Management’s Discussion & Analysis of Financial Condition and Results of Operations
Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated.
Our reciprocal management segment is made up of AFP, our New York subsidiary, and its two wholly owned subsidiaries, Intermediaries and Group Data Corporation (“Group Data”). AFP acts as administrator and attorney-in-fact for PRI, the second largest medical professional liability insurer for physicians in the state of New York. Intermediaries acts as a reinsurance broker and intermediary in the placement of reinsurance. Group Data acts as a broker in the placement of annuities for structured settlements. The segment also includes the business of Professional Medical Administrators, LLC (“PMA”), a 70% owned subsidiary. Effective January 1, 2003, FPIC owns 80% of PMA. PMA provides brokerage and administration services for professional liability insurance programs. Financial and selected other data for the reciprocal management segment for the years ended December 31, 2002, 2001 and 2000 is summarized in the table below. Dollar amounts are in thousands.
In accordance with the management agreement between AFP and PRI, AFP receives a management fee equal to 13% of PRI’s direct premiums written, with an adjustment for expected return premiums. As such, our revenues and results of operations are financially sensitive to the revenues and financial condition of PRI. PRI, as an MPL insurer, is subject to many of the same types of risks as those of our insurance subsidiaries and MPL companies generally. Growth at PRI is subject to surplus constraints; however, as a reciprocal, PRI is able to operate at higher leverage ratios than non-reciprocals such as our insurance subsidiaries. Further, as allowed under New York insurance laws, PRI has requested and received permission from the New York State Insurance Department to follow the permitted practice of discounting its loss and LAE reserves. The New York State Insurance Department mandates PRI’s rates, including rates charged for policies in excess of $1.3 million, which have been reinsured to First Professionals.
FAS 148, “Accounting for Stock-Based Compensation- Transition and Disclosure,” amends FAS 123, “Accounting for Stock-Based Compensation,” to provide transition guidance for a change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of FAS 123 for both annual and interim financial statements. FAS 148 is effective December 31, 2002. The adoption of FAS 148 did not have a material effect on our financial statements. The disclosure requirements of FAS 148 have been incorporated into Note 19 to the consolidated financial statements.
At December 31, 2002 and 2001, real estate investments consisted of the following:
The provision for income taxes differs from the statutory corporate tax rate of 35% for 2002, 2001 and 2000 as follows:
Effective July 1, 2002, our largest insurance subsidiary, First Professionals, entered into a finite reinsurance agreement with two insurance companies of the Hannover Re group (“Hannover Re”). The agreement, which calls for First Professionals to cede quota share portions of its 2002 and 2003 written premiums, contains adjustable features, including a loss corridor, sliding scale ceding commissions and a cap on the amount of losses that may be ceded to the reinsurer. The effect of these features is to limit the reinsurers’ aggregate exposure to loss and thereby reduce the ultimate cost to First Professionals as the ceding company. These features also have the effect of reducing the amount of protection relative to the quota share amount of premiums ceded by First Professionals. While First Professionals does not receive pro-rata protection relative to the amount of premiums ceded, the amount of such protection is significant, as determined in accordance with guidance under both statutory accounting practices and GAAP. In addition to ceding a significant portion of its risks to Hannover Re, the agreement also allows First Professionals to reduce its financial leverage and to realize immediate reimbursement for related up-front acquisition costs, thus adding to its financial capacity. The following table illustrates the pro forma effects of the agreement on selected consolidated financial information of our insurance subsidiaries.
i) Total debt to cash flow available for debt service may not exceed 3.00:1;
In accordance with the provisions of FAS 131, “Disclosures about Segments of an Enterprise and Related Information,” FPIC has determined that it has three reportable operating segments: insurance, reciprocal management and TPA. Our insurance segment specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. On October 3, 2002, Interlex entered into an agreement with an unrelated insurance organization to sell the renewal rights to all of its legal professional liability policies. The reciprocal management segment contains our subsidiary AFP, which serves as the exclusive manager and attorney-in-fact of PRI, an insurance reciprocal in New York. We do not own PRI and so its financial statements are not consolidated or included in ours. Instead, PRI is similar to a mutual insurer and the risks and rewards of ownership basically vest with the policyholders of PRI. The reciprocal management segment also provides brokerage, administration and intermediary services for insurance and reinsurance programs to PRI and FPIC. Our TPA segment markets and administers self-insured and fully insured plans for both large and small employers, including group accident and health, workers’ compensation and general liability and property insurance.