PROPERTIES - ------------------- The physical properties used by the Company and its significant business segments are summarized below:
changing rates of inflation and other economic conditions, (viii) the ability to collect reinsurance recoverables, (ix) the competitive environment in which the Company operates, related trends and associated pricing pressures and developments, (x) the impact of mergers and acquisitions, including the ability to successfully integrate acquired businesses and achieve cost savings, competing demands for the company's capital and the risk of undisclosed liabilities, and (xi) developments in global financial markets that could affect the Company's investment portfolio and financing plans.
The words "believe", "anticipate", "estimate", "project", "plan", "expect", "intend", "hope", "will likely result" or "will continue" and variations thereof or similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
GENERAL - ------- FPIC Insurance Group, Inc. ("FIG" or the "Company") was formed in 1996 in connection with a reorganization (the "Reorganization") pursuant to which it became the parent company of Florida Physicians Insurance Company, Inc. ("FPIC") and McCreary Corporation ("McCreary"), a third party administrator. 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.
The Company has three main operating segments as follows: insurance, third party administration ("TPA") and reciprocal management ("RM"). The Company's primary sources of revenue are management fees and dividends received from its subsidiaries. The primary sources of revenues for these amounts are premiums earned and investment income derived from the insurance segment and fee and commission income from the TPA and RM segments.
Not only have the Company's recent acquisitions provided growth, but also diversification; helping it to better withstand the risks associated with a downturn in its core medical malpractice business such as that experienced in 2000. During 1996, the year the Company went public, medical malpractice insurance comprised approximately 98% of the Company's direct premiums written, with 99% of the Company's direct MPL business in the state of Florida. In the year 2000, medical malpractice insurance comprised approximately 85% of the Company's direct premiums written, with 60% of the Company's direct MPL business in the state of Florida.
INSURANCE SEGMENT - ----------------- The underwriting results, other significant financial data and income or loss before taxes for the Company's insurance segment for the twelve months ended December 31, 2000, 1999 and 1998 are summarized in the table below. Dollar amounts are in thousands.
Assumed premiums written for fiscal year 2000 were $ 64.3 million, an increase of $30.3 million or 89%, from $34.0 million in fiscal year 1999. The increase in assumed premiums is primarily related to the 100% quota share reinsurance agreement written in the first quarter of 2000 between the Company's insurance subsidiaries and PRI whereby the Company assumed the death, disability and retirement ("DD&R") risks under PRI's claims made
insurance policies in exchange for cash and investments. Approximately $34 million of this amount represents the portion of the initial consideration received corresponding with management's estimate of the reserves required for future benefits at the inception of the contract, which were recorded as unearned premium. This amount of assumed premiums written will, therefore, not recur in the future. In addition, the increase in assumed premiums was offset by experience adjustment accruals for business assumed from PRI. The experience adjustments represent an estimate of the amount of premium the Company will return to PRI in future years.
Management closely monitors the adequacy of its liabilities for loss and LAE incurred and underlying claims trends, including having the Company's outside consulting actuaries perform calculations periodically. During 2000, the company identified certain unfavorable trends in the underlying claims data with respect to FPIC's core physicians' MPL business, including an increase in the rate of claims closed with indemnity payment, a slow down in the overall closure rate of pending claims, and an increase in the severity of indemnity payments made during 2000 relating to prior periods. The Company and its outside consulting actuary further analyzed these trends and determined that additional reserves were required. As a result, the Company's reserve strengthening included an increase in FPIC's liability for loss and LAE of approximately $15.0 million.
The liability for losses and LAE represents management's best estimate of the ultimate cost of all losses incurred but unpaid and considers prior loss experience, loss trends, the Company's loss retention levels and changes in the frequency and severity of claims. Competitive market conditions in recent years have lessened the Company's ability to underwrite and price its business on as favorable terms as in prior years. Consequently, the Company has significantly increased it provisions for loss and LAE in 2000.
Other underwriting expenses decreased $0.5 million to $20.5 million for the twelve months ended December 31, 2000 from $21.0 million for the twelve months ended December 31, 1999. The decline in other underwriting expenses is attributable to a decline in assumed reinsurance costs and the accretion of the deferred credit associated with the 100% DD&R quota share reinsurance agreement entered into during the first quarter of 2000.
Net investment income increased to $24.5 million for the year ended December 31, 2000, up $5.7 million or 30%, from $18.8 million in 1999. The increase is primarily due to the investments received in association with the 100% DD&R quota share reinsurance agreement between the Company's insurance subsidiaries and PRI. On a consolidated basis, the Company's total investment portfolio grew to $ 405.0 million in 2000, up $58.4 million or 17%, from $346.6 million in 1999.
Net investment income increased to $18.8 million in 1999, up $1.4 million, or 8%, from $17.4 million in 1998. The increase was primarily attributable to the inclusion of Tenere, which added approximately $1.9 million of investment income.
THIRD PARTY ADMINISTRATION ("TPA") SEGMENT - ------------------------------------------ Significant financial data and income before taxes for the Company's TPA segment for the twelve months ended December 31, 2000, 1999 and 1998 are summarized in the table below. Dollar amounts are in thousands.
Claims administration and management fees increased $3.0 million to $12.9 million for the twelve months ended December 31, 2000 from $9.9 million for the twelve months ended December 31, 1999. The growth in claims administration and management fees is attributable to the asset acquisition of Brokerage Services, Inc. ("BSI") and Group Brokerage, Inc. ("GBI"), by Employers Mutual, Inc. during the third quarter of 1999, and the resulting recognition of a full twelve months of revenue from the acquired operations during the current year.
Claims administration expense increased $3.6 million to $15.4 million for the twelve months ended December 31, 2000 from $11.8 million for the twelve months ended December 31, 1999. The growth in claims administration and management expense is also primarily attributable to the acquisition of assets by Employers Mutual, Inc. during the third quarter of 1999.
RECIPROCAL MANAGEMENT ("RM") SEGMENT - ------------------------------------ Significant financial data and income before taxes for the Company's RM segment for the twelve months ended December 31, 2000, 1999 and 1998 are summarized in the table below. Dollar amounts are in thousands.
Commission income increased $0.3 million to $1.0 million for the twelve months ended December 31, 2000 from $0.7 million for the twelve months ended December 31, 1999. The increase in commission income is attributable to a full year of brokerage income from FPIC Intermediaries, which was formed during the second quarter of 1999.
Net premiums receivable decreased $3.4 million to $31.2 million for the twelve months ended December 31, 2000 from $34.6 million for the twelve months ended December 31, 1999. The reduction in net premiums receivable is mainly related to an increase in the allowance for doubtful accounts by $1.0 million, of which $.6 million was for a specific hospital receivable.
Deferred policy acquisition costs increased $3.3 million to $6.1 million for the twelve months ended December 31, 2000 from $2.8 million for the twelve months ended December 31, 1999. The increase in deferred acquisition costs is attributable to the 100% DD&R quota share reinsurance agreement with PRI.
The liability for loss and LAE increased $8.2 million to $281.3 million for the twelve months ended December 31, 2000 from $273.1 million for the twelve months ended December 31, 1999. The net increase in the liability for loss and LAE is primarily attributable to the reserve strengthening recorded during the fourth quarter of 2000 of $21.0 million. In addition, the Company also reduced the amount of reserves released from prior report years, which accounted for approximately $17.0 million of the net increase in net loss and LAE incurred from 1999 to 2000. The difference between the increase in the provisions for losses and LAE during 2000, and the net increase in the ending balance of aggregate reserves is the result of the payment and settlement of claims during 2000, as compared with 1999.
INVESTMENTS - ----------- The Company invests primarily in a diversified portfolio of high grade, taxable and tax-exempt, fixed-income securities, with a targeted duration of approximately five years. The majority of these securities are held as invested assets by the various insurance subsidiaries. At the close of 2000, approximately 46% of the fixed-income portfolio was invested in tax-exempt securities and approximately 54% in taxable securities.
Realized investment gains and losses are recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required by generally accepted accounting principles ("GAAP"), when investments are marked-to-market with the corresponding gain or loss included in earnings. Variations in the amount and timing of realized investment gains and losses could cause significant variations in periodic net earnings.
Net investment income increased $5.7 million to $24.7 million for the twelve months ended December 31, 2000 from $19.0 million for the twelve months ended December 31, 1999. On a consolidated basis, the Company's
LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The payment of losses, LAE and operating expenses in the ordinary course of business is the principal need for the Company's liquid funds. Cash provided by operating activities has been used to pay these items and was sufficient during 2000 to meet these 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, increased use of managed care and adverse legislative changes. In order to compensate for such risk, the Company: (i) maintains what management considers to be adequate reinsurance; (ii) conducts regular actuarial reviews of loss and LAE reserves; and (iii) maintains adequate asset liquidity (by managing its cash flow from operations coupled with the maturities from its fixed income portfolio investments).
The Company maintains a $75.0 million revolving credit facility with four banks to meet certain non-operating cash needs as they may arise. As of December 31, 2000, $67.2 million had been borrowed under this facility at an interest rate of approximately 7.46% per annum. The credit facility bears interest at various rates ranging from LIBOR plus 0.75% to Prime plus 0.50%. The credit facility terminates on January 4, 2002. The Company anticipates that before such time, it will either replace the existing credit facility with a similar facility or obtain alternative financing. The Company is not required to maintain compensating balances in connection with this credit facility but is charged a fee on the unused portion, which ranges from 20 to 30 basis points. 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 cannot exceed 0.35:1 and b) net premiums written to statutory capital and surplus cannot exceed 2.0:1. Effective January 1, 2001, the funded debt to total capital plus funded debt ratio cannot exceed 0.30:1. At December 31, 2000, the Company was in violation of two of the loan covenants. The Company has obtained a waiver for these violations bringing the Company into compliance with its debt covenants. The credit facility is guaranteed by and collateralized by the common stock of certain subsidiaries.
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," was issued in June 1998, and establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. As issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999. SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," was issued in June 1999 and defers the effective date of SFAS No. 133. SFAS No. 133 is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133 did not have a significant impact on the Company's consolidated financial position or results of operations.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- The consolidated financial statements and schedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Page 34.