Dear Diary

Dear Diary

The 2008 journal entry for one of

the largest insurance firms on the Gulf Coast is all about survival. Revival could be on the horizon by 2010.

insurance by Mark Gordon | Managing Editor

In early January, when G.W. Jacobs assembled a handful of top executives within the insurance company he runs for the firm's first big meeting of 2008, he decided to go "old man" on the crew.

He told the group, the brain trust behind Lakewood Ranch-based FCCI, one the largest Gulf Coast-based insurance firms, that 2008 could very well be a watershed year. The type of year where they will learn business lessons they could lean on for the rest of their careers. It was the same advice Jacobs heard three decades earlier, when he was a young attorney and rising insurance executive.

For Jacobs, president and chief executive of FCCI, that year was 1973 - the beginning of the Arab oil embargo and ensuing energy crisis. "If I were you," Jacobs remembers telling his senior staff, "I would keep a diary or a journal for 2008 because I have a feeling that this will be one of those years."

A peek into a journal like that would certainly be enlightening, especially considering the financial markets of the past month. Several pages, for example, could surely be devoted to the unforeseen perils of investing company assets in seemingly top of the top investments. In FCCI's case, that would be the $12 million in Fannie Mae it lost when the mortgage company was taken over by the federal government and the $7 million it lost when investment firm Lehman Bros. filed for bankruptcy last month. FCCI has $1.2 billion in investable assets.

Another part of the diary could contain entries regarding what Jacobs calls the twin demons: A continued decrease in state-mandated worker's compensation rates combined with a drop in the amount of insurance clients are buying. On the former, the worker's comp rate in Florida is down 18% in 2008, after being down 16% in 2007. And on the latter issue, clients are limiting their exposure on the insurance side, as the economy continues to slide.

The demons show themselves on the company's balance sheet, in places such as its decreases in premium revenues and net income. On premium revenues, the company has dropped about 10% since 2006, from $582 million that year to a projected $535 million in 2008. Net income was off 15.3% from 2006 to 2007.

Still, the FCCI diary of 2008 would be one of hope and optimism, an attitude that starts with Jacobs, the venerable CEO, and works its way down to the company's 650-plus employees. An overall theme would be to survive now, prosper later.

For instance, the company, which turns 50 years old next year, hasn't had to layoff even one employee due to the economic downturn, a fact few other companies, insurance or otherwise, can boast about these days. Also, FCCI's surplus, a key measure of financial stability for an insurance company, hasn't shrunk in 2008 - yet. With two more potentially tenuous months left in the year, the company's surplus holds at about $463 million, even factoring in the investment losses it has already suffered.

Finally, says Jacobs, "the good news is that we have continued to gain market share by the number of accounts we are putting on the books."

A formidable competitor

One big reason for the company's survival through the rough times is its 1999 decision to go from being mostly a worker's comp provider - it was, and remains, one of the biggest in Florida in that category - to being a full-blown business insurance company. That call paid off in many ways, but no more so than this nugget: FCCI's premium revenue per employee has increased 116% since 2000, from about $380,000 to $820,000.

The move was one of several that made the company a more formidable competitor, says Jacobs. Its regional diversification efforts have played a big role the past few years, too.

The company's southeast unit, for example, which includes a handful of states in the region except Florida, has grown premium revenues about 20% a year since 2006. That contrasts with other regional data: FCCI's Midwest region, which includes states such as Illinois, Ohio and Michigan, is off about 18% the last three years, while Florida is down 15% over that time.

Overall, 30% of FCCI's clients in the 14 states in which it writes polices are construction companies, so the decreases aren't much of a surprise. "Businesses are struggling right now," says Jacobs. "This is a difficult time for a lot of them."

This is the second major challenge FCCI has faced this decade. In the early 2000s the company lost $90 million as it executed its diversification business plan. A third of that loss was directly attributed to its purchase of Carmel, Ind.-based Monroe Guaranty Insurance Co., the first significant move it made in moving out of Florida and into the traditional commercial property and casualty insurance market.

Monroe, though, turned out to be in some financial trouble, which FCCI inherited and had to work through. "It turns out we didn't get $44 million in equity," Jacobs said regarding the $58 million purchase of Monroe in a 2006 Review story. "We got a $14 million asset and a $44 million intangible asset."

Up until the Monroe purchase, FCCI had grown mostly by sticking to its original mission outlined in 1959: As a way for members of the Sarasota General Contractors Association to save money on worker's comp insurance. Originally known as the Florida Contractors and Construction Industries Self Insurance Fund, the entity was initially a nonprofit.

Buying Monroe, however, did serve the purpose of growing FCCI's reach. And with almost a decade worth of hindsight, the company can also look at the purchase in a lessons-learned way. Three big ones come to mind for Jacobs, he said in a book on FCCI's history published last year.

The first lesson was to never buy at the end of a soft market, which happened with Monroe and cost FCCI "14 years of under-pricing with no opportunities to rebuild the balance sheet," Jacobs said in A Legacy of Trust: The Story of FCCI. Another lesson was to never again buy a company at the end of a year, which shortens the accounting and financial checks and balances process. And finally, Jacobs said he would be hesitant to buy another employee stock ownership plan, like FCCI did with Monroe.

Unexpected happenings

Jacobs predicts the economic challenges, for both FCCI and its clients, will continue into 2009 and possibly into 2010. Jacobs projects FCCI will report about a 4% return on equity next year.

He's hoping 2010 will be a little better, partially because he thinks Florida's economic hard times will have started to dissipate by then. "We don't know when it will start coming back," Jacobs says, "but at least we know it will have hit bottom."

Jacobs, however, isn't sure he will be around, at least on a daily basis, to see what happens past 2010. When he joined the company in 1998, he thought he would stay to about 2005. But around then the board asked him to stay to 2010, which he agreed to do, partially to see FCCI through its latest transition.

Now, some company executives are joking about Jacobs staying another five years. Jacobs isn't committing to staying on with the company past 2010, although he doesn't rule it out either. While there's no clear-cut heir-apparent to the top job, Jacobs does say several young executives have become great candidates.

Either way, FCCI executives will always have 2008 to lean on, as yet another lessons-learned experience.

"This has been a year when a lot of things have happened that we didn't expect to happen," Jacobs says. "And it's the ones that you don't anticipate that could kill you."

AT A GLANCE

FCCI Insurance Group

Balance Sheet ($ in thousands)

Assets 2006 2007 % growth

Bonds and other investments $1,056,455 $1,150,119 8.9%

Short-term investments $4,010 $2,000 -50.1%

Cash and cash equivalents $8,576 $2,117 -75.3%

Amounts due from policyholders $203,590 $209,982 3.1%

Amounts recoverable from reinsurers $271,673 $274,634 1.1%

Amounts due from Florida

Special Disability Trust Fund $25,567 $20,128 -21.3%

Land, building and equipment,

net of depreciation $50,362 $54,713 8.6%

Other Assets $119,857 $110,345 -7.9%

Total Assets $1,741,090 $1,824,038 4.8%

Liabilities and Member's Equity 2006 2007 % growth

Loss and loss adjustment expenses $935,973 $971,287 3.8%

Unearned and advanced premiums $233,691 $225,689 -3.4%

Notes Payable $32,000 $32,000 0.0%

Other liabilities $127,617 $132,365 3.7%

Total liabilities $1,319,281 $1,361,341 3.2%

Member's equity $421,809 $462,697 9.7%

Total Liabilities and Member's Equity $1,741,090 $1,824,038 4.8%

Summarized Earnings Statement

Revenues 2006 2007 % growth

Net premiums earned $520,491 $504,706 -3.0%

Net investments income $43,390 $46,685 7.6%

Net realized investment gain ($419) $127 N/A

Service fees and other income $3,619 $5,636 55.7%

Total revenues $567,081 $559,154 -1.4%

Cost and expenses

Loss and loss adjustment expenses incurred $337,541 $337,268 -0.1%

Policy acquisition expenses $106,715 $102,754 -3.7%

Underwriting, general and

administrative expenses $62,695 $66,905 6.7%

Policyholder's dividends $4,850 $6,854 41.3%

Other $1,489 $2,254 51.4%

Total costs and expenses $513,290 $516,035 0.5%

Income before income taxes $53,791 $43,119 -19.8%

Income tax expense $15,743 $10,888 -30.8%

Net income $38,048 $32,231 -15.3%

Source: FCCI Insurance Group