                 41,762,530
   Due after five years through ten years                      67,790,750                 69,808,061
   Due after ten years, primarily U.S. Government
      and mortgage-backed securities                          196,860,415                202,360,542
    Equity securities                                          10,193,495                 10,327,990
                                                            -------------                 ----------

      Totals                                                $ 327,602,037              $ 336,250,549
                                                            =============              =============
</TABLE>

Treasury notes and a political sub-division bond with a carrying value of
$4,808,076 and a market value of $5,032,495 were on deposit with the Insurance
Departments in various states as of December 31, 1998, as required by law.

For the years ended December 31, 1998, 1997, and 1996, net investment income
earned was as follows:

<TABLE>
<CAPTION>
                                                   1998                 1997             1996
                                                   ----                 -----            ----
<S>                                            <C>                  <C>              <C>         
   Investment income earned:
   Bonds and U.S. Government securities        $18,131,630          $16,628,612      $ 15,664,261
   Real estate investments                         452,099              368,270           305,187
   Equities                                         51,112               53,667                 0
   Other invested assets                           551,965              123,210            88,362
   Short-term investments                          113,050              132,721           161,180
   Cash on hand and on deposit                      83,206               13,846             9,232
                                                ----------           ----------       -----------
   Total investment income earned               19,383,062           17,320,326        16,228,222
   Investment expenses                          (1,833,963)          (1,341,792)       (1,523,872)
                                                ----------           ----------        ----------


      Net investment income                    $17,549,099          $15,978,534      $ 14,704,350
                                               ===========          ===========      ============
</TABLE>

Gross realized gains and gross realized losses on sales of debt and equity
securities and real estate investments based on specific identification, were as
follows:

<TABLE>
<CAPTION>
                                                    1998               1997             1996
                                                    ----               ----             ----

<S>                                              <C>                <C>                <C>     
   Gross realized gains-available-for-sale         $ 10,384           $ 42,643           $ 59,804
   Gross realized losses-available-for-sale        (49,610)           (89,057)          (150,265)
   Gross realized gains-real estate                       0             78,479             19,173
                                                 ----------       ------------      -------------

   Net realized (losses) gains                   $ (39,226)           $ 32,065         $ (71,288)
                                                 ==========           ========         ==========
</TABLE>

The changes in net unrealized gains (losses) on available-for-sale investments
were $3,057,284, $5,469,762, and $(2,340,918), in 1998, 1997, and 1996,
respectively.

5. REAL ESTATE INVESTMENTS
At December 31, 1998 and 1997, real estate investments consisted of the
following:

<TABLE>
<CAPTION>
                                                    1998                1997
                                                    ----                ----

<S>                                              <C>               <C>         
Land and building                                $4,670,310        $  3,934,570
Rental units                                        461,200             461,200
Other                                                37,670              37,670
                                                  ---------        ------------
                                                  5,169,180           4,433,440
Accumulated depreciation                           (587,509)           (248,672)
                                                 ----------            --------

            Net real estate investments          $4,581,671        $  4,184,768
                                                 ==========        ============
</TABLE>


                                                                              45
<PAGE>   48

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Total depreciation expense of real estate investments was $338,837, $138,598,
and $54,817, in 1998, 1997, and 1996, respectively.

6. PROPERTY AND EQUIPMENT
At December 31, 1998, and 1997, property and equipment consisted of the
following:

<TABLE>
<CAPTION>
                                                              1998               1997
                                                              ----               ----

<S>                                                        <C>              <C>
Leasehold improvements                                       $795,933       $  1,096,737
Data processing equipment, including software               1,835,510          1,074,972
Automobiles                                                   282,577            231,647
Furniture, fixtures and equipment                           2,258,917          1,824,844
                                                            ---------          ---------
                                                            5,172,937          4,228,200
Accumulated depreciation                                   (2,558,251)        (1,858,605)
                                                           ----------       ------------

            Net property and equipment                     $2,614,686       $  2,369,595
                                                           ==========       ============
</TABLE>

Total depreciation expense of property and equipment was $699,646, $605,516, and
$389,495, in 1998, 1997, and 1996, respectively.

7. DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the years ended December 31,
1998, 1997, and 1996, were as follows:

<TABLE>
<CAPTION>
                                    1998               1997             1996
                                    ----               ----             ----

<S>                              <C>               <C>               <C>        
Balance, beginning               $1,411,420        $  1,212,035      $   818,312
Additions                         5,450,153           4,194,981        3,236,689
Amortization expense             (4,860,325)         (3,995,596)      (2,842,966)
                                 ----------        ------------      -----------

Balance, ending                  $2,001,248        $  1,411,420      $ 1,212,035
                                 ==========        ============      ===========
</TABLE>

8. INTANGIBLE ASSETS
Intangible assets include goodwill associated with business acquisitions, and at
December 31, 1998, 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
                                                      1998                1997               1996
                                                      ----                ----               ----
<S>                                               <C>                <C>                 <C>
        Balance, beginning                         $7,173,841        $  1,989,113        $ 1,108,117
        Additions at cost                          11,559,043           5,407,588          1,000,000
        Reductions at cost (see Note 2)           (1,500,000)                   0                  0
        Amortization expense                        (646,623)           (222,860)          (119,004)
                                                    ---------       -------------       ------------
        Balance, ending                           $16,586,261        $  7,173,841        $ 1,989,113
                                                  ===========        ============        ===========
</TABLE>

These intangible assets are being amortized over periods ranging from five to
twenty-five years.

9. BORROWING ARRANGEMENTS

The Company maintains a $30,000,000 revolving credit facility with SunTrust
Bank. As of December 31, 1998 and 1997, $27,165,000 and $2,000,000,
respectively, had been borrowed under this credit facility at a per annum rate
of approximately 5.9% and 6.3%, respectively. In January 1999, the Company
increased the credit facility to $75,000,000. The new credit facility
terminates on January 4, 2002 and bears interest at various rates. The interest
rates range from LIBOR plus 0.75% to Prime plus 0.50%. The Company is not
required to maintain compensating balances in connection with this credit
facility. Under the terms of the credit facility, the Company is required to
meet certain financial covenants. Significant covenants are as follows: a) The
Company's funded debt to total capital plus funded debt ratio cannot exceed
0.3:1 and b) Net premiums written to statutory capital and surplus ratio cannot
exceed 2.0:1. The credit facility is guaranteed by certain subsidiaries and
collateralized by the common stock of certain subsidiaries. On January 6, 1999,
an additional $33,000,000 was borrowed under this agreement at a per annum rate
of approximately 6.1% (see Note 20). 


                                                                              46
<PAGE>   49

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES 
Loss and loss adjustment expense (LAE) reserves are generally determined on the
basis of individual claims and actuarially determined estimates of future
claims based upon the Company's actual experience, assumptions and projections
as to claims frequency, severity and inflationary trends and settlement
payments. Such estimates may vary significantly from the eventual outcome. The
ranges of reasonably expected ultimate unpaid losses and LAE are estimated by
the Company's consulting actuaries on an undiscounted basis. The assumptions
used in making such estimates and for establishing the resulting reserves are
continually reviewed and updated based upon current circumstances, and any
adjustments resulting therefrom are reflected in current income.

Activity in the reserves for losses and loss adjustment expenses for the years
ended December 31, 1998, 1997 and 1996 was as follows:

<TABLE>
<CAPTION>
                                               1998                 1997                  1996
                                               ----                 ----                  ----

<S>                                         <C>                  <C>                   <C>
Balance at January 1                        $188,086,000         $172,738,000          $164,506,000
Less reinsurance recoverables                 14,115,000           11,614,000             9,188,000
                                            ------------         ------------          ------------

Net balance at January 1                     173,971,000          161,124,000           155,318,000
                                             -----------        -------------          ------------

Reserves of entity acquired                   23,406,000                    0                     0
                                             -----------         ------------          ------------

Incurred related to:
            Current year                      81,694,000           69,126,000            61,617,000
            Prior year                      (14,332,000)         (15,115,000)          (14,669,000)
                                            ------------        -------------        --------------

            Total incurred                    67,362,000           54,011,000            46,948,000
                                              ----------         ------------         -------------

Paid related to:

            Current year                      14,279,000            8,061,000             5,253,000
            Prior year                        49,697,000           33,103,000            35,889,000
                                              ----------        -------------          ------------
            Total paid                        63,976,000           41,164,000            41,142,000
                                              ----------        -------------          ------------

Net balance at end of period                 200,763,000          173,971,000           161,124,000
Plus reinsurance recoverables                 41,614,000           14,115,000            11,614,000
                                          --------------        -------------          ------------

Balance at December 31                      $242,377,000         $188,086,000          $172,738,000
                                            ============         ============          ============
</TABLE>

The provision for losses and loss adjustment expenses for prior years (net of
reinsurance recoveries of $7,115,000, $5,834,000, and $4,921,000, in 1998, 1997,
and 1996, respectively) decreased because of lower-than-anticipated losses,
caused by the Company's underwriting of certain target specialties and claims
free business.

11. REINSURANCE
The Company presently has excess of loss reinsurance contracts that serve to
limit the Company's maximum loss to $500,000 per occurrence. To the extent that
any reinsuring company might be unable to meet its obligations, the Company
would be liable for such defaulted amounts not already covered by letters of
credit.

The effect of reinsurance on premiums written and earned for the years ended
December 31, 1998, 1997, and 1996 (which includes APAC premiums for the six
months ended December 31, 1998) was as follows:

<TABLE>
<CAPTION>
                                    1998                            1997                            1996
                                    ----                            ----                            ----

                         Written          Earned          Written         Earned           Written         Earned
                         -------          ------          -------         ------           -------         ------
<S>                   <C>              <C>              <C>             <C>              <C>            <C>        
Direct & assumed      $116,989,450     $105,616,840     $77,770,733     $73,011,835      $64,292,287    $61,781,531

Ceded                 (15,512,281)     (16,055,262)     (7,485,436)     (7,508,160)      (5,552,785)    (5,707,095)
                      ------------     ------------     -----------     ----------       ----------     -----------
Net premiums          $101,477,169      $89,561,578     $70,285,297     $65,503,675      $58,739,502    $56,074,436
                       ===========      ===========     ===========     ===========      ===========    ===========
</TABLE>


                                                                              47
<PAGE>   50

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. SHAREHOLDERS' EQUITY
The Company has a stock option plan for officers and key employees (the employee
plan) and a plan for non-employee directors (the director plan). Both plans
became effective in 1996. Under the director plan, only nonqualified stock
options may be issued. Under the employee plan, both an incentive stock option
and a nonqualified stock option 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 such shares on the grant date. The option price of a
non-qualified option shall not be less than 50% of the fair market value of such
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 a
discretionary basis at future dates as approved by the Board, at a price not
less than 100% of the fair market value on the grant date.

During 1998, 116,688 nonqualified stock options and 3,312 incentive stock
options were issued under the employee plan. An additional 70,000 restricted
options, which were not part of either plan, were issued in connection with
acquisitions during the year. During 1997, 120,000 nonqualified stock options
were granted under the director plan, and 265,000 nonqualified stock options
were issued under the employee plan. During 1996, 320,000 incentive stock
options and 335,000 nonqualified stock options were issued under both plans. Of
the 1998 nonqualified stock options issued, 50,000 were issued to an employee
with an exercise price lower than the fair market value on the date of the
grant. This difference in price of $7.55 per option is considered noncash
compensation and is being amortized over the period in which the options vest
and of which $20,972 has been recognized as an expense in the 1998 income
statement. Options granted under the plans are exercisable at such dates as are
determined in connection with their issue, but not later than ten years after
the date of grant.

A summary of the status of the Company's stock option plans as of December 31,
1998 is presented below:

<TABLE>
<CAPTION>
                                                             WEIGHTED AVERAGE
FIXED OPTIONS                              SHARES             EXERCISE PRICE
-------------                              ------             --------------

<S>                                      <C>                      <C>   
Outstanding at beginning of year           991,500                $14.43
Granted                                    190,000                $30.80
Exercised                                 (86,832)                $10.41
                                          --------
Outstanding at end of year               1,094,668
                                         =========
Options exercisable at year-end            581,556                $20.16
                                           =======
</TABLE>

At December 31, 1998, 315,000 shares of the Company's common stock were reserved
for issuance in connection with the stock option plans. The Company maintains an
Employee Stock Purchase Plan that allows employees to purchase the Company's
common stock at 85% of the market value on the first or last day of the offering
period, whichever was lower.

Significant assumptions used to estimate the fair values of options using the
Black-Sholes option-pricing model were as follows:


<TABLE>
<CAPTION>
                                                                1998                 1998                1998
                                                            NONQUALIFIED         NONQUALIFIED        NONQUALIFIED
                                                            STOCK OPTION         STOCK OPTION        STOCK OPTION
                                                            ------------         ------------        ------------
<S>                                                            <C>                  <C>                <C>
a.  current price of underlying stock                           $34.38               $30.19             $30.19
      at the date of grant
b.  exercise price of the option                                $34.38               $30.19             $22.64
c.  expected life of the option                                5 years              5 years            5 years
d.  expected volatility of underlying stock                     36.01%               36.01%             36.01%
e.  expected dividends on the stock                                 $0                   $0                 $0
f.  risk-free interest rate at the date of grant                 5.29%                4.48%              4.48%
</TABLE>


                                                                              48
<PAGE>   51

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                             1997                 1996                 1996
                                                         NONQUALIFIED         NONQUALIFIED           INCENTIVE
                                                         STOCK OPTION         STOCK OPTION         STOCK OPTION
                                                         ------------         ------------         ------------
<S>                                                        <C>                  <C>                  <C>
a.  current price of underlying stock                       $23.63                $8.22               $10.00
      at the date of grant
b.  exercise price of the option                            $23.63                $8.22               $10.00
c.  expected life of the option                            5 years              5 years              5 years
d.  expected volatility of underlying stock                 26.74%               26.87%               26.87%
e.  expected dividends on the stock                             $0                   $0                   $0
f.  risk-free interest rate at the date of grant             6.17%                5.37%                6.31%
</TABLE>


Total compensation expense recognized in the income statement was $0. The
weighted average fair value of options granted during the year was $30.80.

The pro forma disclosures required under SFAS No.123 methodology were as
follows:

<TABLE>
<CAPTION>
                                                                   1998                     1997
                                                                   ----                     ----

<S>                                                             <C>                   <C>          
       Pro Forma Net Income                                     $17,946,863           $  16,002,439
       Pro Forma Tax Expense                                    $ 6,693,078           $   6,489,098
       Pro Forma Diluted Earnings Per Share                     $      1.83            $       1.70
</TABLE>

13. INCOME TAXES
The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
                                                 1998              1997              1996
                                                 ----              ----              ----
<S>                                          <C>              <C>                 <C>
Current income tax expense:
            Federal                           $6,974,016        $ 7,230,181       $ 3,839,423
            State                              1,558,601          1,496,856           801,181
                                               ---------        -----------       -----------
                          Total                8,532,617          8,727,037         4,640,604
                                               ---------       ------------       -----------

Deferred income tax (benefit) expense:
            Federal                            (308,340)        (1,695,163)         1,157,033
            State                               (52,703)          (244,336)           198,060
                                                --------       ------------       -----------
                        Total                  (361,043)        (1,939,499)         1,355,093
                                               ---------      -------------       -----------

Net income tax expense                        $8,171,574       $  6,787,538       $ 5,995,697
                                              ==========       ============       ===========
</TABLE>

The provision for income taxes differed from the statutory corporate tax rate of
35 percent for 1998 and 1997 and 34 percent for 1996 as follows:

<TABLE>
<CAPTION>
                                                     1998              1997             1996
                                                     ----              ----             ----
<S>                                               <C>              <C>               <C>        
Computed "expected" tax
    expense                                       $10,102,476      $  8,170,478      $ 6,568,603
Municipal bond interest                           (2,521,221)       (1,834,950)      (1,316,743)
State income taxes, net of
   federal benefit                                    978,834           814,138          659,500
Other, net                                          (388,515)         (362,128)           84,337
                                                  -----------      ------------      -----------

Actual expense                                     $8,171,574      $  6,787,538      $ 5,995,697
                                                   ==========      ============      ===========
</TABLE>


                                                                              49
<PAGE>   52

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


At December 31, 1998 and 1997, the significant components of the net deferred
tax asset were as follows:

<TABLE>
<CAPTION>
                                                          1998               1997
                                                          ----               ----
<S>                                                   <C>               <C>
Deferred tax assets arising from:
     Loss reserve discounting                         $9,970,448         $ 9,166,279
     Unearned premium reserves                         3,015,392           2,176,983
     Other                                               777,289             814,250
                                                      ----------        ------------
            Total deferred tax assets                 13,763,129          12,157,512
                                                      ----------        ------------
Deferred tax liabilities arising from:
     Unrealized gains on securities                    3,026,979           1,956,928
     Deferred acquisition costs                          506,782             544,455
     Other                                               880,874             719,035
                                                      ----------        ------------
            Total deferred tax liabilities             4,414,635           3,220,418
                                                       ---------        ------------

Net deferred tax asset                                $9,348,494        $  8,937,094
                                                      ==========        ============
</TABLE>

The Company has not recorded a valuation allowance, as the deferred tax assets
were considered by management to be realizable based on the level of anticipated
future taxable income. Net deferred tax assets and federal income tax expense in
future years can be significantly affected by changes in enacted tax rates or by
unexpected adverse events that would impact management's conclusions as to the
ultimate realizability of deferred tax assets.

14. EMPLOYEE BENEFIT PLAN
The Company's employees are covered by a qualified defined benefit plan and a
defined contribution pension plan sponsored by the Company.

SFAS 132 requires restatement of earlier period amounts provided for comparative
purposes unless the information is not readily available. Amounts provided for
1997 and 1996 have not been restated under SFAS 132 as the information is not
readily available.

The benefits of the defined benefit plan are based on years of service and the
employee's compensation. The actuarially computed net periodic pension cost for
December 31, 1998, 1997, and 1996 included the following:

<TABLE>
<CAPTION>
                                                           1998             1997           1996
                                                           ----             ----           ----
<S>                                                     <C>             <C>             <C>
Service cost - benefits earned during the period         $137,691       $   94,015      $   88,239
Interest cost on projected benefit obligation             125,482          106,284          95,970
Actual return on plan assets                            (106,633)        (219,877)        (75,464)
Net amortization and deferral                              26,268          181,770          45,258
                                                          -------        ---------       ---------
Net periodic pension cost                                $182,808       $  162,192      $  154,003
                                                         ========        =========      ==========
</TABLE>


<TABLE>
<CAPTION>
Actuarial present value of benefit obligation:                1998                  1997                  1996
                                                              ----                  ----                  ----

<S>                                                      <C>                  <C>                      <C>          
      Accumulated benefit obligation                     $ (1,584,795)        $  (1,156,683)           $   (890,071)
      Projected benefit obligation for
         service rendered to date                        $ (2,690,664)        $  (1,945,621)           $ (1,477,290)
      Plan assets at fair value                              1,219,686             1,139,563                 854,139
                                                           -----------         -------------            ------------

      Projected benefit obligation in
         excess of plan assets                             (1,470,978)             (806,058)               (623,151)
      Unrecognized net loss (gain)
        from past experience different
        from that assumed                                      746,695               117,581                (21,467)
      Prior service cost not yet
         recognized in net periodic
         pension cost                                         (44,367)              (48,679)                (52,991)
</TABLE>



                                                                              50
<PAGE>   53

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<S>                                                      <C>                  <C>                      <C>          
      Unrecognized net obligation at
         inception recognized over
          15.29 years                                          284,092               314,672                 345,252
                                                           -----------           -----------           -------------

      Accrued pension cost                               $   (484,558)        $     (422,484)          $    (352,357)
                                                         =============        ==============           =============
</TABLE>

The following table sets forth the plan's funded status for the fiscal year
ending December 31, 1998.

<TABLE>
<S>                                                        <C>       
Change in Benefit Obligation
----------------------------
Benefit Obligation at Beginning of Year                    $1,945,621
Service Cost                                                  137,691
Interest Cost                                                 125,482
Actuarial Loss                                                504,493
Benefits Paid                                                (22,623)
                                                            ---------
Benefit Obligation at End of Year                          $2,690,664
                                                           ==========

Change in Plan Assets
---------------------
Fair Value of Plan Assets at Beginning of Year             $1,139,563
Actual Return on Plan Assets                                 (17,988)
Employer Contributions                                        120,734
Benefits Paid                                                (22,623)
                                                            ---------
Fair Value of Plan Assets at End of Year                   $1,219,686
                                                           ==========
</TABLE>

Assumptions used in the accounting for net periodic pension cost at December 31,
1998, 1997, and 1996, were as follows:

<TABLE>
<CAPTION>
                                                         1998         1997         1996
                                                         ----         ----         ----

<S>                                                     <C>          <C>          <C>  
      Discount rates                                    5.50%        6.50%        7.25%
      Rate of increase in compensation levels           5.23%        5.23%        5.23%
      Expected long-term rate of
        return on assets                                9.00%        9.00%        7.25%
</TABLE>

The defined contribution plan has two parts. The first part is a profit-sharing
plan. The second part allows employees to contribute, beginning in 1997, up to 5
percent of their annual compensation (2.5 percent in 1996), of which up to 2.5%
is matched 100 percent by the Company. The Company's policy is to fully fund the
liability at the end of each year. At December 31, 1998, the fair market value
of plan assets was $6,198,304. The expense for this plan amounted to $434,783,
$426,291, and $324,376 in 1998, 1997, and 1996, respectively.

The Company also has a supplemental executive retirement plan (SERP) that
provides certain executives with income at retirement equal to 60 percent of
pre-retirement base compensation, less qualified pension plan benefits paid by
the Company and all predecessor plans and Social Security benefits. The plan had
a net periodic pension cost of $92,251 for 1998. The projected benefit
obligation at December 31, 1998 was $481,434 and the accrued pension cost was
$336,912, using a discount rate of 5.5 percent. The plan has no vesting prior to
age 55. The Company accrued $95,000 to cover any liability under this plan in
1998, 1997 and 1996. The total liability included in the financial statements
for this plan amounted to approximately $345,000 and $250,000 as of December 31,
1998 and 1997, respectively.

15. STOCK TRANSACTIONS
As part of a reorganization in June 1996, a stock split was transacted in which
five shares of the Company's $.10 par value common stock were received for each
share of FPIC's $1 par value common stock. The accompanying financial statements
reflect the transaction retroactively in a manner similar to a stock split. In
January 1996, a cash dividend of 10 cents per common share was declared
amounting to $813,964. In addition, the Company paid $6,000 in retroactive
dividends in 1996 to certain shareholders.


                                                                              51
<PAGE>   54

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16. COMMITMENTS AND CONTINGENCIES
The future minimum annual rentals under noncancellable leases are as follows:

<TABLE>
            <S>                   <C>         
            1999                  $    614,201
            2000                       610,700
            2001                       461,530
            2002                       355,290
            Thereafter                       0
                                       -------
                                   $ 2,041,721
                                   ===========
</TABLE>

Total rental expense was $371,038, $386,016, and $332,821 for 1998, 1997, and
1996, respectively.

The Company is involved in numerous legal actions arising primarily from claims
under insurance policies. The legal actions arising from claims under insurance
policies have been considered by the Company in establishing its reserves. While
the outcome of all legal actions is not presently determinable, the Company's
management is of the opinion that the settlement of these actions will not have
a material adverse effect on the Company's financial position or results of
operations.

The Company is subject to assessment by the Florida Insurance Guaranty
Association, Inc. (FIGA) as well as similar associations in other states where
it is licensed, for the provision of funds necessary for the settlement of
covered claims under certain policies of insolvent insurers.

In addition to the standard FIGA assessments, the Florida Legislature may also
levy special assessments to settle claims caused by certain catastrophic losses.
The Company would be assessed on a basis of premium written. No provision for
special assessments was made in the 1998 financial statements. However, damages
caused by future catastrophic losses, such as a hurricane, could subject the
Company to additional FIGA assessments.

17. STATUTORY ACCOUNTING

FPIC and APAC are required to file statutory financial statements with state
insurance regulatory authorities. Shareholders' equity on a statutory basis was
$117,277,880, $87,875,717 and $76,519,879 at December 31, 1998, 1997, and 1996,
respectively. Statutory net income amounted to $18,325,503, $12,404,838, and
$10,442,464 for the years ended December 31, 1998, 1997, and 1996, respectively.
During 1996 and in connection with the reorganization, FPIC, by way of dividend,
transferred its $2.5 million investment in MCC to the Company. This amount was
charged directly to statutory surplus.

The insurance subsidiaries are restricted under the Florida Insurance Code as to
the amount of dividends they may pay without regulatory consent. In 1999, they
may pay dividends up to approximately $18,300,000 without regulatory consent.

18. RECONCILIATION OF BASIC AND DILUTED EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                           1998               1997             1996
                                                           ----               ----             ----
<S>                                                    <C>                <C>               <C>        
Net income and income from
continuing operations                                  $20,692,642        $16,556,685       $13,323,725
                                                       ===========        ===========       ===========

Basic weighted average shares outstanding                9,332,206          9,044,984         8,518,211
Common stock equivalents                                   476,458            362,109           205,756
                                                        ----------        -----------       -----------
Diluted weighted average shares outstanding              9,808,664          9,407,093         8,723,967
                                                         =========        ===========       ===========

Basic earnings per share                                     $2.22              $1.83             $1.56
                                                             =====              =====             =====

Diluted earnings per share                                   $2.11              $1.76             $1.53
                                                             =====              =====             =====
</TABLE>


                                                                              52
<PAGE>   55

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


19. SEGMENT INFORMATION

Under the provisions of SFAS 131, the Company determined it has two reportable
operating segments, which are insurance and third party administration (TPA).
The insurance segment provides a variety of insurance products for participants
in the healthcare industry including MPL insurance for medical professionals,
managed care liability insurance, professional and comprehensive general
liability insurance for healthcare facilities, provider stop loss insurance,
workers compensation insurance, and group accident and health coverage. The TPA
segment provides third party administration services such as the administration
of self-insurance plans for large employers.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates a segment's
performance based on net income or loss. Intersegment revenues for transactions
between the two 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.

Information by industry segment follows (in thousands):

<TABLE>
<CAPTION>
                                                     1998                       1997                     1996
                                                     ----                       ----                     ----
 REVENUES:
 ---------
<S>                                            <C>                         <C>                      <C>    
  External customers:
     Insurance                                   $107,823                    $82,668                  $70,974
     TPA                                           12,171                     10,484                    5,281
                                                ---------                   --------                  -------
                                                  119,994                     93,152                   76,255
  Intersegment:
    Insurance                                         996                        815                        0
    TPA                                               583                          0                        0
                                                 --------                   --------                 --------
                                                $ 121,573                   $ 93,967                 $ 76,255
                                                =========                   ========                 ========
INTEREST REVENUE:
-----------------
    Insurance                                     $18,389                    $16,708                  $15,728
    TPA                                               164                         27                       88
                                                  -------                   --------                 --------
                                                 $ 18,553                   $ 16,735                 $ 15,816
                                                 ========                   ========                 ========

NET INCOME:
-----------
    Insurance                                     $17,865                    $14,013                  $12,535
    TPA                                               994                      1,177                      730
                                                  -------                    -------                 --------
                                                 $ 18,859                   $ 15,190                 $ 13,265
                                                 ========                   ========                 ========
INCOME TAXES:
-------------
    Insurance                                     $ 7,584                    $ 5,209                  $ 5,521
    TPA                                               638                        735                      445
                                                 --------                    -------                  -------
                                                  $ 8,222                    $ 5,944                  $ 5,966
                                                =========                    =======                  =======
IDENTIFIABLE ASSETS:
--------------------
    Insurance                                    $444,050                   $332,131                 $295,414
    TPA                                            10,801                      7,508                    4,264
                                                ---------                  ---------                ---------
                                                $ 454,851                  $ 339,639                $ 299,678
                                                =========                  =========                =========
DEPRECIATION & AMORTIZATION:
----------------------------
    Insurance                                      $1,289                     $1,647                   $1,493
    TPA                                               708                        429                      265
                                                 --------                    -------                  -------
                                                  $ 1,997                    $ 2,076                  $ 1,758
                                                =========                    =======                  =======
</TABLE>

The following table provides reconciliations of reportable operating segment
revenues, net income, and assets to the Company's consolidated totals:


                                                                              53
<PAGE>   56

                           FPIC INSURANCE GROUP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                               1998                       1997                     1996
                                                               ----                       ----                     ----
<S>                                                      <C>                         <C>                     <C>
REVENUES:
---------

Total revenues for reportable segments                     $121,573                    $93,967                  $76,255
Elimination of intersegment revenues                        (1,579)                      (815)                      (0)
Other                                                           327                         64                      108
                                                           --------                   --------                 --------
   Total consolidated revenues                             $120,321                   $ 93,216                 $ 76,363
                                                           ========                   ========                 ========

NET INCOME:
-----------

Total income for reportable segments                       $ 18,859                   $ 15,190                 $ 13,265
Other                                                         1,834                      1,367                       59
                                                           --------                   --------                 --------
  Total consolidated net income                            $ 20,693                   $ 16,557                 $ 13,324
                                                           ========                   ========                 ========


ASSETS:
-------

Total assets for reportable segments                       $454,851                   $339,639                 $299,678
Investments in equity method investees                     (42,670)                   (23,019)                 (21,769)
Other                                                        67,925                     36,990                   25,797
Intercompany receivables                                      (999)                      (760)                    (153)
                                                          ---------                   --------                ---------
    Total consolidated assets                             $ 479,107                  $ 352,850                $ 303,553
                                                          =========                  =========                =========
</TABLE>

20. SUBSEQUENT EVENTS

On January 6, 1999, the Company purchased all of the outstanding common stock of
Administrators For The Professions, Inc. (AFP), a New York corporation, for
aggregate consideration of $54,000,000, paid in cash of $44,000,000 and of
Company common stock. AFP is the manager and attorney-in-fact for Physicians'
Reciprocal Insurers, the second largest medical professional liability insurer
for physicians in the state of New York.

The Company's subsidiary, FPIC, acquired The Tenere Group, Inc. (Tenere) on
March 17, 1999 for $19,608,000 in cash. Tenere, headquartered in Springfield,
Missouri, is a stock holding company that has two primary insurance
subsidiaries, providing medical and legal professional liability insurance.

21. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for 1998
and 1997:

Year Ended December 31, 1998

<TABLE>
<CAPTION>
                                                 FIRST            SECOND              THIRD            FOURTH
                                                 -----            ------              -----            ------

<S>                                        <C>               <C>                 <C>              <C>        
Premiums written and assumed               $29,851,492       $25,662,544         $27,915,386      $33,560,028
Net investment income                        4,339,754         4,372,425           4,259,182        4,577,738
Net income                                   4,785,108         5,046,487           5,480,735        5,380,312
Basic earnings per share                          $.52              $.55                $.58             $.57
Diluted earnings per share                        $.50              $.52                $.55             $.54
</TABLE>

Year Ended December 31, 1997

<TABLE>
<CAPTION>
                                            FIRST               SECOND              THIRD             FOURTH
                                            -----               ------              -----             ------

<S>                                 <C>                  <C>                 <C>               <C>          
Premiums written and assumed        $  27,710,231        $  17,806,822       $  18,512,127     $  13,741,553
Net investment income                   3,823,088            3,943,499           4,047,205         4,164,742
Net income                              3,790,566            3,910,210           4,278,310         4,577,599
Basic earnings per share                     $.42                 $.43                $.47              $.50
Diluted earnings per share                   $.41                 $.42                $.46              $.48
</TABLE>


                                                                              54
<PAGE>   57


                                                                 SCHEDULE I

                           FPIC INSURANCE GROUP, INC.

                             SUMMARY OF INVESTMENTS
                   OTHER THAN INVESTMENTS IN RELATED PARTIES
                               DECEMBER 31, 1998
<TABLE>
<CAPTION>
                                                                                                        AMOUNT AT
                                                                                                     WHICH SHOWN IN
                                                                  COST (1)               VALUE        BALANCE SHEET
                                                               -------------        -------------     -------------

<S>                                                            <C>                  <C>               <C>
Securities Available-for-Sale
Fixed Maturities:
U.S. Treasury securities
      and obligations of
      U.S. Government corporations
      and agencies                                              $ 56,231,795         $ 58,283,040      $ 58,283,040
Debt securities issued by states
      and political subdivisions                                 148,544,449          153,069,384       153,069,384
Corporate securities                                              46,072,483           46,090,912        46,090,912
Mortgage-backed securities                                        66,532,029           68,479,223        68,479,223
                                                               -------------        -------------     -------------

                        Total fixed maturities                   317,380,756          325,922,559       325,922,559

Equity Securities:
      Industrial, miscellaneous, and other                        10,221,281           10,327,990        10,327,990
Real Estate                                                        4,581,671            4,581,671         4,581,671
Other Invested Assets                                              4,171,771            4,419,789         4,171,771
                                                               -------------          ------------   --------------

                        Totals                                 $ 336,355,479       $  345,252,009    $  345,003,991
                                                               =============       ==============    ==============
</TABLE>


(1) Original cost of equity securities and real estate adjusted for
    any permanent write downs, and, as to fixed maturities, original
    cost reduced by repayments, write downs and adjusted for
    amortization of premiums or accrual of discounts.

See accompanying auditors' report.


<PAGE>   58




                                     SCHEDULE II
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEET
                    FPIC INSURANCE GROUP, INC. (PARENT ONLY)

<TABLE>
<CAPTION>
                                                                               Years Ended December 31
                                                                           12/31/98                12/31/97
                                                                        ==============         ================
<S>                                                                     <C>                    <C>
ASSETS
Investments and cash:
    Investments in subsidiaries *                                         $152,945,528            $112,449,713
    Common stocks                                                            7,586,136               2,086,090
    Other invested assets                                                    4,171,771               2,000,000

                                                                        ---------------        ----------------

    Total Investments and Cash                                             164,703,435             116,535,803

Property and equipment, net                                                    293,764                 150,059
Due from subsidiaries *                                                      5,708,229               5,938,784
Intangible assets                                                            5,579,816               3,207,661
Federal income taxes receivable                                              1,804,225                       0
Prepaid expenses                                                               379,856                 263,245
Other assets                                                                 2,234,210                 327,767
                                                                        ---------------        ----------------

      TOTAL ASSETS                                                        $180,703,535            $126,423,319
                                                                        ---------------        ----------------

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES
Cash and overdraft                                                             697,173                   2,613
Federal income taxes payable                                                        $0              $2,620,083
Short term debt                                                             27,165,000               2,000,000
Other liabilities                                                            1,910,834               1,736,203
                                                                        ---------------        ---------------

       TOTAL LIABILITIES                                                    29,773,007               6,358,899
                                                                            ----------               ---------

SHAREHOLDERS' EQUITY 
Common stock, $.10 par value:
     25,000,000 shares authorized;
     9,518,679 and 9,179,581 shares issued and
     outstanding in 1998 and 1997, respectively                                951,868                 917,958
Additional paid-in capital                                                  34,297,994              25,789,144
Unearned compensation on stock options                                       (356,528)                       0
Other comprehensive income                                                   5,621,533               3,634,299
Retained Earnings                                                          110,415,661              89,723,019
                                                                        ---------------        ----------------

TOTAL SHAREHOLDERS' EQUITY                                                 150,930,528             120,064,420
                                                                        ---------------        ----------------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                $180,703,535            $126,423,319
                                                                        ---------------        ----------------

</TABLE>

* Eliminated in consolidation.

See the accompanying Notes to Condensed Financial Statements.
See accompanying auditors' report.



<PAGE>   59


                                  SCHEDULE II
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                        CONDENSED STATEMENTS OF EARNINGS
                    FPIC INSURANCE GROUP, INC. (PARENT ONLY)

<TABLE>
<CAPTION>
                                                                         YEARS ENDED DECEMBER 31

                                                               1998                  1997                  1996
                                                         =================    ==================    ===================

<S>                                                      <C>                  <C>                   <C>
REVENUES
Management fees from subsidiaries *                           $12,267,004            $11,204,829                     $0
Dividends from subsidiaries *                                     450,000                      0              2,500,000
Net investment income                                             326,788                 63,846                107,673
                                                         -----------------    ------------------    -------------------

           TOTAL REVENUES                                      13,043,792             11,268,675              2,607,673

EXPENSES
Other operating expenses                                       10,809,689              9,057,547                 18,416
                                                         -----------------    ------------------    -------------------

           TOTAL EXPENSES                                      10,809,689              9,057,547                 18,416

Income before income taxes                                      2,234,103              2,211,128              2,589,257

Income taxes                                                     (49,958)                843,660                30,347
                                                         -----------------    ------------------    -------------------

           EARNINGS BEFORE EQUITY IN
            UNDISTRIBUTED EARNINGS OF SUBSIDIARIES              2,284,061              1,367,468              2,558,910

Equity in undistributed earnings of subsidiaries               18,408,581             15,189,217             10,764,815
                                                         -----------------    ------------------    -------------------

            NET EARNINGS                                      $20,692,642            $16,556,685             13,323,725
                                                         ================     ==================    ===================
</TABLE>

*  Eliminated in consolidation.

See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.



<PAGE>   60

                                  SCHEDULE II
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF CASH FLOWS
                    FPIC INSURANCE GROUP, INC. (PARENT ONLY)

<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31
                                                                          1998                   1997            1996
                                                                  ======================    ==============================

<S>                                                               <C>                       <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
      Net earnings                                                          $20,692,642      $16,556,685      $13,323,725
      Adjustments to reconcile net earnings to net cash
         provided by operating activities:
                Equity in undistributed earnings of                         (18,408,581)     (15,189,217)     (10,764,815)
                   subsidiaries
                Common stock dividend from subsidiary                          (450,000)               0       (2,500,000)
                Depreciation and amortization                                   251,367           21,151                0
                Noncash compensation                                             20,972                0                0
                Changes in assets and liabilities:
                         Due from subsidiaries                                  230,555       (5,938,784)               0
                         Prepaid expenses                                      (116,611)        (263,245)               0
                         Other assets                                          (406,443)        (185,403)        (142,364)
                         Federal income taxes receivable                     (1,804,225)               0                0
                         Federal income taxes payable                        (2,620,083)       2,620,083                0
                         Other liabilities                                      174,631        1,663,348           72,855
                                                                  ----------------------    ------------------------------

                Net cash (used in) operating activities                      (2,435,776)        (715,382)         (10,599)
CASH FLOWS FROM INVESTING ACTIVITIES
          Purchase of goodwill                                               (4,071,107)      (3,207,661)               0
          Purchase of common stocks                                          (5,500,000)      (2,086,090)     (19,268,673)
          Purchase of other invested assets                                  (2,171,771)      (2,000,000)               0
          Additional investment in subsidiaries                                       0       (1,250,100)               0
          Proceeds from sale or maturity of securities
              available for sale                                                      0        3,881,315                0
          Purchase of securities available for sale                                   0                0       (3,881,315)
          Purchase of subsidiary's assets and stock                         (19,650,000)               0                0
          Purchase of property and equipment, net                              (196,166)        (171,210)               0
                                                                  ----------------------    ------------------------------

                Net cash (used in) investing activities                     (31,589,044)      (4,833,746)     (23,149,988)

CASH FLOWS FROM FINANCING ACTIVITIES
          Receipt of short term debt                                         25,165,000        2,000,000                0
          Purchase of treasury stock                                                  0                0         (181,991)
          Issuance of common stock                                            8,165,260        3,542,215       23,346,878
                                                                  ----------------------    ------------------------------

                 Net cash provided by financing activities                   33,330,260        5,542,215       23,164,887

                Net (decrease) in cash and
                      cash equivalents                                         (694,560)          (6,913)           4,300

Cash and cash equivalents, beginning of year                                     (2,613)           4,300                0
                                                                  ----------------------    ------------------------------

           CASH AND CASH EQUIVALENTS, END OF YEAR                             ($697,173)         ($2,613)           4,300
                                                                  =====================     ==============================
Supplemental disclosure of cash flow information:
      Federal income taxes paid                                              $9,816,000       $6,071,204               $0
      Cash paid for interest                                                   $884,151          $65,962               $0
</TABLE>

See accompanying auditors' report.
See the accompanying Notes to Condensed Financial Statements.

<PAGE>   61

                                   SCHEDULE II
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                    FPIC INSURANCE GROUP, INC. (PARENT ONLY)

       The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of FPIC
Insurance Group, Inc. and Subsidiaries (see part III Item 8).

1.     The Parent Company was formed on June 11, 1996. The shareholders of a
       subsidiary company approved the formation of a holding company structure.
       The shareholders of the subsidiary company became the shareholders of the
       Parent Company in five for one exchange of common stock. Prior to the
       approval of the holding company structure, the Parent Company had no
       activity.

2.     Investments

       See Investments in the consolidated financial statements Part II Item 8
       and in Note 4 of the Notes to the Consolidated Financial Statements.

3.     Intangible assets

       See Intangible Assets in the consolidated financial statements Part II
       Item 8 and in Note 8 of the Notes of the Consolidated Financial
       Statements.

4.     Short term debt

       See Borrowing Arrangements in Note 9 of the Notes to the Consolidated
       Financial Statements.

5.     Income Taxes

       The Company and its eligible subsidiaries file a consolidated U.S.
       Federal Income tax return. Income tax liabilities or benefits are
       recorded by each subsidiary based upon separate return calculations, and
       any difference between the consolidated provision and the aggregate
       amounts recorded by the subsidiaries is reflected in the Parent Company
       financial statements.

       For further information on income taxes, see Income Taxes in Note 13 of
       the Notes to the Consolidated Financial Statements.

6.     Other Comprehensive Income

       See Other Comprehensive Income in the consolidated financial statements
       Part II Item 8.

7.     Dividend Restrictions

       See Statutory Accounting in Note 17 of the Notes to the Consolidated
       Financial Statements.

8.     Accounting Changes

       For information concerning new accounting standards adopted in 1998 and
       1997, see Note 1 of the Notes to the Consolidated Financial Statements.

<PAGE>   62

                                                                  SCHEDULE III

                           FPIC INSURANCE GROUP, INC.

                CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION

                                 (IN THOUSANDS)

                        DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                       Other
                           Deferred     Future Policy                  Policy                            Benefits
                            Policy        Benefits                    Claims &                 Net      Losses and
                          Acquisition  Losses, Claims   Unearned      Benefits   Premium   Investment      Loss
Segment                      Costs      Loss Expenses   Premiums       Payable   Revenue     Income      Expenses
-------                      -----      -------------   --------       -------   -------     ------      --------
<S>                       <C>          <C>              <C>           <C>        <C>       <C>          <C>
1998
  Medical professional
    and other liabiltiy      $2,001       $242,377      $44,310          $0      $89,562     $17,549      $67,362

1997:
 Medical professional
    and other liabiltiy      $1,411       $188,086      $28,218          $0      $65,504     $15,978      $54,011

1996:
  Medical professional
    and other liability      $1,212       $172,738      $23,459          $0      $56,074     $13,611      $46,948
</TABLE>


<TABLE>
<CAPTION>
                            Amortization
                            of Deferred
                              Policy                      Net
                            Acquisition      Other     Premiums
Segment                        Costs       Expenses     Written
-------                        -----       --------     -------

<S>                         <C>            <C>         <C>
1998
  Medical professional
    and other liabiltiy       $4,860        $9,299     $101,477

1997:
 Medical professional
    and other liabiltiy       $3,996        $3,404     $ 70,285

1996:
  Medical professional
    and other liability       $2,843        $3,747     $ 58,740
</TABLE>

See accompanying auditors' report.

<PAGE>   63

                                                                SCHEDULE IV

                           FPIC INSURANCE GROUP, INC.

                                  REINSURANCE

                 FOR THE YEARS DECEMBER 31, 1998, 1997 AND 1996

<TABLE>
<CAPTION>
                                                                                            PERCENTAGE
                                                 CEDED TO        ASSUMED                    OF AMOUNT
PROPERTY AND                       GROSS           OTHER       FROM OTHER        NET         ASSUMED
LIABILITY INSURANCE               AMOUNT         COMPANIES      COMPANIES      AMOUNT        TO NET
-------------------               ------         ---------     -----------     ------        ------

<S>                             <C>             <C>           <C>             <C>            <C>
1998                            $91,141,795     $16,055,262    $14,475,045    $89,561,578    16.16%

1997                            $71,277,054      $7,508,160    $ 1,734,781    $65,503,675     2.65%

1996                            $61,628,450      $5,707,095    $   153,081    $56,074,436     0.27%

</TABLE>

See accompanying auditors' report.


<PAGE>   64


                                                                   SCHEDULE V

                           FPIC INSURANCE GROUP, INC.

                       VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                            BALANCE AT            CHARGED TO                          BALANCE
                                            BEGINNING             COSTS AND                           AT END
         DESCRIPTION                        OF PERIOD             EXPENSES       DEDUCTIONS           OF PERIOD
         -----------                        ---------             --------       ----------           ---------

<S>                                         <C>                  <C>            <C>                 <C>
   Year-ended December 31, 1998
      Allowance for Doubtful
          Accounts, net                     $ 681,175            $ 227,234        $      0            $ 908,409

   Year-ended December 31, 1997
      Allowance for Doubtful
          Accounts, net                     $ 383,580            $ 297,595        $      0            $ 681,175

</TABLE>

See accompanying auditors' report.