FCCI: Healthier, Bigger, Wiser

FCCI: Healthier, Bigger, Wiser

By Matt Walsh

Editor

When the Review last wrote in May 2000 about Sarasota-based FCCI Insurance Group, the company was in an enviable state. Even though its premium revenues had been declining annually for five consecutive years to $246 million, the company still generated annual profits that grew from $13 million in 1995 to $25.8 million in 1999, almost a 100% increase. At the same time, FCCI's surplus, one of the yardsticks that measures an insurance company's strength, more than doubled in the same five years, to $330.8 million.

On top of that, as Florida's largest workers' comp insurer, FCCI had $43.4 million in cash in the bank and about $800 million in invested assets. It would be difficult to argue that the company's financial condition could be much better than it was as it headed into the new millennium.

Well aware of FCCI's financial condition, the company's board of directors decided that, going forward, Florida's workers' comp insurance leader needed to diversify - geographically and outside of workers' comp - if it were to continue growing. And so diversification became one of Chief Executive Officer G.W. Jacobs' top priorities starting in 2000: Make FCCI more than a workers' comp company. Make it a complete business insurer.

Jacobs had no idea, however, how that decision would soon consume and frustrate him. Nor did he have an inkling that the mission to diversify would cost the company nearly $90 million over the next three years. Speaking to the Review recently from his third-floor office in east Sarasota County, Jacobs joked that 2002 and 2003 were so trying "I was about ready to tender my resignation."

He didn't, of course. As it turned out, the company more than survived its foray outside of Florida and into other lines of insurance. Today, FCCI is bigger, healthier, more profitable and wiser - and that's in spite of the company's diversification troubles from 2000 to 2003 and in spite of the hurricanes that struck its policyholders in 2004 and 2005.

Bigger: FCCI now operates in 13 states and generated more than $550 million in premiums in 2005.

Healthier: The company's invested assets total $980 million, and its surplus is $380 million on a GAAP accounting basis, both the highest in its history.

More profitable: Jacobs says FCCI will report net income "north of $30 million" for 2005, a record amount even after paying out $48 million in hurricane claims while taking in only $22.5 million in premiums from those policyholders.

Wiser: Let's just put it this way - Jacobs, FCCI's board and the senior management team learned a lot of lessons about how to and how not to make acquisitions.

When the FCCI board decided in 2000 it was time for the then 41-year-old mutual insurance company to diversify, the board set a five-year objective of lowering its workers' comp premiums from nearly 100% to 45% of the company's revenues and branching into more traditional commercial property and casualty insurance. It also decided the company needed to spread its risk beyond Florida.

To accomplish both objectives in the shortest time, the directors knew FCCI would have to make an acquisition. They set $250 million as the limit they'd be willing to spend.

The search began. Internally, the company generated a list of 26 possible targets. At the same time, FCCI engaged an investment banking firm to help produce a list of possible targets. As Jacobs tells it, independent of each other, the two groups recommended the same target: Monroe Guaranty Insurance Co. in Carmel, Ind.

Monroe wasn't exactly a plumb. FCCI's board knew Monroe, primarily a commercial property and casualty insurer, was struggling and losing market share. In spite of this, after months of its own actuaries' conducting due diligence and two outside firms, including Price Waterhouse, conducting their own due diligence, FCCI's board felt comfortable with Jacobs' and FCCI's outside advisers' recommendation to acquire Monroe.

On Dec. 1, 2000, FCCI made its biggest, boldest move ever: It paid $58 million for Monroe. Jacobs says the acquisition price covered $44 million of Monroe's equity and $14 million for its intangible goodwill.

Over the next two years though, as FCCI undertook the digestion process, FCCI's executives discovered that Monroe was less than what they had thought. The clincher came when the Ohio Supreme Court ruled against Ohio auto insurers in a court case that affected Monroe's Ohio policyholders. Jacobs says FCCI had no idea the suit was pending or that Monroe had potential liability. The suit cost Monroe and FCCI an unexpected $18 million.

On top of that, Jacobs says, when he takes into account Monroe's operating and underwriting losses and other surprises, they and the Ohio court case cost FCCI about $30 million. "It turns out we didn't get $44 million in equity," Jacobs says. "We got a $14 million asset and a $44 million intangible asset."

FCCI has since sued Price Waterhouse for its due diligence - or lack thereof.

For Jacobs, from 2001 through 2003, all the numbers were heading in the wrong direction:

• Premium revenues dropped from $472 million to $400 million. While dealing with Monroe, the company also was pulling back in Florida's money-losing workers' comp market.

• Loss expenses increased from $54 million to $76 million and from 11% of premiums to 20% of premiums.

• Underwriting expenses as a percentage of revenues also rose from 30% to 34%.

• Net underwriting income - the difference between premiums and what is paid out to cover losses, showed consistently large losses - $78 million, $61 million, $39 million and $38 million.

• The surplus dropped from $287 million in 2000 to $253.9 million at the end of 2002.

Jacobs says he felt the pressure, albeit self-inflicted. Now-retired FCCI board member Charles Stottlemyer says board members never exhibited regrets or displeasure with Jacobs, or with their decision to diversify.

"If you polled the board today," Stottlemyer says, "everybody would still agree that (acquiring Monroe and diversifying) was the right decision. If we were going to be something more, we had to jump in and get our feet wet."

As it turns out, Jacobs and his management team turned around Monroe's operations. It has been profitable for each of the past three years - 2003, 2004 and 2005. "We haven't made back our money yet," Jacobs says. "But we will."

What's more, the Monroe acquisition did, in fact, expedite FCCI's diversification. Workers' comp premiums are down to 58% of the total, not quite the 45% that was the target. "Over the long haul," Jacobs says, "it will be about 45% of our business." Geographically, Florida now accounts for 62% of the company's business.

The Monroe purchase also was an important learning experience. For one, Jacobs says, he'll never buy another company at the end of a "soft" market - that's when insurers are expanding by under-pricing to gain market share and hoping to cover their losses with investment income. That's what happened with Monroe. In 2001 through 2003, FCCI saw its loss and underwriting expenses hike up to cover Monroe's mistakes of the past.

In addition, FCCI is avoiding expansion through acquisition - at least for now. FCCI's strategy is to open de novo offices in Midwestern and Southeastern states. The company's regional managers recruit experienced insurance professionals in new states and then begin marketing the company to independent agents, as Jacobs says, by calling on prospects one account at a time.

The strategy appears to be working. FCCI has expanded to 13 states. Overall premium growth has expanded 9% and 26% in the past two years. Jacobs says the goal is to be in 20 states by 2010 and to shift FCCI's reputation from that of being Florida's workers' compensation insurer to that of "the business owner's answer to insurance" - a one-stop shop for business insurance. When FCCI was founded, its initials stood for Florida Construction and Commercial Insurance. Today, Jacobs says, the company wants the initials to stand for "First Choice in Commercial Insurance."

Jacobs acknowledges the company still has a ways to go. One of the biggest and most immediate challenges going forward is developing the same technical expertise on the commercial side as it has in workers' comp. Last summer Jacobs hired a new chief information officer to develop a much more efficient and customer friendly Web-client system.

For instance, while FCCI's workers' comp customers are able to navigate and find customer information online easily, the company's property and casualty customers don't enjoy the same experience. One Sarasota insurance agent, who is an FCCI client and friend of FCCI officials and who declined to have his name used, holds FCCI in high regard for everything but ease of online service. "Nine times out of 10 our people will go to other carriers for that reason," he says.

Says Jacobs: "We have to achieve breakthroughs in our infrastructure. Our ultimate goal is to be the best."

JACOBS TO REMAIN

CEO UNTIL 2010

When FCCI lawyer G.W. Jacobs became CEO of the Sarasota insurance company in 1998, he thought he would serve five, maybe seven years. Last April, the board asked Jacobs, and he agreed, to serve as CEO until 2010.

At the time he was asked to stay, then board member Charles Stottlemyer joked to Jacobs: "You still need to prove yourself." Stottlemyer, in fact, initiated Jacobs staying on. "You could see what he has been able to accomplish," he says. "And if he left in 2008, there was still too much to be done. This assures the leadership, and you don't have people wondering what's going to happen."

To be sure, Stottlemyer is one of Jacobs' biggest fans. He wasn't always. "I'm embarrassed to say when the decision was made to bring him in, I had serious doubts about whether we were making the right decision," he says. "I couldn't have been more wrong. The guy knows how to motivate people. He's a great judge of people. He does everything with humility and the highest integrity and honesty."

Before he retires in 2010, Jacobs says he has three goals to reach:

• A combined ratio of $100 or less. FCCI's combined ratio is $102.6. (The combined ratio is the addition of the ratio of losses incurred to earned premiums and the ratio of underwriting expenses to written premiums. A $102.6 ratio, for instance, says FCCI's policies are costing more than they are generating in income.)

• $1 billion in invested assets. The company has $980 million now. Jacobs expects to cross the $1 billion mark this year.

• An A rating from A.M. Best and the other rating agencies. FCCI has an A- rating.

SNAPSHOT

2004 PREMIUMS

By State (Direct premiums)

Florida $309,306 62.6%*

Georgia $53,111 10.7%

Indiana $35,980 7.3%

Illinois $26,913 5.4%

Mississippi $19,756 4.0%

All others $48,414 9.8%

By Segment (Net premiums)

Workers' comp $264,064 58.0%*

Commercial prop. $72,020 15.8%

Commercial auto $61,316 13,4%

All other $57,508 12.6%

* % of total

Return on Equity

2000 -19.2%

2001 –17.5%

2002 –0.6%

2003 3.2%

2004 4.4%

• Average wages at FCCI are $32,000 a year for hourly employees and $63,000 a year for salaried employees, not including officers.

• FCCI operates in Florida, Georgia, Louisiana, Mississippi, South Carolina, North Carolina, Kentucky, Michigan, Indiana, Alabama, Tennessee, Ohio and Illinois.

• In 1979, FCCI generated $380,000/employee in premiums with 656 employees. Today, with 685 employees, it generates $802,919 per employee.

FCCI BY THE NUMBERS

The following figures are statutory results, not GAAP results. Dollars in thousands.

Balance Sheet

ASSETS 2000 2001 2002 2003 2004

Bonds $665,246 $609,015 $528,990 $771,043 $865,100

Preferred Stocks 2,074 2,190 2,350 2,462 0

Common Stocks 99,652 118,676 23,866 25,592 15,359

Real Estate 3,871 3,862 3,853 3,844 47,528

Cash, Short-term Investments 94,783 142,374 290,499 44,376 9,164

Other Invested Assets 242 195 147 94 40

Total Invested Assets 868,330 876,312 849,704 847,414 937,192

Investment Income Due & Accrued 10,397 8,927 6,407 7,464 7,946

Premiums & Considerations 141,593 227,497 202,384 184,930 180,172

All Other Assets 91,643 115,428 77,461 97,659 38,730

Total Assets 1,111,963 1,228,164 1,135,956 1,137,467 1,164,040

LIABILITIES & SURPLUS

Loss & Loss Adjustment Exp Reserves 577,622 614,903 584,211 546,903 546,395

Unearned Premiums 98,185 136,073 143,138 156,566 175,556

Conditional Reserve Funds 3,591 4,288 3,015 2,275 2,438

All Other Liabilities 145,645 209,859 151,701 117,920 111,754

Total Liabilities 825,043 965,123 882,065 823,664 836,143

Total Policyholders' Surplus 286,921 263,041 253,891 313,804 327,898

Total Liabilities & Surplus 1,111,963 1,228,164 1,135,956 1,137,467 1,164,040

Income Statement 2000 2001 2002 2003 2004

Premiums Earned $411,002 $472,240 $456,726 $399,827 $435,917

Losses Incurred 256,744 298,385 241,649 187,211 226,961

Loss Expenses Incurred 67,341 54,330 63,515 76,905 62,365

Underwriting Expenses Incurred 132,242 143,675 147,453 137,454 145,550

Dividends to Policyholders 33,549 37,505 43,370 36,977 18,286

Net Underwriting Income -78,874 -61,655 -39,261 -38,720 -17,244

Net Investment Income 47,916 44,589 39,275 36,469 35,418

Other Income/Expense 3,060 -1,414 -12,368 -287 -9,141

Pre-tax Operating Income -27,898 -18,480 -12,354 -2,538 9,033

Realized Capital Gains 14,556 13,999 17,518 7,806 5,330

Income Taxes Incurred -766 8 -13,988 -1,667 3,726

Net Income -12,576 -4,489 19,153 6,934 10,637