UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the quarterly period ended March 31, 2009
|
|
Or
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For
the transition period from ___________to
___________
|
Commission
file number 1-11983
FPIC Insurance Group,
Inc.
|
(Exact Name of Registrant as
Specified in its Charter)
|
Florida
|
|
59-3359111
|
(State or Other Jurisdiction
of Incorporation or
Organization)
|
|
(IRS Employer Identification
No.)
|
225 Water Street, Suite
1400
Jacksonville, Florida
32202
(904)
354-2482
www.fpic.com
|
●
|
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
þ
No
¨
|
|
|
●
|
Indicate
by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the
preceding
12 months (or for such shorter period that the registrant was required to
submit and post such files).
Yes
o
No
¨
|
|
|
●
|
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Exchange Act).
Large
Accelerated Filer
¨
Accelerated
Filer
þ
Non-accelerated
Filer
¨
|
|
|
●
|
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes
¨
No
þ
|
|
|
●
|
As of
May
1, 2009,
there were 7,473,379
shares
of the
Registrant’s
common stock, $.10 par value,
outstanding
.
|
FPIC
Insurance Group,
Inc.
Table
of Contents to the 2009 Quarterly Report on Form 10-Q
For the
Quarter Ended March 31, 2009
Part
I
|
|
|
|
|
1
|
|
|
17
|
|
|
25
|
|
|
25
|
|
|
|
|
|
|
|
25
|
|
|
26
|
|
|
26
|
|
|
27
|
|
|
27
|
|
|
27
|
|
|
27
|
|
|
|
|
|
|
Signatures
|
|
27
|
Part I
FINANCIAL
INFORMATION
Item
1.
|
Financial
Statements
|
FPIC Insurance Group,
Inc.
Consolidated Statements of Financial
Position
(unaudited)
(in thousands, except shares
authorized, issued and outstanding)
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Assets
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
Fixed income securities,
available-for-sale
|
|
$
|
636,337
|
|
|
|
637,154
|
|
Equity securities,
available-for-sale
|
|
|
8,473
|
|
|
|
10,934
|
|
Other invested
assets
|
|
|
7,980
|
|
|
|
6,097
|
|
Total investments (Note
6)
|
|
|
652,790
|
|
|
|
654,185
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
|
51,947
|
|
|
|
58,480
|
|
Premiums receivable (net of an
allowance of $300 as of March 31, 2009 and December 31,
2008)
|
|
|
57,926
|
|
|
|
60,907
|
|
Accrued investment
income
|
|
|
7,221
|
|
|
|
7,818
|
|
Reinsurance recoverable on paid
losses
|
|
|
4,510
|
|
|
|
2,065
|
|
Due from reinsurers on unpaid
losses and advance premiums
|
|
|
133,129
|
|
|
|
135,851
|
|
Ceded unearned
premiums
|
|
|
10,602
|
|
|
|
10,082
|
|
Deferred policy acquisition
costs
|
|
|
9,598
|
|
|
|
9,476
|
|
Deferred income
taxes
|
|
|
39,438
|
|
|
|
40,580
|
|
Goodwill
|
|
|
10,833
|
|
|
|
10,833
|
|
Other
assets
|
|
|
7,049
|
|
|
|
7,708
|
|
Total
assets
|
|
$
|
985,043
|
|
|
|
997,985
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Policy liabilities and
accruals:
|
|
|
|
|
|
|
|
|
Losses and loss adjustment
expenses
|
|
$
|
547,369
|
|
|
|
555,848
|
|
Unearned
premiums
|
|
|
100,033
|
|
|
|
98,665
|
|
Reinsurance
payable
|
|
|
2,084
|
|
|
|
663
|
|
Paid in advance and unprocessed
premiums
|
|
|
4,836
|
|
|
|
9,498
|
|
Total policy liabilities and
accruals
|
|
|
654,322
|
|
|
|
664,674
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
46,083
|
|
|
|
46,083
|
|
Other
liabilities
|
|
|
25,982
|
|
|
|
27,334
|
|
Total
liabilities
|
|
|
726,387
|
|
|
|
738,091
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.10 par value,
50,000,000 shares authorized; none issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.10 par value,
50,000,000 shares authorized; 7,491,144 and 7,803,298 shares issued and
outstanding as of March 31, 2009 and December 31, 2008,
respectively
|
|
|
749
|
|
|
|
780
|
|
Additional paid-in
capital
|
|
|
—
|
|
|
|
—
|
|
Retained
earnings
|
|
|
268,283
|
|
|
|
271,503
|
|
Accumulated other comprehensive
loss, net
|
|
|
(10,376
|
)
|
|
|
(12,389
|
)
|
Total shareholders'
equity
|
|
|
258,656
|
|
|
|
259,894
|
|
Total liabilities and
shareholders' equity
|
|
$
|
985,043
|
|
|
|
997,985
|
|
The accompanying notes are an integral
part of the
unaudited
consolidated financial
statements.
FPIC Insurance Group,
Inc.
Consolidated Statements of
Income
(unaudited)
(in thousands, except earnings per
common share)
|
|
For the Quarter
Ended
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
Revenues
|
|
|
|
|
|
|
Net premiums
earned
|
|
$
|
38,412
|
|
|
|
44,293
|
|
Net investment
income
|
|
|
7,220
|
|
|
|
7,747
|
|
Net realized investment
losses
|
|
|
(58
|
)
|
|
|
(92
|
)
|
Other
income
|
|
|
95
|
|
|
|
97
|
|
Total
revenues
|
|
|
45,669
|
|
|
|
52,045
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
Net losses and loss adjustment
expenses
|
|
|
23,240
|
|
|
|
25,155
|
|
Other underwriting
expenses
|
|
|
9,106
|
|
|
|
9,941
|
|
Interest expense on
debt
|
|
|
895
|
|
|
|
1,065
|
|
Other
expenses
|
|
|
—
|
|
|
|
7
|
|
Total
expenses
|
|
|
33,241
|
|
|
|
36,168
|
|
|
|
|
|
|
|
|
|
|
Income before income
taxes
|
|
|
12,428
|
|
|
|
15,877
|
|
Less: Income tax
expense
|
|
|
4,041
|
|
|
|
5,049
|
|
Net income
|
|
$
|
8,387
|
|
|
|
10,828
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common
share:
|
|
$
|
1.10
|
|
|
|
1.22
|
|
Basic weighted-average common
shares outstanding
|
|
|
7,655
|
|
|
|
8,857
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common
share:
|
|
$
|
1.07
|
|
|
|
1.18
|
|
Diluted weighted-average common
shares outstanding
|
|
|
7,824
|
|
|
|
9,159
|
|
The accompanying notes are an integral
part of the
unaudited
consolidated financial
statements.
FPIC Insurance Group,
Inc.
Consolidated Statements of
Shareholders' Equity
(unaudited)
|
|
|
|
|
(in
thousands)
|
|
|
|
Shares of Common
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in-
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive Income (Loss),
Net
|
|
Comprehensive
Income
|
|
Total
|
|
Balances at December 31,
2008
|
|
7,803,298
|
|
|
$
|
780
|
|
|
|
—
|
|
|
|
271,503
|
|
|
|
(12,389
|
)
|
|
|
|
259,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,387
|
|
|
|
—
|
|
|
8,387
|
|
|
8,387
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on invested
assets, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,904
|
|
|
1,904
|
|
|
1,904
|
|
Unrealized gain on derivative
financial instruments, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22
|
|
|
22
|
|
|
22
|
|
Net gain on pension
plan
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
87
|
|
|
87
|
|
|
87
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,013
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted
stock
|
|
18,045
|
|
|
|
2
|
|
|
|
610
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
612
|
|
Issuance of common
shares
|
|
3,915
|
|
|
|
—
|
|
|
|
145
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
145
|
|
Repurchase of common
shares
|
|
(334,114
|
)
|
|
|
(33
|
)
|
|
|
(918
|
)
|
|
|
(11,607
|
)
|
|
|
—
|
|
|
|
|
|
(12,558
|
)
|
Share-based
compensation
|
|
—
|
|
|
|
—
|
|
|
|
163
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
163
|
|
Balances as of March 31,
2009
|
|
7,491,144
|
|
|
$
|
749
|
|
|
|
—
|
|
|
|
268,283
|
|
|
|
(10,376
|
)
|
|
|
|
|
258,656
|
|
The accompanying notes are an integral
part of the
unaudited
consolidated financial
statements.
FPIC Insurance Group,
Inc.
Consolidated Statements of
Shareholders' Equity
(unaudited)
,
continued
|
|
|
|
|
(in
thousands)
|
|
|
|
Shares of Common
Stock
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated Other Comprehensive
Income (Loss), Net
|
|
Comprehensive
Income
|
|
Total
|
|
Balances at December 31,
2007
|
|
8,949,401
|
|
|
$
|
895
|
|
|
|
—
|
|
|
|
295,586
|
|
|
|
(884
|
)
|
|
|
|
295,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,828
|
|
|
|
—
|
|
|
10,828
|
|
|
10,828
|
|
Other
comprehensive income, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on invested
assets, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,885
|
|
|
1,885
|
|
|
1,885
|
|
Unrealized gain on derivative
financial instruments, net of tax
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
44
|
|
|
44
|
|
|
44
|
|
Prior service
cost
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7
|
|
|
7
|
|
|
7
|
|
Transition
obligation
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Net gain on pension
plan
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
3
|
|
|
3
|
|
Other comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,944
|
|
|
|
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative adjustment to adopt FAS
158 measurement date provisions
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(89
|
)
|
|
|
(58
|
)
|
|
|
|
|
(147
|
)
|
Issuance of restricted
stock
|
|
18,517
|
|
|
|
2
|
|
|
|
562
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
564
|
|
Issuance of common
shares
|
|
218,426
|
|
|
|
22
|
|
|
|
4,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
4,287
|
|
Repurchase of common
shares
|
|
(356,113
|
)
|
|
|
(36
|
)
|
|
|
(6,511
|
)
|
|
|
(8,780
|
)
|
|
|
—
|
|
|
|
|
|
(15,327
|
)
|
Share-based
compensation
|
|
—
|
|
|
|
—
|
|
|
|
189
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
189
|
|
Income tax reductions relating to
exercise of stock options
|
|
—
|
|
|
|
—
|
|
|
|
1,495
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
1,495
|
|
Balances at March 31,
2008
|
|
8,830,231
|
|
|
$
|
883
|
|
|
|
—
|
|
|
|
297,545
|
|
|
|
1,002
|
|
|
|
|
|
299,430
|
|
The accompanying notes are an integral
part of the
unaudited
consolidated financial
statements.
FPIC Insurance Group,
Inc.
Consolidated Statements of Cash Flows
(unaudited)
(in
thousands)
|
|
For the Quarter
Ended
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
Operating
Activities
|
|
|
|
|
|
|
Net income
|
|
$
|
8,387
|
|
|
|
10,828
|
|
Adjustments to reconcile net
income to net cash provided by operating
activities:
|
|
|
|
|
|
Depreciation, amortization and
accretion
|
|
|
5,264
|
|
|
|
6,543
|
|
Net realized losses on
investments
|
|
|
58
|
|
|
|
92
|
|
Deferred policy acquisition costs,
net of related amortization
|
|
|
(4,133
|
)
|
|
|
(4,904
|
)
|
Deferred income tax
expense
|
|
|
202
|
|
|
|
665
|
|
Excess tax benefits from
share-based compensation
|
|
|
—
|
|
|
|
(1,469
|
)
|
Share-based
compensation
|
|
|
775
|
|
|
|
755
|
|
Other Changes in Assets and
Liabilities
|
|
|
|
|
|
|
|
|
Premiums receivable,
net
|
|
|
2,981
|
|
|
|
(7
|
)
|
Accrued investment
income
|
|
|
597
|
|
|
|
245
|
|
Reinsurance recoverable on paid
losses
|
|
|
(2,445
|
)
|
|
|
(5
|
)
|
Due from reinsurers on unpaid
losses and advance premiums
|
|
|
2,722
|
|
|
|
2,519
|
|
Ceded unearned
premiums
|
|
|
(520
|
)
|
|
|
(1,220
|
)
|
Other assets and
liabilities
|
|
|
(768
|
)
|
|
|
84
|
|
Losses and loss adjustment
expenses
|
|
|
(8,479
|
)
|
|
|
(2,324
|
)
|
Unearned
premiums
|
|
|
1,368
|
|
|
|
1,514
|
|
Reinsurance
payable
|
|
|
1,421
|
|
|
|
1,279
|
|
Paid in advance and unprocessed
premiums
|
|
|
(4,662
|
)
|
|
|
(3,676
|
)
|
Net cash provided by operating
activities
|
|
|
2,768
|
|
|
|
10,919
|
|
|
|
|
|
|
|
|
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Proceeds
from
|
|
|
|
|
|
|
|
|
Sales of fixed income securities,
available-for-sale
|
|
|
44,895
|
|
|
|
11,467
|
|
Sales of other invested
assets
|
|
|
178
|
|
|
|
5
|
|
Maturities of fixed income
securities, available-for-sale
|
|
|
10,405
|
|
|
|
18,545
|
|
Sales of equity securities,
available-for-sale
|
|
|
393
|
|
|
|
—
|
|
Purchases
of
|
|
|
|
|
|
|
|
|
Fixed income securities,
available-for-sale
|
|
|
(50,349
|
)
|
|
|
(34,806
|
)
|
Equity securities,
available-for-sale
|
|
|
(223
|
)
|
|
|
(1,500
|
)
|
Other invested
assets
|
|
|
(2,165
|
)
|
|
|
(369
|
)
|
Property and
equipment
|
|
|
(22
|
)
|
|
|
(71
|
)
|
Net cash provided by (used in)
investing activities
|
|
|
3,112
|
|
|
|
(6,729
|
)
|
|
|
|
|
|
|
|
|
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Issuance of common
stock
|
|
|
145
|
|
|
|
4,287
|
|
Repurchase of common
stock
|
|
|
(12,558
|
)
|
|
|
(15,328
|
)
|
Excess tax benefits from
share-based compensation
|
|
|
—
|
|
|
|
1,469
|
|
Net cash used in financing
activities
|
|
|
(12,413
|
)
|
|
|
(9,572
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(6,533
|
)
|
|
|
(5,382
|
)
|
Cash and cash equivalents at
beginning of period
|
|
|
58,480
|
|
|
|
70,229
|
|
Cash and cash equivalents at end
of period
|
|
$
|
51,947
|
|
|
|
64,847
|
|
The accompanying notes are an integral
part of the
unaudited
consolidated financial
statements.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
1.
|
Basis of Presentation and New
Accounting
Pronouncements
|
Basis of
Presentation
The accompanying unaudited consolidated
financial statements represent the consolidation of FPIC Insurance Group, Inc.
(“FPIC”) and all majority owned and controlled subsidiaries.
Unless the context otherwise requires,
the terms
“we,” “our,” “us,” the “Company” and
“FPIC” as used in this report refer to
FPIC Insurance Group, Inc. and its
subsidiaries.
These statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and with the rules and regulations of the Securities and
Exchange Commission (“SEC”). The statement of financial position as
of
December 31,
2008
was derived from
audited financial statements, but does not include all disclosures required by
GAAP. All significant transactions between the parent and
consolidated subsidiaries have been eliminated. Reference is made to
our Annual Report on Form 10-K for the year ended
December 31, 2008
, which includes information necessary
for understanding our business and financial statement
presentations. In particular, our significant accounting policies are
presented in
Note 2, Significant
Accounting Policies
, to the
consolidated financial statements included in that report.
These consolidated interim financial
statements are unaudited. These statements include all
adjustments,
including
normal recurring accruals, that are, in
the opinion of management, necessary for the fair
statement
of results for interim
periods. The results reported in these consolidated interim financial
statements should not be regarded as necessarily indicative of results that may
be expected for the entire year. For example, the timing and
magnitude of claim losses incurred by our insurance subsidiaries due to the
estimation process inherent in determining the liability for losses and loss
adjustment expenses (“LAE”) can be relatively more significant to results of
interim periods than to results for a full year. Also, variations in
the amount and timing of realized investment gains and losses could cause
significant variations in periodic net income.
New Accounting
Pronouncements
In March 2008, the
F
inancial Accounting Standards Board
(“FASB”)
issued
Statement of Financial Accounting
Standard (“FAS”) 161,
Disclosures about
Derivative Instruments and Hedging Activities — an amendment of FASB Statement
No. 133
, which amends and
expands the disclosure requirements of FAS 133 to require qualitative disclosure
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on derivative instruments, and
disclosures
about
credit-risk-related contingent features in derivative agreements. We adopted the
provisions of this standard effective January 1, 2009. As a result of
the adoption of FAS 161, we expanded our disclosures
regarding derivative instruments and
hedging activities within
Note 9
,
Derivative
Instruments and Hedging Strategies
,
to the consolidated financial statements
included
herein
.
In June 2008, the
FASB
issued F
ASB Staff Position (“FSP”)
No. EITF 03-6-1
,
Determining Whether Instruments Granted in
Share-Based
Payment Transactions Are Participating Securities.
The FSP addresses whether
instruments granted in share-based
payment transactions are participating securities prior to vesting
and,
therefore, need to be included in the
earnings allocation in computing earnings per share under the two class method
as
described in paragraphs 60 and 61 of FAS
128,
Earnings
per Share.
We have
granted
restricted stock awards under our
share-based compensation plans
that are
considered
participating securities under the new
FSP.
We adopted
t
he FSP effective
January 1, 2009
.
The adoption of FSP
EITF 03-6-1
had the following impact on earnings per
common share and weighted-average shares outstanding:
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
(in thousands, except earnings per
common share)
|
|
For the Quarter
Ended
|
|
|
|
|
|
|
Revised
|
|
|
Original
|
|
|
Increase /
|
|
|
|
March 31,
2008
|
|
|
March 31,
2008
|
|
|
Decrease
|
|
Basic earnings per common
share:
|
|
$
|
1.22
|
|
|
|
1.23
|
|
|
|
(0.01
|
)
|
Basic weighted-average common
shares outstanding
|
|
|
8,857
|
|
|
|
8,776
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common
share:
|
|
$
|
1.18
|
|
|
|
1.19
|
|
|
|
(0.01
|
)
|
Diluted weighted-average common
shares outstanding
|
|
|
9,159
|
|
|
|
9,089
|
|
|
|
70
|
|
In April 2009, the FAS
B issued FSP No. FAS 107-1 and APB 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
. This new FSP relates
to fair value disclosures for financial instruments currently not reflected at
fair value on the statement of financial position of public
companies. Prior to issuing
the FSP,
fair values for these assets and
liabilities were only disclosed once a year. The FSP now requires these
disclosures on a
n
interim
basis, providing
qualitative and quantitative information about fair value estimates for all
those financial instruments not measured on the
statement of financial position of
public companies
at fair
value.
The new
FSP is effective for interim reporting periods ending after June 15,
2009. The adoption of FSP FAS 107-1 and APB 28-1 is not expected to
have a material impact on our consolidated financial
statements.
In April 2009, the FASB issued FSP FAS
115-2 and FAS 124-2,
Recognition and
Presentation of Other-Than-Temporary Impairments
. The new FSP is
intended to bring greater consistency to
the timing of impairment recognition, and provide greater clarity to investors
about the credit and noncredit components of impaired debt securities that are
not expected to be sold. The measure of impairment in comprehensive income
remains fair value. The FSP also requires increased and timelier disclosures
regarding expected cash flows, credit losses, and an aging of securities with
unrealized losses. The new FSP is effective for interim reporting
periods ending after June 15, 2009. The adoption of
FSP FAS 115-2 and FAS 124-2
is not expected to have a material
impact on our consolidated financial statements.
In April 2009, the FASB issued FSP FAS
157-4,
Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That are Not
Orderly
. The new FSP
relates to determining fair values when
there is no active market or where the price inputs being u
sed represent distressed sales and
reaffirms FAS157’s
obj
ective of fair value,
which is
to reflect how
much an asset would be sold for in an orderly transaction (as opposed to a
distressed or forced transaction) at the date of the financial statements under
current market conditions. Specifically, it
reaffirms the need to use judgment to
ascertain if a formerly active market has become inactive and in determining
fair values when markets have become inactive. The new FSP is
effective for interim reporting periods ending after June 15,
2009. The adoption of
FSP FAS 157-4
is not expected to have a material
impact on our consolidated financial statements.
2.
|
Fair Value
Measurements
|
We adopted FAS 157,
Fair Value
Measurements,
which
provides a framework for measuring fair value under GAAP
, for financial assets and liabilities
e
ffective January 1,
2008
.
The adoption of FAS 157
did not
have a
n
impact on our cons
olidated financial
statements.
As
defined in FAS 157, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (
an
exit price
methodology).
We utilize market data or assumptions
that we believe market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inpu
ts to the valuation
technique.
These
inputs can be readily observable, market corroborated or generally
unobservable.
We have primarily applied the market
approach for recurring fair value measurements and endeavor to utilize
t
he best available
information.
Accordingly, we utilize valuation
techniques that maximize the use of observable inputs and minimize t
he use of unobservable
inputs.
We then
classify fair value balances based on the observability of those
inputs.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
The fair value hierarchy under
FAS
157 prioritizes the inp
uts used to measure fair
value. The fair value hierarchy gives the highest priority to quoted
prices in active markets and the lowest priority to unobservable
data.
|
Ÿ
|
Level
1 includes unadjusted quoted prices for identical assets or liabilities in
active markets.
|
|
Ÿ
|
Level
2 includes inputs other than quoted prices included within Level 1 that
are observable for assets or liabilities either directly or
indirectly. Level 2 inputs include, among other items, quoted
prices for similar assets and liabilities in active markets, quoted prices
for identical or similar assets and liabilities in markets that are not
active, and inputs other than quoted prices that are observable for the
asset or liability such as interest rates and yield
curves.
|
|
Ÿ
|
Level
3 inputs are unobservable and reflect management’s judgments about
assumptions that market participants would use in pricing an asset or
liability.
|
A financial instrument’s categorization
within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
Reclassifications impacting Level 3
financial instruments are reported as transfers in (out) of the Level 3 category
as of the beginning of the period in which the transfer
occurs. Therefore
,
gains and losses in income only reflect
activity for the period the instrum
ent was classified in Level
3.
The following is a description of the
valuation measurements used for our financial instruments carried or disclosed
at fair value, as well as the general classification of such financial
instruments pursuant to the valuation hierarchy.
Fixed income securities, available for
sale
|
Ÿ
|
Our
fixed income securities trade in less active markets and fair value is
based on valuation methodologies, the significant inputs into which
include, but are not limited to, benchmark yields, reported trades, broker
/ dealer quotes and issuer spreads. These fixed income
securities are classified within Level
2.
|
|
Ÿ
|
Fixed
income securities for which pricing is based solely on broker / dealer
quotes with inputs less observable are classified within Level
3.
|
Equity securities, available for
sale
|
Ÿ
|
Equity
securities that trade in active markets are classified within Level 1 as
fair values are based on quoted market prices for identical assets as of
the reporting date.
|
|
Ÿ
|
Preferred
stocks that trade in active markets are classified within Level 1 as fair
values are based on quoted market prices for identical assets as of the
reporting date. Preferred stocks that trade in less active
markets are classified within Level 2 as fair values are based on
valuation methodologies, the significant inputs into which include, but
are not limited to, benchmark yields, reported trades, broker / dealer
quotes and issuer spreads.
|
Other invested
assets
Other invested assets include
investments held as part o
f
our deferred compensation plan and an
investment in
a
non-public entit
y.
|
Ÿ
|
Securities,
predominantly mutual funds, held in rabbi trusts maintained by the Company
for deferred compensation plans, are included in other invested assets and
classified within the valuation hierarchy on the same basis as the
Company’s actively traded equity
securities.
|
|
Ÿ
|
For
our investment in the non-public entity, fair value is classified as Level
3 as it was based on net asset values and financial statements of the
non-public entity.
|
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
Derivative financial
instruments
|
Ÿ
|
Our
derivative instruments, principally interest rate swaps, are valued using
models that primarily use market observable inputs and are classified as
Level 2 as their fair value is largely based on observable inputs over the
life of the swaps in a liquid market. The fair value of the interest rate
swaps is calculated by comparing the stream of cash flows on the fixed
rate debt versus the stream of cash flows that would arise under the
floating rate debt. The floating and fixed rate cash flows are then
discounted to the valuation date by using the three month London Interbank
Offered Rate (“LIBOR”) rate at the date of the
valuation. Pricing inputs include bid-ask spreads and current
market prices for an underlying
instrument.
|
The following table presents disclosures
about fair value measurements at
March 31, 2009 and December 31,
2008
for assets measured at
fair value on a recurring basis.
|
|
|
|
Fair Value Measurements at March
31, 2009 Using:
|
|
(in
thousands)
|
|
Carrying Value as of March 31,
2009
|
|
|
Quoted Prices in Active Markets
for Identical Assets (Level 1)
|
|
|
Significant Other Observable
Inputs (Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities,
available-for-sale
|
|
$
|
636,337
|
|
|
|
—
|
|
|
|
636,337
|
|
|
|
—
|
|
Equity securities,
available-for-sale
|
|
|
8,473
|
|
|
|
8,258
|
|
|
|
215
|
|
|
|
—
|
|
Other invested
assets
|
|
|
2,824
|
|
|
|
2,737
|
|
|
|
—
|
|
|
|
87
|
|
Total
|
|
$
|
647,634
|
|
|
|
10,995
|
|
|
|
636,552
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (derivative
financial instruments)
|
|
|
901
|
|
|
|
—
|
|
|
|
901
|
|
|
|
—
|
|
Total
|
|
$
|
901
|
|
|
|
—
|
|
|
|
901
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
December 31, 2008 using:
|
|
(in
thousands)
|
|
Carrying Value as of December 31,
2008
|
|
|
Quoted Prices in Active Markets
for Identical Assets (Level 1)
|
|
|
Significant Other Observable
Inputs (Level 2)
|
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income securities,
available-for-sale
|
|
$
|
637,154
|
|
|
|
—
|
|
|
|
637,154
|
|
|
|
—
|
|
Equity securities,
available-for-sale
|
|
|
10,934
|
|
|
|
10,551
|
|
|
|
383
|
|
|
|
—
|
|
Other invested
assets
|
|
|
935
|
|
|
|
851
|
|
|
|
—
|
|
|
|
84
|
|
Total
|
|
$
|
649,023
|
|
|
|
11,402
|
|
|
|
637,537
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities (derivative
financial instruments)
|
|
|
607
|
|
|
|
—
|
|
|
|
607
|
|
|
|
—
|
|
Total
|
|
$
|
607
|
|
|
|
—
|
|
|
|
607
|
|
|
|
—
|
|
The following table presents disclosures
about fair value measurements at
March 31, 2009 and 2008
using significant unobservable inputs
(Level 3).
|
For the Quarter
Ended
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
(in
thousands)
|
Fixed Income
Securities,
available-for-sale
|
|
Other
Invested
Assets
|
|
|
Fixed Income
Securities,
available-for-sale
|
|
Other
Invested
Assets
|
|
Beginning
balance
|
$
|
—
|
|
|
84
|
|
|
|
3,359
|
|
|
553
|
|
Total gains or losses (realized /
unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in net
income
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(88
|
)
|
Included in other comprehensive
income
|
|
—
|
|
|
(21
|
)
|
|
|
13
|
|
|
(28
|
)
|
Purchases, issuances and
settlements
|
|
—
|
|
|
24
|
|
|
|
1,729
|
|
|
(5
|
)
|
Transfers in and / or out of Level
3
|
|
—
|
|
|
—
|
|
|
|
(3,246
|
)
|
|
—
|
|
Ending
balance
|
$
|
—
|
|
|
87
|
|
|
|
1,855
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of total gains or
losses during the period
|
|
|
|
|
|
|
|
|
|
|
|
that are included in net income
attributable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to the change in unrealized gains
or losses relating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to assets still held at the end of
the period
|
$
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(88
|
)
|
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
Realized
gains and losses included in earnings and unrealized gains and losses included
in other comprehensive income for the period are reported as
follows:
|
For the Quarter
Ended
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
(in
thousands)
|
Fixed Income
Securities,
available-for-sale
|
|
Other
Invested
Assets
|
|
|
Fixed Income
Securities,
available-for-sale
|
|
Other
Invested
Assets
|
|
Total gains or losses included in
net income during the period
|
$
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(88
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains or
losses related to assets still held at the end of the
period
|
$
|
—
|
|
|
(21
|
)
|
|
|
13
|
|
|
(28
|
)
|
3.
|
Earnings per Common
Share
|
Data with respect to our basic and
diluted earnings per common share are shown below.
(in thousands, except earnings per
common share)
|
|
For the Quarter
Ended
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,387
|
|
|
|
10,828
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common
Share:
|
|
|
|
|
|
|
|
|
Basic earnings per common
share
|
|
$
|
1.10
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common
Share:
|
|
|
|
|
|
|
|
|
Diluted earnings per common
share
|
|
$
|
1.07
|
|
|
|
1.18
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average shares
outstanding
|
|
|
7,655
|
|
|
|
8,857
|
|
Common stock equivalents
(1)
|
|
|
169
|
|
|
|
302
|
|
Diluted weighted-average shares
outstanding
|
|
|
7,824
|
|
|
|
9,159
|
|
|
|
(1)
|
Outstanding
stock options totaling 35,616 and 101,369 for the three months ended March
31, 2009 and 2008, respectively, were excluded from the calculation of
diluted earnings per common share because the sum of the hypothetical
amount of future proceeds from the exercise price, unrecorded
compensation, and tax benefits to be credited to additional paid-in
capital for all grants of stock options were higher than the average price
of the common shares, and therefore were
anti-dilutive.
|
4.
|
Liability for Losses and
LAE
|
We establish loss and LAE reserves
taking into account the results of multiple actuarial techniques applied as well
as other assumptions and factors regarding our business. Each
actuarial technique is applied in a consistent manner from period to period and
the techniques encompass a review of selected claims data, including claim and
incident counts, average indemnity payments, and loss adjustment
costs. Estimating liability for losses and LAE is a complex process
and changes in key assumptions or trends could result in a significant change in
our reserve estimates. Given the magnitude of our loss and LAE
reserves, virtually any change in the level of our carried reserves will be
material to our results of operations and may be material to our financial
position. For additional information regarding our liability for
losses and LAE see
Note 6
, Liability for
Losses and LAE
, included in
our Annual Report on Form 10-K for the year ended December 31,
2008
.
A
s a result of the continuation of
favorable
claim
results
, w
e recognized favorable net loss
development related to previously established reserves of $4.0 million and $4.5
million for the three months ended March 31, 2009 and 2008,
respectively
. The favorable
development recognized in 2009 reflects a decline in expected ultimate losses
primarily for the 2004 through 2007 accident years as a result of reductions in
our estimates of incident
to claim development, payment frequency
and payment severity
.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
The effects of
reinsurance on premiums written,
premiums earned, and losses and LAE incurred are shown
below.
(in
thousands)
|
For the Quarter
Ended
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct
premiums
|
$
|
45,604
|
|
|
|
44,237
|
|
|
$
|
51,855
|
|
|
|
50,342
|
|
Assumed
premiums
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Ceded
premiums
|
|
(6,345
|
)
|
|
|
(5,825
|
)
|
|
|
(7,269
|
)
|
|
|
(6,049
|
)
|
Net
premiums
|
$
|
39,259
|
|
|
|
38,412
|
|
|
$
|
44,586
|
|
|
|
44,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in
thousands)
|
For the Quarter
Ended
|
|
|
|
—
|
|
|
|
—
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
|
|
—
|
|
|
|
—
|
|
Losses and
LAE
|
$
|
27,114
|
|
|
|
29,069
|
|
|
|
—
|
|
|
|
—
|
|
Reinsurance
recoveries
|
|
(3,874
|
)
|
|
|
(3,914
|
)
|
|
|
—
|
|
|
|
—
|
|
Net losses and
LAE
|
$
|
23,240
|
|
|
|
25,155
|
|
|
|
—
|
|
|
|
—
|
|
We purchase reinsurance from a number of
companies to mitigate concentrations of credit risk, and utilize our reinsurance
broker to assist us in the analysis of the credit quality of our
reinsurers. We base our reinsurance buying decisions on an evaluation
of the then current financial strength and stability
of
prospective
reinsurers. However, the financial strength of our reinsurers, and
their corresponding ability to pay us, may change in the future due to forces or
events we cannot control or anticipate. As of March 31, 2009 and
December, 31, 2008, our receivable from reinsurers, net of amounts due, was
$146.2 million and $147.3 million, respectively. We have not
experienced any difficulty in collecting amounts due from
reinsurers related to the financial condition of a
reinsurer. Should future events lead us to believe
that any reinsurer is unable to meet
its obligations, adjustments to the amounts recoverable would be reflected in
the results of current operations.
Realized investment gains and losses are
determined on the basis of specific identification. Declines in the
fair value of securities considered to be other-than-temporary are recorded as
realized losses in the consolidated statements of income. Data with
respect to investments are presented in the tables below.
|
|
For the Quarter
Ended
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
(in
thousands)
|
|
Fixed income securities,
available-for-sale
|
|
Equity securities,
available-for-sale
|
|
Other invested
assets
|
|
Total
|
|
|
Fixed income securities,
available-for-sale
|
|
Equity securities,
available-for-sale
|
|
Other invested
assets
|
|
Total
|
|
Gross
realized gains
|
|
$
|
1,436
|
|
|
140
|
|
|
40
|
|
|
1,616
|
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Gross realized
losses
|
|
|
(106
|
)
|
|
(149
|
)
|
|
(64
|
)
|
|
(319
|
)
|
|
|
—
|
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
Other-than-temporary impairment
losses
|
|
|
(1,355
|
)
|
|
—
|
|
|
—
|
|
|
(1,355
|
)
|
|
|
—
|
|
|
—
|
|
|
(86
|
)
|
|
(86
|
)
|
Net realized investment gains
(losses)
|
|
$
|
(25
|
)
|
|
(9
|
)
|
|
(24
|
)
|
|
(58
|
)
|
|
|
7
|
|
|
—
|
|
|
(99
|
)
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales and
maturities
|
|
$
|
55,300
|
|
|
393
|
|
|
178
|
|
|
55,871
|
|
|
|
30,012
|
|
|
—
|
|
|
5
|
|
|
30,017
|
|
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
(in
thousands)
|
|
Fixed income securities,
available-for-
sale
|
|
|
Equity securities,
available-for-
sale
|
|
|
Total
|
|
|
Fixed income securities,
available-for-
sale
|
|
|
Equity securities,
available-for-
sale
|
|
|
Total
|
|
Amortized cost of
investments
|
|
$
|
643,984
|
|
|
|
10,585
|
|
|
|
654,569
|
|
|
|
649,877
|
|
|
|
10,764
|
|
|
|
660,641
|
|
Gross unrealized
gains
|
|
|
14,509
|
|
|
|
—
|
|
|
|
14,509
|
|
|
|
11,596
|
|
|
|
170
|
|
|
|
11,766
|
|
Gross unrealized
losses
|
|
|
(22,156
|
)
|
|
|
(2,112
|
)
|
|
|
(24,268
|
)
|
|
|
(24,319
|
)
|
|
|
—
|
|
|
|
(24,319
|
)
|
Fair
value
|
|
$
|
636,337
|
|
|
|
8,473
|
|
|
|
644,810
|
|
|
|
637,154
|
|
|
|
10,934
|
|
|
|
648,088
|
|
As part of our ongoing evaluation of our
investment portfolio, we determined that certain fixed income securities were
other-than-temporarily impaired. These securities were written down
to their fair value as of March 31, 2009. Our fixed income investment
portfolio had an overall average credit quality of AA, based on the lower of the
available credit ratings from S&P and Moody’s for each investment security
in
our
portfolio
.
7
.
|
Share-based Compensation
Plans
|
We maintain three share-based
compensation plans: (i) a plan for officers and key employees (the “Omnibus
Plan”); (ii) a plan for non-employee directors (the “Director Plan”); and (iii)
an employee stock purchase plan (the “ESPP”). For a description of
these plans, see
Note
11,
Share-Based
Compensation Plans
included
in our Annual Report on Form 10-K for the year ended
December 31,
2008.
T
he following table summarizes data for
stock options outstanding and exercisable as of
March 31, 2009
:
|
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Range of
Prices per
Share
|
|
|
Vested Number of
Shares
|
|
|
Nonvested Number of
Shares
|
|
|
Weighted-Average Exercise
Price
|
|
|
Weighted-Average Remaining
Contractual
Life in
Years
|
|
Total Aggregate Intrinsic
Value (in
thousands)
|
|
Number of
Shares
|
|
|
Weighted-Average Exercise
Price
|
|
Total Aggregate Intrinsic Value
(in thousands)
|
$
|
0.00-11.99
|
|
|
|
108,018
|
|
|
|
—
|
|
|
$
|
9.40
|
|
|
|
2.2
|
|
|
|
|
108,018
|
|
|
$
|
9.40
|
|
|
$
|
12.00-15.99
|
|
|
|
145,951
|
|
|
|
—
|
|
|
|
13.71
|
|
|
|
2.8
|
|
|
|
|
145,951
|
|
|
|
13.71
|
|
|
$
|
16.00-19.99
|
|
|
|
6,500
|
|
|
|
—
|
|
|
|
17.17
|
|
|
|
0.8
|
|
|
|
|
6,500
|
|
|
|
17.17
|
|
|
$
|
20.00-35.99
|
|
|
|
179,724
|
|
|
|
—
|
|
|
|
27.29
|
|
|
|
5.2
|
|
|
|
|
179,724
|
|
|
|
27.29
|
|
|
$
|
36.00-60.99
|
|
|
|
54,246
|
|
|
|
27,123
|
|
|
|
39.37
|
|
|
|
7.8
|
|
|
|
|
54,246
|
|
|
|
39.37
|
|
|
|
|
|
|
|
494,439
|
|
|
|
27,123
|
|
|
$
|
21.54
|
|
|
|
4.2
|
|
$ 8,267
|
|
|
494,439
|
|
|
$
|
20.57
|
|
$ 8,267
|
The following table presents the status
of, and changes in,
performance units and
restricted stock:
|
|
Performance Units and Restricted
Stock
|
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term in
Years
|
Total
Aggregate
Intrinsic
Value (in
thousands)
|
Nonvested, January 1,
2009
|
|
|
106,251
|
|
|
$
|
40.84
|
|
|
|
Granted
|
|
|
54,114
|
|
|
|
41.48
|
|
|
|
Vested
|
|
|
(23,891
|
)
|
|
|
39.16
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
Nonvested, March 31,
2009
|
|
|
136,474
|
|
|
$
|
41.39
|
|
1.3
|
$ 5,054
|
As of March 31, 2009, there was $4.1
million of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under our various plans, which is
expected to be recognized over a weighted-average period of 1.0
years. The compensation cost related to our share-based awards that
were charged to other underwriting expense was $0.8 million for each of the
three months ended March 31, 2009 and 2008, respectively.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
8
.
|
Employee Benefit
Plans
|
The components of the actuarially
computed net periodic pension cost for our benefit plans are summarized in the
table below. For a description of our employee benefit plans, see
Note
1
4
, Employee Benefit
Plans
, included in our
Annual Report on Form 10-K for the year ended December 31,
2008.
(in
thousands)
|
|
For the Quarter
Ended
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
Service cost of benefits earned
during the period
|
|
$
|
176
|
|
|
|
254
|
|
Interest cost on projected benefit
obligation
|
|
|
163
|
|
|
|
179
|
|
Expected return on plan
assets
|
|
|
(76
|
)
|
|
|
(109
|
)
|
Amortization of net
loss
|
|
|
141
|
|
|
|
5
|
|
Amortization of prior service
cost
|
|
|
1
|
|
|
|
12
|
|
Amortization of net transition
obligation
|
|
|
—
|
|
|
|
2
|
|
Net periodic pension
cost
|
|
$
|
405
|
|
|
|
343
|
|
We contributed $0.
8
million to our employee benefit plans
during the
three
months ended March 31,
2009. We currently anticipate contributing an additional $0.5 million
to these plans during the remainder of
2009
for total contributions of
$1.
3
million.
9.
|
Derivative Instruments and Hedging
Strategies
|
We use
hedging contracts to manage the risk
of
our
exposure to interest rate
changes
associated with our
variable rate debt
. All of
our designated hedging instruments are considered to be cash flow
hedges.
Our derivative transactions represent a
hedge of specified cash flows. As a result, these interest rate swaps are
derivatives in accordance with the guidance in FAS 133 and were designated as
cash flow hedging instruments at the initiation of the swaps. We
formally document qualifying hedged transactions and hedging instruments, and
assess, both at inception of the contract and on an ongoing basis, whether the
hedging instruments are effective in offsetting changes in cash flows of the
hedged transaction. At the end of each period, the interest rate
swaps are recorded in the consolidated statement of financial position at fair
value, in other assets if the hedge is an asset position, or in other
liabilities if it is in a liability position. Any related increases or decreases
in
fair value are
recognized in our consolidated statement of financial position in
accumulated other comprehensive
income.
We consider our interest rate swaps to
be a Level 2 measurement under the FAS 157 hierarchy, as their fair value is
largely based on observable inputs over the life of the swaps in a liquid
market. The fair value of the interest rate swaps is calculated by comparing the
stream of cash flows on the fixed rate debt versus the stream of cash flows that
would arise under the floating rate debt. The floating and fixed rate cash flows
are then discounted to the valuation date by using the three month
LIBOR
rate at the date of the
valuation. The valuation of the interest rate swap can be sensitive
to changes in current and future three month LIBOR rates, which can have a
material impact on the fair value of the derivatives. However, as these swaps
are used to manage
our
cash outflows, these changes will not
materially
impact
our
liquidity and capital resources.
Furthermore, since the interest rate swaps are deemed as effective hedging
instruments, these changes do not impact income from operations
.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
Interest
rate risk.
We
are exposed to interest rate risk associated with fluctuations in the interest
rates on our variable interest rate debt. In order to manage this risk, we have
entered into several interest rate swaps that convert the debt's variable rate
debt to fixed rate debt.
As of
March 31, 2009
, we had long-term debt obligations of
$
46.1
million, comprised of $
10.0
million in senior notes and
$
36.1
million in junior subordinated
debentures. Our long-term debt obligations are uncollateralized and
bear floating interest at rates equal to the three-month
L
IBOR
plus an interest rate
spread
.
Our floating interest rates are adjusted
quarterly.
We are required during the
swap
term
s
to make certain
fixed rate payments to the counterparty
calculated on the notional
amount in exchange for receiving floating payments based on the three-month
LIBOR for the same amount. The notional amounts on the
contract
s
are not exchanged.
The net effect of this accounting on our
operating results is that interest expense on our floating rate indebtedness is
recorded based on fixed interest rates.
Credit
risk
.
By using interest rate-related
derivative instruments
to manage
the exposure on our variable
rate
debt, we expose
ourselves
to
credit
risk
. We are
exposed to potential losses if
the
counterparty fails to
perform according to the terms of its agreement.
When the fair value of a derivative
contract is positive
(or in
a net asset position)
, the
counterparty owes us, which
may present a
credit risk
for us
.
We manage our exposure to credit risk by
enter
ing
into transactions with
well-established financial institutions
and by monitoring the financial strength ratings and financial developments of
such institutions
.
In addition, only conventional
derivative financial instruments are utilized.
The terms of
our
derivative agreements
require that we furnish collateral
in the event that
mark-to-market calculations result in settlement obligations
owed by us
to the counterparties
in excess of $0.8
million. N
o
other cash payments are made unless the
swaps are
terminated prior to maturity, in which
case the amount paid or received
at
settlement is established by agreement
at the time of termination, and usually represents the net present value, at
current interest rates, of the remaining obligations to exchange payments under
the terms of the
contracts.
In
accordance with FASB Interpretation No.
39-1 (“FIN 39-1”),
Amendment of FASB
Interpretation No. 39,
Offsetting of
Amounts Related to Certain Contracts
and as allowed under our master netting
arrangement with our counterparty, we have offset
the fair value
amounts recognized
in the statement of financial position
for our derivative
instruments against the fair value amounts recognized for our right to reclaim
cash collateral (a receivable). As of March 31, 2009 and December 31,
2008, the cash collateral paid to our counterparty was $2.6 million and $2.9
million, respectively.
Assessment
of hedge effectiveness
.
We assess the effectiveness
of our interest rate swaps as defined in FAS 133 on a quarterly basis. We have
considered the impact of credit market conditions in assessing the risk of
counterparty default. We believe that it is likely that the counterparty for
these swaps will continue to act throughout the contract period, and as a result
continue to deem the swaps as effective hedging
instruments.
We
will perform subsequent assessments of hedge effectiveness by verifying and
documenting whether the critical terms of the hedging instrument and the
forecasted transaction have changed during the period, rather than by
quantifying the relevant changes in cash flows.
Based on the fact that, at inception,
the critical terms of the
hedging instruments and the hedged forecasted transaction were the same, we have
concluded that we expect changes in cash flows attributable to the risk being
hedged to be completely o
ffset by the hedging derivatives and
have assessed that our cash flow hedges have no ineffectiveness, as determined
by the hypothetical derivative method. If the hedge on any of the interest rate
swaps was deemed ineffective, or extinguished by either party, any accumulated
gains or losses remaining in other comprehensive income would be fully recorded
in interest expense during the period.
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
At March
31
, 2009, the fair value of
our
derivative inst
ruments was recorded as
follows:
Cash flow hedges designated as effective
hedging instruments under FAS 133:
|
|
|
|
Liability
Derivatives
|
|
|
|
|
|
|
|
|
Instrument
|
|
Notional
Amount
(in thousands)
|
|
Balance Sheet
Location
|
|
March 31, 2009 Fair
Value
|
|
|
Receive
Rate
(1)
|
|
|
Pay
Rate
|
|
Maturity
Date
|
Interest Rate Swap -
A
|
|
$
|
5,000
|
|
Other
Liabilities
|
|
$
|
(410
|
)
|
|
|
1.26
|
%
|
|
|
3.94
|
%
|
5/23/2013
|
Interest Rate Swap -
B
|
|
$
|
15,000
|
|
Other
Liabilities
|
|
|
(1,334
|
)
|
|
|
1.23
|
%
|
|
|
4.04
|
%
|
8/15/2013
|
Interest Rate Swap -
C
|
|
$
|
15,000
|
|
Other
Liabilities
|
|
|
(1,440
|
)
|
|
|
1.18
|
%
|
|
|
4.12
|
%
|
10/29/2013
|
Interest Rate Swap -
D
|
|
$
|
10,000
|
|
Other
Liabilities
|
|
|
(327
|
)
|
|
|
1.26
|
%
|
|
|
2.74
|
%
|
11/23/2011
|
|
|
|
|
|
|
|
$
|
(3,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Based on the three month
LIBOR.
|
The effect of derivative instruments on
the Consolidated Statement of Income for the three months ended
March 31, 2009
was as follows:
Derivatives in FAS 133 cash flow hedging
relationships:
|
|
Amount of gain / (loss) recognized
in other comprehensive income on the derivative
|
|
Location of gain / (loss)
reclassified
from accumulated other
comprehensive
income into net
income
|
|
Amount of gain / (loss)
reclassified from accumulated other comprehensive
income into net
income
|
|
|
|
(Effective portion - in
thousands)
|
|
(Effective
portion)
|
|
(Effective portion - in
thousands)
|
|
Instrument
|
|
March 31,
2009
|
|
|
|
March 31,
2009
|
|
Interest Rate Swap -
A
|
|
$
|
(11
|
)
|
Interest
expense
|
|
$
|
(26
|
)
|
Interest Rate Swap -
B
|
|
|
(49
|
)
|
Interest
expense
|
|
|
(87
|
)
|
Interest Rate Swap -
C
|
|
|
(7
|
)
|
Interest
expense
|
|
|
(82
|
)
|
Interest Rate Swap -
D
|
|
|
31
|
|
Interest
expense
|
|
|
(23
|
)
|
|
|
$
|
(36
|
)
|
|
|
$
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of gain / (loss) recognized
in net income on the derivative
|
|
Location
of gain / (loss) recognized in net income on the
derivative
|
|
|
|
|
|
|
(Ineffective portion and amount
excluded from effectiveness testing - in thousands)
|
|
(Ineffective
portion and amount excluded from effectiveness testing)
|
|
|
|
Instrument
|
|
March 31,
2009
|
|
|
|
|
|
|
Interest Rate Swap -
A
|
|
$
|
—
|
|
Interest
expense
|
|
|
|
|
Interest Rate Swap -
B
|
|
|
—
|
|
Interest
expense
|
|
|
|
|
Interest Rate Swap -
C
|
|
|
—
|
|
Interest
expense
|
|
|
|
|
Interest Rate Swap -
D
|
|
|
—
|
|
Interest
expense
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
FPIC Insurance Group, Inc.
Notes
to the Unaudited Consolidated Financial Statements
Table
of Contents
10.
|
Commitments and
Contingencies
|
Liabilities for loss contingencies
arising from claims, assessments, litigation, fines and penalties and other
sources are recorded when it is determined to be probable that a liability has
been incurred and the amount of the assessment and/or remediation can be
reasonably estimated. In addition, our insurance subsidiaries may
become subject to claims for extra-contractual obligations or risks in excess of
policy limits in connection with their insurance claims. These claims
are sometimes referred to as “bad faith” actions as it is alleged that the
insurance company acted in bad faith in the administration of a claim against an
insured. Bad faith actions are infrequent and generally occur in
instances where a jury verdict
exceeds the insured’s policy
limits. Under such circumstances, it is routinely alleged that the
insurance company failed to negotiate a settlement of a claim in good faith
within the insured’s policy limit. In recent years, policy limits for
medical professional liability (“MPL”) insurance in Florida have trended
downward. This trend and the current judicial climate have increased
the incidence and size of jury awards in excess of policy limits against Florida
medical professionals insured by our competitors and us. Such awards
could ultimately result in increased frequency of claims alleging bad faith on
the part of Florida MPL insurers. Our primary excess of loss
reinsurance program includes an additional level of coverage for
claims in excess of policy
limits. (
For
additional information regarding
this reinsurance coverage
see
Note
7
,
Reinsurance
, included in our Annual Report on Form
10-K for the year ended December 31,
2008
.
) An award for a bad faith
claim against one of our subsidiaries in excess of the applicable reinsurance
could have an adverse affect on our financial condition, results of operations
or cash flows. We have evaluated such exposures as of March 31, 2009,
and believe our position and defenses are meritorious. However, there
can be no assurance as to the outcome of such exposures.
Our insurance subsidiaries are subject
to assessment by the
insurance
guaranty associations in the states in
which they conduct business for the provision of funds necessary for the
settlement of covered claims under certain policies of insolvent
insurers. Generally, these associations can assess member insurers on
the basis of written premiums in their particular states. During 2006
and 2007, the Florida Office of Insurance Regulation (“Florida OIR”) levied
assessments, totaling $9.4 million and $4.2 million, respectively, on our
Florida
direct premiums
written
at the request of
the Florida Insurance Guaranty Association (“FIGA”) as a result of the
insolvency of a group of Florida-domiciled homeowner’s insurance companies
owne
d by Poe Financial
Group. Loss
es in
excess of FIGA’s estimates could result in the need for additional assessments
by FIGA. Such additional assessments or assessments related to other
property and casualty insurers that have or may become insolvent because of
hurricane activity or otherwise could adversely impact our financial condition,
results of operations or cash flows. Under Florida law, our insurance
subsidiaries are entitled to recoup
insurance
guaranty fund assessments from their
Florida policyholders and have been doing so.
In addition to standard
insurance
guaranty fund assessments, the Florida
and Missouri legislatures may also levy special assessments to settle claims
caused by certain catastrophic losses. No special assessments for
catastrophic losses were made in 2008
or have been made in 2009
. Medical malpractice
policies have been exempted from assessment by the Florida Hurricane Catastrophe
Fund until the fund’s expiration on May 31, 2010.
Item
2.
|
Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
|
For
purposes of this Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”), “FPIC,” “we,” “our,” “us,” and the “Company”
refer to FPIC Insurance Group, Inc., together with its subsidiaries, unless the
context requires otherwise. The following MD&A should be read in
conjunction with the accompanying consolidated financial statements for the
three months ended March 31, 2009, included in Part I, Item 1, as well as the
audited consolidated financial statements and footnotes included in our Annual
Report on Form 10-K for the year ended December 31, 2008, which was filed with
the SEC on March 4, 2009.
Cautionary Statement Regarding
Forward-Looking Statements
This Quarterly Report on Form 10-Q,
including the following MD&A, contains forward-looking statements that
involve risks and uncertainties, as well as assumptions that, if they do not
materialize or prove correct, could cause our results to differ materially from
those expressed or implied by such forward-looking statements. All
statements other than statements of historical fact are statements that could be
deemed forward-looking statements, including statements: of our plans,
strategies and objectives for future operations; concerning new products,
services or developments; regarding future economic conditions, performance or
outlook; as to the outcome of contingencies; of beliefs or expectations; and of
assumptions underlying any of the foregoing. Forward-looking
statements may be identified by their use of forward-looking terminology, such
as “believes,” “expects,” “may,” “should,” “would,” “will,” “intends,” “plans,”
“estimates,” “anticipates,” “projects” and similar words or
expressions. You should not place undue reliance on these
forward-looking statements, which reflect our management’s opinions only as of
the date of the filing of this Quarterly Report on Form 10-Q. Factors
that might cause our results to differ materially from those expressed or
implied by these forward-looking statements include, but are not limited
to:
i)
|
The effect of negative
developments and cyclical changes in the MPL insurance
business;
|
ii)
|
The effects of competition,
including competition for agents to place insurance, of physicians
electing to self-insure or to practice without insurance coverage, and of
related trends and associated pricing pressures and
developments;
|
iii)
|
Business risks that result from
our size, products, and geographic
concentration;
|
iv)
|
The risks and uncertainties
involved in determining the rates we charge for our products and services,
as well as these rates being subject to or mandated by legal requirements
and regulatory approval;
|
v)
|
The actual amount of our new and
renewal business;
|
vi)
|
The uncertainties involved in the
loss reserving process, including the possible occurrence of insured
losses with a frequency or severity exceeding our
estimates;
|
vii)
|
The unpredictability of court
decisions and our exposure to claims for extra contractual damages and
losses in excess of policy limits;
|
viii)
|
Developments in financial and
securities markets that could affect our investment
portfolio;
|
ix)
|
Legislative, regulatory or
consumer initiatives that may adversely affect our business, including
initiatives seeking to lower premium rates;
|
x)
|
The passage of additional or
repeal of current tort reform measures, and the effect of such
measures;
|
xi)
|
Assessments imposed by state
financial guaranty associations or other insurance regulatory
bodies;
|
xii)
|
Developments in reinsurance
markets that could affect our reinsurance programs or our ability to
collect reinsurance recoverables;
|
xiii)
|
The loss of the services of any
key members of senior management;
|
xiv)
|
Changes in our financial ratings
resulting from one or more of these uncertainties or other factors and the
potential impact on our agents’ ability to place insurance business on our
behalf;
|
xv)
|
Other factors discussed elsewhere
in this report and in our Annual Report on Form 10-K for the year ended
December 31,
2008
, including
Item
1A. Risk Factors
and
Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations,
filed with the SEC on
March 4,
2009
.
|
Readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of their
dates. Forward-looking statements are made in reliance on the safe
harbor provision of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended and, we undertake
no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, except as
required by law.
Critical Accounting
Policies
The accounting policies considered by
management to be critically important in the preparation and understanding of
our financial statements and related disclosures are presented in
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
of
our Annual Report on Form 10-K for the year ended
December 31, 2008
.
Impact of Recently Issued Accounting
Pronouncements
As described in
Item
1. Financial Statements, Note 1, Basis of Presentation
and New Accounting
Pronouncements
under the
heading “New Accounting Pronouncements,” there are accounting pronouncements
that have recently been issued. Note 1 describes the potential impact
that these pronouncements are expected to have or have had on our consolidated
financial statements.
Commitments and
Contingencies
For information concerning commitments
and contingencies to which we are subject, see
Item
1. Financial Statements, Note
10
, Commitments and
Contingencies
.
Business Overview
We operate in the MPL insurance sector
of the property and casualty insurance industry. Our primary
insurance products provide protection for physicians, dentists and other
healthcare providers as individual practitioners or as members of practice
groups. Our insurance protects policyholders against losses arising
from professional liability claims and the related defense costs with respect to
injuries
alleged to have
been caused by medical error or malpractice. Optional coverage is
available for professional corporations under which physicians or dentists
practice. Through our insurance subsidiaries, we are the
largest provider of
MPL insurance in
Florida. Based on 2008 premium data published by SNL Financial LC,
which is the latest available data, Florida is the fifth largest market for MPL
insurance in the United States. Our insurance subsidiaries also
provide
MPL insurance in
selected other states. We have
chosen to focus on selected markets
where we believe we have advantages in terms of our market knowledge,
well-established reputation, significant market presence and
resources.
Recent Trends and Other
Developments
(Comparisons
are made for first quarter 2009 to the comparable period in 2008 unless
otherwise indicated)
—
|
Our national and Florida
policyholder retention was 97 percent compared to 95 percent national
retention and 96 percent Florida retention for the comparable period in
2008.
|
—
|
A
s a result of the continuation of
favorable loss trends, w
e recognized favorable net loss
development related to previously established reserves of $
4.0
million for the three months
ended
March 31, 2009
compared to
$
4.5
million
for the same period in
2008
.
As the result of the decline in
premiums earned resulting from the drop in Florida premium rates, our
current accident year loss ratio for 2009 increased to 71 percent from 67
percent in 2008.
|
—
|
Lower rates in our Florida
market
,
offset to some extent by growth
in professional liability policyholders
,
resulted in a 12 percent decline
in net premiums wri
tten.
|
—
|
Consolidated revenues were 12
percent lower primarily as a result of lower Florida premium rates, as
well as lower net investment income.
|
—
|
Net investment income was 7
percent lower as the result of a decline in average invested assets and a
lower yield on cash and cash equivalents partially offset by a slight
increase in the average yield on fixed income
securities.
|
—
|
Our expense ratio was 24 percent
compared to 22 percent for the prior year’s quarter. The higher
ratio was primarily due to lower net premiums earned, as well as a lesser
impact from the recovery of previous insurance guaranty fund
assessments.
|
—
|
Book value per common share grew 4
percent from December 31, 2008 to $34.53 as of March 31,
2009. The statutory surplus of our insurance subsidiaries as of
March 31, 2009 was $236.7 million and the ratio of net premiums written to
surplus was 0.7 to 1.
|
—
|
On April 20, 2009,
A.M. Best affirmed the A-
(Exc
ellent)
financial strength
rating
of our
insurance subsidiaries
with a stable
outlook.
|
—
|
O
n March 20, 20
09, Fitch Ratings affirmed
the
A
-
(Strong) insurer financial strength rating and stable outlook
of our insurance
subsidiaries.
|
—
|
On
a trade date basis, we repurchased
315,188
shares
of our common stock during the
three
months
ended
March
31, 2009
at
an average price of $
37.30
per
share and as of
March
31, 2009
,
had remaining authority from our Board of Directors to repurchase
637,614
more
shares under our stock repurchase program.
Through
May 1, 2009, we have repurchased an additional 87,473 shares
of our common stock, on a
trade date basis, at
an average price of $33.30 per share and had remaining authority
from our Board of Directors to repurchase an additional 550,141 shares as
of that
date.
|
Results of Operations
:
Three Months Ended
March 31, 2009
compared to
Three Months Ended
March 31, 2008
Net income
was $
8.4
million for the three months ended
March 31, 2009
, or $
1.07
per dilut
ed common share, a decrease of
23
percent and
9
percent, respectively, compared to
$
10.8
million, or $
1.18
per diluted common share, for the three
months ended
March 31,
2008
.
The decline in net income is primarily
the result of a decline in net premiums earned and net investment income and a
higher combined ratio in the current year. See the discussion
below for additional information.
Information
concerning
written
premiums
and
policyholders
is summarized in the tables below:
|
|
For the Quarter
Ended
|
|
(in
thousands)
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
March 31,
2009
|
|
|
Change
|
|
|
March 31,
2008
|
|
Direct premiums written
(1)
|
|
$
|
45,604
|
|
|
|
-12
|
%
|
|
|
51,855
|
|
Assumed premiums
written
|
|
|
—
|
|
|
|
0
|
%
|
|
|
—
|
|
Ceded premiums
written
|
|
|
(6,345
|
)
|
|
|
13
|
%
|
|
|
(7,269
|
)
|
Net premiums written
(1)
|
|
$
|
39,259
|
|
|
|
-12
|
%
|
|
|
44,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
Percentage
|
|
|
As of
|
|
|
|
March 31,
2009
|
|
|
Change
|
|
|
March 31,
2008
|
|
Professional liability
policyholders in force
|
|
|
13,829
|
|
|
|
3
|
%
|
|
|
13,380
|
|
Professional liability
policyholders in force under alternative risk
arrangements
|
|
|
211
|
|
|
|
160
|
%
|
|
|
81
|
|
Total professional liability
policyholders in force
|
|
|
14,040
|
|
|
|
4
|
%
|
|
|
13,461
|
|
|
|
(1)
|
Includes $1.5 million and $1.3
million of premiums associated with alternative risk arrangements for the
three months ended March 31, 2009 and 2008,
respectively. Management fees for such arrangements are
included in other
income.
|
Direct premiums
written
and
n
et premiums
written
both
declined
12
percent for the three months ended
March 31, 2009
compared to the same period in
200
8
, primarily as
the
result of lower prem
ium rates in our Florida market,
offset to some extent by an
increase in professional liability policyholders.
Our national and Florida policyholder
retention was 97 percent for the three months ended March 31, 2009, compared to
95 percent national retention and 96 percent Florida retention for the
comparable period in 2008.
Net premiums
earned
declined 13 percent for the three months
ended March 31, 2009 compared to the same period in 2008.
The decline in net premiums
earned for the three months ended March 31, 2009
is
primarily the result of
lower rates in our Florida market and
a prior shift in business
mix to lower risk specialties that is now being reflected in net premiums
earned
.
Net investment
income
declined
7
percent for the three months ended
March 31, 2009 compared to the same period in 2008. The decline in
net investment income is
the
result of a decline in average invested
assets and a lower yield on cash and cash equivalents partially offset by a
slight increase in the average yield on fixed income
securities.
Information concerning our
loss
ratio
,
underwriting
expense
ratio
and
combined
ratio
is summarized in the
table below.
|
|
|
|
|
For the Quarter
Ended
|
|
|
|
|
|
|
March 31,
2009
|
|
|
March 31,
2008
|
|
Loss ratio
|
|
|
|
|
|
|
|
|
|
Current accident
year
|
|
|
|
|
|
70.9
|
%
|
|
|
67.0
|
%
|
Prior accident
years
|
|
|
|
|
|
-10.4
|
%
|
|
|
-10.2
|
%
|
Calendar year loss
ratio
|
|
|
|
A
|
|
|
60.5
|
%
|
|
|
56.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting expense
ratio
|
|
|
|
B
|
|
|
23.7
|
%
|
|
|
22.4
|
%
|
Insurance guaranty fund
recoveries
|
|
|
|
|
|
|
-1.0
|
%
|
|
|
-1.7
|
%
|
Underwriting expense ratio
excluding insurance guaranty fund recoveries
|
|
|
|
C
|
|
|
24.7
|
%
|
|
|
24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio (Sum of
A+B)
|
|
|
|
|
|
|
84.2
|
%
|
|
|
79.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio excluding insurance
guaranty fund recoveries (Sum of A+C)
|
|
|
|
85.2
|
%
|
|
|
80.9
|
%
|
Net losses and LAE
decreased 8 percent for the
three months ended March 31, 2009 compared to the same period in
2008. The continu
ation of favorable claim trends resulted
in
$4.0 million of
favorable prior year development for the three months ended March 31, 2009
compared to $4.5 million for the three months ended March 31,
2008.
The
favorable development recognized in 2009 reflects reductio
ns in our estimates of
incident
to claim
development, payment frequency and payment severity.
Lower net premiums earned offset by an
increase in the corresponding provision for losses and LAE contributed to the
decline in net losses and LAE in 2009.
Other underwriting
expenses
decreased 8
percent for the three months ended March 31, 2009 compared to the same period in
2008. The decrease in other underwriting expenses is primarily the
result of lower
fixed costs
associated with
compensation and benefits and lower variable costs for agent commissions and
premium taxes as a result of lower premiums earned. These declines
were slightly offset by lower recoveries on guaranty fund assessments in 2009
compared to the recoveries received during 2008.
Selected information concerning our
direct
professional liability insurance claim data
is summarized in the table
below.
|
|
For the Quarter
Ended
|
|
(in
thousands)
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
March 31,
2009
|
|
|
Change
|
|
|
March 31,
2008
|
|
Net paid
losses
|
|
$
|
18,535
|
|
|
|
56
|
%
|
|
|
11,911
|
|
Less: Net paid losses on assumed
business in run-off
|
|
|
481
|
|
|
|
234
|
%
|
|
|
144
|
|
Net paid losses excluding assumed
business in run-off
|
|
|
18,054
|
|
|
|
53
|
%
|
|
|
11,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid
LAE
|
|
|
10,462
|
|
|
|
-20
|
%
|
|
|
13,048
|
|
Less: Net paid LAE on assumed
business in run-off
|
|
|
—
|
|
|
|
-100
|
%
|
|
|
70
|
|
Net paid LAE excluding assumed
business in run-off
|
|
|
10,462
|
|
|
|
-19
|
%
|
|
|
12,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net paid losses and LAE excluding
assumed business in run-off
|
|
$
|
28,516
|
|
|
|
15
|
%
|
|
|
24,745
|
|
|
|
For the Quarter
Ended
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
March 31,
2009
|
|
|
Change
|
|
|
March 31,
2008
|
|
Total professional liability
claims closed without indemnity payment
|
|
|
149
|
|
|
|
27
|
%
|
|
|
117
|
|
Total professional liability
incidents closed without indemnity payment
|
|
|
147
|
|
|
|
60
|
%
|
|
|
92
|
|
Total professional liability
claims and incidents closed without indemnity
payment
|
|
|
296
|
|
|
|
42
|
%
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional liability
claims with indemnity payment
|
|
|
92
|
|
|
|
42
|
%
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CWIP ratio on a rolling four
quarter basis
(1)
|
|
|
37
|
%
|
|
|
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CWIP ratio, including incidents,
on a rolling four quarter basis
(1)
|
|
|
19
|
%
|
|
|
|
|
|
|
14
|
%
|
|
|
(1)
|
The
claims with indemnity payment (“CWIP”) ratio is defined as the ratio of
total professional liability claims with indemnity payment to the sum of
total professional liability claims with indemnity payment and total
professional liability claims closed without indemnity
payment.
|
|
|
For the Quarter
Ended
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
March 31,
2009
|
|
|
Change
|
|
|
March 31,
2008
|
|
Total professional liability
claims reported during the period
|
|
|
172
|
|
|
|
-2
|
%
|
|
|
175
|
|
Total professional liability
incidents reported during the period
|
|
|
263
|
|
|
|
18
|
%
|
|
|
222
|
|
Total professional liability
claims and incidents reported during the period
|
|
|
435
|
|
|
|
10
|
%
|
|
|
397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total professional liability
claims and incidents that remained open
|
|
|
3,411
|
|
|
|
-1
|
%
|
|
|
3,462
|
|
Net paid losses and LAE, excluding
assumed reinsurance contracts in run-off, increased 15 percent for the three
months ended March 31, 2009 compared with the same period in 2008. This
increase is due to a 53 percent increase in net paid indemnity partially offset
by a 19 percent decrease in paid LAE. The increase in indemnity paid is
primarily due to an increase in the number of claims with an indemnity
payment. The average payment severity of our claims remains within our
expectations. The number of reported claims and incidents for the three months
ended March 31, 2009 was 10 percent higher than the comparable period in
2008; however, the number of reported claims was 2 percent lower. When
adjusted for the relative composition of our book of business, the frequency of
reported claims remains near historic lows and generally reflects the continued
trend of lower frequency in newly reported claims and incidents in our Florida
market that began in the fourth quarter of 2003. For the four
quarters ended March 31, 2009, the CWIP ratio was 37 percent and the CWIP
ratio, including incidents, was 19 percent, compared to 30 percent and
14 percent, respectively, for the four quarters ended March 31,
2008. The CWIP ratios remain within our expectations. Our
inventory of open claims and incidents declined 1 percent during the last
12 months. It is not unusual for our claims data to fluctuate from period
to period, and our claims data remains within our
expectations.
Interest expense on
debt
decreased
16
percent for the three months ended
March 31, 2009
co
mpared to the same period
in 200
8
.
The decrease in
interest expense
is primarily
the result of the placement of interest
rate swaps on our variable rate long-term debt, which effectively lowered our
cost of debt compared with the prior period. These derivatives
convert the variable interest rates being charged on our long-term indebtedness
to fixed interest rates.
Income tax expense
decreased
20
percent for the three months ended
March 31, 2009 compared to the same period in 2008
primarily
due to lower taxable income
. O
ur effective tax rate was 33 percent and
32 percent for the three months ended March 31, 2009 and 2008,
respectively.
Liquidity and Capital
Resources
Liquidity is a measure of a company’s
ability to generate cash flows sufficient to meet short-term and long-term cash
requirements of its business operations. As a holding company, our
assets consist primarily of the stock of our subsidiaries and of other
investments. The sources of liquidity available to us for the payment
of operating expenses, taxes
,
debt-related amounts
and other needs
include management fees and dividends
from our insurance subsidiaries. Management fees from our
ins
urance subsidiaries are
based
on agreements in
place with First Professionals
Insurance Company
and Anesthesiologists P
rofessional Assurance
Company
, pursuant to which
we provide
for them
substantially all
management and administrative services. In accordance with
limitations imposed by Florida law, our insurance subsidiaries are permitted to
pay us dividends of approximately $
24.6
million during 200
9
without prior
regulatory approval. We have
received dividends of $
12.5
million from our insurance subsidiaries
during
the
three
months ended
March 31, 2009 in furtherance of our
capital management initiatives
.
For additional information concerning
our liquidity and financial resources, see
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
included in our Annual Report on Form 10-K for the year ended
December 31, 2008
.
Sources of liquidity include cash from
operations, sales of investments and financing arrangements. As
reported in the consolidated statement of cash flows,
net cash provided by
operating activities
was $2.8 million for the three
months ended March 31, 2009 compared to $10.9 million for the three months ended
March 31, 2008.
The decline in net cash
provided by operating activities is primarily due to
higher loss and LAE payments
.
Net cash provided by
investing activities
was $
3.1
million for the
three
months ended
March 31, 2009
compared to
net cash used in investing activities of
$
6.7
million for the
three
months ended
March 31, 2008
.
N
et cash provided by investing activities
increased during 2009
p
rimarily
as a result of
transactions involving securities,
which are dependent on our cash flows from operating activities and the
management of our investment portfolio.
Net sales
and maturities
of
investments
were
$3.1 million for 2009
compared
to
net purchases of $
6.7
million for 200
8
.
Net cash used in
financing activities
was
$12.4 million for the three months ended March 31, 2009 compared to $9.6 million
for the three months ended March 31, 2008. The increase in net cash
used in financing activities for 2009 is primarily due to lower proceeds from
common share issuances partially offset by lower share repurchases under our
stock repurchase program.
As of
March 31, 2009
, we had
cash and
investments
of
$
704.7
million. Included within cash
and investments were cash and cash equivalents of $
51.9
million and
fixed income
securities,
available-for-
sale, with a fair value of approximately
$
68.0
million with scheduled
maturities
during the next
12 months. We believe that our cash and investments as of
March 31, 2009
, combined with expected cash flows from
operating activities and the scheduled maturities of investments, will be
sufficient to meet our cash needs for operating purposes for at least the next
12 months.
Capital Resources
Capital resources consist of funds
deployed or available to be deployed to support our business
operations. We believe our financial strength
generally
provide
s
us with the flexibility and capacity to
obtain funds externally through debt or equity financing on both a short-term
and long-term basis. Our ability to access the capital
markets
,
however,
is dependent on,
among other things, market conditions. The following table summarizes
the components of our capital resources as of
March 31, 2009
and
December 31, 2008
.
(in
thousands)
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
Long-term
debt
|
|
$
|
46,083
|
|
|
|
46,083
|
|
Shareholders'
equity
|
|
$
|
258,656
|
|
|
|
259,894
|
|
Ratio of debt to total
capitalization
|
|
|
15.1
|
%
|
|
|
15.1
|
%
|
Long-Term Debt
During 2003, we completed the placement
of $10.0 million in senior notes and created three trusts that issued 30-year
trust-preferred securities for which the proceeds from such issuances together
with cash previously contributed to the trusts were used to purchase junior
subordinated debentures from FPIC totaling $36.1 million. The
debentures that we issued, which are reported as long-term debt in the
consolidated statements of financial position, to the three trusts are
subordinated to all senior indebtedness, including the senior notes, and are
equal in standing with one another. In accordance with the guidance
given in FASB Interpretation No. 46
(R)
, “
Consolidation
of
Variable Interest
Entities
, an Interpretation
of ARB No. 51,
” we have not
consolidated these subsidiary trusts.
These debt securities are
uncollateralized and bear floating interest equal to the three-month LIBOR plus
spreads ranging from 3.85 percent to 4.20 percent (actual interest rates ranged
from 5.03 percent to 5.46 percent as of March 31, 2009).
We have the option to redeem the senior
notes and trust-preferred securities on any quarterly interest payment date, in
whole or in part, without premium or penalty
.
However, if we elected to redeem our
long-term indebtedness, we would be required to unwind our interest rate swaps
and any related gains or losses remaining in other comprehensive income would be
fully recorded in interest expense during the period. The
trust-preferred securities also contain features that would allow us the option,
under certain conditions, to defer interest payments for up to 20
quarters. The securities have stated maturities of 30 years and are
due in May and October 2033.
Contractual Obligations and Off-Balance
Sheet Arrangements
We have various contractual obligations
that are recorded as liabilities in our consolidated financial
statements
and
other
items that represent
contractual obligations, commitments and contingent liabilities that are not
recorded or that are considered to possess off-balance sheet risks beyond their
respective amounts otherwise reflected in our consolidated financial
statements. These
include: (1) derivative financial
instruments, which are used to hedge interest rate risk; (2) guarantees
by
us and contractual
obligations related to the trust-preferred securities issued by separately
created, unconsolidated trusts; and (3) employee benefit plans. We
were not a party to any unconsolidated arrangement or financial instrument with
special purpose entities or other vehicles as of
March 31, 2009
that would give rise to previously
undisclosed ma
rket, credit
or financing risk. No
significant changes
have occurred to
our contractual obligations, commitments
and off-balance sheet arrangements as described in the applicable section of our
MD&A included in our Annual Report on Form 10-K for
the year ended December 31,
2008
.
Item
3
.
|
Quantitative and Qualitative
Disclosures about Market
Risk
|
Market risk is the risk of loss arising
from adverse changes in market and economic conditions and is directly
influenced by the volatility and liquidity in the markets in which the related
underlying assets are traded. We have exposure to t
hree
principal types of market risk:
interest rate ris
k,
credit risk
and equity price risk
. Our market risk sensitive
instruments are acquired for purposes other than trading.
There have been no material changes in
the reported market risks, as described in our Annual Report on Form 10-K for
the year ended December 31,
2008
.
Item
4
.
|
Controls and
Procedures
|
An evaluation of the effectiveness of
our
disclosure controls and procedures (as
defined by Rule 13a-15(e) of the Securities Exchange Act of 1934), was completed
as of
March 31,
2009
by
our
Chief Executive Officer and Chief
Financial Officer. Based on such evaluation, FPIC’s disclosure
controls and procedures were found to be effective
at a reasonable assurance
level
. There are
inherent limitations to the effectiveness of any system of disclosure controls
and procedures, including the possibility of human error and the circumvention
or overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives, and management necessarily is
required to use its judgment in evaluating the cost-benefit relationship of
poss
ible controls and
procedures.
There have been no changes in our
internal control over financial reporting that occurred during the
first
quarter of 200
9
and that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
Part II
OTHER
INFORMATION
Item
1
.
|
Legal
Proceedings
|
We, in common with the insurance
industry in general, are subject to litigation involving claims under our
insurance policies in the normal course of business.
We may also become involved in legal
actions not involving claims under our insurance policies from time to
time. We have evaluated such exposures as of
March 31, 2009
, and in all cases, believe our
position
s
and defenses are
meritorious. However, there can be no assurance as to the outcome of
such exposures. Liabilities for loss contingencies arising from
claims, assessments, litigation, fines and penalties and other sources are
recorded when it is determined to be probable that a liability has been incurred
and the amount of the assessment and/or remediation can be reasonably
estimated.
In addition, our insurance subsidiaries
may become subject to claims for extra-contractual obligations or risks in
excess of policy limits in connection with their insurance claims, particularly
in Florida. These claims are sometimes referred to as “bad faith”
actions as it is alleged that the insurance company acted in bad faith in the
administration of a claim against an insured. Bad faith actions are
infrequent and generally occur in instances where a jury verdict exceeds the
insured’s policy limits. Under such circumstances, it is routinely
alleged that the insurance company failed to negotiate a settlement of a claim
in good faith within the insured’s policy limit.
In
recent years, policy limits for MPL insurance in Florida have trended
downward. This trend and the current judicial climate have increased
the incidence and size of jury awards in excess of policy limits against Florida
medical professionals insured by our competitors and us. Such awards
could ultimately result in increased frequency of claims alleging bad faith on
the part of Florida MPL insurers.
We have evaluated such exposures as of
March 31, 2009
, and believe our position and defenses
are meritorious. However, there can be no
a
ssurance as to the outcome of such
exposures. An award for a bad faith claim against one of our
insurance subsidiaries in excess of the applicable reinsurance could have an
adverse effect on our consolidated financial condition, results of operations or
cash flows.
For additional information concerning
our commitments and contingencies, see
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
as
well as
Note
10
, Commitments and
Contingencies
to
this Form 10-Q
.
There have been no material changes to
our risk factors as disclosed in our Annual Report on Form 10-K
f
or the year ended
December 31, 2008
.
Item
2.
|
Unregistered Sales of Equity
Securities and Use of
Proceeds
|
There were no unregistered sales of
equity securities during the first quarter of 2009.
Stock Repurchase
Plan
−
Under our stock repurchase program, we
may repurchase shares at such times, and in such amounts, as management deems
appropriate. Under certain circumstances, limitations may be placed
on our ability to repurchase our stock by the terms of agreements relating to
our junior subordinated debentures. For information regarding these
limitations, see our Annual Report on Form 10-K for the year ended December 31,
2008, Item 8. Financial Statements and Supplementary Data, Note 12,
Long-Term Debt, as well as the discussion under the heading “Liquidity and
Capital Resources” in Item 7. Management’s Discussion and Analysis of
Financial Condit
ion and
Results of Operations.
The following table summarizes our
common stock repurchases
on
a trade date basis
for the
three months ended March 31,
2009:
Period
|
|
Total Number
of Shares
Purchased
|
|
|
Average
Price Paid
per Share
|
|
|
Total Number of Shares Purchased
as Part of Publicly Announced Plans or Programs *
|
|
|
Maximum Number of Shares that May
Yet Be Purchased Under the Plans or Programs at End of Month
*
|
|
January 1-31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase programs
*
|
|
|
79,332
|
|
|
$
|
39.55
|
|
|
|
79,332
|
|
|
|
373,470
|
|
Employee transactions
**
|
|
|
7,056
|
|
|
$
|
42.65
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1-28,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase programs
*
|
|
|
112,618
|
|
|
$
|
38.66
|
|
|
|
112,618
|
|
|
|
260,852
|
|
Employee transactions
**
|
|
|
—
|
|
|
$
|
—
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1-31,
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase programs
*
|
|
|
123,238
|
|
|
$
|
34.61
|
|
|
|
123,238
|
|
|
|
637,614
|
|
Employee transactions
**
|
|
|
—
|
|
|
$
|
—
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
322,244
|
|
|
$
|
37.42
|
|
|
|
315,188
|
|
|
|
637,614
|
|
|
|
*
|
Our
Board of Directors approved our share repurchase program in July 2006 and
approved increases of 500,000 shares each in December 2006, in July and
August 2007, in April, June and November 2008, and in March
2009. We publicly announced the program on August 8, 2006 and
announced the increases in our reports filed with the SEC as
follows: current report on Form 8-K filed on December 22, 2006,
quarterly reports on Form 10-Q filed on November 2, 2007, April 30, 2008,
July 20, 2008, and this report on Form 10-Q, and our annual report on Form
10-K filed on March 4, 2009. This program authorizes us to
repurchase shares through open-market transactions, or in block
transactions, or private transactions, pursuant to Rule 10b5-1 trading
plans, or otherwise. This program expires on December 31,
2009.
|
**
|
Represents
shares of our common stock delivered to us in satisfaction of the tax
withholding obligation of holders of restricted shares that vested during
the quarter.
|
Item
3
.
|
Defaults Upon Senior
Securities
|
Not applicable
Item
4
.
|
Submission of
Matters to a Vote of Security
Holders
|
Not applicable
Item
5
.
|
Other
Information
|
All
matters
requiring a Form 8-K filing have been so
filed as of the date of this filing. There have
been no material changes to the
procedures by which security holders recommend nominees to the board of
directors.
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
Pursuant to the requirements of Sections
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
FPIC Insurance Group,
Inc.
|
|
|
|
|
|
|
|
/s/
Charles Divita, III
|
|
|
|
Charles
Divita
,
III
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
Exhibit
Index to Form 10-Q
For
the Quarter Ended March 31, 2009
|
|
*
|
Management
contract or compensatory plan or
arrangement.
|
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