SELECTED FINANCIAL DATA - -------------------------------- 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.
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.
SAFE HARBOR DISCLOSURE The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by or on behalf of the Company may include forward-looking statements, which reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in documents filed by the Company with the Securities and Exchange Commission) include, but are not limited to, (i) uncertainties relating to government and regulatory policies (such as subjecting the Company to insurance regulation or taxation in additional jurisdictions or amending or revoking or enacting any laws, regulations or treaties affecting the Company's current operations), (ii) the occurrence of insured or reinsured events with a frequency or severity exceeding the Company's estimates, (iii) legal developments, (iv) the uncertainties of the loss reserving process, (v) the actual amount of new and renewal business and market acceptance of expansion plans, (vi) the loss of the services of any of the Company's executive officers, (vii)
Through the insurance segment, the Company specializes in professional liability insurance products and services for physicians, dentists, other healthcare providers and attorneys. 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 for those who have been insured by the Company for at least five consecutive years and retire completely from the practice of medicine. The Company provides TPA services through its subsidiaries that market and administer self-insured and fully insured plans for both large and small employers, including group accident and health insurance, workers' compensation and general liability and property insurance. Through the RM segment, the Company provides management and administrative services and acts as attorney-in-fact for Physicians' Reciprocal Insurers ("PRI"), a New York medical professional liability insurance reciprocal.
OVERVIEW - -------- Fiscal year 2000 was a very challenging one for the Company and the entire medical malpractice sector. Net income declined to $.6 million from $21.9 million reported in 1999, primarily due to increases in the provision for losses and loss adjustment expenses ("LAE") reported in 2000, corresponding with rising loss costs in both 2000 and in recent prior years. Fully diluted earnings per share declined to $.06 per share from $2.19 per share in 1999.
Despite these challenges, the Company was able to grow both revenues and assets significantly in 2000, benefiting in large part from its acquisitions in 1998 and 1999. Total revenues increased 7% to $182.0 million in 2000, from $170.5 million in 1999. Revenues grew 42% in 1999 over 1998.
Management focused substantial efforts in 2000 towards the integration of its recent acquisitions, exiting certain small and unprofitable businesses and products, and other operating improvements, as the environment for strategic acquisitions substantially declined in 2000. As a result of these actions, total revenues are expected to decline slightly in 2001 from those reported in the year 2000. However, management believes that these actions have helped position the Company to more effectively compete, grow and remain profitable in the future. Furthermore, there are preliminary signs that prices in the Company's core medical professional liability business are beginning to increase in 2000 after several years of significant competition, particularly in Florida. It is, therefore, expected that the Company's revenues will return to growth in 2002 as market conditions improve for its core medical malpractice insurance business.
The increase in direct premiums written in 2000 is related to an increase in written premiums in Texas, Alabama, Missouri, Kansas, and Georgia complimented by the acquisition of The Tenere Group, Inc. ("Tenere") on March 17, 1999 which was only included after such date for 1999.
In fiscal year 2000, total insureds grew to 12,150 at December 31, 2000, an increase of 832 or 7%, from 11,318 in 1999. Physician insureds increased to 8,195, an increase of 290 or 4%, from 7,905 in 1999. Dental insureds increased to 2,252 in 2000, an increase of seventy-eight or 4%, from 2,174 in 1999. Growth was also achieved during 2000 in other product areas such as legal professional liability ("LPL") and accident and health ("A&H".)
In fiscal year 1999, total insureds grew to 11,318, an increase of 2,793 or 33%, from 8,525 in 1998. Physician insureds grew 24%, to 7,905 in 1999, up from 6,383 in 1998. Dental insureds grew 18%, to 2,174 in 1999, up from 1,843 in 1998. Growth was also achieved during 1999 in other product areas such as legal defense for healthcare provider licensure investigations, group A&H insurance coverage and errors and omissions and directors and officers liability insurance for managed care organizations.
Net premiums earned increased $2.2 million to $120.4 for the twelve months ended December 31, 2000 from $118.2 million for the twelve months ended December 31, 1999. The increase in net premiums earned is related to growth in assumed reinsurance, which contributed additional assumed premiums earned of $3.1 million, and growth in direct premiums written at APAC and Tenere during the year 2000. The Company increased premium rates at FPIC and APAC in Florida and increased premium rates at Tenere in Missouri in 2000. As a result of the rate increases taken by FPIC, selective underwriting, and the competitive environment in Florida, net premiums earned have decreased in FPIC's core MPL business, and FPIC has experienced a decline in its physician insureds since 1998. APAC and Tenere have experienced relatively more favorable market conditions, which has allowed them to grow their earned premiums and policyholder counts. Such growth has offset some of the decline in net premiums earned at FPIC, and resulted in the overall increases in the Company's direct professional liability insureds since 1998.
Net premiums earned increased $28.6 million to $118.2 for the twelve months ended December 31, 1999 from $89.6 million for the twelve months ended December 31, 1998. The increase in net premiums earned was primarily due to the acquisition of Tenere and the recognition of a full year of premiums earned at APAC. The Company also reported additional assumed MPL premiums of $13.4 million and health premiums of $4.7 million.
Net losses and LAE incurred increased $41.8 million to $122.8 million for the twelve months ended December 31, 2000 from $81.0 million for the twelve months ended December 31, 1999. The loss ratios were 102% and 69% for the twelve months ended December 31, 2000 and December 31, 1999, respectively. A loss ratio is defined as the ratio of loss and LAE incurred to net premiums earned. The increase in net loss and LAE incurred is primarily due to an increase in the loss and LAE provision during 2000 resulting from a reserve strengthening of $21.0 million, including an increase in the current year provision for MPL business of $7.8 million. In addition, the 1999 results included reserve releases of approximately $17.0 million resulting from favorable development in loss experience on business written in years prior to 1999, which did not recur during the year 2000.
Net loss and LAE incurred increased $13.6 million to $81.0 million for the twelve months ended December 31, 1999 from $67.4 million for twelve months ended December 31, 1998. The loss ratios were 69% and 75% for the twelve months ended December 31, 1999 and 1998 respectively. The positive trend in the Company's loss ratio from 1998 to 1999 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 ratio than the core MPL business, offset to some extent by adverse results from the Company's group A&H business.
The Company previously reported its plan to exit the A&H business by the end of 2001. Despite some improvement during the second and third quarters of 2000, the Company experienced a pre-tax loss of $3.5 million in the fourth quarter of 2000. The Company expects the business to continue to record pre-tax losses in the range of $2.0 million to $3.0 million through the end of 2001, with lessening impact after the non-renewal of the majority of FDA policies beginning on April 1, 2001 and the non-renewal of the majority of FMA policies beginning on July 1, 2001.
The process of establishing reserves for property and casualty claims is a complex and uncertain process, requiring the use of informed estimates and judgments. The Company's estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. Any such revisions could result in future changes in the estimates of losses or reinsurance recoverables, and would be reflected in the Company's results of operations when the change occurs.
Other underwriting expenses increased to $21.0 million in 1999, up $8.5 million or 68%, from $12.5 million in 1998. The increase was primarily attributable to an increase in expenses related to assumed premiums of $1.4 million, and the inclusion of other underwriting expenses at 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 and the Company's health insurance products, which grew significantly in 1999, have a higher expense structure than the Company's MPL products.
During the fourth quarter of 2000, the Company began its consolidation of the TPA operations and reorganization of BSI in order to improve operating performance. The Company incurred a one-time pre tax charge of $0.5 million as a result of the restructuring.
Commission income increased $0.5 million to $2.2 million for the twelve months ended December 31, 2000 from $1.7 million for the twelve months ended December 31, 1999. The increase in commission income is the result of growth in the placement of insurance and reinsurance by McCreary with external parties on behalf of its self-insured customers during 2000.
SELECTED BALANCE SHEET ITEMS - YEARS ENDED DECEMBER 31, 2000 AND 1999 - --------------------------------------------------------------------- Bonds and U.S. government securities increased $58.4 million to $385.5 million at December 31, 2000 from $327.1 million at December 31, 1999. The increase is attributable to securities received in conjunction with the 100% DD&R quota share reinsurance agreement with PRI and growth in the invested assets at APAC and Tenere as a result of an increase in business written.
Intangible assets and goodwill, net decreased $12.9 million to $61.0 million for the twelve months ended December 31, 2000 from $73.9 million for the twelve months ended December 31, 1999. The decrease is due to the recognition of a deferred credit associated with the 100% DD&R quota share reinsurance agreement with PRI and the amortization of goodwill and other intangibles.
Unearned premiums increased $39.2 million to $100.5 million for the twelve months ended December 31, 2000 from $61.3 million for the twelve months ended December 31, 1999. The increase in unearned premiums is primarily attributable to the 100% DD&R quota share reinsurance agreement with PRI.
total investment portfolio grew $58.4 million to $405.0 million in 2000 from $346.6 million in 1999. The increase in net investment income is directly related to interest earned on securities received in connection with the 100% DD&R quota share reinsurance agreement with PRI.
STOCK REPURCHASE PLANS - ---------------------- On June 29, 1999 and September 11, 1999, the Company's Board of Directors (the "Board") approved stock repurchase plans pursuant to which the Company was authorized to repurchase, at management's discretion, up to 1,000,000 of its shares on the open market. On September 11, 2000, the second plan expired with 259,500 shares left unpurchased. The Company's Board approved a third stock repurchase plan on January 25, 2000 under which the Company could repurchase 500,000 additional shares prior to January 22, 2001. The Board subsequently approved an extension of the plan to January 22, 2002. As of December 31, 2000, the Company had repurchased approximately 853,500 shares at a cost of approximately $16.0 million; leaving 387,000 shares available under the Company's stock repurchase plans.
At December 31, 2000, the Company held approximately $15.2 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 reported in the accompanying consolidated statements of cash flows, the Company has generated positive net cash from operations of $14.8 million, $14.3 million and $30.2 million in 2000, 1999 and 1998, respectively.
Shareholder dividends payable by the Company's insurance subsidiaries are subject to certain limitations imposed by Florida and Missouri laws. In 2001, these subsidiaries are permitted, within insurance regulatory guidelines, to pay dividends of approximately $11.6 million, without prior regulatory approval.
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, 2000, the Company's insurance subsidiaries maintain adjusted surplus in excess of their required RBC thresholds.
ACCOUNTING PRONOUNCEMENTS - ------------------------- In December 1999, the Securities Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements, which outlines the basic criteria that must be met to recognize revenue and provides guidance for presentation of revenue and for disclosure related to revenue recognition policies in financial statements filed with the SEC. In June 2000, the SEC issued SAB 101(B), which defers the implementation date of SAB 101 to no later than the fourth fiscal quarter of fiscal years commencing after December 15, 1999. The adoption of SAB 100 did not have a significant impact on the Company's consolidated financial position of results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, " Accounting for Certain Transactions Involving Stock Compensation: an Interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44 establishes accounting guidance for stock option grants and modifications to existing stock option awards and is effective for option grants made after June 30, 2000. The adoption of FIN 44 did not have a material effect on the consolidated financial statements of the Company.