The following management's discussion and analysis ("MD&A") should be read in conjunction with the consolidated financial statements and the notes to the consolidated financial statements appearing elsewhere in this report. The consolidated financial statements include the results of all of our wholly-owned subsidiaries. Except for the historical information contained here, the discussions in the MD&A contain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under Item 1A. Risk Factors.

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 2007 premiums reported by SNL Financial LC, Florida is the fourth largest market for MPL insurance in the United States in terms of direct premiums written. We focus on selected markets where we believe we have advantages in terms of our market knowledge, well-established reputation, meaningful market presence and resources.

Form 10-K: 20

Our former insurance management operations, which provided insurance management services in New York and Pennsylvania, were discontinued in September 2006 in connection with the sale of these operations to a private investor. Our former TPA operations, which provided administrative and claims management services to employers, primarily in Florida, were sold in 2005. For additional information on our discontinued operations, see Note 18, Discontinued Operations to the consolidated financial statements included elsewhere herein.

Executive Summary

- Net income decreased 37 percent (29 percent on a diluted common share basis) for the year ended December 31, 2008 compared to 2007. Excluding the impact of the PRI commutation in February 2007, net income decreased 22 percent (12 percent on a diluted common share basis) for the year ended December 31, 2008. See the discussion below of certain factors, including, among other things, the PRI commutation, favorable prior year loss development, net realized investment losses and guaranty fund assessments that affect the comparability of our results from different periods.

- Net premiums written increased 27 percent for the year ended December 31, 2008 compared to 2007. Excluding the impact of the PRI commutation on assumed premiums written for 2007, net premiums written declined 11 percent in 2008 as a result of lower premium rates in our Florida market offset to some extent by an increase in professional liability policyholders. The decrease in Florida premium rates over the last few years also drove a decline in net premiums earned.

- During 2008, we launched an initiative to provide management services for alternative risk arrangements and recorded $2.9 million of direct premiums written. Total policyholders related to such business totaled 174 at December 31, 2008.

- As a result of the current financial market crisis, we recorded realized investment losses of $13.5 million for investments that were other-than-temporarily impaired during 2008 ($6.3 million in fixed income securities, $6.8 million in equity securities and $0.4 million for other invested assets). As of December 31, 2008, we had a total of $712.7 million in cash and investments, which consisted of 89 percent fixed income securities, 2 percent equity securities, 8 percent cash and 1 percent other invested assets. Our fixed income investment portfolio had an average Moody's credit quality rating of Aa2 (High Quality).

- The number of professional liability policyholders, excluding policyholders under alternative risk arrangements, increased 3 percent to 13,728 policyholders at December 31, 2008 compared to 13,372 policyholders at December 31, 2007.

- We continued our targeted market focus in 2008. National and Florida policyholder retention was 96 percent each, compared to National and Florida policyholder retention of 94 percent and 95 percent, respectively, for 2007.

- As a result of the continuation of favorable loss trends, we recognized favorable net loss development related to previously established reserves of $17.0 million for the year ended December 31, 2008 compared to $16.0 million for the year ended December 31, 2007. The favorable net loss development in 2007 excludes the impact of the PRI commutation.

- On a trade date basis, we repurchased 1,477,741 shares of our common stock during 2008 at an average price of $45.10 per share and as of December 31, 2008, had remaining authority from our Board of Directors to repurchase 452,802 more shares under our stock repurchase program. Through February 27, 2009, we have repurchased an additional 191,950 shares of our common stock, on a trade date basis, at an average price of $39.03 per share and had remaining authority from our Board of Directors to repurchase an additional 260,852 shares as of that date.

- Book value per common share was $33.31 as of December 31, 2008 compared to $33.03 as of December 31, 2007. We received $47.5 million in dividends from our insurance subsidiaries during 2008. The statutory surplus of our insurance subsidiaries as of December 31, 2008 was $242.8 million compared to $261.6 million as of December 31, 2007.

Form 10-K: 21

Industry Overview

For a discussion of industry factors affecting us, see Item 1. Business - Industry Overview.

Business Strategy

For a discussion of our business strategy, see Item 1. Business - Business Strategy.

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition, results of operations and liquidity and capital resources is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We generally base our estimates on historical experience or other appropriate assumptions that we believe are reasonable and relevant under the circumstances and evaluate them on an ongoing basis. The results of these estimation processes form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the critical accounting policies discussed in the remainder of this section of our MD&A affect our more significant judgments and estimates used in preparation of our consolidated financial statements. These may be further commented upon in applicable sections on Consolidated Results of Operations and Liquidity and Capital Resources that follow. Information about the significant accounting policies we use in the preparation of our consolidated financial statements is included in Note 2, Significant Accounting Policies to the consolidated financial statements included elsewhere herein.

Liability for Losses and LAE - Our liability for losses and LAE (also referred to as our loss and LAE reserves) is our largest liability and represents the financial statement item most sensitive to estimation and judgment. MPL insurance is our primary line of business and accounted for nearly 100 percent of our total consolidated liability for losses and LAE for both 2008 and 2007.

Our loss and LAE reserves represent management's best estimate as of the end of the period of the amounts we expect to pay out in the future on account of all insured events. The liability comprises estimated case reserves on reported claims plus estimates of insured losses and LAE incurred but not yet reported ("IBNR"). Also implicit in our loss and LAE reserves is a provision for case reserve development, which represents an estimate of the aggregate difference between our individually estimated case reserves and the amount for which they will ultimately be settled. This provision, which is included in our total IBNR reserves, comprises the majority of such reserves given our claims-made policy coverage.

The following table summarizes our liability for losses and LAE by line of business:

(in thousands)                 As of December 31, 2008                   As of December 31, 2007
                          Case                        Total         Case                        Total
                        reserves       IBNR *       reserves      reserves       IBNR *       reserves
Gross basis:
Medical professional
liability               $ 304,024       244,931       548,955     $ 353,291       222,193       575,484
Other lines                 9,383        (2,490 )       6,893         9,898          (295 )       9,603
Total gross reserves    $ 313,407       242,441       555,848     $ 363,189       221,898       585,087

Net basis:
Medical professional
liability               $ 252,524       166,326       418,850     $ 280,817       158,173       438,990
Other lines                 2,137          (990 )       1,147         2,373          (611 )       1,762
Total net reserves      $ 254,661       165,336       419,997     $ 283,190       157,562       440,752

* Includes case reserve development.

Form 10-K: 22

IBNR as a component of our total reserves has increased in recent years primarily as a result of higher estimates of LAE, such as legal defense and related costs, driven by the stricter claims philosophy we adopted in 2001, which focuses on the aggressive defense of non-meritorious claims in order to lower overall claims costs. While we believe this approach has been beneficial to our results in total, it has increased our estimates for LAE costs as an individual component. Establishing case reserves for LAE is inherently difficult since the level of costs ultimately necessary to resolve a case tends to increase over time and can vary significantly based on factors such as whether and when a case is taken to trial. Therefore, a substantial portion of total LAE reserves is reflected in our estimates for case reserve development. Additionally, our stricter claims philosophy has resulted in a relatively lower number of cases with an indemnity case reserve, which has also resulted in an increase in IBNR as a component of total reserves.

In addition, our insurance subsidiaries may become subject to claims for extra-contractual obligations ("ECO") or risks in excess of policy limits ("XPL") 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 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. When establishing our liability for losses and LAE, we take our exposure for ECO/XPL claims into consideration. Within the Florida market for MPL insurance, the magnitude of ECO/XPL payments has increased in recent years and is expected to continue to be a significant source of uncertainty in establishing reserves. An award for an ECO/XPL 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 and cash flows.

Tort reform - Many of the states in which we operate, including Florida, Georgia, Arkansas, Missouri and Texas, have passed various medical malpractice tort reform measures. For instance, beginning in 2003, Florida enacted a series of laws and adopted a series of constitutional amendments that provide for, among other things, a $0.5 million cap on non-economic damages under certain circumstances, certain modifications to bad faith statutes, limitations on fees to plaintiff's attorneys, and abolition of joint and several liability. In general, we believe that these reforms have provided an additional level of stability to the MPL market and in part, have contributed to the decline in frequency of claims since enactment. Given the nature of these reforms, the uncertainties surrounding future legislative initiatives and the fact that these reforms are being challenged in various state courts, we are unable to determine what specific effect these developments have had on our claims experience or to predict what their effect may be in the future. To the extent these reforms have contributed to lower frequency of claims and are not ultimately upheld, the reversal of these reforms may result in a higher frequency of claims in the future.

Actuarial techniques and primary factors that impact our reserve estimates - 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. The actuarial techniques we use that are material to our evaluation of loss and LAE reserves include the following:

Ÿ Loss Development Methods (Incurred and Paid Development);

Ÿ Berquist-Sherman Case Reserve Adjustment Method;

Ÿ Frequency/Severity Methods;

Ÿ Allocated Loss Adjustment Expense ("ALAE") Development Methods (Incurred and Paid Development);

Ÿ Bornhuetter-Ferguson Expected Loss Projection Methods; and

Ÿ Backward Recursive Method.

Form 10-K: 23

Each technique has inherent benefits and shortcomings (i.e., biases), particularly when applied to company-specific characteristics and trends. For example, certain methods (e.g., the Bornhuetter-Ferguson methods) are more relevant to immature accident years, and other methods (e.g., the loss development methods) provide more meaningful information for years with a greater level of maturity. Because each method has its own set of attributes, we do not rely exclusively upon a single method. Rather, we evaluate each of the methods for the different perspectives that they provide. Each method is applied in a consistent manner from period to period and the methods encompass a review of selected claims data, including claim and incident counts, average indemnity payments and loss adjustment costs.

Using internal actuarial staff, we analyze and develop projections of ultimate losses that are evaluated and considered in establishing our carried reserves. In performing our review, we separate reserves by line of business, coverage type, layer of coverage, geography and accident year. By doing so, we are able to evaluate the unique patterns of development and trends for each line of business. We then select a point estimate for each line of business with due regard for the age, characteristics and volatility of the portion of the business, the volume of data available for review and past experience with respect to the accuracy of estimates for business of a similar type. This series of selected point estimates, along with other relevant quantitative and qualitative information, is then evaluated by management to produce our best estimate of our total liability for losses and LAE.

We also utilize and evaluate calculations contained in an actuarial study performed by an independent actuarial firm to corroborate the adequacy of our carried reserves. Our best estimate may differ from the selected reserve estimate of our independent actuary because of differences in evaluating such things as the impact of historical experience, legal and regulatory changes, expectations about future claim results and trends and certain other factors as discussed below. While our best estimate may differ, our carried reserves remain within a reasonable actuarial range of the independent actuary's selected reserve estimate. The independent review of our reserves plays an important role in our overall assessment of the adequacy of our reserves. A typical range of reasonable values for MPL business is considered to be as wide as 15 percent. Therefore, in addition to the performance of the business itself, our financial condition, results of operations and cash flows are sensitive to our reserve estimates and judgments. Our range developed for our loss and LAE reserves, net of reinsurance, at December 31, 2008 was $364.4 million to $433.4 million with management's best estimate of loss and LAE reserves at $420.0 million. The reserve opinions of our independent actuary for the years ended December 31, 2008 and 2007 have been filed with state insurance regulators along with the statutory financial statements of our insurance companies.

The primary factors affecting our estimates of ultimate reserves for insurance claims, defense, and other related costs include the following:

Ÿ Frequency and severity trends (the numbers of claims and how much we expect to ultimately pay for such claims);

Ÿ The timing or pattern of future payments;

Ÿ The amount of defense costs we will pay for each claim or group of claims;

Ÿ Frequency of claims closed with indemnity payments (the percentage of claims received that ultimately result in a loss payment versus those that are resolved and closed without a loss payment); and

Ÿ Inflationary trends that are expected to bear on future loss and LAE payments.

Form 10-K: 24

These factors, in turn, can be affected by external events, including changes in the judicial environment and tort-related trends over time. For example, the removal or significant weakening of one or more of the tort reforms passed in our largest market, Florida, could result in an unexpected increase in claim frequency and/or severity. In addition, these factors may also be impacted by internal events, such as changes in our business mix or claims handling philosophy. Determining whether such events are reasonably likely to occur and attempting to quantify the impact of an individual event are inherently difficult. We utilize our experience and judgment and consider these factors as well as historical experience and the results of applied actuarial techniques when evaluating the adequacy of carried loss and LAE reserves. All of the above-mentioned factors individually can and will generally vary from one period to the next over time but are estimated to approximate their ultimate values in setting reserve estimates.

In considering the potential sensitivity of the factors and assumptions underlying management's best estimate of loss and LAE reserves, it is also important to understand that the MPL sector of the property and casualty insurance industry is characterized by a relatively small number of claims with a large average cost per claim. For instance:

Ÿ In 2008, we paid a total of $66.7 million in loss payments (indemnity only), excluding the impact of commuted reinsurance agreements, on 330 claims.

Ÿ In 2007, we paid a total of $61.5 million in loss payments (indemnity only), excluding the impact of commuted reinsurance agreements, on 311 claims.

Ÿ In 2006, we paid a total of $66.4 million in loss payments (indemnity only), excluding the impact of commuted reinsurance agreements, on 322 claims.

Given the magnitude of our reserves and these characteristics, even relatively small changes in our estimates for factors such as the number of claims we expect to pay or the amount we expect to ultimately pay for such claims could have a significant impact on our reserves and, correspondingly, our financial position, results of operations and cash flows. This is the case for other key assumptions as well, such as the frequency of reported claims and incidents that will ultimately close with an indemnity payment versus those that will close without an indemnity payment. Because our aggregate loss and LAE reserves are so large, this also means that 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.

Form 10-K: 25

FPIC Insurance Group, Inc.
Annual Report on Form 10-K

  Roll forward of consolidated liability for losses and LAE - The following
table rolls forward our consolidated liability for losses and LAE, net of
reinsurance.

(in thousands)                               For the year ended December 31,
                                            2008           2007           2006
Net loss and LAE reserves, January 1     $  440,752        484,087        359,619

Incurred Related To:
Current year                                116,721        133,834        156,711
Prior years                                 (17,000 )      (16,000 )       (5,063 )
Commutation of assumed reinsurance (1)            -        (13,982 )            -
Total incurred                               99,721        103,852        151,648

Paid Related To:
Current Year                                (10,922 )       (9,884 )      (10,166 )
Prior Years                                (109,554 )     (108,149 )     (103,430 )
Total paid excluding commmutations         (120,476 )     (118,033 )     (113,596 )
Commutations (1), (2), (3)                        -        (29,154 )       86,416
Total paid                                 (120,476 )     (147,187 )      (27,180 )

Net balance, December 31                    419,997        440,752        484,087
Plus reinsurance recoverables               135,851        144,335        158,868
Gross balance, December 31               $  555,848        585,087        642,955

(1) Effective January 1, 2007, First Professionals commuted all assumed reinsurance treaties with PRI under which First Professionals acted as a reinsurer. Under the terms of the commutation agreements, First Professionals paid cash and delivered securities with an aggregate value of $87.7 million to PRI as full settlement of all past and future obligations for policy risks previously reinsured by First Professionals. The corresponding net liabilities related to these agreements carried by First Professionals totaled $103.4 million. First Professionals recognized a decrease in incurred losses of $14.0 million and an after-tax gain of $9.7 million as a result of the commutation.
(2) Effective December 31, 2006, First Professionals commuted its net account quota share reinsurance agreement with Hannover Re. Under the terms of the commutation agreement, First Professionals assumed loss and LAE reserves previously ceded of approximately $84.0 million and in exchange Hannover Re released to First Professionals the funds withheld under the agreement of $84.0 million. No gain or loss was recognized on the transaction.
(3) During November 2006, First Professionals entered into an agreement with CX Re to commute its ceded reinsurance agreement. Under the terms of the agreement, First Professionals assumed loss and LAE reserves previously ceded of approximately $2.4 million and received a comparable amount of assets in the form of cash and investments, resulting in no material gain or loss on the transaction.

Form 10-K: 26

Losses and LAE incurred related to the current year decreased approximately 13 percent and 15 percent in 2008 and 2007, respectively. As noted in our discussion of results of operations below, our net premiums earned declined 13 percent in 2008 and 12 percent in 2007. Our loss ratio (defined as the ratio of net losses and LAE to net premiums earned) related to the current year (excluding prior year development) was 67.5 percent, 67.3 percent and 69.0 percent for the years ended December 31, 2008, 2007 and 2006, respectively. Our current year loss ratio has declined in recent years as a result of overall favorable claims trends, including the level of newly reported claims and incidents.

Losses and LAE for claims related to prior years represent the total net change in estimates charged or credited to earnings in the current year with respect to liabilities established in prior years. Information regarding losses and LAE is accumulated over time and the estimates of the liability are revised accordingly, with the change recognized in the period revisions are made. As noted in the table above, during 2008 our loss and LAE reserve estimates for prior years decreased $17.0 million compared to $16.0 million in 2007, excluding the impact of the PRI commutation. The favorable prior year loss development reflects a decline in expected ultimate losses for years prior to 2008, primarily the 2004 through 2007 accident years, as a result of improved claim trends compared to earlier estimates, including lower incident to claim development, a lower number of claims closed with indemnity payment and stable payment severity.

While we believe that our estimates for ultimate projected losses and LAE in total are reasonable, there can be no assurance that our estimates will not change in the future given the many variables inherent in such estimates and the extended period of time that it can take for claim patterns to emerge.

Loss Reserve development table - The following table sets forth on a calendar year basis, the development of our liability for losses and LAE, net of amounts recoverable under reinsurance arrangements, for the ten-year period preceding the year ended December 31, 2008, and the cumulative amounts paid with respect to such reserves. Development reflects the difference between the amount we previously established as loss reserves and the re-estimated liability as of the end of each succeeding year. Favorable development, or redundancy, means that we now believe we will have to pay less for related claims than we had previously established in reserves and have revised our reserve estimates accordingly. Adverse development, or deficiency, means that we now believe we will have to pay more for related claims and have increased our reserve estimates. The table also provides a reconciliation of our liability net of reinsurance to the gross liability before reinsurance, as it is shown on our consolidated statement of financial position.

The net cumulative redundancy / (deficiency) shown in the table below for each year end includes accident year development for all years leading up to that year. For example, for the year ended December 31, 2008, there was $17.0 million of favorable development for calendar year 2007 reserves, including all accident years leading up to and including 2007. This favorable development consists of . . .