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 September 30, 2001
Commission File Number: 0-25505
[LOGO of
NCRIC Group, Inc.] 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
---------------------------------------------
(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 November 1, 2001,
there were 3,711,427 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)
- ------------------------------------------------------------------------------------------------------------------------------
September 30, 2001 December 31, 2000
(unaudited)
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 97,881 $ 91,482
Equity securities 6,755 6,563
--------- ---------
Total securities available for sale 104,636 98,045
OTHER ASSETS:
Cash and cash equivalents 5,773 3,972
Reinsurance recoverable 31,196 27,549
Goodwill, net 7,398 6,218
Deferred income taxes 1,515 1,918
Other assets 11,520 8,162
--------- ---------
TOTAL ASSETS $ 162,038 $ 145,864
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 57,935 $ 55,785
Loss adjustment expenses 26,407 25,349
--------- ---------
Total losses and loss adjustment expenses 84,342 81,134
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 2,709 5,478
Unearned premiums 19,689 11,472
Bank debt 1,820 --
Other liabilities 7,484 6,331
--------- ---------
TOTAL LIABILITIES 116,044 104,415
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized; 3,711,427
shares issued and outstanding (net of 31,428
and 17,500 treasury shares, respectively) 37 37
Additional paid in capital 9,522 9,455
Unallocated common stock held by the ESOP (811) (889)
Common stock held by the stock award plan (374) (476)
Accumulated other comprehensive gain (loss) 1,792 (744)
Retained earnings 36,088 34,197
Treasury stock, at cost (260) (131)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 45,994 41,449
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 162,038 $ 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 September 30, Nine Months Ended September 30,
2001 2000 2001 2000
REVENUES:
Net premiums earned $ 5,312 $ 3,808 $14,721 $10,981
Net investment income 1,521 1,632 4,617 4,814
Net realized investment gains 97 -- 194 --
Practice management and related income 1,451 1,294 4,643 4,112
Other income 146 122 436 331
------- ------- ------- -------
Total revenues 8,527 6,856 24,611 20,238
------- ------- ------- -------
EXPENSES:
Losses and loss adjustment expenses 4,386 3,170 12,905 8,925
Underwriting expenses 1,430 934 3,630 2,955
Practice management expenses 1,472 1,296 4,365 3,767
Other expenses 297 261 963 892
------- ------- ------- -------
Total expenses 7,585 5,661 21,863 16,539
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 942 1,195 2,748 3,699
INCOME TAX PROVISION 296 353 857 1,128
------- ------- ------- -------
NET INCOME $ 646 $ 842 $ 1,891 $ 2,571
======= ======= ======= =======
OTHER COMPREHENSIVE INCOME GAIN $ 1,913 $ 674 $ 2,536 $ 800
------- ------- ------- -------
COMPREHENSIVE INCOME $ 2,559 $ 1,516 $ 4,427 $ 3,371
======= ======= ======= =======
Net income per common share:
Basic $ 0.18 $ 0.24 $ 0.54 $ 0.73
Diluted $ 0.18 $ 0.24 $ 0.52 $ 0.73
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,891 $ 2,571
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (194) -
Amortization and depreciation 564 509
Deferred income taxes (1,075) 421
Stock released for coverage of benefit plans 224 96
Changes in assets and liabilities:
Reinsurance recoverable (3,647) 723
Other assets (4,738) (3,508)
Losses and loss adjustment expenses 3,208 (3,058)
Retrospective premiums accrued under
reinsurance treaties (2,769) (1,107)
Unearned premiums 8,217 6,218
Other liabilities 1,338 (1,000)
----------- ----------
Net cash flows provided by operating activities 3,019 1,865
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,997) (26,146)
Sales, maturities and redemptions of investments 14,395 24,913
Investment in purchased business (3,014) -
Purchases of property and equipment (293) (584)
----------- ----------
Net cash flows used in investing activities (2,909) (1,817)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock (129) (131)
Proceeds from long-term debt 1,971 -
Repayment of long-term debt (151) -
----------- ----------
Net cash flows provided by (used in) financing activities 1,691 (131)
----------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,801 (83)
----------- ----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 3,972 5,407
----------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 5,773 $ 5,324
=========== ==========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,167 $ 1,175
=========== ==========
Cash paid for interest $ 46 $ -
=========== ==========
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 nine-month periods ended September 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 nine-month periods ended September 30, 2001 and
2000 (in thousands):
For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
--------------------------- -----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Insurance
Revenues from external customers $ 5,439 $ 3,912 $ 15,102 $ 11,258
Net investment income 1,509 1,609 4,577 4,751
Depreciation and amortization 61 58 152 174
Segment profit before taxes 1,100 1,323 3,079 3,848
Segment assets 152,666 138,772
Segment liabilities 113,574 105,559
Expenditures for segment assets 45 189 133 566
For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Practice Management Services
Revenues from external customers $ 1,472 $ 1,314 $ 4,705 $ 4,171
Net investment income 13 23 45 56
Depreciation and amortization 150 113 412 335
Segment profit before taxes 6 36 364 415
Segment assets 9,589 6,846
Segment liabilities 4,082 1,273
Expenditures for segment assets 50 2 160 18
Total
Revenues from external customers $ 6,911 $ 5,226 $ 19,807 $ 15,429
Net investment income 1,522 1,632 4,622 4,807
Depreciation and amortization 211 171 564 509
Segment profit before taxes 1,106 1,359 3,443 4,263
Segment assets 162,255 145,618
Segment liabilities 117,656 106,832
Expenditures for segment assets 95 191 293 584
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):
September 30,
------------------
2001 2000
---- ----
Assets:
Total assets for reportable segments $ 162,255 $ 145,618
Elimination of intersegment receivables (1,707) (865)
Other unallocated amounts 1,490 565
--------- ---------
Consolidated total $ 162,038 $ 145,318
========= =========
Liabilities:
Total liabilities for reportable segments $ 117,656 $ 106,832
Elimination of intersegment payables (1,707) (865)
Other liabilities 95 220
--------- ---------
Consolidated total $ 116,044 $ 106,187
========= =========
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues from external customers:
Total revenues for reportable segments $ 6,911 $ 5,226 $ 19,807 $ 15,429
Elimination of intersegment revenues (2) (2) (7) (5)
-------- -------- -------- --------
Consolidated total $ 6,909 $ 5,224 $ 19,800 $ 15,424
======== ======== ======== ========
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Net investment income:
Total investment income for
reportable segments $ 1,522 $ 1,632 $ 4,622 $ 4,807
Elimination of intersegment income (1) -- (5) --
Other unallocated amounts -- -- -- 7
------- ------- ------- -------
Consolidated total $ 1,521 $ 1,632 $ 4,617 $ 4,814
======= ======= ======= =======
Profit before taxes:
Total profit for reportable segments $ 1,106 $ 1,359 $ 3,443 $ 4,263
Other expenses (164) (164) (695) (564)
------- ------- ------- -------
Consolidated total $ 942 $ 1,195 $ 2,748 $ 3,699
======= ======= ======= =======
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 For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 646 $ 842 $1,891 $2,571
====== ====== ====== ======
Weighted average common
shares outstanding - basic 3,526 3,520 3,524 3,527
Dilutive effect of stock options
and awards 83 25 88 14
------ ------ ------ ------
Weighted average common
shares outstanding - diluted 3,609 3,545 3,612 3,541
====== ====== ====== ======
Net income per common share:
Basic $ 0.18 $ 0.24 $ 0.54 $ 0.73
====== ====== ====== ======
Diluted $ 0.18 $ 0.24 $ 0.52 $ 0.73
====== ====== ====== ======
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. At September
30, 2001, the interest rate was 5.35%. 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. On September 10, 2001, 3,028 shares were
repurchased at a price of $11.25 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. ACC
has incurred $118,000 in costs associated with the start up of the company and
has not begun operations as of September 30, 2001.
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
nine months ended September 30, 2001, the after tax impact on the nine months
earnings due to the elimination of goodwill amortization would be an increase of
approximately $270,000.
Consolidated net income
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Net income was $646,000 for the three months ended September 30, 2001
compared to $842,000 for the three months ended September 30, 2000. Total
revenue was up 24% 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. Additionally, in the third quarter of 2001
a guaranty fund assessment of $243,000 was accrued for an assessment received
from the District of Columbia Insurance Guaranty Association in October related
to the insolvency of Reliance Insurance Company; no assessments were received
previously in 2001 or 2000. NCRIC expects to also receive an assessment from the
Virginia Insurance Guaranty Association due to the Reliance insolvency. While
the amount of that assessment is unknown at this time, NCRIC has a liability
accrued of $40,000 which it believes will be adequate to cover the potential
assessment.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Net income totaled $1.9 million for the nine months ended September 30,
2001 compared to $2.6 million for the nine months ended September 30, 2000.
Total revenue increased 22% for the nine months ended September 30, 2001
compared to September 30, 2000. The higher revenue was offset by an increase in
loss and loss adjustment expenses, the guaranty fund assessment and in practice
management expenses.
NCRIC's insurance segment experienced a significant increase in new
business written in the third quarter of 2001 and for the nine months ended
September 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 September 30, 2001 compared to three months ended September
30, 2000
Net premiums earned increased by $1.5 million, or 40%, to $5.3 million from
$3.8 million for the three months ended September 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 for the third quarter of 2001 include a decrease of $195,000
from the September 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 $9.2 million for the three months ended September
30, 2001 increased from $8.7 million for the three months ended September 30,
2000, due to net new business written combined with the premium rate increase.
The increase in gross premiums written was partially offset as a result of the
September 2000 termination of a hospital sponsored risk-sharing program. Under
terms of the contract the sponsor was billed $1.3 million in September 2000
based on the loss experience of the program; a similar billing did not occur in
2001.
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 85% of total new business written in the third quarter of 2001 from
54% during the same period in 2000.
Three Months Ended
September 30,
-------------
2001 2000
---- ----
Direct $ 486,000 $ 636,000
Agent 2,784,000 745,000
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Net premiums earned increased by 34% to $14.7 million from $11.0 million for
the nine months ended September 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
September 30, 2001, includes a decrease of $617,000 from the September 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 $28.8 million for the nine months ended September
30, 2001 increased by $7.0 million from $21.8 million for the nine months ended
September 30, 2000, due to net new business written combined with the premium
rate increase and some changes in policy effective dates to January 1. In
addition, written premium in 2000 included $1.3 million related to a hospital
sponsored program which was not repeated in 2001, as discussed above.
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 89% of total new business written in the first nine months of 2001
from 63% during the same period in 2000.
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
Direct $ 923,000 $1,346,000
Agent 7,106,000 2,289,000
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 nine months of 2000, 37% comes from
business written in Maryland, 47% from Virginia, 12% from West Virginia, and 10%
from Delaware. These increases are largely as the result of sales by agents. In
the District of Columbia there was a decline in written premium primarily as
a result of the September 2000 termination of a hospital sponsored risk-sharing
program.
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 third quarter of 2001, $385,000 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 September 30, 2001 compared to three months ended September
30, 2000
Net investment income decreased by $111,000 for the three months ended
September 30, 2001 compared to the third quarter of 2000 due to a decrease in
yields partially offset by an increase in invested funds. The average effective
yield was approximately 5.8% for the three months ended September 30, 2001 and
6.4% for the three months ended September 30, 2000. The tax equivalent yield was
approximately 6.3% for the third quarter of 2001 and 6.9% for the third quarter
of 2000. The decrease in investment yields reflects the market decrease in
interest rates in 2001 compared to 2000.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Net investment income decreased by $197,000 for the nine months ended
September 30, 2001 compared to the first nine 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 nine
months of 2001 by $3.1 million. The average effective yield was approximately
5.9% for the nine months ended September 30, 2001 and 6.3% for the nine months
ended September 30, 2000. The tax equivalent yield was approximately 6.4% for
the first nine months of 2001 and 6.7% for the first nine 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Practice management 50% 44% 44% 43%
Accounting 26% 29% 25% 28%
Tax & personal financial planning 7% 7% 13% 12%
Retirement plan accounting & admin 11% 12% 11% 12%
Other 6% 8% 7% 5%
---- ---- ---- ----
Total 100% 100% 100% 100%
==== ==== ==== ====
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Practice management and related revenue of $1.5 million for the three
months ended September 30, 2001 is up from $1.3 million for the three months
ended September 30, 2000. The increased revenue is a result of the addition of
new clients and the 2001 increase in consulting rates.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Practice management and related revenue of $4.6 million for the nine months
ended September 30, 2001 is up 12% from $4.1 million for the nine months ended
September 30, 2000. The increased revenue is 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 $325,000 of revenue in the first nine months of 2001 results
from services provided to existing insureds of NCRIC compared to $256,000 of
revenue in the same period during 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Incurred loss and LAE related to:
Current year - losses .................... $ 5,979 $ 4,044 $ 16,698 $ 13,288
Prior years - development ................ (1,593) (874) (3,793) (4,363)
-------- -------- -------- --------
Total incurred for the period .................. $ 4,386 $ 3,170 $ 12,905 $ 8,925
======== ======== ======== ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Nine Months Ended
September 30,
-------------
2001 2000
---- ----
Loss and LAE ratio..................... 87.7% 81.3%
Underwriting expense ratio............. 24.6% 26.9%
Combined ratio......................... 112.3% 108.2%
Three months ended September 30, 2001 compared to three months ended September
30, 2000
Total incurred loss and LAE expense of $4.4 million for the third quarter
of 2001 increased by $1.2 million from the $3.2 million incurred for the third
quarter of 2000. The increase in current year losses to $6.0 million for the
third quarter of 2001 reflects the increase in the level of exposure as a result
of premium growth and a rise in the cost of settling claims. The higher level of
favorable development of losses reported in prior years reflects the favorable
experience on the claims closed during the quarter, partially offset by 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.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Total incurred loss and LAE expense of $12.9 million for the first nine
months of 2001 increased by $4.0 million from the $8.9 million incurred for the
first nine months of 2000. The increase in current year losses to $16.7 million
for the first nine 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 112.3% for the nine months ended September 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 September 30, 2001 compared to three months ended September
30, 2000
Underwriting expenses of $1.4 million for the three months ended September
30, 2001 increased by $496,000 from $934,000 for the three months ended
September 30, 2000. The increase in expenses results primarily from increases in
commissions, premium taxes, and travel related to the increased level of new
business, particularly agent produced business. The mix of business produced by
NCRIC's independent agency force has increased to 85% of new business written
for the three months ended September 30, 2001 from 54% for the three months
ended September 30, 2000. Additionally, in the third quarter of 2001: 1) a
guaranty fund assessment of $243,000 was expensed; no guaranty fund assessments
were received in previous quarters of 2001 or 2000, and 2) professional fees,
primarily due to legal expenses related to the premium collection litigation
noted above, were higher than in the third quarter of 2000.
Practice management and related expenses were $1.5 million for the three
months ended September 30, 2001 and $1.3 million for the three months ended
September 30, 2000. Expenses increased due to the growth in business, new
business development, and an increase in the goodwill amortization and interest
expense 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 $297,000 for the three months ended September 30, 2001 compare to
$261,000 for the three months ended September 30, 2000. Other expenses for the
third quarter of 2001 include $65,000 of start up expenses for the new captive
insurance company subsidiary.
Nine months ended September 30, 2001 compared to nine months ended September 30,
2000
Underwriting expenses increased $675,000 to $3.6 million for the nine months
ended September 30, 2001 from $3.0 million for the nine months ended September
30, 2000. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in
commissions, travel and other underwriting costs. These expenses were partially
offset by an increase in ceding allowances as a result of the increase in
premiums earned. The mix of business produced by NCRIC's independent agency
force has increased to 89% of new business written for the nine months ended
September 30, 2001 from 63% for the nine months ended September 30, 2000.
Additionally, year-to-date expenses in 2001 are higher than for the same period
of 2000 due to the guaranty fund assessment noted above.
Practice management and related expenses were $4.4 million for the nine
months ended September 30, 2001 and $3.8 million for the nine months ended
September 30, 2000. Expenses increased as a result of the growth in new business
and business development efforts during 2001. In addition, goodwill amortization
increased by $88,000 and interest expense increased $50,000 as a result of the
contingent 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 $963,000 for the nine months ended September 30, 2001 compare to
$892,000 for the nine months ended September 30, 2000. Other expenses include
$118,000 of start up expenses for the new captive insurance company subsidiary
through September 30, 2001.
Federal income taxes
The effective tax rate for NCRIC at 31% for the nine months ended September
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 nine months ended September 30, 2001, NCRIC had cash flows from
operations of $3.0 million compared to $1.9 million for the corresponding period
of 2000. The $1.1 million of increased cash flow results primarily from an
increase in net premiums received partially offset by an increase 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
$2.0 million. 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 corporate
and tax-exempt securities. As of September 30, 2001, the carrying value of the
securities portfolio was $104.6 million. The portfolio was invested as follows:
At September 30, At December 31,
2001 2000
---- ----
U. S. Government and agencies..................... 9% 14%
Asset and mortgage-backed securities.............. 25 32
Tax-exempt securities............................. 19 16
Corporate bonds and equity securities............. 47 38
Over 69% of the portfolio was invested in U.S. Government and agency
securities or had a rating of AAA or AA. For regulatory purposes, 91% 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 September 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 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. At September 30, 2001, the interest rate was 5.35%.
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 September 30, 2001, fixed maturity securities
comprise 93% of total investments at market value. U.S. Government and agencies
and tax-exempt bonds represent 30% 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 nine 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 September 30, 2001,
NCRIC's fixed maturities were valued at $2.7 million above 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 nine months ended September 30, 2001, there was a change in the
allocation of NCRIC's portfolio increasing the percentage of tax-exempt and
corporate bonds to 65% of the total fixed maturity securities compared to 51% at
December 31, 2000. This has the potential to increase the market risk since 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 6. Exhibits and Reports on Form 8-K.
None
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.
November 14, 2001 /s/ R. Ray Pate, Jr.
--------------------------------------
R. Ray Pate, Jr., President &
Chief Executive Officer
(Duly Authorized Officer)
November 14, 2001 /s/ Rebecca B. Crunk
--------------------------------------
Rebecca B. Crunk, Sr. Vice President &
Chief Financial Officer
(Principal Financial Officer)