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 26,600 sq. ft. of space is occupied for its offices and 12,000 sq. ft. is occupied by EMI. The Company and its subsidiaries lease additional facilities that management believes 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 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.
The Company, through its insurance subsidiaries, specializes in 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 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 advantage of a claims-made policy is that it allows the insurer to accrue reserves in
the year that the claim is reported. Consequently, the insurer is able to measure frequency of claims faster, and therefore estimate reserves, with greater accuracy.
The 1998 net losses and loss adjustment expenses for the Company's insurance subsidiaries rose 25%, from $54.0 million in 1997 to $67.4 million in 1998, primarily due to the increase in premiums earned.
The Company experienced another solid year of underwriting results during 1998, with the frequency of physician claims reported decreasing by 12% from 1997 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 claims 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, report years 1997 and 1998 are not mature enough to accurately project at this time.
On a consolidated basis, the Company's total investment portfolio grew $76.7 million from $268.3 million in 1997 to $345.0 in 1998. APAC accounted for $33.0 million of the increase and the expiration of the Cologne reinsurance contract contributed approximately $15.2 million to the increase. The growth in investments also consisted of a net contribution from the reinvestment of net interest income of $18.2 million and an increase in equities and other invested assets of $10.3 million. Net investment income earned increased 9%, from $16.0 million in 1997 to $17.5 million in 1998.
The Company's assessment of the current Florida MPL market indicates that premium growth may be flat for 1999 due to the continuation of intense competition from both the large numbers of carriers already present and new carriers entering the state. This competition is likely to keep downward pressure on rates during 1999.
Effective January 1, 1999, FPIC instituted a rate increase averaging 6.2% overall. Certain diagnostic and primary care specialties received much greater rate increases. Within these specialties FPIC has continued to realize deteriorating loss experience with loss ratios reaching levels that, over time, could negatively impact earnings. The Company's strategy is to increase pricing on these negatively developing medical specialties to the level where contribution is being made toward covering related fixed expenses.
On July 1, 1998, the Company acquired APAC for $18 million in a combination of cash, Company common stock and assumption of debt. APAC is a Florida-domiciled insurer that writes MPL coverage for anesthesiologists. Net premiums earned by APAC during 1998 totaled $1.5 million, and as of December 31, 1998 APAC had 736 insureds. APAC contributed little to the Company's 1998 operating results due to preexisting reinsurance arrangements; however, the Company anticipates that APAC will contribute to 1999 operating results. Also, on July 1, 1998, the Company acquired a 9.9% equity interest in American Professional Assurance Ltd. ("APAL"), a Cayman Islands reinsurer, for $5.5 million in cash.
The Florida Medical Association has also entered into agreements with FPIC to administer its health plan in an arrangement similar to that with the Florida Dental Association. The plan should begin in the second quarter of 1999.
During 1998, the Company continued its efforts to develop and provide complementary products and services to its existing businesses and to create opportunities to more efficiently distribute its products and services. In May 1998, the Company formed a new subsidiary, Professional Strategy Options, Inc., to provide consulting assistance to medical practices and organizations with respect to risk sharing arrangements, developing provider sponsored organizations and improving practice management. In July 1998 EMI acquired Sy.Med Development, Inc., a Tennessee-based software development and consulting company that specializes in developing products designed to reduce the administrative burden for physician practices created by managed care. In August 1998, FPIC and Coastal Insurance Enterprises, Inc., an Alabama insurer, formed and obtained equal equity interests in Polaris Insurance Group, Inc., which markets their insurance products in the state of Georgia. In November 1998, EMI's subsidiary, FPIC Services, Inc., together with Bexar County Medical Society Management Holding Company, Inc. and Texas Medical Liability Trust, formed and obtained equal equity interests in a Texas corporation, Bexar Credentials Verification, Inc., which offers credential verification and other related services to physicians.
On January 6, 1999, the Company acquired Administrators for the Professions, Inc. (AFP), which is the manager and attorney-in-fact for Physicians' Reciprocal Insurers (PRI), a New York
A number of capital sources are available to finance acquisitions, including internally generated funds, bank credit facilities and newly issued debt and/or equity securities.
On July 13, 1998, the Company's Board of Directors approved 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, 1998, 71,000 shares had been repurchased by the Company pursuant to this plan at a cost of approximately $1,840,000.
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's primary investment objective is to acquire investment grade fixed-income securities with an average duration of approximately five years. Though interest rates declined in 1998, the average maturity of the portfolio was not extended and the duration decreased slightly from 5.0 years in 1997 to 4.9 years in 1998.
Claims administration fees and commission income increased $1.4 million, or 14%, from $10.2 million in 1997 to $11.6 million in 1998. This increase is attributable to the addition of new contracts.
Claims administration expenses increased $1.4 million, or 16%, from $8.5 million in 1997 to $9.9 million in 1998. This increase was primarily attributed to the addition of new contracts.
For the reasons stated above, net income increased $4.1 million, or 25%, from $16.6 million in 1997 to $20.7 million in 1998.
Results of Operations - Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net investment income increased $1.3 million, or 8.8%, from $14.7 million in 1996 to $16.0 million in 1997. The increase was primarily attributable to a higher level of invested assets. The increase was achieved despite a shift in the portfolio from 41% of tax free securities in 1996 to 50% of tax-free securities in 1997. The Company's investment policy is to acquire investment grade fixed income securities with an average duration of approximately five years. Due to the falling interest rate environment, maturities in the portfolio were extended and the average duration of the portfolio was increased from 4.2 years in 1996 to 5.0 years in 1997.
Losses and LAE increased $7.0 million, or 15%, from $47.0 million in 1996 to $54.0 million in 1997 reflecting, in part, the increase in insureds. The Company experienced GAAP loss ratios of 82.5% in 1997 and 83.7% in 1996. 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 $15.1 million in 1997 and $14.7 million in 1996.
Other underwriting expenses increased $0.7 million, or 11%, from $6.4 million in 1996 to $7.1 million in 1997. This increase was primarily attributable to acquisition costs relating to the increase of insureds and the related premium written, and the expansion into other product lines.
The Company maintains a revolving credit facility with SunTrust Bank. As of December 31, 1998, $27,165,000 had been borrowed under this agreement at an interest rate of approximately 5.9%. In January 1999, the Company increased the facility from $30,000,000 to $75,000,000. The new credit facility agreement terminates on January 4, 2002 and bears interest at various rates. The interest rates range from LIBOR plus 0.75% to Prime plus 0.50%. The Company is not required to maintain compensating balances in connection with this credit facility. 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 0.3:1 and b) Net premiums written to statutory capital and surplus ratio cannot exceed 2.0:1. The credit facility is guaranteed by certain subsidiaries and collateralized by the common stock of certain subsidiaries. On January 6, 1999, an additional $33,000,000 was borrowed under this agreement at a rate of approximately 6.1%.
In recent years the 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, 1998, the insurance subsidiaries statutory annual statements reported a total adjusted surplus to policyholders of $117.3 million, which is $99 million more than the NAIC's authorized RBC control level of $18.3 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 adopted the NAIC's RBC standards.
Statement of Financial Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income" requires that all items that meet the definition of components of comprehensive income be reported in the financial statements for the period in which they are recognized. The Company adopted the provisions of SFAS No. 130 for the period ended December 31, 1998.