The Company leases 8,926 square feet for its corporate headquarters and administrative offices located in downtown Jacksonville, Florida. The Company also owns an 8-story, 70,000 square foot office building in Jacksonville where 26,600 square feet of space is occupied by FPIC for its insurance operations and 12,000 square feet is occupied by EMI. The Company and its subsidiaries also lease additional facilities for their operations in various locations throughout the United States. Management believes the Company's owned and leased properties are adequate for the Company's current needs.
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 the 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.
Management's Discussion & Analysis of Financial Condition and Results of Operations - -------------
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this report. The consolidated financial statements include the results of all of the Company's wholly owned and majority owned subsidiaries. The results of AFP and Tenere have been included from January 1, 1999 and March 17, 1999, respectively. All amounts have been rounded to the nearest $100,000.
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 LPL insurer.
The Company's financial position and results of operations are subject to fluctuations due to a variety of factors. Unexpected high frequency or severity of losses for the Company's insurance subsidiaries in any period, particularly in the Company's prior three policy years, could have a material adverse effect on the
Company. In addition, reevaluations of the liability for loss and LAE could result in an increase or decrease in liabilities and a corresponding adjustment to earnings. The Company's historical results of operations are not necessarily indicative of future earnings.
level of favorable development and corresponding reserve reductions will decline in 2000; therefore, the Company's combined ratio can be expected to increase accordingly.
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 1999, 55% of the fixed-income portfolio was invested in tax-exempt securities and 45% in taxable securities.
The Company's assessment of the current Florida and Missouri MPL markets indicates that premium growth may be flat to slightly negative for 2000 due to the continuation of intense competition from both the large numbers of carriers already present and new carriers entering these states. This competition is likely to keep downward pressure on rates during 2000.
The Company continues to consider and analyze the possibility of sponsoring a conversion of PRI to a stock insurer and acquiring it. Such a transaction, although unlikely during the coming year, would be subject to the approval of the Company's board of directors and shareholders, as well as PRI's Board of Trustees and policyholders, and the Florida and New York Departments of Insurance and other regulatory authorities. 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 August 6, 1999, the Company's subsidiary, EMI, purchased all of the assets of Brokerage Services, Inc. ("BSI") and Group Brokerage, Inc. ("GBI"), related corporations headquartered in Albuquerque, New Mexico. BSI and GBI provide third party administration services for self-insured and fully insured health plans. The consideration paid by EMI for such assets aggregated approximately $1,000,000.
On June 29, 1999, the Company's Board of Directors approved the extension of 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, 1999, the Company had
Selected Balance Sheet Items - December 31, 1999 compared to December 31, 1998
Due From Reinsurers on Unpaid Losses and Advance Premiums - ---------------------------------------------------------
Goodwill increased $57.7 million, from $12.7 million at December 31, 1998 to $70.4 million at December 31, 1999. The increase is primarily related to the acquisitions of AFP and Tenere, of $55.0 million and $3.9 million, respectively.
The revolving credit facility increased $35.5 million, from $27.2 million at December 31, 1998 to $62.7 million at December 31, 1999. The increase in the credit facility is due to additional borrowings to complete the acquisition of AFP and fund non-operating cash needs, such as the repurchase of the Company's common stock.
Accrued expenses and other liabilities increased $10.0 million, from $8.8 million at December 31, 1998 to $18.8 million at December 31, 1999 primarily due to the acquisitions of AFP and Tenere, which added $2.6 million and $5.5 million, respectively.
Additional paid-in capital increased $7.6 million, from $34.3 million at December 31, 1998 to $41.9 million at December 31, 1999. This increase is due to shares issued in connection with the purchase of AFP offset by a decline in additional paid-in capital due to repurchase of the Company's common stock.
In connection with the Company's review of the liability for losses and LAE, 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 $18.6 million in 1999 and $14.3 million in 1998. Given recent competitive market conditions, which have lessened the Company's ability to underwrite and price its business at such favorable terms, management does not expect reserve reductions to continue at these levels in 2000. Furthermore, given the inherent uncertainties in the estimation of loss and LAE reserves, there can be no assurance concerning future adjustments, positive or negative, for prior years' claims.
Claims administration and management expenses increased $16.9 million, or 170.7%, from $9.9 million in 1998 to $26.8 million in 1999. The increase is primarily attributable to the purchase of AFP, which incurred $14.3 million in management expenses during 1999 and $.7 in compensation expense related to stock grants for AFP employees.
Income taxes increased $1.1 million, or 13.4%, from $8.2 million in 1998 to $9.3 million in 1999. This increase was due to additional income before taxes.
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 maintains a $75,000,000 revolving credit facility with five banks to meet certain non-operating cash needs as they may arise. As of December 31, 1999, $62,719,109 had been borrowed under this facility at an interest rate of approximately 6.4% 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 would either extend the financing 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 ratio cannot exceed 0.35:1 and b) net premiums written to statutory capital and surplus ratio cannot exceed 2.0:1. At December 31, 1999, the Company's subsidiary, Intermed, was in technical violation of one of the Company's loan covenants. The Company has obtained a waiver for this technical violation bringing Intermed and the Company into compliance. The credit facility is guaranteed by certain subsidiaries and collateralized by the common stock of certain subsidiaries.
At December 31, 1999, the Company held approximately $14.3 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 $14,342,940 in 1999.
Shareholder dividends payable by the Company's insurance subsidiaries are subject to certain limitations imposed by Florida and Missouri law. In 2000, these subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends of approximately $19,700,000 without prior regulatory approval.
The consolidated financial statements and schedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Page 35.