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 and six months ended June 30, 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;

Form 10-Q: 30

Table of Contents FPIC Insurance Group, Inc.
Quarterly Report on Form 10-Q

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) The completion of the acquisition of Advocate, MD Financial Group Inc.;
xvi) 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.

Our significant accounting policy on investments is presented below and has been updated due to our adoption of FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments effective April 1, 2009.

Investments - Our invested assets comprise our largest single asset class and consist primarily of investment securities in the form of fixed income securities. Our fixed income securities, equity investments and short-term investments are carried at their fair values and accounted for $636.9 million or 99 percent of our total investments and 65 percent of our total assets as of June 30, 2009, compared to $648.1 million or 99 percent of our total investments and 65 percent of our total assets as of December 31, 2008. Unrealized gains or losses in their fair values are recorded directly in shareholders' equity, net of tax effects, as a component of accumulated other comprehensive (loss) income. Gross unrealized investment gains were $16.5 million and gross unrealized investment losses were $14.0 million as of June 30, 2009 compared to gross unrealized investment gains of $11.8 million and gross unrealized investment losses of $24.3 million as of December 31, 2008.

Form 10-Q: 31

All investments in an unrealized loss position are reviewed at the individual security level to determine whether a credit or interest rate-related impairment is other-than-temporary. For fixed income securities, impairment is considered to be other-than-temporary if we have the intent to sell the security prior to recovery, if it is more likely than not we will be required to sell the security prior to recovery, or if we do not believe the value of the security will recover. Our impairment analysis takes into account factors, both quantitative and qualitative in nature. Among the factors we consider are the following:

††† The length of time and the extent to which fair value has been less than cost;

††† Issuer-specific considerations, including an issuer's short-term prospects and financial condition, recent events that may have an adverse or favorable impact on its results, and an event of missed or late payment or default;

††† The occurrence of a significant economic event that may affect the industry in which an issuer participates; and

††† Our intent and ability to hold the investment for a sufficient period to allow for any anticipated recovery in fair value.

Equity securities are deemed other-than-temporarily impaired based on the severity of the unrealized loss and the time the security has been in an unrealized position. If the impairment is deemed to be other-than-temporary, a loss is recognized in net income for the difference between the fair value and cost basis of the investment and a new cost basis for the investment is established.

We have a process in place to identify fixed income and equity securities that could potentially have a credit impairment that is other-than-temporary. This process involves monitoring market events that could impact issuers' credit ratings, business climate, management changes, litigation and government actions and other similar factors. This process also involves monitoring pricing levels, downgrades by rating agencies, key financial ratios and cash flow projections as indicators of credit issues.

For fixed income securities, the other-than-temporarily impaired amount is separated into the amount related to a credit loss as a charge to realized investment gains (losses) included in our earnings, and the amount related to all other factors, which is recognized in other comprehensive income (loss). The credit loss component is calculated using our best estimate of the present value of cash flows expected to be collected from the fixed income security. Subsequent to recognition of a credit related impairment loss, the difference between the new cost basis and the cash flows expected to be collected is accreted as interest income.

Form 10-Q: 32

The fair value of our investment holdings is affected by general economic conditions and changes in the financial and credit markets, and we rely on the investment income produced by our investment portfolio to contribute to our profitability. Changes in interest rates and credit quality may result in fluctuations in the income derived from, the valuation of, and in the case of declines in credit quality, payment defaults on our fixed income securities. In addition, deteriorating economic conditions could impact the value of our equity securities resulting in other-than-temporary impairments to such securities. These changes could have a material adverse effect on our financial condition, results of operations or cash flows. Our investment portfolio is also subject to credit and cash flow risk, including risks associated with our investments in asset-backed and mortgage-backed securities. Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders' equity, adverse changes in economic conditions could result in other-than-temporary impairments that are material to our financial condition, operating results or cash flows. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies or municipalities in which we maintain investment holdings. Our 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.

Impact of Recently Issued Accounting Pronouncements

As described in Item 1. Financial Statements, Note 1, Basis of Presentation, New Accounting Pronouncements and Significant Accounting Policies, 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 11, 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.

Form 10-Q: 33

Recent Trends and Other Developments

(Comparisons are made to the comparable period(s) in 2008 unless otherwise indicated)

- Our policyholder retention was 95 percent on a national basis and 96 percent in Florida as of June 30, 2009 and 2008.
- Our professional liability policyholders, excluding alternative risk arrangements, increased 5 percent to 13,999 policyholders as of June 30, 2009 from 13,316 policyholders as of June 30, 2008.
- As a result of the continuation of favorable loss trends, we recognized favorable net loss development related to previously established reserves of $5.0 million and $9.0 million for the three and six months ended June 30, 2009, respectively, compared to $4.0 million and $8.5 million for the same periods in 2008. As the result of the decline in premiums earned resulting from lower Florida premium rates, our current accident year loss ratio for the six months ended June 30, 2009 increased to 71 percent from 67 percent in 2008.
- Consolidated revenues were 9 percent and 11 percent lower for the three and six months ended June 30, 2009, respectively, primarily as a result of lower Florida premium rates, as well as lower net investment income.
- Lower rates in our Florida market and a shift in business mix, offset to some extent by growth in professional liability policyholders, resulted in a decline in net premiums written of 15 percent and 13 percent for the three and six months ended June 30, 2009, respectively.
- Net investment income was 6 percent and 7 percent lower for the three and six months ended June 30, 2009, respectively, 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 26.5 percent and 25.1 percent for the three and six months ended June 30, 2009, respectively, compared to 21.7 percent 22.0 percent for the same periods in 2008. The higher ratios were 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 11 percent from December 31, 2008 to $37.04 as of June 30, 2009. The statutory surplus of our insurance subsidiaries as of June 30, 2009 was $236.0 million and the ratio of net premiums written to surplus was 0.6 to 1.
- On April 20, 2009, A.M. Best affirmed the A- (Excellent) financial strength rating of our insurance subsidiaries with a stable outlook.
- On March 20, 2009, Fitch Ratings affirmed the A- (Strong) insurer financial strength rating and stable outlook of our insurance subsidiaries.

Form 10-Q: 34

- In July 2009, our Board of Directors approved a 500,000 share increase in our share repurchase program. On a trade date basis, we repurchased 378,644 shares of our common stock during the three months ended June 30, 2009 at an average price of $31.22 per share and as of June 30, 2009, had remaining authority from our Board of Directors to repurchase 258,970 more shares under our stock repurchase program. Through July 31, 2009, we have repurchased an additional 135,496 shares of our common stock, on a trade date basis, at an average price of $31.21 per share and had remaining authority from our Board of Directors to repurchase an additional 623,474 shares as of that date.
- On July 30, 2009, we announced a definitive agreement to acquire Advocate, MD Financial Group Inc., which through its subsidiary is the fourth largest provider of MPL insurance in Texas.

Results of Operations: Three and Six Months Ended June 30, 2009 compared to Three and Six Months Ended June 30, 2008

Net income was $9.2 million for the three months ended June 30, 2009, or $1.22 per diluted common share, a decrease of 11 percent and an increase of 5 percent, respectively, compared to $10.3 million, or $1.16 per diluted common share, for the three months ended June 30, 2008. Net income was $17.6 million for the six months ended June 30, 2009, or $2.29 per diluted common share, a decrease of 17 percent and 2 percent, respectively, compared to $21.2 million, or $2.34 per diluted common share, for the six months ended June 30, 2008. The decline in net income for the three and six months ended June 30, 2009 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.

Form 10-Q: 35

FPIC Insurance Group, Inc.
Quarterly Report on Form 10-Q
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Information concerning written premiums and policyholders is summarized in the
tables below:


(in thousands)                               For the Quarter Ended
                                                   Percentage
                               June 30, 2009         Change         June 30, 2008
Direct premiums written (1)   $        36,506              -13 %            42,092
Assumed premiums written                    -                0 %                 -
Ceded premiums written                 (5,131 )              0 %            (5,128 )
Net premiums written (1)      $        31,375              -15 %            36,964




(in thousands)                              For the Six Months Ended
                                                   Percentage
                               June 30, 2009         Change         June 30, 2008
Direct premiums written (1)   $        82,110              -13 %            93,947
Assumed premiums written                    -                0 %                 -
Ceded premiums written                (11,476 )              7 %           (12,397 )
Net premiums written (1)      $        70,634              -13 %            81,550




                                                    As of           Percentage            As of
                                                June 30, 2009         Change          June 30, 2008
Professional liability policyholders in
force                                                   13,999                 5 %            13,316
Professional liability policyholders in
force under alternative risk arrangements                  227               110 %               108
Total professional liability policyholders
in force                                                14,226                 6 %            13,424

(1) Includes $0.5 million and $2.0 million of premiums associated with alternative risk arrangements for the three and six months ended June 30, 2009, respectively, compared to $0.3 million and $1.7 million for the comparable periods in 2008, respectively. Management fees for such arrangements are included in other income.

Direct premiums written declined 13 percent for the three and six months ended June 30, 2009 compared to the same periods in 2008, primarily as the result of lower premium rates in our Florida market and a shift in business mix, offset to some extent by an increase in professional liability policyholders. Our policyholder retention was 95 percent on a national basis and 96 percent in Florida as of June 30, 2009 and 2008.

Net premiums written declined 15 percent and 13 percent for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008, primarily as the result of lower premium rates in our Florida market and a shift in business mix, offset to some extent by an increase in professional liability policyholders.

Form 10-Q: 36

Net premiums earned declined 12 percent and 13 percent for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. The decline in net premiums earned is primarily the result of lower rates in our Florida market and a prior shift in business mix that is now being reflected in net premiums earned.

Net investment income declined 6 percent and 7 percent for the three and six months ended June 30, 2009, respectively, compared to the same periods 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                   For the Six Months Ended
                                        June 30, 2009         June 30, 2008      June 30, 2009         June 30, 2008
Loss ratio
Current accident year                             71.0 %                67.5 %             70.9 %                67.2 %
Prior accident years                             -13.3 %                -9.3 %            -11.8 %                -9.7 %
Calendar year loss ratio         A                57.7 %                58.2 %             59.1 %                57.5 %

Underwriting expense ratio       B                26.5 %                21.7 %             25.1 %                22.0 %
Insurance guaranty fund
recoveries                                        -0.9 %                -2.0 %             -1.0 %                -1.8 %
Underwriting expense ratio
excluding insurance
guaranty fund recoveries         C                27.4 %                23.7 %             26.1 %                23.8 %

Combined ratio (Sum of A+B)                       84.2 %                79.9 %             84.2 %                79.5 %

Combined ratio excluding
insurance guaranty fund
recoveries (Sum of A+C)                           85.1 %                81.9 %             85.2 %                81.3 %

Net losses and LAE declined 13 percent and 10 percent for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. The declines in net losses and LAE are primarily related to the declines in net premiums written and the related provisions for losses and LAE, and an increase in the amount of favorable prior year reserve development over the prior year periods. The continuation of favorable claim trends resulted in $5.0 million and $9.0 million of favorable prior year development for the three months and six months ended June 30, 2009, respectively, compared to $4.0 million and $8.5 million for the three months and six months ended June 30, 2008, respectively. The favorable development recognized in 2009 primarily reflects reductions in our estimates of incident to claim development, payment frequency and payment severity for accident years 2005 through 2007 as compared to previous estimates.

Form 10-Q: 37

Other underwriting expenses increased 7 percent and declined 1 percent for the three and six months ended June 30, 2009, respectively, compared to the same periods in 2008. The increase in other underwriting expenses for the three months is primarily the result of lower recoveries on guaranty fund assessments during the three months ended June 30, 2009 compared to the recoveries received during the three months ended June 30, 2008 and lower ceding commissions. The decrease in other underwriting expenses for the six months ended June 30, 2009 is primarily the result of lower 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 partially offset by lower recoveries on guaranty fund assessments in 2009 compared to the recoveries received during 2008 and lower ceding commissions.

Selected information concerning our direct professional liability insurance claim data is summarized in the table below.

(in thousands)                                               For the Six Months Ended
                                                                    Percentage
                                                June 30, 2009         Change         June 30, 2008
Net paid losses                                $        33,512               22 %            27,550
Less: Net paid losses on assumed business in
run-off                                                    501               20 %               417
Net paid losses excluding assumed business
in run-off                                              33,011               22 %            27,133

Net paid LAE                                            21,931              -19 %            27,088
Less: Net paid LAE on assumed business in
run-off                                                      -             -100 %                70
Net paid LAE excluding assumed business in
run-off                                                 21,931              -19 %            27,018

Net paid losses and LAE excluding assumed
business in run-off                            $        54,942                1 %            54,151

                                                               For the Six Months Ended
. . .