U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 2001
Commission File Number: 0-25505
[GRAPHIC-Company Logo] NCRIC Group, Inc.
District of Columbia 52-2134774
------------------------------- -------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
------------
(Issuer's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: As of August 1,
2001, there were 3,714,455 shares of NCRIC Group, Inc. common stock outstanding.
Table of Contents
Page
PART I. Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
NCRIC Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets...................... 3
Condensed Consolidated Statements of Operations............ 4
Condensed Consolidated Statements of Cash Flows............ 5
Notes to Condensed Consolidated Financial Statements....... 6
Item 2. Management's Discussion and Analysis....................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
PART II. Other Information
Item 1. Legal Proceedings.......................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........ 19
Item 6. Exhibits and Reports on Form 8-K........................... 19
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ---------------------------------------------------------------------------------------------------
June 30, 2001 December 31, 2000
(unaudited)
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 88,903 $ 91,482
Equity securities 6,924 6,563
--------- ---------
Total securities available for sale 95,827 98,045
OTHER ASSETS:
Cash and cash equivalents 4,431 3,972
Reinsurance recoverable 28,773 27,549
Goodwill, net 7,508 6,218
Deferred income taxes 2,208 1,918
Other assets 11,265 8,162
--------- ---------
TOTAL ASSETS $ 150,012 $ 145,864
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 54,597 $ 55,785
Loss adjustment expenses 26,330 25,349
--------- ---------
Total losses and loss adjustment expenses 80,927 81,134
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 3,209 5,478
Unearned premiums 17,887 11,472
Bank debt 1,971 --
Other liabilities 2,652 6,331
--------- ---------
TOTAL LIABILITIES 106,646 104,415
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized;
3,714,455 shares issued and outstanding (net of 28,400
and 17,500 treasury shares, respectively) 37 37
Additional paid in capital 9,479 9,455
Unallocated common stock held by the ESOP (837) (889)
Common stock held by the stock award plan (408) (476)
Accumulated other comprehensive loss (121) (744)
Retained earnings 35,442 34,197
Treasury stock, at cost (226) (131)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 43,366 41,449
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,012 $ 145,864
========= =========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
2001 2000 2001 2000
REVENUES:
Net premiums earned $ 4,597 $ 3,544 $ 9,409 $ 7,173
Net investment income 1,538 1,588 3,096 3,182
Net realized investment gains 2 -- 97 --
Practice management and related income 1,654 1,443 3,192 2,818
Other income 146 107 290 209
------- ------- ------- -------
Total revenues 7,937 6,682 16,084 13,382
------- ------- ------- -------
EXPENSES:
Losses and loss adjustment expenses 4,680 2,766 8,519 5,755
Underwriting expenses 931 1,081 2,200 2,021
Practice management expenses 1,554 1,257 2,893 2,471
Other expenses 338 345 666 631
------- ------- ------- -------
Total expenses 7,503 5,449 14,278 10,878
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 434 1,233 1,806 2,504
INCOME TAX PROVISION 119 382 561 775
------- ------- ------- -------
NET INCOME $ 315 $ 851 $ 1,245 $ 1,729
======= ======= ======= =======
OTHER COMPREHENSIVE INCOME GAIN (LOSS) $ (338) $ (207) $ 623 $ 126
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ (23) $ 644 $ 1,868 $ 1,855
======= ======= ======= =======
Net income per common share:
Basic $ 0.09 $ 0.24 $ 0.35 $ 0.49
Diluted $ 0.09 $ 0.24 $ 0.34 $ 0.49
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
Six Months Ended June 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,245 $ 1,729
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (97) --
Amortization and depreciation 353 338
Deferred income taxes (709) 423
Stock released for coverage of benefit plans 144 58
Changes in assets and liabilities:
Reinsurance recoverable (1,224) 1,782
Other assets (4,464) (1,063)
Losses and loss adjustment expenses (207) (3,613)
Retrospective premiums accrued under
reinsurance treaties (2,269) (596)
Unearned premiums 6,415 2,880
Other liabilities (735) (916)
-------- --------
Net cash flows (used in) provided by operating activities (1,548) 1,022
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (9,025) (18,221)
Sales, maturities and redemptions of investments 12,381 16,241
Investment in purchased business (3,014) --
Purchases of property and equipment (211) (393)
-------- --------
Net cash flows provided by (used in) investing activities 131 (2,373)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock (95) --
Proceeds from long-term debt 1,971 --
-------- --------
Net cash flows provided by financing activities 1,876 --
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 459 (1,351)
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,972 5,407
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,431 $ 4,056
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,156 $ 525
======== ========
Cash paid for interest $ 19 $ --
======== ========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three and six-month periods ended June 30, 2001
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2001. These condensed consolidated financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited consolidated financial
statements of NCRIC Group, Inc. (NCRIC Group) for the year ended December
31, 2000, which were filed with the Securities and Exchange Commission on
Form 10-K.
2. Reportable Segment Information
NCRIC Group has two reportable segments: Insurance and Practice Management
Services. The insurance segment provides medical professional liability and
other insurance. The practice management services segment provides medical
practice management services primarily to private practicing physicians.
NCRIC Group evaluates performance based on profit or loss from operations
before income taxes. The reportable segments are strategic business units
that offer different products and services and therefore are managed
separately.
Selected financial data is presented below for each business segment at or
for the three-month and six-month periods ended June 30, 2001 and 2000 (in
thousands):
For the Three Months At or For the Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------- ------- ------- -------
Insurance
Revenues from external customers $ 4,725 $ 3,633 $ 9,663 $ 7,345
Net investment income 1,527 1,571 3,068 3,142
Depreciation and amortization 36 58 91 116
Segment profit before taxes 572 1,260 1,979 2,525
Segment assets 140,953 134,672
Segment liabilities 104,150 102,874
Expenditures for segment assets 21 233 88 377
For the Three Months At or For the Six Months
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2001 2000 2001 2000
------- ------- ------- -------
Practice Management Services
Revenues from external customers $ 1,675 $ 1,464 $ 3,233 $ 2,858
Net investment income 13 17 32 33
Depreciation and amortization 136 125 262 222
Segment profit before taxes 128 192 358 379
Segment assets 9,489 6,833
Segment liabilities 3,930 1,247
Expenditures for segment assets 57 2 110 16
Total
Revenues from external customers $ 6,400 $ 5,097 $ 12,896 $ 10,203
Net investment income 1,540 1,588 3,100 3,175
Depreciation and amortization 172 183 353 338
Segment profit before taxes 700 1,452 2,337 2,904
Segment assets 150,442 141,505
Segment liabilities 108,080 104,121
Expenditures for segment assets 78 235 198 393
The following are reconciliations of reportable segment assets,
liabilities, revenues, net investment income, and profit before taxes to
NCRIC Group's consolidated totals (in thousands):
June 30,
--------------------------
2001 2000
--------- ---------
Assets:
Total assets for reportable segments $ 150,442 $ 141,505
Elimination of intersegment receivables (1,532) (802)
Other unallocated amounts 1,102 715
--------- ---------
Consolidated total $ 150,012 $ 141,418
========= =========
Liabilities:
Total liabilities for reportable segments $ 108,080 $ 104,121
Elimination of intersegment payables (1,532) (802)
Other liabilities 98 391
--------- ---------
Consolidated total $ 106,646 $ 103,710
========= =========
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues from external customers:
Total revenues for reportable segments $ 6,400 $ 5,097 $ 12,896 $ 10,203
Elimination of intersegment revenues (3) (3) (5) (3)
-------- -------- -------- --------
Consolidated total $ 6,397 $ 5,094 $ 12,891 $ 10,200
======== ======== ======== ========
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
------- ------- ------- -------
Net investment income:
Total investment income for
reportable segments $ 1,540 $ 1,588 $ 3,100 $ 3,175
Elimination of intersegment income (2) -- (4) --
Other unallocated amounts -- -- -- 7
------- ------- ------- -------
Consolidated total $ 1,538 $ 1,588 $ 3,096 $ 3,182
======= ======= ======= =======
Profit before taxes:
Total profit for reportable segments $ 700 $ 1,452 $ 2,337 $ 2,904
Other expenses (266) (219) (531) (400)
------- ------- ------- -------
Consolidated total $ 434 $ 1,233 $ 1,806 $ 2,504
======= ======= ======= =======
3. Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share (in thousands except per share data):
For the Three Months Ended For the Six Months Ended
June 30, June 30,
--------------------------- ------------------------
2001 2000 2001 2000
------ ------ ------ ------
Net income $ 315 $ 851 $1,254 $1,729
====== ====== ====== ======
Weighted average common
shares outstanding - basic 3,521 3,533 3,524 3,531
Dilutive effect of stock options
and awards 94 6 91 8
------ ------ ------ ------
Weighted average common
shares outstanding - diluted 3,615 3,539 3,615 3,539
====== ====== ====== ======
Net income per common share:
Basic $ 0.09 $ 0.24 $ 0.35 $ 0.49
====== ====== ====== ======
Diluted $ 0.09 $ 0.24 $ 0.34 $ 0.49
====== ====== ====== ======
4. Outstanding Bank Debt
During June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to
finance contingent purchase payments related to the 1999 acquisition of
HealthCare Consulting, Inc., HCI Ventures, LLC, and the assets of Employee
Benefits Services, Inc. The outstanding debt from the first quarter of 2001
was repaid with a portion of this loan. The term of the loan is 3 years at
a floating rate of LIBOR plus two and three-quarter percent. Principal and
interest payments are due on a monthly basis.
5. Treasury Stock
On April 17, 2001, NCRIC Group repurchased 10,900 shares of its stock at a
price of $8.75 per share. The repurchased shares of Common Stock are
recorded as Treasury Stock, which is reported as a reduction of
Stockholders' Equity.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
condensed consolidated financial statements and related notes included in this
Form 10-Q. References to "NCRIC" mean NCRIC Group and its subsidiaries,
including their predecessors.
General
The financial statements and data presented in the Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the
United States of America, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
In connection with the 1999 acquisition of HealthCare Consulting, the
purchase agreement provided for additional purchase payments if certain
profitability was achieved during the subsequent three years. Additionally, an
Operating Agreement with the former owners provided the terms under which they
would continue to operate the business to achieve the profitability objectives.
Based on successfully attaining the 2000 earnings objectives, the first
contingent payment of $1.55 million was made in March, 2001. In June, 2001 the
payment of the second contingent purchase payment of $1.39 million was
accelerated, the Operating Agreement was terminated and new employment contracts
with the former owners were executed.
In April, NCRIC announced its formation of American Captive Corporation
(ACC), a wholly owned subsidiary and the first captive insurance company to be
licensed in the District of Columbia under the Captive Insurance Act of 2000. As
a captive insurance company, ACC was established to provide an alternative risk
financing vehicle for affinity groups. The captive program will be marketed to
organizations and groups wishing to finance and manage their own risk. Through
June 30, 2001, ACC has incurred $53,000 in costs associated with the start-up of
the company.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Use of the pooling-of-interests
method will be prohibited. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
adoption of SFAS 142 on January 1, 2002. NCRIC has not yet completed its
analysis of the impact of SFAS 142. However, if SFAS 142 was adopted for the six
months ended June 30, 2001, the after tax impact on the six months earnings due
to the elimination of goodwill amortization would be an increase of
approximately $174,000.
Consolidated net income
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Net income was $315,000 for the three months ended June 30, 2001
compared to $851,000 for the three months ended June 30, 2000. Total revenue was
up 19% for the quarter compared to the same quarter in 2000. The higher revenue
was offset by an increase in loss and loss adjustment expenses and in practice
management expenses.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Net income totaled $1,254,000 for the six months ended June 30, 2001
compared to $1,729,000 for the six months ended June 30, 2000. Total revenue
increased 20% for the six months ended June 30, 2001 compared to June 30, 2000.
The higher revenue was offset by an increase in loss and loss adjustment
expenses and in practice management expenses.
NCRIC's insurance segment experienced a significant increase in new
business written in the second quarter of 2001 and for the six months ended June
30, 2001, which resulted in a rise in net premiums earned. The profitability of
a medical professional liability insurance policy is designed to emerge over a
period of years rather than in the year the policy is written; profits are
designed to accrue through investment income on the invested premiums and
through successful settlement of claims. Therefore, the large increase in new
business written in the current period causes a strain on current period
earnings. In addition, earnings were impacted by reduced net investment income
because of lower market yields and increased incurred losses reflecting
increased frequency and severity trends.
NCRIC's practice management segment produced a significant increase in
revenue primarily as a result of its focused efforts on new business
development. Higher revenue was offset by expenses related to the ongoing
servicing of new business, the allocation of additional resources to new
business development and, in the second quarter of 2001, some non-recurring
expenses.
Net premiums earned
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Net premiums earned increased by $1.1 million, 30%, to $4.6 million from
$3.5 million for the three months ended June 30, 2001 and 2000, respectively.
The increase is primarily reflective of the increase in policies in force as the
result net new business written combined with the increase in premium rates
effective with policy anniversary dates in 2001. Additionally, net premiums
earned for the second quarter of 2001 include a decrease of $568,000 from the
June 30, 2000 level due to favorable loss development in the hospital-sponsored
retrospectively rated programs. Under these programs, additional premiums are
either earned or returned based on a group's adverse or favorable loss
experience.
Gross premiums written of $4.9 million for the three months ended June 30,
2001 increased by $2.9 million from $2.0 million for the three months ended June
30, 2000, due to net new business written combined with the premium rate
increase. The mix of business produced directly by NCRIC versus by agents has
changed between years as shown on the following chart of new gross written
premium. The proportion of business produced by NCRIC's independent agency force
has increased to 95% of total new business written in the second quarter of 2001
from 82% during the same period in 2000.
Three Months Ended
June 30,
--------------------------------------
2001 2000
------------ -----------
Direct $ 92,000 $ 230,000
Agent 1,931,000 1,045,000
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Net premiums earned increased by 31% to $9.4 million from $7.2 million for
the six months ended June 30, 2001 and 2000, respectively. The increase is
primarily reflective of the increase in policies in force as the result of net
new business written combined with the increase in premium rates effective with
policy anniversary dates in 2001. Additionally, net premiums earned through June
30, 2001, includes a decrease of $422,000 from the June 30, 2000 level due to
favorable loss development in the hospital-sponsored retrospectivly rated
programs. Under these programs, additional premiums are either earned or
returned based on a group's adverse or favorable loss experience.
Gross premiums written of $19.6 million for the six months ended June 30,
2001 increased by $6.5 million from $13.1 million for the six months ended June
30, 2000, due to net new business written combined with the premium rate
increase and some changes in policy effective dates to January 1. The mix of
business produced directly by NCRIC versus by agents has changed between years
as shown on the following chart of new gross written premium. The proportion of
business produced by NCRIC's independent agency force has increased to 91% of
total new business written in the first half of 2001 from 69% during the same
period in 2000.
Three Months Ended
June 30,
--------------------------------------
2001 2000
------------ -----------
Direct $ 437,000 $ 710,000
Agent 4,322,000 1,544,000
While insurance in force continues to follow the historic pattern of
insuring risks concentrated in the District of Columbia, there has been notable
growth in premium written in NCRIC's other market areas. Of the increase in
written premium in 2001 over the first six months of 2000, 30% comes from
business written in Maryland, 24% from Virginia, and 13% from West Virginia and
Delaware (combined). These increases are largely as the result of sales by
agents.
During 2000, it was determined that one of NCRIC's hospital-sponsored
retrospective programs would not be renewed. Under this type of risk sharing
program, physicians are underwritten directly by NCRIC and pay lower individual
premiums than if not part of the risk-sharing program. At the end of the policy
year covered by the premium, a review of the actual loss experience of the
physician group is completed. Should the group's loss experience be unfavorable,
NCRIC will require additional premium payments from the sponsoring hospital to
offset the unfavorable losses.
Based on the actual accumulated loss experience of the program through its
termination on September 1, 2000, NCRIC billed the hospital sponsor $1.3 million
under terms of the contract based on actual loss experience through the
termination date. Additionally, based on the continuing development of loss
experience through the second quarter of 2001, $364,000 of net premiums earned
has been accrued related to additional amounts due to NCRIC from the hospital
sponsor.
Because the original 2000 bill was not paid when due, NCRIC initiated legal
proceedings to collect. NCRIC will use all means legally available to collect
the amount it is due. Although NCRIC believes that it will prevail, since the
premium amount is disputed, an allowance for uncollectibility has been
established and is included in underwriting expense. The ultimate outcome cannot
be determined at this time.
Net investment income
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Net investment income decreased by $50,000 for the three months ended June
30, 2001 compared to the second quarter of 2000 due to a decrease in yields
partially offset by an increase in invested funds. The average effective yield
was approximately 6.02% for the three months ended June 30, 2001 and 6.25% for
the three months ended June 30, 2000. The tax equivalent yield was approximately
6.55% for the second quarter of 2001 and 6.67% for the second quarter of 2000.
The decrease in investment yields reflects the market decrease in interest rates
in 2001 compared to 2000.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Net investment income decreased by $86,000 for the six months ended June 30,
2001 compared to the first six months of the prior year due to a decrease in
yields partially offset by an increase in invested funds. Average invested
assets, which include cash equivalents, were higher in the first six months of
2001 by $2.1 million. The average effective yield was approximately 5.97% for
the six months ended June 30, 2001 and 6.25% for the six months ended June 30,
2000. The tax equivalent yield was approximately 6.46% for the first six months
of 2001 and 6.63% for the first six months of 2000. The decrease in investment
yields reflects the market decrease in interest rates in 2001 compared to 2000.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
Practice management 42% 41% 42% 42%
Accounting 21% 26% 24% 27%
Tax & personal financial planning 20% 19% 15% 15%
Retirement plan accounting & admin 10% 12% 11% 13%
Other 7% 2% 8% 3%
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Practice management and related revenue of $1.7 million for the three months
ended June 30, 2001 is up from $1.4 million for the three months ended June 30,
2000. The increased revenue was a result of the addition of new clients and the
2001 increase in consulting rates.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Practice management and related revenue of $3.2 million for the six months
ended June 30, 2001 is up 13% from $2.8 million for the six months ended June
30, 2000. The increased revenue was a result of 1) the focused efforts on new
business development through the addition of new clients in both recurring fee
business and one-time consulting assignments and 2) the 2001 increase in
consulting rates.
Approximately $221,000 of revenue in the first half of 2001 results from
services provided to existing insureds of NCRIC compared to $158,000 of revenue
in the first half of 2000 reflecting results of the cross-selling initiative.
Loss and loss adjustment expenses and combined ratio results
NCRIC continues to experience pressure from the rise in severity of losses,
and it continues to take a cautious approach in evaluating reserves. The expense
for incurred losses and LAE net of reinsurance is summarized as follows (in
thousands):
Three Months Ended June 31, Six Months Ended June 30,
--------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Incurred loss and LAE related to:
Current year - losses $ 5,688 $ 5,458 $ 10,719 $ 9,244
Prior years - development (1,008) (2,692) (2,200) (3,489)
-------- -------- -------- --------
Total incurred for the period $ 4,680 $ 2,766 $ 8,519 $ 5,755
======== ======== ======== ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Six Months Ended June 30,
-------------------------
2001 2000
---- ----
Loss and LAE ratio...................... 90.5% 80.2%
Underwriting expense ratio............. 23.4% 28.2%
Combined ratio........................... 113.9% 108.4%
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Total incurred loss and LAE expense of $4.7 million for the second quarter
of 2001 increased by $1.9 million from the $2.8 million incurred for the second
quarter of 2000. The increase in current year losses to $5.7 million for the
second quarter of 2001 reflects the increase in the level of exposure as a
result of premium growth, an increase in frequency of reported claims, and a
rise in the cost of settling claims. The lower favorable development of losses
reported in prior years reflects the continuing upward pressure of severity of
losses as noted previously. Prior year development results from the
re-estimation and settlement of individual losses not covered by reinsurance,
which generally are losses under $500,000.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Total incurred loss and LAE expense of $8.5 million for the first six
months of 2001 increased by $2.7 million from the $5.8 million incurred for the
first six months of 2000. The increase in current year losses to $10.7 million
for the first six months of 2001 reflects the increase in the level of exposure
as a result of premium growth, an increase in frequency of reported claims, and
a rise in the cost of settling claims. The lower favorable development of losses
reported in prior years reflects the continuing upward pressure of severity of
losses as noted previously.
The combined ratio of 113.9% for the six months ended June 30, 2001
reflects the increase in loss and loss adjustment expenses as noted above. The
lower underwriting expense component reflects the stable level of underwriting
expenses coupled with the higher level of premiums.
Expenses
Three months ended June 30, 2001 compared to three months ended June 30, 2000
Underwriting expenses of $931,000 for the three months ended June 30, 2001
compare to $1.1 million for the three months ended June 30, 2000. The decrease
in expenses results primarily from a lower expense for uncollectible premiums
partially offset by increases in commissions, premium taxes, and advertising as
a result of the increased new business, particularly agent produced business.
The mix of business produced by NCRIC's independent agency force has increased
to 95% of new business written for the three months ended June 30, 2001 from 82%
for the three months ended June 30, 2000.
Practice management and related expenses were $1.6 million for the three
months ended June 30, 2001 and $1.3 million for the three months ended June 30,
2000. Expenses increased due to the growth in business, new business development
and $78,000 of non-recurring expenses as well as an increase in the goodwill
amortization related to the contingent purchase payments made in 2001 to the
prior owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee
Benefits Services, Inc.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $338,000 for the three months ended June 30, 2001 compare to
$345,000 for the three months ended June 30, 2000. Other expenses for the second
quarter of 2001 include $40,000 of start-up expenses for the new captive
insurance company subsidiary.
Six months ended June 30, 2001 compared to six months ended June 30, 2000
Underwriting expenses increased $200,000 to $2.2 million for the six months
ended June 30, 2001 from $2.0 million for the six months ended June 30, 2000.
The increase in expenses primarily stems from (1) the increase in new business,
particularly agent produced business, through increases in commissions and other
underwriting costs, and (2) a net increase in the allowance for uncollectible
premiums. These expenses were partially offset by an increase in ceding
allowances as a result of the increase in premiums earned as well as a reduction
in depreciation and professional fees during 2001. The mix of business produced
by NCRIC's independent agency force has increased to 91% of new business written
for the six months ended June 30, 2001 from 69% for the six months ended June
30, 2000.
Practice management and related expenses were $2.9 million for the six
months ended June 30, 2001 and $2.5 million for the six months ended June 30,
2000. Expenses increased as a result of the growth in new business and business
development efforts during 2001. In addition, there has been an increase in the
goodwill amortization related to the contingent payments made in 2001 to the
prior owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee
Benefits Services, Inc. and related interest on the debt incurred to partially
fund the payments.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $666,000 for the six months ended June 30, 2001 compare to $631,000
for the six months ended June 30, 2000. Other expenses include $53,000 of
start-up expenses for the new captive insurance company subsidiary.
Federal income taxes
The effective tax rate for NCRIC at 31% for the six months ended June 30,
2001 and 2000, is lower than the federal statutory rate principally due to
nontaxable investment income.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the six months ended June 30, 2001, NCRIC had negative cash flows from
operations of $1.5 million compared to positive cash flows from operations of
$1.0 million for the corresponding period of 2000. The $2.5 million of decreased
cash flow results primarily from an increase of $1.6 million in income taxes
paid, an increase of $1.3 million for reinsurance premium payments under the
swing rated treaty, and an increase in the payments of losses and LAE of $2.3
million partially offset by an increase in cash receipts of $2.6 million as a
result of the increase in premiums. Because of the long-term nature of both the
payments of claims and the settlement of swing-rated reinsurance premiums due to
the reinsurers, cash from operations for a medical professional liability
insurer like NCRIC can vary substantially from year to year.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in government
and tax-exempt securities. As of June 30, 2001, the carrying value of the
securities portfolio was $95.8 million. The portfolio was invested as follows:
At June 30, At December 31,
2001 2000
---- ----
U. S. Government and agencies........... 9% 14%
Asset and mortgage-backed securities.... 28 32
Tax-exempt securities................... 18 16
Corporate bonds and equity securities... 45 38
Over 71% of the portfolio was invested in U.S. Government/agency securities
or had a rating of AAA or AA. For regulatory purposes, 90% of the securities
portfolio was rated "Class 1" for all periods presented, which is the highest
quality rated group as classified by the NAIC.
The $2.5 million line of credit available as of June 30, 2001 is restricted
to working capital for claims settlements. The line of credit is unsecured and
renewable annually. NCRIC has not drawn down on this facility. NCRIC has no
other material commitments for capital expenditures.
Under terms of the purchase agreement between NCRIC and the previous owners
of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits
Services, Inc., additional purchase payments totaling $3.1 million could be paid
in cash if the acquired companies achieve earnings targets in 2000, 2001, and
2002. During 2000, the earnings target was met and NCRIC paid the prior owners
$1.55 million on March 31, 2001. After analyzing the acquired companies'
operations since the acquisition, terms were negotiated and agreed upon for an
early payment of the second contingent payment originally scheduled to be paid
in 2002. As a result, on June 23, 2001, NCRIC paid $1.39 million, the present
value of the remaining payments, to the prior owners. During June 2001, NCRIC
MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance these payments. The
outstanding debt from the first quarter of 2001 was repaid with a portion of
this loan. The term of the loan is 3 years at a floating rate of LIBOR plus two
and three-quarter percent. Principal and interest payments are due on a monthly
basis.
Effects of inflation
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that losses and LAE reserve levels and NCRIC's
ratemaking process adequately incorporate the effects of inflation.
Forward-Looking Information
A number of statements made by NCRIC in this document are forward-looking
statements which involve known and unknown risks and uncertainties which may
cause NCRIC's actual results to be materially different from historical results
or from the results expressed or implied by the forward-looking statements.
These risks and uncertainties include:
o general economic conditions including changes in interest rates and the
performance of financial markets;
o NCRIC, Inc.'s concentration in a single line of business primarily in
the District of Columbia;
o the impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o price competition;
o uncertainties associated with expanding business in new market areas,
including uncertainties associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance;
o the mutual insurance holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially
and adversely affect NCRIC's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NCRIC's investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At June 30, 2001, fixed maturity securities comprise
93% of total investments at market value. U.S. government and agencies and
tax-exempt bonds represent 29% of the fixed maturity securities. Equity
securities, consisting primarily of preferred stock, account for the remainder
of the investment portfolio. NCRIC has classified its investments as available
for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure NCRIC has on its investment portfolio. In
general, the market value of NCRIC's fixed maturity portfolio increases or
decreases in an inverse relationship with fluctuation in interest rates. During
periods of rising interest rates, the fair value of NCRIC's investment portfolio
will generally decline resulting in decreases in NCRIC's stockholders' equity.
Conversely, during periods of falling interest rates, the fair value of NCRIC's
investment portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity. In addition, NCRIC's net investment income increases or
decreases in a direct relationship with interest rate changes on monies
reinvested from maturing securities and investments of positive cash flow from
operating activities.
Interest rates have decreased during the first six months of 2001,
resulting in an increase in the value of treasury bonds and improving the
carrying value of NCRIC's fixed maturity portfolio. At June 30, 2001, NCRIC's
fixed maturities were valued at $186,000 below amortized cost. At December 31,
2000, the value of the portfolio was $1.1 million below amortized cost.
Generally, the longer the duration of the security, the more sensitive the
asset is to market interest rate fluctuations. To control the adverse effects of
the changes in interest rates, NCRIC's investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
NCRIC's investment policy also provides that all security purchases be limited
to rated securities or unrated securities approved by management on the
recommendation of NCRIC's investment advisor. Approximately 59% of the portfolio
is Treasury or Agency related or rated AAA, the highest rating for a security.
During the six months ended June 30, 2001, there was a change in the
allocation of NCRIC's portfolio increasing the percentage of tax-exempt and
corporate bonds to 61% of the total fixed maturity securities compared to 51% at
December 31, 2000. This has the potential to increase the market risk as less of
the portfolio is backed by the U.S. Government. Management of NCRIC, along with
NCRIC's external investment managers, seeks to maximize after-tax yields while
minimizing portfolio credit risk. The decision to reallocate the portfolio as
funds became available was based on this goal.
PART II OTHER INFORMATION
Item 1. Legal proceedings.
See the Form 10-K for the fiscal year ended December 31, 2000 for
information on pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of NCRIC Group, Inc. took place on
May 8, 2001.
(b) The following directors were elected and received the following votes:
Number of Votes
---------------------------
Name For Withheld
---- --------- --------
Martin W. Dukes 3,541,064 32,772
Luther W. Gray 3,541,064 32,772
Edward G. Koch 3,541,064 32,772
Leonard M. Parver 3,541,064 32,772
Nelson P. Trujillo 3,541,064 32,772
The following directors continued in office:
Vincent Burke, III Pamela Coleman
R. Ray Pate, Jr. Leonard Glassman
Prudence P. Kline J. Paul McNamara
Raymond Scalettar David M. Seitzman
Robert L. Simmons
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(b) Reports on Form 8-K
NCRIC Group, Inc. did not file any reports on Form 8-K during the
quarter ended June 30, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
August 14, 2001 /s/ R. Ray Pate, Jr.
--------------------
R. Ray Pate, Jr., President
& Chief Executive Officer
(Duly Authorized Officer)
August 14, 2001 /s/ Rebecca B. Crunk
---------------------
Rebecca B. Crunk, Sr. Vice President
& Chief Financial Officer
(Principal Financial Officer)