EX-99.3 5 exhibit99-3.htm FPIC INSURANCE GROUP, INC. UNAUDITED PRO FORMA SEPT 30, 2009 FINANCIAL STMTS exhibit99-3.htm
EXHIBIT 99.3
 

 
FPIC INSURANCE GROUP, INC. AND ADVOCATE, MD FINANCIAL GROUP INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 

 
The unaudited pro forma condensed combined statement of financial position combines the historical consolidated statements of financial position of FPIC Insurance Group, Inc “(“FPIC”) as of September 30, 2009 and gives effect to the acquisition (the “Acquisition”) of all of the outstanding capital stock of Advocate, MD Financial Group Inc. (“Advocate, MD”) described in Item 2.01 of the Current Report on Form 8-K/A, as if it had been completed on September 30, 2009. The unaudited pro forma condensed combined statements of income combine the historical consolidated statements of income of FPIC and Advocate, MD, giving effect to the acquisition as if it had been completed on January 1, 2008. The historical consolidated financial information has been adjusted in the unaudited pro forma condensed combined financial statements to give effect to pro forma events that are:
 
 
1.
Directly attributable to the acquisition,
 
 
2.
Factually supportable, and
 
 
3.
With respect to the statements of income, expected to have a continuing impact on results. You should read this information in conjunction with the:
 
●
accompanying notes to the unaudited pro forma condensed combined financial information;
   
●
separate unaudited historical consolidated financial statements of FPIC as of and for the three and nine months ended September 30, 2009 and the related notes included in FPIC’s quarterly report on Form 10-Q for the three and nine months ended September 30, 2009;
   
●
separate audited historical financial statements of FPIC as of and for the year ended December 31, 2008 and the related notes included in FPIC’s annual report on Form 10-K for the year ended December 31, 2008;
   
●
separate unaudited historical financial statements of Advocate, MD as of and for the nine months ended September 30, 2009 and the related notes included herein; and
   
●
separate audited historical financial statements of Advocate, MD as of and for the year ended December 31, 2008 and the related notes included herein.

 
Form 8-K: 41
 
 
 
 
 
 
The unaudited pro forma condensed combined financial information is provided for informational purposes only. The pro forma information is not necessarily indicative of what FPIC’s financial position or results of operations actually would have been had the acquisition been completed at the dates indicated. In addition, the unaudited pro forma condensed combined financial information does not purport to project the future financial position or operating results of the combined company. There were no material transactions between FPIC and Advocate, MD during the periods presented in the unaudited pro forma condensed combined financial statements.
 
These pro forma financial statements and adjustments are based on preliminary estimates and assumptions made by management and have been made solely for purposes of developing these pro forma financial statements for illustrative purposes to aid in the analysis of the impact of the acquisition to FPIC. The unaudited pro forma condensed combined statements of operations do not include the impacts of any revenue, cost or other operating synergies that may result from the acquisition or the costs to integrate the operations of FPIC and Advocate, MD or any non-recurring charges that may result from the acquisition. The unaudited pro forma condensed combined financial statements also do not reflect the impact of financing, liquidity or other balance sheet repositioning that may be undertaken in connection with or subsequent to the acquisition.
 

 

 

Form 8-K: 42
 
 
 
 
 
 
FPIC INSURANCE GROUP, INC.
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
 
(in thousands)
  
As of September 30, 2009
   
FPIC
    
Advocate, MD
    
Advocate, MD
Pro forma
Adjustments
    
Pro forma
Assets
                      
Investments:
                      
Fixed income securities, available-for-sale
   $ 617,071       71,260       —       688,331
Equity securities, available-for-sale
     11,647       1,497       —       13,144
Other invested assets
     8,879       —       —       8,879
Total investments
     637,597       72,757       —       710,354
                               
Cash and cash equivalents
     80,933       5,957       (44,600)
 (A),(B)
     42,290
Premiums receivable
     56,114       4,219       —       60,333
Accrued investment income
     6,760       542       —       7,302
Reinsurance recoverable on paid losses
     6,403       —       —       6,403
Due from reinsurers on unpaid losses and advance premiums
     131,571       5,110       —       136,681
Ceded unearned premiums
     10,717       1,626       —       12,343
Deferred policy acquisition costs
     9,447       4,430       (2,787)
 (A)
     11,090
Deferred income taxes
     27,346       —       (872)
 (A)
     26,474
Goodwill
     10,833       —       11,818 
 (A)
     22,651
Intangible Assets
     —       —       7,279 
 (A)
     7,279
Other assets
     7,108       1,923       —       9,031
Total assets
   $ 984,829       96,564       (29,162)       1,052,231
                               
Liabilities and Shareholders' Equity
                              
Policy liabilities and accruals:
                              
Losses and loss adjustment expenses
   $ 533,407       39,458       —       572,865
Unearned premiums
     98,652       14,983       —       113,635
Reinsurance payable
     2,196       1,801       —       3,997
Paid in advance and unprocessed premiums
     4,545       946       —       5,491
Total policy liabilities and accruals
     638,800       57,188       —       695,988
                               
Long-term debt
     46,083       9,000       (9,000)
 (B)
     46,083
Other liabilities
     23,845       3,206       7,008 
 (A)
     34,059
Total liabilities
     708,728       69,394       (1,992)       776,130
                               
Commitments and contingencies
                              
                               
Shareholders' equity
                              
Preferred stock
     —       37       (37)
 (C)
     —
Common stock
     682       22       (22)
 (C)
     682
Additional paid-in capital
     —       8,206       (8,206)
 (C)
     —
Retained earnings
     265,598       17,845       (17,845)
 (C)
     265,598
Accumulated other comprehensive income, net
     9,821       1,060       (1,060)
 (C)
     9,821
Total shareholders' equity
     276,101       27,170       (27,170)       276,101
Total liabilities and shareholders' equity
   $ 984,829       96,564       (29,162)       1,052,231
 
See the accompanying notes to the unaudited pro forma condensed combined financial information.
 
Form 8-K: 43
 
 

FPIC Insurance Group, Inc.
 
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
 
(in thousands, except earnings per common share)
  
For the Nine Months Ended September 30, 2009
   
FPIC
    
Advocate, MD
    
Advocate, MD
Pro forma Adjustments
    
Pro forma
Revenues
                      
Net premiums earned
   $ 115,548       18,069       —       133,617
Net investment income
     21,043       2,941       (84)
 (F)
     23,900
Net realized investment gains
     1,339       —       —       1,339
Other income
     373       6       —       379
Total revenues
     138,303       21,016       (84)       159,235
                               
Expenses
                              
Net losses and loss adjustment expenses
     68,315       12,808       —       81,123
Other underwriting expenses
     29,441       6,231       378 
 (D)
     36,050
Interest expense on debt
     2,709       163       (163)
 (E)
     2,709
Other expenses
     —       —       310 
 (D)
     310
Total expenses
     100,465       19,202       525        120,192
                               
Income (loss) from continuing operations before income taxes
     37,838       1,814       (609)       39,043
Less:  Income tax expense (benefit)
     11,792       907       (213)
 (G)
     12,486
Income (loss) from continuing operations
   $ 26,046       907       (396)       26,557
                               
Basic earnings per common share:
                              
Income from continuing operations
   $ 3.54                       3.62
Basic weighted-average common shares outstanding
     7,346                       7,346
                               
Diluted earnings per common share:
                              
Income from continuing operations
   $ 3.48                       3.54
Diluted weighted-average common shares outstanding
     7,494                       7,494

See the accompanying notes to the unaudited pro forma condensed combined financial information.
 
Form 8-K: 44
 
 
 
 

FPIC Insurance Group, Inc.
 
Unaudited Pro Forma Condensed Combined Statement of Income
 
(in thousands, except earnings per common share)
  
For the Year Ended December 31, 2008
   
FPIC
    
Advocate, MD
    
Advocate, MD
Pro forma Adjustments
    
Pro forma
Revenues
                      
Net premiums earned
   $ 172,830        22,508       —       195,338 
Net investment income
     30,295        2,888       (905)
 (F)
     32,278 
Net realized investment losses
     (13,552)       —       —       (13,552)
Other income
     432        2,967       —       3,399 
Total revenues
     190,005        28,363       (905)       217,463 
                               
Expenses
                              
Net losses and loss adjustment expenses
     99,721        5,926       —       105,647 
Other underwriting expenses
     37,992        6,229       504 
 (D)
     44,725 
Interest expense on debt
     3,827        419       (419)
 (E)
     3,827 
Other expenses
     412        23       413 
 (D)
     848 
Total expenses
     141,952        12,597       498        155,047 
                               
Income (loss) before income taxes
     48,053        15,766       (1,403)       62,416 
Less:  Income tax expense (benefit)
     15,953        5,111       (491)
 (G)
     20,573 
Net income (loss)
   $ 32,100        10,655       (912)       41,843 
                               
Basic earnings per common share:
                              
Net income
   $ 3.83                        5.00 
Basic weighted-average common shares outstanding
     8,374                        8,374 
                               
Diluted earnings per common share:
                              
Net income
   $ 3.72                        4.84 
Diluted weighted-average common shares outstanding
     8,637                        8,637 
 
See the accompanying notes to the unaudited pro forma condensed combined financial information.
 
 
Form 8-K: 45
 
 
 
 
FPIC Insurance Group, Inc.
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
 
 
 
A.
Purchase price allocation
 
The purchase price of Advocate, MD for purposes of preparing these unaudited pro forma condensed combined financial statements is $42.6 million, as described below. Our subsidiary, First Professionals Insurance Company, Inc. acquired all of the outstanding capital stock of Advocate, MD.  The allocation of the purchase price is based upon preliminary estimates of the assets and liabilities acquired and estimated contingent consideration expected to be paid in accordance with accounting guidance on business combinations issued by the Financial Accounting Standards Board. The acquisition date fair value includes the estimated fair value of acquisition-related contingent consideration totaling $7.0 million.
 
In accordance with SFAS No. 141(R), a liability was recognized for the estimated fair value of acquisition-related contingent consideration totaling $7.0 million using a probability-weighted discounted cash flow model assuming the achievement of certain targets. Any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes from events after the acquisition date, such as changes in our estimate of the targets, will be recognized in earnings in the period the estimated fair value change. The fair value estimate is based on the probability weighted targets to be achieved over the earn-out period. A change in fair value of the acquisition-related contingent consideration could have a material effect on the statement of operations and financial position in the period of the change in estimate.
 
The total acquisition date fair value of consideration transferred is estimated as follows:
 
(in thousands)
    
     
Cash consideration paid at closing
   $ 33,600
Cash paid for non-compete agreement
     2,000
Total cash paid
     35,600
Estimated contingent consideration
     7,008
Acquisition date fair value of consideration
  $ 42,608

 
 The allocation of the consideration transferred is estimated as follows:
 
(in thousands)
    
     
Net assets acquired
   $ 24,383 
Goodwill
     11,818 
Acquired intangible assets
     7,279 
Deferred income tax liability
     (872)
    $ 42,608 

 
Form 8-K: 46
 
 
 
 
FPIC Insurance Group, Inc.
Notes to the Unaudited Pro Forma Condensed Combined Financial Information
 
 
 
B.
Repayment of Advocate senior notes
 
In connection with the transaction, FPIC also retired all of Advocate, MD’s outstanding bank debt, totaling $9 million.  This adjustment reflects the pay off of the senior note to Frost Bank.
 
C.
Elimination of Advocate stockholders’ equity
 
This adjustment reflects the elimination of the historical stockholders’ equity of Advocate, MD.
 
D.
Effect of the acquisition on amortization expense
 
This adjustment reflects the effects of the acquisition on amortization of intangible assets, which consist of state licenses, trade names, non-compete agreements and customer relationships.
 
(in thousands)
              
Amortization Expense
   
Intangible Asset
    
Projected
Useful Life
(years)
    
Nine Months Ended September 30, 2009
    
Year Ended December 31, 2008
State licenses
   $ 250    
Indefinite
     $ —       —
Trade name - Advocate, MD
     530    
Indefinite
       —       —
Non-competes
     2,371       4.7       378       504
Customer relationships
     4,128       10       310       413
    $ 7,279             $ 688       917

 
E.
Effect of acquisition on interest expense
 
This adjustment reflects the elimination of interest expense for the nine months ended September 30, 2009 and the year ended December 31, 2008.
 
F.
Effect of acquisition on investment income
 
This adjustment reflects the effects of the acquisition on FPIC’s investment income resulting from the decline in cash and invested assets associated with consideration paid for the acquisition.  The adjustments were calculated using FPIC’s actual return on cash for the respective periods presented.
 
G.
Effect of acquisition on income tax expense
 
This adjustment reflects the effects of the acquisition on the provision for income taxes as if taxes were calculated on a separate return basis using an assumed effective tax rate in each respective year.
 

Form 8-K: 47