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'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.
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 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.
With respect to the Company's core MPL business, total insureds increased 25% in 1998, from
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'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.
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.
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 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 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
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.
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.
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.
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.
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.
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.
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 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.
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).
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.
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.
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.
The financial statements and schedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Page 38.