The Company's corporate headquarters are located in Jacksonville, Florida. The headquarters property is an 8-story, 70,000 sq. ft. office building owned by the Company where 17,500 sq. ft. of space is occupied for its offices. The Company's subsidiary, MCC, leases a 13,300 sq. ft. office building in Stuart, Florida where its offices are located. Management believes these facilities are adequate for the Company's current needs.
which provides protection to the insured against only those claims that arise out of incidents occurring and of which notice to the insurer is given while coverage is in effect. Claims-made policies allow the reserves to accrue in the year that the claim is reported. Consequently, FPIC is able to estimate its reserves with more accuracy since there is less uncertainty with respect to the frequency of claims.
FIG's financial position and results of operations are subject to fluctuations due to a variety of factors. Unexpected changes in loss trends in any period could have a materially adverse effect on FIG. Additionally, reevaluations of loss and loss adjustment expense (LAE) reserves could result in an increase or decrease in reserves and a corresponding adjustment to earnings. LAE are costs associated with the settlement of claims. FIG's historical results of operations are not necessarily indicative of future earnings.
In 1996, FPIC's combined ratio (a measure of a company's underwriting profitability), measured on a GAAP basis, was 95.5%. The GAAP combined ratios for 1995 and 1994 were 94.9% and 92.2%, respectively. According to information reported by Physician Insurers Association of America (PIAA), the industry combined ratio for the three years ending December 31, 1995 averaged over 105%. These favorable underwriting profits were the result of our selective underwriting process, aggressive claims handling and tight control of expenses.
In 1991, FPIC began laying the groundwork for its success by segmenting the market into targeted specialties based on above-average underwriting margins. Over the last several years, FPIC has entered into exclusive endorsement opportunities with medical specialty societies and associations throughout the state of Florida. These relationships fueled the growth of the target specialties. Target specialties and all other specialties based on Class 1 equivalent exposures were 1,945 and 3,460 in 1991; 2,280 and 3,613 in 1992; 2,663 and 3,765 in 1993; 2,897 and 3,903 in 1994; 3,226 and 3,992 in 1995; and 4,320 and 4,201 in 1996. Class 1 equivalent exposures (a measure of risk per insured) of the selected target specialties grew at an average of 24.4% per year from 1991 to 1996. Of the growth of $6.3 million in physician direct premium written in 1996, 68.2% was in the targeted specialties.
The other significant strategic program FPIC developed was a preferred provider program in 1994 which extends discounts to those insureds with consecutive years of loss-free experience. Currently, more than 75% of FPIC's eligible insureds receive a loss-free discount. As expected, the retention rate and profitability of this select group has been higher than that of FPIC's other business.
The combination of a very disciplined underwriting approach and the expansion of FPIC's marketing programs allowed the Company to significantly increase market share in 1996. By combining the above with an efficient claims handling program, FPIC was able to reduce its
FPIC's severity trend has risen since 1993. The average cost per claim, limited to $500,000 per claim, was $31,704 in 1992, $29,952 in 1993, $35,705 in 1994, $42,537 in 1995, and $45,212 in 1996. The Company experienced a rise in the severity of claims in 1995 shortly after the media reported on several cases of other insurance companies. FPIC is unable to precisely estimate the average cost of the claims reported in 1995 and 1996 because those report years are not yet mature enough to predict if this pattern will continue. Currently, there is no indication that the losses for any report year are materially different from the initial reserve estimates. The major risk factors associated with changes in severity include increases in inflation, amendments to applicable laws and the cost of medical care.
FPIC's net paid loss and LAE increased $6.9 million over 1995 partially due to an increase in the number of insureds over the last several years and an effort by the Claims Department to resolve more severe cases as early as possible. The Company's net paid loss and LAE by calendar year in millions was $29.1 in 1992, $29.6 in 1993, $27.3 in 1994, $33.7 in 1995, and $40.6 in 1996. LAE expenses are costs associated with the settlement of claims.
The only geographic area of concern in the Florida malpractice market in 1996 was in Southeast Florida, where the Company has 17% of its direct premium written. Two large international insurers began programs with rates significantly lower than the rest of the market. During 1996, these programs had a very limited effect on FPIC as current renewals and new business remain strong in this area.
FPIC is committed to expanding its market beyond its existing position as a single state carrier in the medical malpractice market. FPIC is now licensed in Georgia and Alabama. Slow growth is expected since both states are dominated by local carriers who have been able to maintain strong customer loyalty. The same targeted specialty and loss-free approach developed in Florida will be used in these states, in addition to the establishment of an agency force. FPIC chose this strategy because in Georgia approximately 50% and in Alabama approximately 20% of the markets are controlled by agents.
In January 1997, MCC purchased Employers Mutual Inc. (EMI) for $1.25 million, subject to future adjustments if certain earnings goals are met. EMI administers self-insured managed care health plans in Florida and Texas, with 1996 revenues in excess of $3 million. With this acquisition, the Company has increased it group health and workers' compensation TPA business by 70%.
FIG maintains a conservative investment approach. The investment portfolio is a diversified mix of taxable and tax-exempt fixed-income securities with a duration of 4.2 years. More than 85% of the portfolio is rated AAA with 7% rated AA, 6% rated A, and 2% rated BBB. FIG's investment policy is predominantly a buy and hold strategy to generate an above average level of taxable and tax-exempt income. FPIC's business philosophy is to take risk on its insurance underwriting rather than in its investment portfolio.
Direct premium written increased $7.7 million, or 14%, from $56.6 million in 1995 to $64.3 million in 1996. This increase was despite a 2.4% decrease in rates. This increase was primarily attributable to growth in the number of insureds. Reinsurance premium ceded increased $3.3 million, or 144%, from $2.3 million in 1995 to $5.6 million in 1996 due to a return of ceded premium of $3.4 million upon the expiration of a reinsurance contract in 1995 which was recorded as a decrease to ceded premium. Excluding this transaction, reinsurance premium ceded would have decreased $0.1 million. Net premium earned increased $3.4 million or 6%, from $52.7 million in 1995 to $56.1 million in 1996 due to the increase in direct premium written and the decrease in ceded premium. Excluding the one time effect of the return of ceded premium received in conjunction with the above-mentioned reinsurance contract, net premium earned increased $6.8 million from $49.3 million to $56.1 million.
Other income increased $2.8 million, or 61%, from $4.6 million in 1995 to $7.4 million in 1996. This increase was primarily attributable to the inclusion of a full year of income from MCC.
Losses and LAE increased $2.2 million, or 5%, from $44.8 million in 1995 to $47.0 million in 1996 reflecting, in part, the increase in net premium earned. The GAAP loss ratios of 83.7% in 1996 and 85.1% in 1995 reflect the stability the Company has experienced in its loss trends in recent years. 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 $14.7 million in 1996 and $14.0 million in 1995. These reductions produced corresponding increases in the Company's pre-tax income. There is no assurance that reserve adequacy reevaluations will produce similar reserve reductions and pre-tax income increases 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.
The Company believes that its favorable loss and LAE reserve development has primarily resulted from the following factors: (i) tort reform; (ii) the Company's approach to establishing reserves; (iii) the Company's targeting of medical specialties in which it believes it has developed substantial knowledge and experience; and (iv) the Company's targeting of "claims-free" business.
Other operating expenses more than doubled from $2.0 million in 1995 to $4.1 million in 1996. These expenses are for MCC and this increase was primarily attributed to the inclusion of a full year of MCC operations in the 1996 financial statements.
Income taxes increased $0.1 million, or 2%, from $5.9 million in 1995 to $6.0 million in 1996. Income tax expense was flat even though net income before tax increased by $1.7 million from $17.6 million in 1995 to $19.3 million in 1996 due to the shift in the investment policy from taxable to tax-free securities.
Results of Operations - Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Direct premium written increased $4.2 million, or 8%, from $52.4 million in 1994 to $56.6 million in 1995. This increase was primarily attributable to (i) an average rate increase of 3.6% on physician MPL premiums, and (ii) an increase in the number of insureds and the average premium per insured (excluding the impact of the rate increase discussed above). Reinsurance premium ceded decreased $2.6 million, or 53%, from $4.9 million in 1994 to $2.3 million in 1995 due to a return of ceded premium of $3.4 million upon the expiration of a reinsurance contract in 1995. Excluding this transaction, reinsurance premium ceded would have increased $0.8 million to $5.7 million. Net premium earned increased $5.9 million, or 13%, from $46.8 million in 1994 to $52.7 million in 1995 due to the increase in direct premium written and the decrease in ceded premium.
Net investment income increased $1.6 million, or 16%, from $10.4 million in 1994 to $12.0 million in 1995. This increase, which was partially offset by a $0.5 million write-down of the Company's home office building, was primarily attributable to a decrease in the portfolio's average cash balance in 1995 from 1994, the difference of which was invested in higher yielding securities, and a higher level of invested assets. The change in cash position was attributed to the Company's decision to change its investment strategy from active trading to a buy and hold approach. The Company's investment policy is to acquire investment grade fixed income securities with an average duration of less than four years. The average duration of the portfolio decreased from 4.6 years in l994 to 3.6 years in 1995.
Net realized investment gains in 1995 were $0.2 million as compared to net realized investment losses of $6.7 million in 1994. The Company's net realized investment losses of $6.7 million
Other income increased $2.9 million, or 171%, from $1.7 million in 1994 to $4.6 million in 1995. This increase was primarily attributable to claims administration fees of $1.9 million and commissions of $0.6 million from MCC's operations.
Losses and LAE increased $5.6 million, or 14%, from $39.2 million in 1994 to $44.8 million in 1995 reflecting the increase in net premium earned. The GAAP loss ratios of 83.6% in 1994 and 85.1% in 1995 reflect the stability the Company has experienced in its loss trends in recent years. 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 $10.5 million in 1994 and $14.0 million in 1995. These reductions produced corresponding increases in the Company's pre-tax income. There is no assurance that reserve adequacy reevaluations will produce similar reserve reductions and pre-tax income increases in the future.
Other underwriting expenses increased $1.1 million, or 27%, from $4 million in 1994 to $5.1 million in 1995. This increase was primarily attributable to an increase of $0.6 million in commission expense as a result of higher direct premium written by agents and an increase in the commission rate paid to agents.
Other operating expenses were $2.0 million in 1995 as compared to none in 1994. This increase was attributed to the addition of $2.0 million in administrative expenses for MCC'S operations.
Income taxes increased $2.8 million, or 91%, from $3.1 million in 1994 to $5.9 million in 1995. This increase was primarily attributable to the increase in net income before income taxes.
For the reasons stated above, net income increased $5.8 million, or 98%, from $5.9 million in 1994 to $11.7 million in 1995.
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 1996 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).
Shareholder dividends payable by the Company's insurance subsidiary, FPIC, are subject to certain limitations imposed by Florida law. In 1997, FPIC is permitted, within insurance regulatory guidelines, to pay dividends of approximately $10.4 million without prior regulatory approval. In recent years the National Association of Insurance Commissioners (NAIC) has developed risk-based capital ("RBC") measurements for insurers. The measurements provide state regulators with varying levels of authority based on the adequacy of an insurer's RBC. At December 31, 1996, FPIC's statutory annual statement reported a total adjusted surplus to policyholders of $76.5 million, which is $69.0 million more than the NAIC's authorized RBC control level of $7.5 million. The authorized control level permits an insurance regulator to take whatever regulatory actions are considered necessary to protect the best interests of the policyholders and creditors of the insurer, which may include placing the insurer under regulatory control (i.e., rehabilitation or liquidation). The Florida Department of Insurance has not adopted the NAIC's RBC standards, although it does use the standard to identify companies that may need regulatory attention.
The statements which are not historical facts contained in this report are forward-looking statements that involve certain risks and uncertainties. These forward-looking statements include the plans and objectives of management for future operations relating to the products and future economic performance of FIG and its subsidiaries.
Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking information will be realized. Budgeting, reserving and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the effect of which may cause the Company to alter its marketing, capital expenditures or other budgets, which may in turn affect the Company's results of operations. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved.
The financial statements and schedules listed in Item 14(a)(1) and (2) are included in this Report beginning on Page 27.