FPIC Insurance Group, Inc. ("FIG" or 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 source of revenue is management fees and dividends from its subsidiaries. The primary sources of revenues for these amounts are premiums earned and investment income derived from the insurance operations of FPIC, APAC, Intermed, and Interlex, and fee and commission income from McCreary, AFP and their respective subsidiaries. The Company, through its insurance subsidiaries, specializes in professional 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 substantially 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 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.
The Company believes that the premiums and earnings growth rates in 2000 are not likely to be comparable to those achieved in 1999, which were largely the results of acquisitions.
Growth was achieved during 1999 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 $14.7 million in 1998 to $20.5 million in 1999, primarily as a result of the increased health premium.
The Company experienced another solid year of underwriting results during 1999, with the frequency of physician claims reported decreasing by 2.6% from 1998 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 claim 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, while report years 1997, 1998, and 1999 are not mature enough to accurately project at this time, management believes it is unlikely that the reserves carried for these years will develop to be as materially redundant as has been the case in the past.
The Company's combined ratio for fiscal year 1999, calculated using generally accepted accounting principles ("GAAP"), declined 1.7%, from 89.2% in 1998 to 87.7% in 1999. The combined ratio is defined as the sum of net losses and loss adjustment expenses plus other underwriting expenses as a percentage of net premiums earned. This positive trend was primarily due to favorable loss and LAE experience on the Company's core MPL business, the addition of assumed reinsurance, which carries a lower loss and combined ratio than the core MPL business, offset to some extent by adverse results from the Company's group accident and health business. As discussed in the preceding paragraph, management expects that the
During 1999, the Company requested a 40% rate increase on its FDA group accident and health program from the Florida Department of Insurance for which it received approval in February 2000. This rate increase will begin to take effect for business written or renewed beginning April 1, 2000. However, based upon management's expectation that adverse accident and health claim trends may continue, the Company has subsequently announced its intention to withdraw from all its group accident and health programs. The Company's group accident and health programs combined contributed an after-tax operating loss of approximately $3.9 million for the year ended December 31, 1999, as compared to an after-tax operating gain of $.4 million for the year ended December 31, 1998.
On a consolidated basis, the Company's total investment portfolio grew $1.6 million from $345.0 million in 1998 to $346.6 million in 1999. APAC and Tenere accounted for $4.3 million and $44.5 million, respectively, of the increase in the Company's total investment portfolio while FPIC's portfolio declined $39.8 million due to sales of bonds in connection with the acquisition of Tenere, dividends paid to the Company in connection with the acquisition of AFP and unrealized losses on FPIC's portfolio. The growth in investments also consisted of a net contribution from the reinvestment of net interest income, a decrease in equity securities of $.6 million and an increase in other invested assets of $.4 million. Net investment income earned increased 8.6%, from $17.5 million in 1998 to $19.0 million in 1999.
Effective January 1, 2000, the insurance subsidiaries of the Company did not institute any overall rate increases. However, certain regions in the various states in which the Company does business as well as certain medical specialties did receive rate increases. Within these specialties and regions, the Company has continued to realize deteriorating loss experience with loss ratios reaching levels that, over time, could negatively affect earnings. The Company's strategy is to increase pricing on these negatively developing medical specialties and regions to the level where contribution is being made toward covering related fixed expenses.
Effective January 1, 1999, the Company acquired AFP, which is the manager and attorney-in-fact for Physicians' Reciprocal Insurers ("PRI"), a New York MPL insurance reciprocal. PRI, which is the second largest MPL carrier for physicians in New York, insures over 8,000 physicians and has direct written premiums of approximately $130 million and total assets of approximately $897 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 acquisition of AFP had a positive impact on the Company's 1999 operating results.
On March 17, 1999, FPIC acquired Tenere, which is the holding company for Intermed, a Missouri MPL insurer with approximately 1,439 insureds, and Interlex, a Missouri LPL insurer with approximately 1,205 insureds. The purchase price for Tenere was approximately $19.6 million in cash. Included in the net assets acquired was approximately $14 million in cash. Contrary to management's initial expectations, Tenere contributed an after-tax net operating loss of approximately $688,000 to the Company's consolidated operating results for 1999. Tenere's 1999 loss was primarily the result of a reserve strengthening. The acquisition of Tenere, Intermed, and Interlex provided the Company with approximately $8.2 million of additional net premiums earned and increased 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.
The Company continues to believe that the MPL industry is in a consolidation phase and will ultimately be dominated by companies with a national or large regional presence. During 2000, the Company will continue to work to implement its strategy of growing nationally within the MPL industry by expanding writings of its existing carriers geographically and through strategic acquisitions that may become available. 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 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 other TPAs that are acquisition candidates.
repurchased 460,500 shares pursuant to this plan at a cost of approximately $10.1 million. On September 11, 1999, the Company's Board of Directors approved an additional stock buyback program, pursuant to which the Company is authorized to repurchase an additional 500,000 shares of its stock on the open market when all available shares have been repurchased under the previously announced program.
On January 25, 2000, the Company's Board approved a third stock buyback program for an additional 500,000 shares, under which the Company can repurchase shares upon completion of the first two programs. Subsequent to December 31, 1999, and as of March 20, 2000, the Company has repurchased an additional 280,000 shares for approximately $4.7 million, completing the first program plus 240,500 shares authorized under the second program. This leaves 259,500 shares that are authorized under the second program, and 500,000 shares under the third, for a total of 759,500 shares available for repurchase.
As noted above, the Company completed two significant acquisitions, AFP and Tenere, in the first quarter of 1999. These acquisitions were accounted for using the purchase method and had an impact on certain balance sheet accounts. The effects of these acquisitions as well as other changes are described below.
Premiums receivable increased $5.5 million, from $40.3 million at December 31, 1998 to $45.8 million at December 31, 1999 primarily due to the acquisition of Tenere, which added $1.9 million, additional health premium receivables of $.5 million and additional assumed premiums of $3.2 million.
Due from reinsurers on unpaid losses and advance premiums increased $18.3 million, from $42.1 million at December 31, 1998 to $60.4 million at December 31, 1999 primarily due to the acquisition of Tenere.
Deferred income taxes increased $11.9 million, from $9.3 million at December 31, 1998 to $21.2 million at December 31, 1999. Approximately $5.8 million of the increase is due to the acquisition of Tenere. The remaining $6.1 million relates to deferred tax changes due to fluctuations in unrealized gains and losses on investments available for sale.
The liability for loss and LAE increased $30.7 million, from $242.4 million at December 31, 1998 to $273.1 million at December 31, 1999. The increase is primarily due to the acquisition of Tenere and the inclusion of its reserves.
Unearned premiums increased $11.5 million, from $44.3 million at December 31, 1998 to $55.8 million at December 31, 1999. Approximately $1.8 million of the increase is due to the acquisition of Tenere. The remaining $9.7 million is primarily due to an increase in premiums on assumed business during 1999.
Accumulated other comprehensive income decreased $14.1 million from $5.6 million at December 31, 1998 to $(8.5) million at December 31, 1999 due to unrealized losses on securities available for sale.
Results of Operations - Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Direct premiums written and assumed increased $31.2 million, or 26.7%, from $117.0 million in 1998 to $148.2 million in 1999. The increase in premiums written and assumed is due to the acquisitions of APAC and Tenere, which added $6.1 million and $6.2 million, respectively, and additional assumed premiums written of $12.1 million. Net premiums earned increased $28.6 million, or 31.9%, from $89.6 million for the year ended December 31, 1998 to $118.2 million for the year ended December 31, 1999. The increase in net premiums earned is due to the acquisition of Tenere, which added $6.3 million, a full year of premiums earned at APAC of $4.2 million, additional assumed MPL premium of $13.4 million, and additional health premium of $4.7 million.
Net investment income increased $1.5 million, or 8.6%, from $17.5 million in 1998 to $19.0 million in 1999. The increase was primarily attributable to the inclusion of Tenere, which added approximately $1.9 million of investment income. The overall allocation to tax-free securities decreased from 58% in 1998 to 55% in 1999.
Claims administration fees and commission income increased $19.4 million, or 167.2%, from $11.6 million in 1998 to $31.0 million in 1999. The increase is primarily attributable to the acquisition of AFP, which added $20.6 million in management fees and commission revenue during 1999.
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 assume insurance risks on these products; each employer assumes the risk and McCreary places any desired excess coverage with various insurers and reinsurers. McCreary generated commission income from the placement of this excess coverage. Management fees are revenues generated by AFP for providing all underwriting, administrative and investment functions for PRI.
Losses and LAE increased $13.6 million, or 20.2%, from $67.4 million in 1998 to $81.0 million in 1999, reflecting, in part, the increase in premiums earned. The GAAP loss ratios were 68.5% in 1999 and 75.2% in 1998. The loss ratio is defined as losses and loss adjustment expenses as a percentage of net premiums earned. The positive trend in the Company's loss ratio was primarily due to favorable loss and LAE experience on business written on the Company's core MPL business, the addition of assumed reinsurance, which carries a lower loss ratio than the core MPL business, offset to some extent by adverse results from the Company's group accident and health business. 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 frequency and severity of claims.
Other underwriting expenses increased $10.2 million, or 81.6%, from $12.5 million in 1998 to $22.7 million in 1999. The increase is primarily attributable to an increase in expenses related to assumed premiums of $1.4 million, and the inclusion of APAC and Tenere, which combined, added $6.0 million. In addition, general and administrative expenses increased $2.3 million, including a non-recurring severance charge of $1.9 million. In addition, the Company's health insurance products have a higher expense factor than the Company's core MPL products.
Interest expense increased $3.2 million, from $.8 million in 1998 to $4.0 million in 1999. The increase is primarily due to additional draws on the credit facility to fund non-operating activities and the acquisition of AFP.
Other expenses increased $4.4 million, from $.8 million in 1998 to $5.2 million in 1999. The increase is primarily attributable to amortization expense on goodwill recorded in connection with acquisitions accounted for under the purchase method.
Net income increased $1.2 million, or 5.8%, from $20.7 million in 1998 to $21.9 million in 1999. Diluted earnings increased $.08 per share from $2.11 per share for the year ended December 31, 1998 to $2.19 per share (including the $.16 per share nonrecurring severance charge) for the year ended December 31, 1999. Excluding the nonrecurring severance charge of $.16 per share, operating earnings per share for the year-ended December 31, 1999 would be $2.32 per share.
Results of Operations - Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
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.
workers' compensation areas. Neither McCreary nor the Company assumes insurance risk on these products; each employer assumes the risk and McCreary places any desired excess coverage with various insurers and reinsurers. McCreary generated all the commission income from the placement of this excess coverage.
Other expenses increased $.5 million, or 166.7%, from $.3 million in 1997 to $.8 million in 1998. The increase is primarily attributable to the purchase of Sy.Med in 1998.
Net income increased $4.1 million, or 25%, from $16.6 million in 1997 to $20.7 million in 1998. Diluted earnings increased $.35 per share, or 19.9%, from $1.76 per share for the year-ended December 31, 1997 to $2.11 per share for the year-ended December 31, 1998.
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 1999 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 management considers to be adequate reinsurance; (ii) conducts regular actuarial reviews of loss 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 NAIC has developed risk-based capital ("RBC") measurements for insurers, which have been adopted by the Florida and Missouri Departments of Insurance. RBC measurements provide state regulators with varying levels of authority based on the adequacy of an insurer's adjusted surplus. At December 31, 1999, the Company's insurance subsidiaries maintain adjusted surplus in excess of all required RBC thresholds.
is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management believes that SFAS No. 133 will not have a significant impact on the Company's consolidated financial position or results of operations.
The Company is subject to assessment by the Florida Insurance Guaranty Association, Inc. (FIGA) and the Missouri Property and Casualty Insurance Guaranty Association (MPCIGA) 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 assessments, the Florida and Missouri Legislatures 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 1999 financial statements. However, damages caused by future catastrophes could subject the Company to additional assessments.