U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Number: 0-25505
NCRIC Group, Inc.
District of Columbia 52-2134774
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(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)
Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock par value $.01 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the Nasdaq SmallCap Market on March 5, 2002 was
approximately $12.4 million.
The number of shares outstanding of the Issuer's Common Stock, the issuer's
only class of outstanding capital stock, as of March 5, 2002 was 3,711,427.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into certain items of
Part III.
TABLE OF CONTENTS
PART I. Page
Item 1. Business of the Company....................................................... 1
Item 2. Properties.................................................................... 43
Item 3. Legal Proceedings............................................................. 44
Item 4. Submission of Matters to a Vote of Security Holders........................... 44
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......... 44
Item 6. Selected Financial Data....................................................... 45
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................... 73
Item 8. Financial Statements.......................................................... 75
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 108
PART III.
Item 10. Directors and Officers of the Registrant...................................... 108
Item 11. Executive Compensation........................................................ 108
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 108
Item 13. Certain Relationships and Related Transactions................................ 108
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 108
PART I
Item 1. Business of the Company
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Background
NCRIC Group, Inc., a District of Columbia corporation, is a holding
company that owns NCRIC, Inc., a medical professional liability insurance
company, and NCRIC MSO, Inc., a physician practice management and financial
services company. The principal operations of NCRIC, Inc. and NCRIC MSO are
conducted in the District of Columbia, Maryland, Virginia, West Virginia,
Delaware and North Carolina. References to "NCRIC" mean NCRIC Group and its
subsidiaries, including their predecessors.
NCRIC Group was organized in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into a mutual
holding company structure (the "Reorganization"). NCRIC, A Mutual Holding
Company owns all of the outstanding shares of NCRIC Holdings, Inc., which prior
to July 29, 1999, owned all of the outstanding shares of NCRIC Group. Effective
July 29, 1999, NCRIC Group completed a public offering (the "Stock Offering")
and issued 2,220,000 shares of the common stock, to NCRIC Holdings, Inc. and
1,480,000 shares of the common stock in a subscription and community offering at
a price of $7.00 per share.
NCRIC Group owns all of the outstanding shares of NCRIC, Inc. and
NCRIC MSO. The following chart illustrates the organizational structure pursuant
to which the Company operates.
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NCRIC, A Mutual Holding Company
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100% of Shares |
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NCRIC Holdings, Inc.
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60% of Shares |
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NCRIC Group, Inc. 40% of Shares Public
------------- Stockholders
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100% of Shares | 100% of Shares
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NCRIC, Inc. NCRIC MSO, Inc. d/b/a
HealthCare Consulting
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Subsidiaries Subsidiaries
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District of Columbia law provides that NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC, Inc.
NCRIC is the leading provider of medical professional liability
insurance in the District of Columbia, based on direct premiums written in 2000.
Medical professional liability insurance insures the physician against
liabilities arising from the rendering of, or failure to render, professional
medical services. NCRIC is one of the leading providers of practice management
and financial services to physicians in Virginia and North Carolina. In January
1999, NCRIC expanded its operations through the acquisition of HealthCare
Consulting, Inc., a physician practice management company, its affiliate, HCI
Ventures, LLC, a provider of capital and financial services to management
services organizations, and of Employee Benefits Services, Inc., a provider of
employee benefits services, owned by the stockholders of HealthCare Consulting.
Net proceeds received by NCRIC in the Stock Offering were $8.4
million. In connection with the Stock Offering, NCRIC loaned $1,036,000 to the
Employee Stock Ownership Plan, ESOP, and $518,000 to the stock award plan. The
loans from NCRIC enabled the ESOP to purchase 148,000 shares of NCRIC's common
stock, and the stock award plan to purchase 74,000 shares of NCRIC's common
stock. Of the net proceeds, $5.1 million were used to repay indebtedness
incurred through the acquisition of HealthCare Consulting.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company
servicing healthcare providers in the District of Columbia and Maryland. NCRIC,
Inc.'s wholly owned subsidiary, Commonwealth Medical Liability Insurance
Company, CML, sells medical professional liability insurance to healthcare
providers in Virginia, Maryland, West Virginia, and Delaware. CML's policies
closely resemble NCRIC's policies except that insureds of CML do not become
members of NCRIC, A Mutual Holding Company.
Created by District of Columbia physicians in 1980 when medical
professional liability insurance was either unavailable or prohibitively
expensive, NCRIC has provided high quality insurance products to its insureds in
the District of Columbia, a legal jurisdiction which has rejected tort reform
and has the highest cumulative average medical professional liability jury
awards of any jurisdiction in the United States. NCRIC's success rests, among
other factors, on its ability to successfully litigate claims, reduce its
insured's loss exposure through effective risk management and provide its
insureds with individualized service. Recognizing the value of NCRIC's insurance
products, 98% of NCRIC's insureds renewed their policies in 2001. NCRIC believes
that it successfully managed the medical professional liability insurance crisis
of the early 1980's and has prospered since through a combination of physician
governance and professional management expertise. As of December 31, 2001, the
insurance companies had 35 employees.
Over the past four years, NCRIC has distributed a customer
satisfaction survey. In 2001, 90% of those responding indicated that they were
"always pleased" or "almost always pleased" with NCRIC's service, which is
comparable to 2000's rating of 93%.
According to A.M. Best Company, in 2000, 50% of the direct premiums
written for physician and hospital professional liability insurance in the
District of Columbia were written by NCRIC. In addition, during the year ended
December 31, 2001, NCRIC generated 49% of its premiums in Maryland, Virginia,
West Virginia, and Delaware. NCRIC's market share, based on the 2000 data, is
less than 3% in each of these markets. As of December 31, 2001, NCRIC had
approximately 3,000 medical professional liability policies outstanding in all
of its markets. The majority of NCRIC's premiums are generated from individual
and small-group practices, but it also has risk sharing programs with groups of
physicians sponsored by metropolitan Washington, D.C. area hospitals. NCRIC
markets its products directly to its physician clients. NCRIC also markets its
products through independent brokers and agents who produced 90% of new premiums
written in 2001 as compared to 59% in 2000.
Medical professional liability insurance insures the physician or
other healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
NCRIC's direct insurance premiums written were $34.5 million, $22.7
million, and $21.4 million for the years ended December 31, 2001, 2000, and
1999, respectively. The historic results of operations may not be indicative of
future operations. The operating results of medical professional liability
insurers are subject to significant fluctuation, which can result in net losses
due to a number of factors, including:
o adverse claims experience;
o judicial trends;
o changes in the investment and interest rate environment; and
o general economic conditions.
NCRIC believes it can best leverage its strengths and appeal to
customers by maintaining strength in its financial accounts. In line with this
philosophy, as of December 31, 2001, NCRIC has established, on a gross basis,
$84.6 million in loss reserves. NCRIC's success in adequate estimation of loss
reserves is demonstrated by its loss development pattern, as displayed in the
chart on page 26. These favorable loss developments have contributed
significantly to NCRIC's reported earnings. While NCRIC believes that its loss
reserves are adequate, there is ultimately no guarantee that reserve levels will
be adequate as losses develop.
Practice management and financial services
NCRIC MSO, Inc. was established in 1997, after thorough due diligence
by a NCRIC Board appointed task force and upon review and approval by the Board,
to be NCRIC's vehicle to provide practice management and financial services to
physicians. Following the due diligence, in 1998, NCRIC selected a joint venture
partner in HealthCare Consulting, HCI Ventures and Employee Benefits Services.
In order to substantially accelerate its entry into the practice management,
financial services and employee benefits markets, NCRIC acquired HealthCare
Consulting, HCI Ventures and Employee Benefits Services in January of 1999.
Today, NCRIC provides practice management and financial services to over 1,200
physicians throughout the mid-Atlantic area of Virginia, North Carolina,
District of Columbia and Maryland. Since the acquisition, NCRIC MSO has been
doing business as HealthCare Consulting.
A key business strategy of NCRIC has been to provide a broad range of
practice management services that give physicians the management expertise they
need to conduct their practices without requiring them to relinquish ownership
or control of their practices. NCRIC serves physicians of all group sizes, from
solo ownership to large integrated group practices and works with other health
care providers, such as hospitals and clinics, in the provision of practice
management services.
NCRIC believes that its practice management and financial services
business diversifies its operations while solidifying the already strong
relationship NCRIC has with its existing insureds through the provision of such
needed management expertise. As NCRIC continues its successful diversification
into practice management and financial services, it continues its goal to
provide an additional distribution channel for its core insurance products.
NCRIC intends to be a partner that physicians can rely on to understand their
problems and who has the foresight to develop services to fit their needs across
a spectrum of business issues.
Other NCRIC Group subsidiaries
In addition to NCRIC, Inc., CML, and NCRIC MSO operations, NCRIC has
a captive insurance operation, a reinsurance brokerage operation, an insurance
agency, and a physicians organization.
American Captive Corporation, ACC, was established in April 2001 as
the first captive insurance company to be licensed in the District of Columbia
under the Captive Insurance Act of 2000 and is authorized to form independent
protected cells to accommodate affinity groups seeking to manage their own risk
through an alternative risk transfer structure. In 2001 ACC was engaged in
establishing the foundation for development of captive management operations. In
February 2002 NCRIC announced formation of a joint venture with Risk Services,
LLC, to form National Capital Risk Services to offer a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
National Capital Insurance Brokerage, Ltd., a wholly-owned subsidiary
of NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance
broker. National Capital Insurance Brokerage, Ltd. has retained commission
income that would otherwise have been paid to outside reinsurance brokers. This
income has been used by NCRIC to offset other operating expenses. National
Capital Insurance Brokerage has also played a critical role in structuring
NCRIC's reinsurance program to provide effective and comprehensive reinsurance
coverage without reducing NCRIC's profitability.
NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC, Inc.
formed in 1989, offers life, health and disability insurance as well as property
and casualty insurance products. NCRIC Insurance Agency had commission income of
$56,000 in 2001 compared to $80,000 in 2000 and $71,000 in 1999. NCRIC Insurance
Agency offers its products in the same markets as NCRIC. As an insurance agent,
NCRIC Insurance Agency receives commissions for business it places for insurance
companies it represents. NCRIC Insurance Agency markets insurance products not
underwritten by NCRIC. This permits NCRIC's core insureds to obtain a wider
range of insurance products through NCRIC.
NCRIC Physicians Organization, Inc., organized in 1994, a
wholly-owned subsidiary of NCRIC MSO, manages a coalition of physicians which is
organized to contract with managed care payers as an exclusive healthcare
provider network. NCRIC Physicians Organization ended all of its contracts in
1999 and formed an agreement with American Medical Security, AMS, to provide its
network to a developing PPO health plan by AMS for the Washington, D.C.
metropolitan area. NCRIC Physicians Organization reached a settlement with AMS,
effective October 1, 1999, that will provide NCRIC Physicians Organization with
$6,000 per month over a five-year period. The monthly fee of $6,000 is reduced
by $0.75 for each subscriber who enrolls in the network plan.
Current Business Environment
NCRIC strives to provide improving value in its services and products
to the physician clients and the overall health care provider community it
serves. NCRIC is influenced by two primary market environments: first, the
highly specialized financial environment of professional liability, and, second,
the ever-changing health care environment. Continuing to enhance products and
services through existing resources is challenging in today's environment.
Physician clients served by NCRIC have seen a stunning impact on the
financial performance of their business over the past 12 months. A key
environmental factor in NCRIC's business market and upon its clients is in the
rising cost of professional liability insurance. The rising cost stems from
increasing claims severity, as well as, an increase in the frequency of claims
within NCRIC's market areas, the contraction of market capacity, rising
reinsurance costs, and the falling interest rate environment. Occurring
simultaneously is a continuing decrease in the reimbursement to NCRIC clients by
third party payors, particularly Medicare, which can constitute on average up to
40% of a typical physician's total revenue. Further, the increase in regulatory
requirements on physicians adds another layer of compliance costs in order to
continue in the business of medical practice.
The value NCRIC provides in services to its clients will continue to
improve but not without an increase in the cost for its services. While
physicians face a decreasing revenue stream, physicians who utilize and benefit
from the services of NCRIC will see increased rates for professional liability
insurance and for management services. NCRIC recognizes that as it focuses on
improving the value it provides to its clients, its focus must also include
providing its services in the most cost-effective manner in recognition of the
revenue constraints faced by medical providers.
Cost
The costs NCRIC incurs to provide products and services are
increasing due to changes in the current business environment. Within all of
NCRIC's markets for professional liability insurance there has been an
escalation of the severity of claims (cost), including the cost for defending
claims, and an uptick in the frequency of reported claims. In addition to
increasing premium rates in each of its market territories, NCRIC is reducing
pricing credits given to its insureds. At a time when one of the country's
largest insurers, St. Paul Companies, is exiting the medical malpractice market,
NCRIC has met the insurance marketplace challenges head-on with success and
growth. Further, the tragic events of September 11, 2001 and the resulting
impact on the reinsurance capital markets has resulted in the need to pass
through to NCRIC insureds the increase in reinsurance rates for excess limits
coverage.
NCRIC continues to maintain its philosophy of pricing its insurance
products at the level needed to provide a secure financial position to support
its obligations to its insured medical providers. This practice has helped to
hold down the required level of premium rate increases and has diminished the
impact of the cost of its insurance products to the physician community. While
some insurers are increasing the rate of their products beyond 50% and in some
cases, over 100%, NCRIC has been able to temper its increases in the cost of its
products. This leads to NCRIC's ability to continue to deploy the capital needed
to continue a high level of service to its clients, which results in a strong
client retention, while at the same time attracting new customers to NCRIC's
philosophy of prudent financial management. This commitment is shown in our
results of 2001. While NCRIC increased rates in 2001 and again in 2002, in 2001
NCRIC experienced the largest increase in its customer base in its 21-year
history.
Further dominating the cost landscape, NCRIC's clients are facing new
governmental regulations requiring development and implementation of
technological changes in medical practices. This is dominated by compliance
required in coding of services by the Medicare/Medicaid Fraud False Claims Act
and the transfer and handling of patient information as regulated by the Health
Insurance Portability and Accountability Act. Also, the tragic events of
September 11, 2001 are focusing new demands on all health care providers to take
a front line role in providing patient care and safety in the event of future
bioterrorist attacks. It has been estimated that the requirements needed by
health care providers to meet the bioterrorist threats costs could exceed $1
billion. These changing health care requirements are adding to the cost
structure of medical businesses. While this has negative consequences for
NCRIC's clients from a cost control standpoint, it provides new revenue sources
to NCRIC as it assists its clients to comply with the new regulatory
requirements.
Revenue
As NCRIC clients are faced with the challenge of increasing their
revenue to cover increasing costs of services and to continue growth in value of
their medical practices, NCRIC's rates for services to physicians for management
services and professional liability insurance continue to increase.
Physicians today face dramatic challenges as payors restructure their
payment plans. Additionally, health care plans are increasing their premium
rates to employers on average 11%, and in turn employers are pushing these
additional costs to their employees. This cost shifting could have a spiraling
effect on lowering overall reimbursement to the physician and further stressing
physicans revenue. So that NCRIC's clients can preserve their business and meet
opportunities to grow revenue, NCRIC will continue to help physicians protect
their assets through professional liability insurance coverage and management
and financial services.
To identify new sources of revenue, NCRIC's practice management
segment is helping its clients evaluate improvements in technology to improve
office and medical record efficiencies; joint venture of allied health services,
e.g., lab and physical therapy; and non-traditional resources to drive new
revenue.
Leading integration and networking with new capital partners is
another approach NCRIC is aggressively pursuing with its clients to address
decreasing reimbursement. NCRIC has been successful in developing integrated
group practice models to focus on cost sharing, group purchasing and improved
contracting with third party payors. NCRIC is now using its leverage with these
larger groups to provide assistance to clients in expanding their medical
practices through alignment with other businesses. These ventures are focused on
developing "same store" shopping for services, while capitalizing on the venture
to develop a larger distribution system for services. NCRIC has a proven role in
providing additional management services under contract, improving and expanding
its own revenue stream.
Value
To ensure that clients continue to receive valued services, NCRIC
studies the changing health care market to identify new services that add value
for the client and provide added revenue and profitability for the company.
Several recent regulatory changes have allowed NCRIC to diversify into new
products and territories. With the onslaught of the federal government in
investigating Medicare false claims and billing errors, NCRIC has responded to
the market by providing liability coverage through its PracticeGard policies and
envisions expansion of this product throughout the country via American Captive
Corporation. In addition, NCRIC has increased services and revenue in its
management consulting operations by assisting physicians to comply with the new
regulations.
To respond to the existing conditions in the medical professional
liability insurance market, which include significant premium increases,
substantial reductions in the availability of coverage, and a pronounced decline
in capacity within the professional liability insurance industry, NCRIC entered
the alternative risk transfer marketplace with the licensing of its subsidiary
American Captive Corporation, ACC. Alternative risk transfer is broadly defined
as the use of alternative insurance mechanisms as a substitute for traditional
risk-transfer products offered by insurers. These mechanisms include, but are
not limited to, wholly-owned captives, rent-a-captives including protected cell
captives, risk-retention groups and other risk-financing arrangements that
employ elements of self-insurance.
As a protected cell captive, ACC offers an alternative risk financing
vehicle for insureds looking for advantages of a captive insurance company but
without the time and financial commitment involved in establishing a
wholly-owned insurance company. Each insured group is assigned a "protected
cell" that is independent from all other participants. The risk of one cell is
self-contained and is not affected by the risk of another protected cell.
To better meet the requirements of potential healthcare providers
seeking an alternative risk transfer solution, NCRIC identified Risk Services,
LLC, as a partner to complement its core competencies, thus enabling NCRIC to
provide more comprehensive services. In early 2002 NCRIC and Risk Services
joined to form National Capital Risk Services, which offers a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
The flexibility and strength created in the joint venture enables National
Capital Risk Services to customize risk transfer programs and to offer a broad
variety of services, including captive formation and management, insurance
program structuring and design, claims and risk management, underwriting, rating
and policy issuance, reinsurance accessibility, and financial and regulatory
compliance.
ACC is well positioned to meet current professional liability
insurance market needs due to its ability to manage risk and provide access to
increasingly unavailable reinsurance markets. The potential for fee-based
revenue through this venture is greatly enhanced by the ability of National
Capital Risk Services to provide both administrative and consulting services. As
demand for these specialized services increases, NCRIC believes this venture is
well positioned to capitalize on the emerging opportunities.
Increased value to our physician clients is evidenced by the direct
involvement of physicians in the governance of NCRIC. Physician leadership in
the NCRIC Board and committees provides NCRIC with a constant and consistent
"focus group" that provides insight on physician needs, keeping NCRIC ahead of
the curve on improving products and services. In 2001 and early 2002 NCRIC
advanced this model for physician involvement into its new market territories of
Delaware, West Virginia and Virginia by establishing a Physician Advisory Board
in each of these jurisdictions. These groups composed of local physicians will
provide critical insight on local market conditions.
Our vision
NCRIC continues to be a healthcare financial services organization
which provides individual physicians and groups of physicians and other
healthcare providers with economical, high-quality medical professional
liability insurance and the practice management and financial services necessary
for them to succeed in the current healthcare environment. NCRIC believes that
it is well positioned to accomplish these goals. It has a loyal base of
policyholders and management clients to build upon, and NCRIC is very adaptable
to meeting changing needs.
Current channels of distribution and the strong retention of clients
by NCRIC will assist in the growth of the Company and the cross selling of its
expanded range of services and products among existing and new clients. In 2001
NCRIC expanded its client base by 1,100 physicians. This provides for the
opportunity to continue to cross-sell and expand revenue and profitability based
on pure organic internal growth.
NCRIC's insurance operations will market its medical professional
liability products and services to some of its management and financial
services' approximately 1,200 physician clients. Since the HealthCare Consulting
acquisition closed on January 4, 1999, NCRIC has sold 78 medical malpractice
insurance policies to clients of HealthCare Consulting, which, in turn, has sold
services to 23 NCRIC physicians.
The growth and future success of our practice management company will
be best served through organic growth of increased services to existing clients,
development of new services to address the changing health care environment and
governmental regulations, and focusing on mergers and acquisitions that
supplement and strengthen our core practice management services. The HealthCare
Consulting acquisition has provided an opportunity for NCRIC to make available
practice management and employee benefit services to its approximately 3,000
insureds. In 2001 and 2000, NCRIC's practice management revenue from its insured
physicians was approximately $398,000 and $365,000, respectively. Altogether in
2001 NCRIC provided products and services to approximately 4,200 physicians, up
from approximately 3,100 physicians in 2000.
Core Insurance Products
NCRIC underwrites medical professional, office premises, and medical
billings, errors, and omissions liability policy risks for physicians, physician
medical groups and clinics, and other providers in the healthcare industry.
NCRIC currently issues policies on a claims-made basis. Claims-made policies
provide coverage to the policyholder for claims occurring and reported during
the period of coverage. NCRIC also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting NCRIC's underwriting criteria.
This coverage extends the effective date of claims-made policies to designated
periods prior to the physicians' becoming an insured of NCRIC. Insureds are
covered continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy
forms for physicians who are individual practitioners and for those who practice
as part of a medical group. This insurance provides protection for the legal
liability of the insureds for injury as a result of the performance of patient
treatment, failure to treat and failure to diagnose and related types of
malpractice. The policy issued to individual practitioners also provides
secondary coverage of premises liabilities that may arise in the
non-professional operations of the medical practice.
Policy limits. NCRIC offers limits of insurance up to $11 million per
claim, with up to a $13 million aggregate policy limit for all claims reported
with each policy year. The most common limit is $1 million per claim, subject to
a $3 million aggregate policy limit. Higher limits and excess coverage is
written with special reinsurance arrangements.
Reporting endorsements. Extended reporting endorsements are offered
to physicians at the termination of each NCRIC policy. This endorsement extends
indefinitely the period for reporting claims. The price of the reporting
endorsement coverage is based on approved rates. NCRIC provides extended
reporting endorsement coverage at no additional cost for insured physicians who,
while their policy is in force, either die, become disabled to practice their
specialty, or retire under specific considerations.
PracticeGard. NCRIC has established a limited defense reimbursement
benefit of up to $25,000 to defend physicians in proceedings by disciplinary
boards. This benefit is provided within the NCRIC policy at no additional cost.
PracticeGard provides legal counsel to defend the insured from licensure actions
brought by a State Medical Licensing Board, actions involving medical staff
credentialing by hospitals, actions to remove physicians from participation in a
managed care plan and actions to limit participation in government programs like
Medicare and Medicaid.
PracticeGard Plus. In 1999, NCRIC began providing PracticeGard Plus.
This coverage protects physicians and hospitals with coverage for Medicare and
Medicaid billings errors and omissions liability. This coverage provides up to
$1 million in combined limits for defense and indemnity of civil fines. Coverage
is provided under a separate claims-made policy and can be extended to six years
of prior acts coverage.
Program for physicians who do not meet usual underwriting standards.
NCRIC also has a program for physicians who do not meet NCRIC's usual
underwriting standards. After careful consideration and extensive underwriting,
a surcharge is applied to the premiums of these physicians to compensate for the
higher level of risk. NCRIC monitors the activities of these insureds more
closely than those of its other insureds and attempts to rehabilitate these
insureds through risk management training. This program was not a significant
source of revenue in 2001.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of February 20, 2002.
Direct Premiums Percentage
Group Size Written of Total
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(in thousands)
Solo practitioner physicians .................... $19,965 43%
Groups with two physicians ...................... 1,218 3
Groups with three or more physicians ............ 16,960 37
Sponsored programs, including risk sharing ...... 7,806 17
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Total ................................. $45,949 100%
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Occurrence policies. Until July 1, 1986, NCRIC issued policies on an
occurrence basis. Occurrence policies provide coverage to the policyholder for
all losses incurred during the policy year regardless of when the claims are
reported. As of December 31, 2001, NCRIC has loss and LAE reserves in the amount
of $4.7 million in connection with its potential liability under occurrence
policies.
Maintenance and expansion of core insurance products
NCRIC's future success is in part dependent on its ability to ensure
that its core insurance products continue to meet the needs of healthcare
providers. Expanding NCRIC's relationships with larger groups of physicians,
broadening its geographical boundaries and enhancing its distribution systems
will accomplish growth and retention of NCRIC's core insurance business. NCRIC
will also continue developing appropriate risk financing vehicles for larger
groups. The key elements of NCRIC's strategy to compete effectively and create
profitable long-term growth for its core insurance products are the following:
Maintain its strong franchise or close relationship with area medical
communities. National Capital Reciprocal Insurance Company was founded in 1980
with the strong support of the Medical Society of the District of Columbia and
the District of Columbia's physicians. NCRIC maintains the exclusive endorsement
of the Medical Society of the District of Columbia, as well as that of the
Virginia-based Arlington County Medical Society. NCRIC's endorsement agreement
with the Medical Society of the District of Columbia requires NCRIC, A Mutual
Holding Company to reserve a seat on its board of directors for an individual
nominated by the Medical Society of the District of Columbia. NCRIC also
maintains strong working relationships with the Medical Society of Virginia and
the Delaware Medical Society.
The articles of incorporation of NCRIC, A Mutual Holding Company
require that at least two-thirds of the members of its board of directors and
NCRIC's board of directors be physicians. This direct involvement of physicians
enables NCRIC to better understand medical practice patterns, claims, customer
needs and other relevant matters.
Growth through geographic expansion and expanded distribution
channels. In addition to its dominant position in the District of Columbia area,
NCRIC, through its subsidiary CML, is a significant insurer in Maryland,
Virginia, Delaware, and West Virginia. NCRIC is constantly alert to potential
expansion opportunities in other Mid-Atlantic states. Upon expansion into a new
jurisdiction, NCRIC recruits and retains qualified personnel, not only as
Company employees, but also as defense counsel, agents, and other affiliates.
Competition for qualified personnel may be intense and NCRIC may be unable to
attract and retain qualified persons.
NCRIC continues to expand and support its brokers and agent network.
Historically, direct distribution in the District of Columbia has held down
expenses and provided close ties to NCRIC's insureds. Direct distribution
provided 76% of NCRIC's renewal premiums in 2001. In recent years, new growth
has largely come from NCRIC's force of appointed agents. In 2001, 10% of all new
business was written through direct distribution and 90% through independent
agents. NCRIC believes it can further increase new business through greater use
of independent agents and brokers. This will continue to increase NCRIC's
dependence on insurance agents and other intermediaries.
Enhance current insurance product offerings with new coverages to
increase sales and strengthen ties with physicians. NCRIC has developed other
insurance products in addition to its core medical professional liability
insurance offerings. These products include comprehensive premises liability
coverage for medical offices and NCRIC PracticeGard Plus. PracticeGard Plus is
designed to protect physicians from costly civil fees and penalties related to
the government's new regulations regarding billing coding and compliance.
Additionally, NCRIC has developed a new program, CompliancePlus, which couples
its PracticeGard Plus insurance product with necessary compliance and
educational services. The CompliancePlus package consists of (a) Compliance
Advantage, a comprehensive, Internet-based risk evaluation tool, which serves as
a primary source for information on billing compliance; (b) CompliancePlus
Office Program, a survey and written plan which outlines areas of risk that may
need special interest or attention both now and in the future; and (c)
PracticeGard Plus, a billings errors and omissions insurance product that
provides defense and indemnity coverage for attorney costs as well as civil
fines and penalties sought as a result of compliance violations alleged by
Medicare and Medicaid agencies.
Alternative risk transfer products. NCRIC believes its protected cell
captive, American Captive Corporation, and its alliance with Risk Services, LLC,
in the formation of National Capital Risk Services well positions NCRIC to meet
market needs for alternative risk transfer solutions and to expand its fee-based
administrative and consulting services. Since fee-based revenue from this
business has not yet occurred, there is no certainty as to the impact of this
new product line on NCRIC's financial results.
Growth through strategic acquisitions. NCRIC believes that
consolidation will continue in the medical professional liability insurance
industry. This may give rise to opportunities for NCRIC to make strategic
acquisitions to expand its business, product offerings and geographic scope.
NCRIC is positioned to make acquisitions, since it has access to capital markets
and can issue stock in connection with an acquisition. In addition, NCRIC
intends to diversify into other healthcare-related enterprises through strategic
acquisitions such as the HealthCare Consulting acquisition. NCRIC may be unable
to acquire other medical professional liability insurers or other physician
practice management companies. An unsuccessful or poorly performing acquisition
could have a material adverse effect on NCRIC's business or financial results.
Maintain conservative balance sheet and strong ratings. Management
believes that existing and prospective clients evaluate, among other factors,
the financial strength of NCRIC in any decision regarding the purchase of
medical liability coverage.
Use legal and risk management expertise to vigorously reduce loss
costs. NCRIC's experience with, commitment to and focus on medical professional
liability insurance for over 20 years has allowed it to develop strong knowledge
of the local healthcare and legal environments and to build an extensive
database of medical professional liability claims experience. NCRIC uses this
expertise to select and price risks, to provide risk management services to
prevent or reduce the severity of losses and to aggressively defend against
unjustified claims or excessive settlement demands.
Practice Management Services
On January 4, 1999, NCRIC Group acquired all of the outstanding
shares of HealthCare Consulting, Inc. and all of the outstanding membership
interests of HealthCare Consulting's affiliate, HCI Ventures. NCRIC Group also
purchased all of the assets of Employee Benefits Services, an employee benefits
company formed by the three stockholders of HealthCare Consulting. NCRIC Group
assumed all of the liabilities of HealthCare Consulting, HCI Ventures and those
relating to the assets of Employee Benefits Services. HealthCare Consulting has
been merged into NCRIC MSO, and HCI Ventures has become a wholly owned
subsidiary of NCRIC MSO. HealthCare Consulting and Employee Benefits Services
continue to operate as divisions of NCRIC MSO. The HealthCare Consulting
acquisition has greatly enhanced NCRIC's ability to provide practice management
services, employee benefit services and financial services to physicians in the
Washington, D.C. metropolitan area and throughout the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its
predecessor has provided practice management services, accounting and tax
services and personal financial planning services to medical and dental
practices throughout the Mid-Atlantic region. HealthCare Consulting offers its
clients extensive experience and expertise in:
o practice management;
o managed care contracting;
o information systems implementation;
o practice evaluations;
o billing and collections;
o personnel;
o practice structure; and
o management and market recognition among key players in the
healthcare industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; Washington, D.C.; and Greensboro, North Carolina. As
of December 31, 2001, HealthCare Consulting had approximately 57 employees, of
whom 18 served as practice management consultants and 13 are contracted
employees to physicians' practices.
The following table indicates the sources of HealthCare Consulting's revenues
during the past three calendar years:
2001 2000 1999
----- ----- -----
Practice management ............. 50.5% 52.4% 46.2%
Accounting ...................... 29.9 31.3 35.8
Tax & personal financial planning 13.4 12.7 13.0
Other ........................... 6.2 3.6 5.0
----- ----- -----
Total ........................... 100% 100% 100%
===== ===== =====
HCI Ventures. HCI Ventures provides start-up capital to newly formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for which HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
Employee Benefits Services. Employee Benefits Services provides
employee benefits services, plan design, plan administration and plan asset
accounting to approximately 300 clients in the Mid-Atlantic region. The
principal assets that NCRIC acquired from Employee Benefits Services were its
established client base and the systems it had developed to service its clients.
Employee Benefits Services also manages documentation and required forms
filings. Over 55% of HealthCare Consulting's physician practice clients who
qualify for plan administration services utilize Employee Benefits Services as
their employee benefit plan administrator. While Employee Benefits Services
initially provided services only to healthcare businesses, currently over 46% of
its clients are non-healthcare related. As of December 31, 2001, Employee
Benefits Services had twelve employees.
The following table indicates the sources of Employee Benefits
Services' revenues during the past three years:
2001 2000 1999
---- ---- ----
Retirement Plan Accounting and
Administration................................ 89% 90% 91%
Section 125 Administration.................... 11 10 9
---- ---- ----
Total.................................... 100% 100% 100%
==== ==== ====
Maintenance and expansion of core practice management services
The growth and future success of our practice management business
will occur through continued organic growth of services to existing clients;
development of new services to address the changing health care environment and
governmental regulations; continued cross-selling activity with NCRIC insurance
clients; and focusing on mergers and acquisitions that supplement and strengthen
our core practice management services.
Retain existing clientele and bring additional services to strengthen
our relationship. NCRIC's acquisition of HealthCare Consulting brought to NCRIC
some long-standing business relationships, some of which span back to 1973.
NCRIC's practice management company has experienced significant growth and, in
addition to that growth, has seen the stability of providing services to
satisfied clients who retain our services with them year to year. NCRIC
maintains a target of retaining at least 95% of its core clientele. This year,
NCRIC renewed engagement agreements with all clients. NCRIC conducted a thorough
analysis of the service level and fee structure for each client. This analysis
provided the opportunity to identify additional available services not currently
being purchased by the client, which could be offered to improve the client's
medical practice.
Expand through the development of new products and services that meet
changing physician needs from regulations, other providers and payers. NCRIC
continues to monitor the ever-changing healthcare environment for the
development of needed services for physicians. NCRIC evaluates changes in state
and federal regulations, hospital organizational changes, and revamping
reimbursement and payer requirements. This year began the development of our
Data Information Center to centralize the requests of existing clients regarding
management assistance relative to new laws and regulations. This has also shown
to be effective in marketing to potential clients who seek advice and eventual
longer-term fee based services. These issues force physicians to redirect how
they price their services, deliver and market their services, and with whom they
have business relationships. Since the beginning of many of the federal changes
impacting all Medicare providers, NCRIC has been proactive in developing its
services and adding new products to meet the impact these regulations have on
the expenses of running a medical practice.
Focus on services that integrate with our insurance products and can
be cross-sold. NCRIC continues to cross-sell all of its services across each of
its segment's client bases. As an example, NCRIC has developed a program,
CompliancePlus that bundles its PracticeGard Plus policy with its compliance
planning services. A three-year service agreement is required for which the
client/insured receives the insurance policy, access to an Internet-based risk
evaluation tool, chart audits and a compliance plan and educational services.
This product will also be offered through NCRIC's captive insurance company on a
nationwide basis. NCRIC is also providing chart review and coding analysis for
all current PracticeGard clients on a fee basis and is cross-selling the
PracticeGard to those management clients we have serviced with compliance and
coding services.
Growth through strategic acquisitions. NCRIC has sought out
discussions with companies that provide similar services to a similar client
market in new market areas. NCRIC believes that organizations that provide a
niche service, such as billing, or accounting, could supplement its core base of
services with additional resources and personnel. NCRIC further believes that
this is a viable growth strategy through profitable acquisition, or a joint
venture arrangement. NCRIC is also able to offer target acquisitions the
opportunity to expand their product offerings with a viable purchase and
transition of clients, particularly for those nearing retirement. NCRIC may be
unable to acquire other companies and a poorly performing acquisition could have
an adverse effect on NCRIC's business or financial results.
Maintain fee schedules and focus on profitability of services. NCRIC
believes it is critical to develop profitable services as opposed to loss
leaders. On an annual basis, each account and its resource commitment is
evaluated to assess if fee adjustments are appropriate. Additionally, the
overall rate structure is evaluated to ensure continued profitability of NCRIC
services, and an increase in all fees is being implemented in 2002. Further
NCRIC believes that the majority of recurring clients should be moved to a
retainer fee structure so that revenue is more constant level to NCRIC and the
cost of services is more constant to the client. Clients who purchase a single
service or one-time consulting assignment will be charged according to the new
rate structure for 2002. As a result, NCRIC may not have competitive prices for
all its services.
Marketing and policyholder services
Within the District of Columbia, NCRIC markets directly to individual
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians by
targeting medical residents and physicians just entering medical practice. In
addition, NCRIC participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar events. NCRIC believes that this personal,
comprehensive approach to marketing is essential to providing medical
professional liability insurance, where special knowledge and experience are a
prerequisite.
NCRIC's primary marketing channel outside D.C is its independent
agent network. In 2001, these agents produced 90% of new premiums and 24% of
renewing premiums. Healthcare providers frequently utilize agents when they
purchase medical professional liability insurance. Therefore, NCRIC believes
that developing its broker relationships in Virginia, Maryland, West Virginia
and Delaware is important to grow its market share. NCRIC selects agents who
have demonstrated experience and stability in the medical professional liability
insurance industry. Brokers and agents receive market rate commissions and other
incentives averaging 9% based on the business they produce and maintain. NCRIC
strives to foster relationships with those brokers and agents who are committed
to promoting NCRIC's products and are successful in producing business for
NCRIC.
NCRIC also has a Policyholder Services department that provides
account information to all insureds and strives to maintain a close relationship
with the medical groups and individual practitioners insured by NCRIC. Each of
these practices has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospital
based programs and large and mid-size medical groups, NCRIC has an account
manager assigned to each group who heads a service team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. NCRIC
believes this approach has resulted in its high customer retention rate, year
after year.
Risk management
NCRIC's risk management staff works to aid policyholders in
identifying potential risk exposures and developing strategies to reduce or
eliminate those exposures. To assist in this is NCRIC's risk management
committee, a group of nine physicians representing various specialties. The
committee members provide valuable expertise that helps risk management staff
develop and tailor risk management services to the needs of the individual
insured.
An important component of NCRIC's risk management services is
educational seminars which are given throughout the year in various geographic
locations. In 2001, NCRIC provided a variety of programs to appeal to the needs
and interests of a wide variety of practitioners. "Malpractice Claims: How Do
They Start?" afforded attendees the opportunity to view the claim/litigation
process through the eyes of a plaintiff attorney and a defense attorney and to
learn ways to avoid becoming involved in the malpractice process. For those new
to practice or simply desirous of a refresher course, "Risk Management
Principles" discussed such areas of practice as communication, confidentiality,
informed consent and documentation. "Looking Beyond Disease - Diagnosing
Chemical and Other Exposures" proved to be a timely discussion in light of
recent events. "Use of Prophylactic Antibiotics in Surgical Procedures" was just
one of the many specialty specific programs presented. In 2002, NCRIC will
endeavor to reach out to a greater number of physicians by delivering risk
management programs on a more frequent basis to a larger geographic area. NCRIC
staff is also available to present customized programs, as requested, to
individual physician groups and/or office staff. In recognition of NCRIC's risk
management expertise, staff members are frequently called upon to speak to
groups of residents and other medical organizations. CME accreditation through
the Medical Society of the District of Columbia (MSDC), allows NCRIC to award
2.0 hours of Category 1 CME to those physicians attending a risk management
program. Attendance also entitles NCRIC insureds to a policy premium discount.
Physicians unable to attend a risk management program are given the
opportunity to access NCRIC's risk management services in other ways. Currently,
two home study courses, "Physician Documentation and Communication" and
"Essentials of Communication in the Medical Office," are available and
accessible on-line. Successful completion of a home study course carries 1.5
hours of CME credit. 2002 will bring the addition of specialty specific home
study courses and greater access to on-line risk management information,
including access to forms and the ability to pose questions via the company
website. NCRIC reaches out to physicians through the publication of a quarterly
newsletter, the Risk Prevention Monitor, which provides topical risk management
and practice information. In the upcoming year, member physicians will receive a
risk management notebook to use as a resource in dealing with their daily risk
management questions. The notebook will cover such topics as retention and
release of medical records, termination of the physician-patient relationship,
informed consent, dealing with difficult patients, and treatment of minors.
Those physicians wanting a more "hands on" approach to dealing with
their risk management concerns may participate in an office assessment conducted
by a NCRIC risk management staff member. Assessments begin with the completion
of a detailed questionnaire by physicians and staff to uncover potential areas
of risk in their practices and procedures. A thorough review is then conducted
of the physical office and the physicians' record keeping practices. At the
conclusion, physicians are provided with suggestions on how to control or
eliminate risk exposure. This activity also allows participants to receive 1.5
hours of CME credit. Office assessments may also be conducted on an involuntary
basis at the request of the Underwriting Department.
An important element of NCRIC risk management services is physician
access to information. Experienced staff is available to assist physicians and
office staff in solving their risk management problems. The recent addition of
risk management staff in its Richmond office allows NCRIC to keep abreast of
local issues affecting physicians both from a legislative and medical
perspective and provides area physicians with a local expert to handle their
risk management questions.
Claims and litigation experience
The claims department of NCRIC is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, monitoring of attorneys engaged by NCRIC to
defend a claim and negotiation of the settlement or other disposition of a
claim. NCRIC's policy obligates it to provide a defense for its insureds in any
suit involving a medical incident covered by its policy. Medical professional
liability claims often involve the evaluation of highly technical medical
issues, significant injuries and conflicting expert opinions. In most cases, the
person bringing the claim against the physician is already represented by legal
counsel when NCRIC learns of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of
claims. When a claim is reported, claims department professionals complete an
initial evaluation and set the initial reserve. After a full evaluation of the
claim has been completed, which generally occurs within seven months, the
initial reserve may be adjusted.
Very important to NCRIC is its focus on maintaining a local presence
in the jurisdictions where it writes coverage. This enables an intimate
knowledge of the community, its litigation processes and how this impacts the
processing of claims. It was reported last year that NCRIC significantly
increased the number of its insureds in Virginia. Claims and risk management
services were expanded into Virginia with the opening of an office in Richmond
to give NCRIC a local presence and to further NCRIC's goal to provide top
quality service to its insureds. The strategy employed for structuring claims
and risk management services in Virginia has been used in developing NCRIC's
presence in Delaware and West Virginia where NCRIC gained understanding of the
local medical and legal climates through on-site visits, interviews with local
law firms, discussions with insureds and on-going communications with local law
firms. Sharing successful solutions through a team approach has been a NCRIC
commitment. Attorneys located throughout NCRIC's market territory who have a
successful track record in medical liability defense and share NCRIC's
philosophy have been identified for defending claims against NCRIC insureds.
NCRIC is focused to ensure the delivery of quality claims and risk management
services in all its market locales.
As of December 31, 2001, NCRIC had approximately 430 open cases with
an average of 85 cases being handled by each claims representative. The level of
education of the claims representatives range from certified paralegal to juris
doctor. The professional claims staff has an average of 14 years of experience
handling medical professional liability cases. NCRIC limits the number of claims
handled by each representative to approximately 90 cases. Management believes
that by limiting the case load assigned to each claims representative, each of
its insureds who face claims will receive personalized, professional service,
thus enabling claims to be thoroughly investigated, well-managed and, if a case
has merit, quickly resolved.
NCRIC retains locally based attorneys specializing in medical
professional liability defense to defend claims. NCRIC also obtains the services
of medical experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery, orthopedic surgery,
neurosurgery, obstetrics, gynecology, internal medicine and radiology. The
claims committee meets monthly to provide evaluation and guidance on claims. The
multi-specialty approach of these physicians adds a unique perspective to the
claims handling process since it provides an opportunity to obtain the opinions
of several different specialists meeting to share their expertise and experience
in the area of liability evaluation and general peer review. This service is
invaluable to the claims representatives and insureds as it provides in-depth
analysis of claims.
In order to further NCRIC's objective of physician involvement and to
provide local physician guidance in jurisdictions where NCRIC provides insurance
coverage outside of Washington, D.C., individual state advisory boards have been
created. These advisory boards shall serve as the preliminary risk screening
mechanism for NCRIC. They shall meet quarterly to address the insurance risks
and exposures of NCRIC, which include but are not limited to, reviewing medical
incidents and assessing claims and practice characteristics of current and
prospective insureds. The advisory boards shall conduct underwriting and claims
reviews and shall bring to the attention of NCRIC all matters of special
interest to healthcare providers in their state. The advisory boards are
composed of physicians of various specialties and include two adjunct members,
one each from the D.C.-based Underwriting and Claims Committees of NCRIC, who
serve as advisors to the local advisory boards and as liaisons to their
respective D.C.-based committees.
Federal law requires that any claim payment, regardless of amount, be
reported to the National Practitioner Data Bank, which can be accessed by
various state licensing and disciplinary boards, hospitals, other healthcare
entities and professional societies. Thus, the physician is often placed in a
difficult position of knowing that a payment may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to effectively communicate NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
appropriate. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
Rules of the court systems in the various jurisdictions impact
NCRIC's claims process, particularly in the area of claims handling expenses.
For example, in the District of Columbia the discovery period, during which the
plaintiff's case must be discerned and, in conjunction with an attorney, the
defense developed, generally takes place over a six- to eight-month period of
intense activity, which increases claims handling expenses. The court-imposed
mediation process has not proven to successfully resolve NCRIC's cases in part
because the volunteer mediators are frequently plaintiffs' attorneys. Trials are
being set about one to one and one half years from the date of service of the
complaint. In Virginia there is no mandatory mediation. Trials are set about one
year from the date of service of the motion for judgment. In Virgnia there is an
absolute cap on medical malpractice awards. Currently, the cap is $1,600,000. It
will increase every year until 2008 when it will be $2,000,000. Despite
obstacles presented by the legal environment, management believes its aggressive
claims handling procedures effectively assist NCRIC to reduce losses and obtain
favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include meeting regularly throughout the year with defense
attorneys retained by NCRIC for coordination, discussion and presentations on
all aspects of claims handling.
Claims closed in the 36-month period from January 1999 through
December 2001 resulted in 15% of cases closed with indemnity payment and 85% of
cases closed with no payment. Indemnity payments during this three-year period
totaled $38.7 million, with an average payment per paid claim of $375,756.
Trial results for the 36-month period from January 1999 through
December 2001 reveal that of the 61 cases tried, 32, or 52%, were won by NCRIC,
16 trials resulted in verdicts for the plaintiff, 9 ended in mistrials or hung
juries, and 4 were settled. Of the 16 plaintiff verdicts, 5 awarded amounts in
excess of NCRIC's $500,000 retention. Trial results for 2001 reveal that of the
20 cases tried, 5, or 25%, resulted in plaintiff verdicts, 13 cases, or 65%,
ended in defense verdicts, 2 ended in mistrials or hung juries, which will need
to be retried, and 2 cases were settled. Of the 5 plaintiff verdicts in 2001,
one verdict was awarded in excess of NCRIC's $500,000 retention.
Underwriting
NCRIC's underwriting committee consists of 12 physicians, all of whom
are insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has a policyholder services department, consisting
of three technicians trained in underwriting, and an administrative assistant.
NCRIC believes that this combination of medical professionals and insurance
industry professionals gives NCRIC a competitive advantage in underwriting
services. The physicians on the underwriting committee are able to assist the
underwriting department's insurance professionals by applying their medical
knowledge to better assess risk.
NCRIC's policyholder services department is responsible for the
evaluation of applicants for medical professional liability coverage, the
issuance of policies and the establishment and implementation of underwriting
standards for all of the coverages underwritten by NCRIC. The policyholder
services department provides information to the underwriting committee to assist
the physicians on the committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative
procedures with respect to the issuance of all physician professional liability
policies. Each applicant or member of an applicant medical group is required to
complete and sign a detailed application that provides a personal and
professional history, the type and nature of the applicant's professional
practice, information relating to specific practice procedures, hospital and
professional affiliations and a complete history of any prior claims and
incidents. NCRIC performs its own independent verification of these matters and
conducts an investigation to determine if there are any lawsuits that may not
have been disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims history and risk management reports. Each
year, NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The policyholder services department submits all recommendations for
premium surcharges or non-renewal to the underwriting committee for a final
decision. Physicians have the right to seek reconsideration of surcharges by
NCRIC's board of directors, although to date, every request for reconsideration
has resulted in the underwriting committee's decision being upheld. As insureds
are often more comfortable discussing claims and practice issues with their
peers, NCRIC has found that physician interchange with the committee is a
strength of NCRIC.
Rates
NCRIC establishes, through its management and independent actuaries,
rates and rating classifications for its physician and medical group insureds
based on the loss and LAE experience it has developed over the past 20 years and
the loss and LAE experience for the entire medical professional liability
market. NCRIC has various rating classifications based on practice location,
medical specialty and other factors. NCRIC utilizes various discounts, including
discounts for part-time practice, physicians just entering medical practice,
claim-free insureds and risk management participation. Most discounts are
designed to encourage lower risk physicians to insure with NCRIC. Total
discounts granted to a policyholder cannot exceed 25% of the base premium.
Likewise, surcharges cannot exceed 25% of the base premium. Effective rates
equal NCRIC's base rate, less any discounts, plus any surcharges to the insured.
NCRIC establishes its rates based on its previous loss experience,
loss expense adjustments, anticipated policyholder discounts or surcharges, and
NCRIC's fixed and variable operating expenses. In recognition of the increase in
the severity of losses, NCRIC raised base premiums an average of 7.5% effective
January 1, 2001. NCRIC's base rates remained unchanged in 2000 and 1999.
Effective for policy effective dates in 2002, premium rates were raised in all
jurisdictions as follows:
Percentage Increase
Jurisdiction In Premium Rates
------------ ----------------
District of Columbia 11%
Maryland 18
Delaware 12
West Virginia 20
Virginia 18
Since 1993 NCRIC, Inc. has authorized renewal premium dividend
credits to physician insureds that renew their policies. Renewal credits are a
premium credit on the renewal policy's premium. Renewal credits stabilize
policyholder premiums and improve NCRIC, Inc.'s competitive position relative to
other insurers by encouraging policyholder renewals. For accounting purposes,
renewal credits are accrued in the policy year declared as a reduction of
premium income. NCRIC's insureds are not automatically entitled to renewal
credits and only renewing insureds receive renewal credits. NCRIC has in the
past, and will in the future, consider general insurance market conditions as
well as the previous years' loss and loss adjustment expenses in determining
whether or not to authorize renewal credits and the amounts of any renewal
credits. With the rising trend in severity, NCRIC has determined that it will
not provide a renewal premium credit for 2002 renewals.
NCRIC has authorized renewal credits of the following amounts:
Percentage of Earned
Year Renewal Premiums Amount
---- ---------------- ------
2001 0% $ 0
2000 10 1,033,000
1999 10 1,068,940
1998 12.5 1,888,794
1997 16 2,245,918
1996 10 1,452,308
1995 10 1,560,907
1994 10 1,806,450
Risk sharing arrangements
Since its inception, NCRIC has entered into agreements for risk
sharing programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. The predominant type of risk sharing
arrangement offered by NCRIC involves the initial funding of a portion of a
premium being held by NCRIC to pay losses. In this type of arrangement, NCRIC
receives its full gross premium, less applicable credits otherwise granted.
After quota share losses are determined, if loss development is favorable, any
premium in excess of the losses is returned.
Another type of risk sharing arrangement previously offered by NCRIC
is one in which physicians practicing at a hospital pay lower individual
premiums if the physicians in their hospital group, taken as a whole, have
favorable loss experience and comply with risk management protocols. Under such
a risk sharing arrangement, physicians receive an initial premium reduction or
credit. 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
to offset the unfavorable losses.
Risk sharing arrangements help lower NCRIC's risk associated with
medical care provided by the hospital's attending physicians. The arrangements
also establish a cost-effective source of professional liability coverage for
physicians participating in the program.
Loss and LAE reserves
The determination of loss and LAE reserves involves projection of
ultimate losses through an actuarial analysis of the claims history of NCRIC and
other medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's claims department as claims are reported and
investigated. Actuaries rely primarily on historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss trends and the delays in reporting and settling claims. As additional
information becomes available, the estimates reflected in earlier loss reserves
might be revised. Any increase or decrease in the amount of reserves, including
reserves for insured events of prior years, would have a corresponding adverse
or beneficial effect on NCRIC's results of operations for the period in which
the adjustments are made.
NCRIC's estimates of the ultimate cost of settling the claims are
based on:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and
severity;
o predictions of future inflation rates;
o judicial theories of liability;
o judicial interpretations of insurance contracts;
o legislative activity; and
o other factors.
The inherent uncertainty of establishing reserves is greater for
medical professional liability insurance because lengthy periods may elapse
before notice of a claim or a determination of liability. Medical professional
liability insurance policies are "long tail" policies, which means that claims
and expenses may be paid over a period of 10 or more years. This is longer than
most property and casualty claims. As a result of these long payment periods,
trends in medical professional liability policies may be slow to emerge, and
NCRIC may not promptly modify its underwriting practices and change its premium
rates to reflect underlying loss trends. Finally, changes in the practice of
medicine and healthcare delivery, like the emergence of new, larger medical
groups that do not have an established claims history, and additional claims
resulting from restrictions on treatment by managed care organizations, may not
be fully reflected in NCRIC's underwriting and reserving practices.
NCRIC's independent actuaries review NCRIC's reserves for losses and
LAE periodically and prepare semi-annual reports that include a recommended
level of reserves. NCRIC considers this recommendation as well as other factors,
like loss retention levels and anticipated or estimated changes in frequency and
severity of claims, in establishing the amount of its reserves for losses and
LAE. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(in thousands)
Balance, beginning of year.............................. $ 81,134 $ 84,282 $ 84,595
Less reinsurance recoverable on unpaid claims....... 27,312 25,815 24,546
------------ ------------ ------------
Net balance............................................. 53,822 58,467 60,049
------------ ------------ ------------
Incurred related to:
Current year................................... 23,056 17,829 20,795
Prior years.................................... (4,198) (5,883) (7,928)
------------ ------------ ------------
Total incurred............................ 18,858 11,946 12,867
------------ ------------ ------------
Paid related to:
Current year................................... 1,599 917 817
Prior years.................................... 16,145 15,674 13,632
------------ ------------ ------------
Total paid............................... 17,744 16,591 14,449
------------ ------------ ------------
Net balance............................................. 54,936 53,822 58,467
Plus reinsurance recoverable on unpaid claims..... 29,624 27,312 25,815
------------ ------------ ------------
Balance, end of year.................................... $ 84,560 $ 81,134 $ 84,282
=========== =========== ===========
The amounts shown above and the reserve for unpaid losses and LAE on the chart
located on the next page are presented in conformity with generally accepted
accounting principles.
The following table reflects the development of reserves for unpaid
losses and LAE for the years indicated, at the end of that year and each
subsequent year. The first line shows the reserves, as originally reported at
the end of the stated year. Each calendar year-end reserve includes the
estimated unpaid liabilities for that coverage year and for all prior coverage
years. The section under the caption "Cumulative Liability Paid Through End of
Year" shows the cumulative amounts paid through each subsequent year on those
claims for which reserves were carried as of each specific year-end. The section
under the caption "Re-estimated Liability" shows the original recorded reserve
as adjusted as of the end of each subsequent year to reflect the cumulative
amounts paid and any other facts and circumstances discovered during each year.
The line "Redundancy" sets forth the difference between the latest re-estimated
liability and the liability as originally established.
The table reflects the effects of all changes in amounts of prior
periods. For example, if a loss determined in 1996 to be $100,000 was first
reserved in 1991 at $150,000, the $50,000 favorable loss development, being the
original estimate minus the actual loss, would be included in the cumulative
redundancy in each of the years 1991 through 1996 shown below. This table
presents development data by calendar year and does not relate the data to the
year in which the claim was reported or the incident actually occurred.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid Losses
and LAE................ $64,333 $86,727 $88,891 $77,647 $68,928 $68,101 $72,031 $84,595 $84,282 $81,134
Cumulative Liability Paid
Through End of Year:
One year later.... 13,094 18,103 19,786 21,667 16,084 14,916 9,667 13,865 20,813 20,828
Two years later... 27,889 35,861 39,293 34,829 27,634 22,237 21,810 32,778 38,078
Three years later. 37,247 51,163 47,348 43,237 32,409 29,135 36,310 42,381
Four years later.. 47,633 56,648 51,845 45,219 34,657 39,938 42,553
Five years later.. 51,482 59,473 52,984 45,682 41,578 44,297
Six years later... 52,276 60,335 53,208 51,450 43,753
Seven years later. 53,098 60,440 58,246 52,551
Eight years later. 53,193 63,395 59,086
Nine years later.. 56,145 64,113
Ten years later... 56,854
Re-estimated Liability:
One year later.... 69,522 79,174 70,640 68,891 62,028 61,121 71,419 72,575 77,373 73,582
Two years later... 61,090 65,174 63,248 66,439 53,429 62,097 64,980 66,733 71,489
Three years later. 54,208 62,521 65,422 60,858 55,883 58,169 61,336 60,752
Four years later.. 54,215 65,225 64,460 62,625 53,400 54,324 54,996
Five years later.. 55,221 67,681 66,275 61,077 50,744 50,977
Six years later... 58,324 69,765 64,877 58,220 47,946
Seven years later. 60,908 68,415 63,514 55,739
Eight years later. 60,218 67,740 61,262
Nine years later.. 59,031 65,671
Ten years later... 58,384
Redundancy $ 5,949 $21,056 $27,629 $21,908 $20,982 $17,124 $17,035 $23,843 $12,793 $ 7,552
General office premises liability incurred losses have been less than
1% of medical professional liability incurred losses in the last five years.
NCRIC does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
Reinsurance
NCRIC follows customary industry practice by reinsuring a portion of
its risks and paying a reinsurance premium based upon the premiums received on
all policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks, reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- the amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary
liability for the full amount of its insurance policies, it contractually
obligates the reinsurer to pay successful claims against NCRIC to the extent of
risk ceded. NCRIC's current reinsurance program is designed to provide coverage
through separate reinsurance treaties for three layers of risk.
(1) Losses in excess of $500,000 per claim up to $1,000,000.
Effective January 1, 2000 to January 1, 2003, the treaty, which reinsures NCRIC
for losses in excess of $500,000 per claim up to $1,000,000, is a fixed rate
treaty. The reinsurance premium is agreed upon as a fixed percentage of gross
net earned premium income. Gross net earned premium income is NCRIC's gross
premium earned net of discounts.
For claims submitted related to 1999 and prior years, NCRIC has a
swing rated treaty which reinsures NCRIC for losses in excess of $500,000 per
claim, subject to an inner aggregate deductible of 5% of gross net earned
premium income, up to $1,000,000. The ultimate reinsurance premium is subject to
incurred losses and ranges between a minimum premium of 4% of gross net earned
premium income and a maximum premium of 22.5% of gross net earned premium
income. The inner aggregate deductible means that NCRIC must pay losses within
the reinsurance layer until the inner aggregate deductible is satisfied. NCRIC
pays a deposit premium equal to 14% of gross net earned premium income that is
ultimately increased or decreased based on actual losses, subject to the minimum
and maximum premium. Following are the reinsurance premium terms for the swing
rated treaty for calendar years 1999, 1998, 1997 and 1996.
Percentage of Gross Net Earned
------------------------------
Premium Income
--------------
1999 1998 1997 1996
------ ----- ----- -----
Deposit premium........................ 14.0% 14.0% 14.0% 14.0%
Maximum premium........................ 22.5 22.5 22.5 30.0
Minimum premium........................ 4.0 4.0 4.0 4.0
Inner aggregate deductible............. 5.0 5.0 5.0 10.0
NCRIC has recorded, based on actuarial analysis, management's best
estimate of premium expense under the terms of the swing rated treaty. Each
year, for the most recent treaty year, the premium has been capped at the
maximum rate. NCRIC then adjusts the liability and expense as losses develop in
subsequent years.
(2) Losses up to $1,000,000 in excess of $1,000,000 per claim.
NCRIC's first excess layer treaty covers losses up to $1,000,000 in excess of
$1,000,000 per claim. For risks related to claims submitted January 1, 2000 and
thereafter, NCRIC cedes 100% of its risks and premium under this treaty. For
claims related to 1999 and prior years, NCRIC cedes 91% of its risks and premium
to the $1,000,000 excess layer treaty program and retains 9% of the risks and
premium. NCRIC receives a ceding commission from the reinsurers to cover the
cost associated with issuing this coverage to its insureds.
(3) Losses up to $9,000,000 in excess of $2,000,000 per claim. The
second excess layer treaty covers losses up to $9,000,000 in excess of
$2,000,000 per claim. NCRIC cedes 100% of its risks to the $2,000,000 excess
layer treaty program and retains none of the risks. The premium for the
$2,000,000 excess layer treaty is 100% of the premium collected from insureds
for this coverage. NCRIC receives a ceding commission from the reinsurers to
cover the cost associated with issuing this coverage to its insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums
in the excess layer treaties are deducted from other underwriting expenses.
Ceding commissions were $644,000, $357,000, and $322,000 in 2001, 2000, and
1999.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
Through December 31, 1999 Effective January 1, 2000
------------------------- -------------------------
Total Amount of Individual Loss Company Reinsurers Company Reinsurers
------------------------------- ------- ---------- ------- ----------
$0 - $500,000................................. 100% 0% 100% 0%
$500,000 - $1,000,000......................... 4 96 0 100
$1,000,000 - $2,000,000....................... 9 91 0 100
Over $2,000,000 .............................. 0 100 0 100
The table does not reflect the effect of the inner aggregate
deductible for treaty years through 1999.
NCRIC may provide higher policy limits through facultative
reinsurance programs. Facultative reinsurance programs are reinsurance programs
which are specifically designed for a particular risk not covered by NCRIC's
existing reinsurance arrangements.
NCRIC determines the amount and scope of reinsurance coverage to
purchase each year based upon its evaluation of the risks accepted,
consultations with reinsurance consultants and a review of market conditions,
including the availability and pricing of reinsurance. NCRIC's primary
reinsurance treaty is placed with non-affiliated reinsurers for a three-year
term with annual renegotiations. NCRIC's current three-year treaty expires
January 1, 2003.
The reinsurance program is placed with a number of individual
reinsurance companies and Lloyds' syndicates to mitigate the concentrations of
reinsurance credit risk. Most of the reinsurers are London companies or Lloyds'
syndicates; there is a small percentage placed with a domestic reinsurer. NCRIC
relies on its wholly owned brokerage firm, National Capital Insurance Brokerage,
Ltd., Willis Re, Inc. and a London-based intermediary to assist it in the
analysis of the credit quality of its reinsurers. NCRIC also requires reinsurers
that are not authorized to do business in the District of Columbia to post a
letter of credit to secure reinsurance recoverable on paid losses.
The following table reflects reinsurance recoverable on paid and
unpaid losses at December 31, 2001 by reinsurer:
Reinsurance
Reinsurer Recoverable
--------- -----------
(in thousands)
Lloyd's of London syndicates............. $ 18,172
Hannover Reinsurance..................... 2,666
CNA Reinsurance of London Limited........ 3,321
Unionamerica Insurance................... 2,433
Transatlantic............................ 2,065
4 other reinsurers....................... 1,420
---------
Total...................... $ 30,077
=========
The effect of reinsurance on premiums written and earned for the
years ended December 31, 2001, 2000, and 1999 is as follows:
Year Ended December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
(in thousands)
Direct..... $ 34,459 $ 28,192 $ 22,727 $ 19,965 $ 21,353 $ 18,832
Ceded ..... (10,542) (7,296) (5,874) (4,110) (4,127) (2,977)
-------- -------- -------- -------- -------- --------
Net ....... $ 23,917 $ 20,896 $ 16,853 $ 15,855 $ 17,226 $ 15,855
======== ======== ======== ======== ======== ========
In late 1999, NCRIC introduced PracticeGard Plus, which provides
errors and omissions coverage on Medicare/Medicaid billing to health care
providers. This coverage provides up to $1 million in indemnity and expense
protection and only pays indemnity on civil fines and penalties. NCRIC reinsures
100% of this risk and receives a 15% ceding commission. NCRIC intends to
evaluate its level of risk acceptance based on how losses develop in the future.
Since this coverage protects a new risk based on recently passed national
legislation, current loss development is uncertain.
Investment portfolio
Investment income is an important component in support of the
operating results of NCRIC. NCRIC utilizes external investment managers who
adhere to policies established and supervised by the investment committee of
NCRIC, Inc. NCRIC's current investment policy has placed primary emphasis on
investment grade, fixed income securities and seeks to maximize after-tax yields
while minimizing portfolio credit risk. Toward achieving this goal, NCRIC's
investment guidelines, which set the parameters for NCRIC's investment policy,
permit investments in tax-advantaged securities such as municipal bonds and
preferred stock. NCRIC's investment guidelines document is reviewed and updated
annually.
Effective January 1, 2000 Zurich Insurance Asset Management, Zurich,
became the external investment manager for NCRIC's fixed income securities
including tax advantaged preferred stocks.
Since 1996, NCRIC and its investment manager have conducted extensive
financial analyses of the investment portfolio using stochastic models to
develop a risk appropriate investment portfolio given the business environment
and risks relevant to NCRIC. Zurich supplements stochastic modeling with the
output from their independent investment research and strategy group to develop
a tailored investment approach for NCRIC. Analysis of NCRIC's capital structure
and risk-bearing ability, valuation, peer comparisons, as well as proprietary
and third party modeling, determine the optimal level of tax advantaged
investments and provide strategy input.
Zurich uses Dynamic Financial Analysis, DFA, a total company tool to
test the company's capital structure and business plan under numerous potential
future economic scenarios. The results of DFA, in the form of probability
distributions on key financial statistics, allow NCRIC to make risk informed
decisions on the structure of its investment portfolio as it relates to its
business profile. DFA output has been especially useful in setting portfolio
policy regarding average duration and optimizing potential equity exposure.
NCRIC has classified its investments as available for sale and
reports them at fair value, with unrealized gains and losses excluded from net
income and reported, net of deferred taxes, as a component of stockholders'
equity. During periods of rising interest rates, as experienced during 1999, 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, as experienced during 2001, the fair value of NCRIC's investment
portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity.
The following table sets forth the fair value and the amortized cost
of the investment portfolio of NCRIC at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
As of December 31, 2001 (in thousands)
U.S. Government and agencies ........................ $ 4,600 $ 161 $ -- $ 4,761
Corporate ........................................... 43,739 977 (1,311) 43,405
Tax-exempt obligations .............................. 19,304 634 (134) 19,804
Asset and mortgage-backed securities................. 28,073 695 (15) 28,753
-------- -------- -------- --------
95,716 2,467 (1,460) 96,723
Equity securities ................................... 6,691 118 (407) 6,402
-------- -------- -------- --------
Total ............................................... $102,407 $ 2,585 $ (1,867) $103,125
======== ======== ======== ========
As of December 31, 2000
U.S. Government and agencies ........................ $ 13,037 $ 490 $ (14) $ 13,513
Corporate ........................................... 32,301 181 (1,763) 30,719
Tax-exempt obligations .............................. 15,379 631 -- 16,010
Asset and mortgage-backed securities................. 31,335 208 (303) 31,240
-------- -------- -------- --------
92,052 1,510 (2,080) 91,482
Equity securities ................................... 7,121 45 (603) 6,563
-------- -------- -------- --------
Total ............................................... $ 99,173 $ 1,555 $ (2,683) $ 98,045
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
As of December 31, 1999
U.S. Government and agencies ........................ $ 13,937 $ -- $ (716) $ 13,221
Corporate ........................................... 27,842 25 (1,605) 26,262
Tax-exempt obligations .............................. 14,058 22 (289) 13,791
Asset and mortgage-backed securities................. 38,907 2 (1,246) 37,663
-------- -------- -------- --------
94,744 49 (3,856) 90,937
Equity securities ................................... 4,691 -- (536) 4,155
-------- -------- -------- --------
Total ............................................... $ 99,453 $ 49 $ (4,932) $ 95,092
======== ======== ======== ========
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 2001, NCRIC held 43 asset and
mortgage-related securities most of which had a quality of Agency/AAA.
Collectively, NCRIC's mortgage-related securities had an average
yield-to-maturity of approximately 5.57%. Approximately 47% of the
mortgage-related securities are pass-thru securities. NCRIC does not have any
interest only or principal only pass-thru securities.
The following table contains the investment quality distribution of
NCRIC's fixed maturity investments at December 31, 2001.
Type/Ratings of Investment Percentage
-------------------------- ----------
Treasury/Agency......................... 20%
AAA..................................... 35
AA...................................... 10
A....................................... 23
BBB..................................... 12
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc.
The following table sets forth information concerning the maturities
of fixed maturity securities in NCRIC's investment portfolio as of December 31,
2001, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
As of December 31, 2001
----------------------------------------------
Amortized Percentage of
Cost Fair Value Fair Value
---- ---------- ----------
(in thousands)
Due in one year or less .............. $ 757 $ 778 0.7%
Due after one year through five years 14,645 15,152 14.7
Due after five years through ten years 22,778 23,486 22.8
Due after ten years .................. 29,463 28,554 27.7
-------- -------- -----
67,643 67,970 65.9
Equity securities .................... 6,691 6,402 6.2
Asset and mortgage-backed securities . 28,073 28,753 27.9
-------- -------- -----
Total ...................... $102,407 $103,125 100%
======== ======== =====
Proceeds from bond maturities, sales and redemptions of available for sale
investments during the years 2001, 2000, and 1999 were $22.0 million, $10.5
million and $66.1 million, respectively. Gross gains of $787,000, $16,000 and
$260,000 and gross losses of $1,065,000, $21,000 and $331,000 were realized on
available for sale investment redemptions during 2001, 2000, and 1999,
respectively.
The average effective maturity and the average modified duration of
the securities in NCRIC's fixed maturity portfolio as of December 31, 2001 and
2000, was 4.7 years and 5.2 years, respectively.
Competition
The competitive landscape has changed dramatically over the past
year. No longer do we see competition from the companies which have
historically been NCRIC's largest competitors: St. Paul Companies and CNA
Insurance Companies. Across the United States the largest writers of medical
professional liability insurance have recently announced significant
retrenchment or full withdrawal from the marketplace. The market now is
dominated by smaller niche players.
According to A.M. Best Company 2000 data, the most recent available,
NCRIC has 50% of the District of Columbia physician and hospital professional
liability market and less than 3% of the market in the other four jurisdictions
in which NCRIC writes insurance. However, the A.M. Best Company data includes
all medical professional liability insurance sold in these jurisdictions
including insurance purchased by institutions like hospitals, which NCRIC does
not insure, but which are insured by its principal competitors. Thus, the A.M.
Best Company data does not accurately reflect NCRIC's share of the medical
professional liability insurance markets in which it participates. A.M. Best
Company reports at least 25 other companies that offered some type of medical
professional liability insurance in each of NCRIC's markets in 2000, and more
companies may enter NCRIC's markets in the future. In addition, NCRIC believes
that the number of healthcare entities that insure their affiliated physicians
through self-insurance or alternative risk-transfer solutions may increase.
Competition continues to be based on many factors, including the
following:
o perceived financial strength of the insurer;
o A.M. Best ratings;
o policy pricing;
o policy terms and conditions; and
o service, reputation and experience.
As the marketplace continues to evolve in the current business
environment, NCRIC may face strong competition from carriers that are closely
focused on narrow geographic markets. NCRIC's competitors may have existing
relationships with insurance brokers or other distribution channels, which NCRIC
may be unable to supplant.
NCRIC believes that its principal strengths are:
o its claims management and underwriting expertise;
o its ability to successfully litigate claims;
o its risk management; and
o its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
20-year presence in the metropolitan Washington, D.C. medical professional
liability market and its demonstrated commitment to its District of Columbia
physicians.
Risk Factors
The concentration of NCRIC, business in the District of Columbia leaves it
vulnerable to a decrease in the number of medical practices or an increase in
damage awards in the District of Columbia
In 2001, District of Columbia insureds accounted for approximately
51% of NCRIC's direct premiums written. The concentration of NCRIC's business
in the District of Columbia means that NCRIC's revenues and profitability depend
heavily on conditions in the District of Columbia medical community.
If we established inadequate loss and LAE reserves, our profitability will
diminish
NCRIC's reserves for losses and loss adjustment expenses or LAE are
estimates of amounts needed to pay reported and unreported claims and related
LAE. If NCRIC experiences greater than expected severity or frequency of claims,
or both, there is a risk that currently established reserves will prove
inadequate.
Indemnity payments in medical professional liability cases are rising and there
is a risk that a very high jury award could be rendered against NCRIC
We cannot predict the impact of clusters of cases, like the breast
implant or "Fen-Phen" cases. Also, from time to time NCRIC has had, and may in
the future have, very high jury awards rendered against it. This risk is
heightened by the District of Columbia's rejection of tort reform. According to
the National Practitioner Data Bank, for the ten-year period between September
1, 1990 and December 31, 2000, the District of Columbia had the highest
cumulative mean medical liability payment average in the United States at
$397,915, which is 25% higher than the average payment reported for the
nine-year period September 1, 1990 through December 31, 1999. In addition, for
the year 2000, the District of Columbia had the highest mean payment at
$584,338. The next closest jurisdiction is Alabama with a cumulative mean
medical liability payment of $340,185 for the ten-year period between September
1, 1990 and December 31, 2000.
The National Practitioner Data Bank reports, for the ten-year period
between September 1, 1990 and December 31, 2000, the average of the cumulative
mean payments to be $209,175, and the 2000 average mean payment to be $266,338,
for the other four jurisdictions in which NCRIC underwrites insurance.
Our profitability could be adversely affected by market driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to
efficiently conduct a traditional medical practice. As a result, many physicians
have joined or affiliated with managed care organizations, healthcare delivery
systems or practice management organizations. The impact of managed care and
tightened Medicare/Medicaid reimbursement may impact a physician's decision to
continue purchasing consulting and practice management services, shifting a
purchase decision from quality and value to price only. Larger healthcare
systems generally retain more risk by accepting higher deductibles and
self-insured retentions or form their own captive insurance companies. This
consolidation has reduced the role of the individual physician and the small
medical group in the medical professional liability insurance purchasing
decision. In 2001, 46% of NCRIC's gross premiums came from physicians practicing
alone or in groups of less than three physicians.
NCRIC may be unable to obtain affordable reinsurance from high quality
reinsurers, which would increase the risk borne by NCRIC and restrict NCRIC's
ability to insure larger risks
NCRIC's ability to provide medical professional liability insurance
at competitive premium rates and coverage limits on a continuing basis depends
in part on its ability to secure adequate reinsurance at commercially reasonable
rates. The amount and cost of NCRIC's reinsurance is governed by prevailing
market conditions beyond the control of NCRIC. At times in the past, insurance
industry conditions have resulted in reinsurance being either unavailable or
prohibitively expensive. Reinsurance permits NCRIC to reduce its net liability
on individual risks and to protect itself against large losses. The reinsurance
program automatically passes on the risks insured by NCRIC in excess of NCRIC's
retention and quota share participation, up to the maximum reinsurance policy
limit offered.
Recently reinsurance market conditions have been significantly
impacted by the terrorist attacks, large business failures and losses from the
medical professional liability sector. Other medical professional liability
underwriters have recently reported significant increases in reinsurance premium
rates.
NCRIC's three-year primary reinsurance treaty expires January 1,
2003. As NCRIC seeks to obtain reinsurance in place of this expiring treaty,
NCRIC may not be able to secure adequate reinsurance at reasonable rates.
While NCRIC seeks to obtain reinsurance with coverage limits that it
believes are appropriate for the risk exposures it assumes, there is a risk that
losses experienced by NCRIC will not be within the coverage limits of its
reinsurance.
NCRIC is also subject to credit risk because reinsurance does not
relieve NCRIC of its obligation to pay claims to its insureds for the risks
ceded to reinsurers. A significant reinsurer's inability or refusal to make
payment under reinsurance terms could have a material adverse effect on NCRIC.
We may purchase less reinsurance and retain more risk ourselves which will
increase our exposure to larger losses
We may reduce our insurance costs by retaining more risk ourselves.
This means that NCRIC would assume the risk of individual losses up to an
increased maximum exposure amount. Any decrease in reinsurance will increase the
amount NCRIC pays for losses.
Our profitability could be negatively impacted by Guaranty Fund assessments
NCRIC is potentially subject to assessments from the guaranty funds
operating in each of the jurisdictions in which NCRIC writes insurance.
Assessments are unpredictable both in timing and amount. The insolvency of
another insurance company within NCRIC's category of insurance could result in
the maximum assessment being imposed on NCRIC over several years. The amount of
any assessment cannot exceed 2% of the direct premiums written per year by NCRIC
in the assessing jurisdiction.
In the absence of regulations governing a full demutualization, there is a risk
that any future regulations will disadvantage minority stockholders like
yourself
The Commissioner of Insurance and Securities has not issued
regulations regarding the conversion of a District of Columbia mutual holding
company to the stock form of organization. If regulations are issued by the
Commissioner of Insurance and Securities, there is a risk that the regulations
may be onerous or burdensome or may include provisions which are disadvantageous
to the stockholders of NCRIC Group other than NCRIC, A Mutual Holding Company.
Public stockholders will not be able to determine matters submitted for
stockholder approval, including whether fundamental corporate changes will be
made
NCRIC, A Mutual Holding Company possesses voting control of NCRIC
Group. Minority stockholders will not be able to control the election of
directors or other matters, including whether NCRIC, A Mutual Holding Company
will fully demutualize or whether NCRIC Group will be merged into another
entity.
No assurance can be given that any strategic alternative will be implemented
NCRIC has been engaged in a review of its strategic alternatives. As
a subsidiary of a mutual holding company, NCRIC initially identified three
alternatives: remain in the mutual holding company structure for the foreseeable
future; complete a second-step conversion; or merge with a mutual insurance
company. The review has focused on enhancing shareholder value and protecting
policyholders' interests. Based on numerous factors, NCRIC no longer believes
that a merger with a mutual insurance company is a feasible alternative. The
review is likely to now focus on the implementation of a second-step conversion
under appropriate market conditions. Pending a second-step conversion, NCRIC
will consider various means of continuing to deliver value to shareholders,
including through stock repurchase programs and dividend policies. However, no
assurance can be given that any particular program, policy or steps will be
taken.
Regulation
NCRIC, A Mutual Holding Company and NCRIC, Inc. are domiciled in the
District of Columbia, and Commonwealth Medical Liability Insurance Company is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of NCRIC.
Regulation of NCRIC, A Mutual Holding Company after the
reorganization. District of Columbia law provides that NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC, Inc. At least two-thirds of the members of
the boards of directors of NCRIC, A Mutual Holding Company and NCRIC must at all
times be policyholders of NCRIC, Inc. NCRIC may not, without approval of the
Commissioner of Insurance and Securities, by way of an acquisition or investment
in a subsidiary, or otherwise, diversify out of the healthcare and insurance
fields.
NCRIC, A Mutual Holding Company, as a mutual insurance holding
company organized in the District of Columbia, is subject to regulation at a
level substantially equal to that of a District of Columbia domestic insurance
company. The Commissioner of Insurance and Securities retains jurisdiction over
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group and NCRIC,
Inc. to assure that policyholders' interests are protected.
Conversion of NCRIC, A Mutual Holding Company to the stock form of
organization. District of Columbia law provides that NCRIC, A Mutual Holding
Company may fully demutualize, which is a conversion from a mutual holding
company form of organization to a stock form of organization. NCRIC, A Mutual
Holding Company's Board of Directors has no current plan to undertake a full
demutalization. If a full demutualization does not occur, then NCRIC Group will
always be controlled by NCRIC, A Mutual Holding Company, its majority
stockholder.
Under District of Columbia law, if a full demutalization occurs,
eligible policyholders would receive the right to subscribe for additional
shares of the new stock holding company that would be formed in the full
demutualization. By order dated January 27, 1999, the Commissioner of Insurance
and Securities stated that in a full demutualization, each share of common stock
outstanding and held by persons other than NCRIC, A Mutual Holding Company would
be converted automatically into shares of common stock of the new stock holding
company. Specifically, the number of shares that each stockholder would receive
would be determined under an exchange ratio that ensures that after the
transaction, the percentage of the to-be outstanding shares of the new stock
holding company received by a stockholder in exchange for his or her common
stock equals the percentage of the outstanding shares of common stock owned by
the stockholder immediately prior to the full demutualization. To date, the
Commissioner of Insurance and Securities has not issued regulations regarding
the conversion of a District of Columbia mutual holding company to stock form,
and there is a risk that any regulations will not be effective when NCRIC, A
Mutual Holding Company may wish to undertake a full demutualization. Moreover,
there is a risk as to what form any regulations may take and what conditions the
Commissioner of Insurance and Securities may impose on a full demutualization of
NCRIC, A Mutual Holding Company.
Under legislation approved by the Council of the District of
Columbia, prior to the implementation of a proposed full demutualization, a
tender offer for more than 50% of the outstanding shares of the corporation is
prohibited unless approved by the Commissioner of Insurance and Securities.
Governance of NCRIC. An order of the District of Columbia
Commissioner of Insurance and Securities requires that at least two-thirds of
the members of NCRIC, A Mutual Holding Company's board of directors be NCRIC,
Inc. policyholders. Currently, there are three non-policyholders on NCRIC, A
Mutual Holding Company's 18-member board of directors. In addition, 10 of 14
members of NCRIC Group's, board of directors are currently policyholders of
NCRIC, Inc. As the number of non-policyholders on NCRIC's various boards of
directors is limited, there is a risk that if the interests of policyholders and
stockholders conflict, the interests of policyholders will prevail to the
detriment of stockholders.
Holding company regulation. A mutual insurance holding company is
subject to regulation at a level substantially equal to that of a District of
Columbia domestic insurance company. The Commissioner of Insurance and
Securities has jurisdiction over an intermediate holding company, like NCRIC
Group. In addition, District of Columbia law provides that the assets of NCRIC,
A Mutual Holding Company are available to satisfy claims of NCRIC's
policyholders in the event that the Commissioner of Insurance and Securities
initiates a liquidation proceeding.
As part of a holding company system, NCRIC, A Mutual Holding Company,
NCRIC Holdings, Inc., NCRIC Group and NCRIC, Inc. are subject to the DC Holding
Company System Act of 1933, D.C. Law 10-44. NCRIC, Inc., as the parent of
Commonwealth Medical Liability Insurance Company, is also subject to Title 38 of
the Virginia Code, which includes in Chapter 13 provisions regarding insurance
holding companies. The Holding Company Acts require NCRIC, A Mutual Holding
Company to file information periodically with the Department of Insurance and
Securities Regulation and Virginia regulatory authorities, including information
relating to its capital structure, ownership, financial condition and general
business operations. Some transactions between an insurance company and its
affiliates, including sales, loans or investments that are deemed "material"
require prior approval by the District of Columbia or Virginia insurance
regulators, as applicable. In the District of Columbia, transactions by an
insurance company with affiliates involving loans, sales, purchases, exchanges,
extensions of credit, investments, guarantees or other contingent obligations,
which within any 12-month period aggregate at least 3% of the insurance
company's admitted assets or 25% of its surplus, whichever is greater, require
prior approval. Prior approval is also required for all management agreements,
service contracts and cost-sharing arrangements between an insurance company and
its affiliates. Some reinsurance agreements or modifications also require prior
approval.
The Holding Company Acts also provide that the acquisition or change
of "control" of a domestic insurance company or of any person or entity that
controls an insurance company cannot be consummated without prior regulatory
approval. The Holding Company Acts also effectively restrict NCRIC from
consummating significant reorganizations or mergers without prior regulatory
approval.
Regulation of dividends from insurance subsidiaries. The DC Holding
Company Act limits the ability of NCRIC, Inc. to pay dividends. Without prior
notice to and approval of the Commissioner of Insurance and Securities, NCRIC,
Inc. may not declare or pay an extraordinary dividend, which is defined as any
dividend or distribution of cash or other property whose fair market value,
together with other dividends or distributions made, within the preceding 12
months exceeds the lesser of (1) 10% of NCRIC, Inc.'s statutory surplus as of
the preceding December 31, or (2) NCRIC, Inc.'s statutory net income excluding
realized capital gains, for the 12-month period ending the preceding December
31, but does not include pro rata distributions of any class of NCRIC's own
securities. In calculating net income under the test, NCRIC, Inc. may carry
forward net income, excluding realized capital gains, from the previous two
calendar years that has not been paid out as dividends. District of Columbia law
gives the Commissioner of Insurance and Securities broad discretion to
disapprove dividends even if the dividends are within the above-described
limits. Based on this limitation and 2001 results, NCRIC, Inc. would be able to
pay approximately $3.3 million in dividends to NCRIC in 2002 under the stated
formula. Commonwealth Medical Liability Insurance Company's dividend
restrictions are similar to NCRIC, Inc.'s. Based on its 2001 operating results,
under Virginia insurance law, Commonwealth Medical Liability Insurance Company
would not be able to pay dividends without prior approval from Virginia's Bureau
of Insurance.
Insurance company regulation. NCRIC, Inc. is subject to supervision
and regulation by the District of Columbia Department of Insurance and
Securities Regulation and insurance authorities in Maryland. Commonwealth
Medical Liability Insurance Company is subject to supervision and regulation by
the Virginia State Corporation Commission Bureau of Insurance and insurance
authorities in West Virginia, Delaware, Maryland, and the District of Columbia.
This regulation is concerned primarily with the protection of policyholders'
interests rather than stockholders' interests. Accordingly, decisions of
insurance authorities made with a view to protecting the interests of
policyholders may reduce NCRIC's profitability. The extent of regulation varies
by jurisdiction, but this regulation usually includes:
o regulating premium rates and policy forms;
o setting minimum capital and surplus requirements;
o regulating guaranty fund assessments;
o licensing of insurers and agents;
o approving accounting methods and methods of setting statutory
loss and expense reserves;
o underwriting limitations;
o the terms upon which a full demutualization transaction can
occur;
o restrictions on transactions with affiliates;
o setting requirements for and limiting the types and amounts of
investments;
o establishing requirements for the filing of annual statements
and other financial reports;
o conducting periodic statutory examinations of the affairs of
insurance companies;
o approving proposed changes of control; and
o limiting the amounts of dividends that may be paid without
prior regulatory approval.
Without the approval of the District of Columbia Commissioner of
Insurance and Securities, NCRIC, Inc. may not diversify out of the healthcare
and insurance fields through an acquisition or otherwise.
Codification. The National Association of Insurance Commissions, or
NAIC, is an association of the insurance regulators of all 50 states and the
District of Columbia. The Codification of Statutory Accounting Principles was
developed by the NAIC as a comprehensive guide to statutory accounting that will
provide analysts and other users with more comparable financial statements. Many
of the changes to statutory accounting are based on generally accepted
accounting principles, or GAAP, with modifications that emphasize the concepts
of conservatism and solvency inherent in statutory accounting. The Codification
has been mandated by the NAIC to be effective as of January 1, 2001. Statutory
accounting changes resulting from this guidance does not have an effect on the
financial statements prepared in accordance with GAAP, which have been included
with this document and filed with the Securities and Exchange Commission.
Guaranty fund laws. Each of the jurisdictions in which NCRIC does
business has guaranty fund laws under which insurers doing business in those
jurisdictions can be assessed on the basis of premiums written by the insurer in
that jurisdiction in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. NCRIC
makes accruals for its portion of assessments related to any insolvencies
considered to be probable of assessment by the guaranty associations. In the
District of Columbia, insurance companies are assessed in three categories:
automobile, workers' compensation and all other. An insurance company licensed
to do business in the District of Columbia is only liable to pay an assessment
if another insurance company within its category becomes insolvent. NCRIC is in
the "all other" category.
Significant assessments could have a material adverse effect on
NCRIC's financial condition or results of operations. While NCRIC will not
necessarily be liable to pay assessments each year, the insolvency of another
insurance company within its category of insurance could result in the maximum
assessment being imposed on NCRIC over several years. NCRIC cannot predict the
amount of future assessments. During 2001 NCRIC received an assessment due to
the insolvency of Reliance Insurance Company. Recently an insurance company
writing medical professional liability insurance in some of NCRIC's market
areas, PHICO, went into receivership; this could potentially result in guaranty
fund assessments against NCRIC. In each of the jurisdictions in which NCRIC
carries on business, the amount of the assessment cannot exceed 2% of the direct
premiums written per year by NCRIC in that jurisdiction.
Examination of insurance companies. Every insurance company is
subject to a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other jurisdiction interested
in participating in a periodic examination may do so. The last completed
periodic financial examination of NCRIC, Inc., based on December 31, 1999
financial statements, was completed and a final report was issued on February
20, 2001. The final report positively assessed NCRIC's financial stability and
operating procedures. The last periodic financial examination report of
Commonwealth Medical Liability Insurance Company, based on December 31, 1998
financial statements, was issued on May 12, 1999. The periodic financial
examination positively assessed Commonwealth Medical Liability Insurance
Company's financial stability and operating procedures.
Approval of rates and policies. The District of Columbia, Virginia
and Delaware require NCRIC to submit rates to regulators on a file and use
basis. Under a file and use system, an insurer is permitted to bring new rates
and policies into effect on filing them with the appropriate regulator, subject
to the right of the regulator to object within a fixed period of days. In
Maryland, rates must be submitted to regulators 30 days prior to their
effectiveness. West Virginia is also a prior approval jurisdiction. In each of
the District of Columbia, Maryland and Virginia, rating plans, policies and
endorsements must be submitted to the regulators 30 days prior to their
effectiveness. If these items are not filed correctly, the possibility exists
that NCRIC may be unable to implement desired rates, policies, endorsements,
forms or manuals if these items are not approved by an insurance commissioner.
Medical professional liability reports. NCRIC principally writes
medical professional liability insurance, and additional requirements are placed
upon it to report detailed information with regard to settlements or judgments
against its insureds. In addition, NCRIC is required to report to the D.C.
Department of Insurance and Securities Regulation or state regulatory agencies
or the National Practitioners Data Bank payments, claims closed without payments
and actions by NCRIC like terminations or surcharges with respect to its
insureds. Penalties may attach if NCRIC fails to report to either the Department
of Insurance and Securities Regulation or an applicable state insurance
regulator or the National Practitioners Data Bank.
Changes in government regulation of the healthcare system. Federal
and state governments recently have considered reforming the healthcare system.
While some of the proposals could be beneficial to NCRIC, the adoption of others
could adversely affect NCRIC. Public discussion of a broad range of healthcare
reform measures will likely continue in the future. These measures that would
affect our medical malpractice business and our practice management products and
services include:
o spending limits;
o price controls;
o limits on increases in insurance premiums;
o limits on the liability of doctors and hospitals for tort
claims; and
o changes in the healthcare insurance system.
A.M. Best Company ratings
A.M. Best Company, which rates insurance companies based on factors
of concern to policyholders, rated NCRIC, Inc. and Commonwealth Medical
Liability Insurance Company "A- (Excellent)." This is the fourth highest rating
of the 15 ratings that A.M. Best assigns. NCRIC, Inc. received its initial
rating of "B" in 1988, was upgraded to "B+" in 1989, to "B++" in 1996 and was
upgraded to "A-" in 1997. A.M. Best reaffirmed the "A-" ratings of NCRIC, Inc.
and Commonwealth Medical Liability Insurance Company in 2000. In 2001 A.M. Best
upgraded its rating outlook for NCRIC from "stable" to "positive". A.M. Best
reviews its ratings periodically. If A.M. Best reduces NCRIC, Inc.'s and
Commonwealth Medical Liability Insurance Company's ratings from their current
"A- (Excellent)" level, it may be more difficult for them to attract insureds
and to develop a network of insurance brokers and agents.
A.M. Best Company's "A-" rating is assigned to those companies that
in A.M. Best's opinion have a strong ability to meet their obligations to
policyholders over a long period of time. In evaluating a company's financial
and operating performance, A.M. Best reviews:
o the company's profitability, leverage and liquidity;
o its book of business;
o the adequacy and soundness of its reinsurance;
o the quality and estimated market value of its assets;
o the adequacy of its reserves and surplus;
o its capital structure;
o the experience and competence of its management; and
o its market presence.
Item 2. Properties
NCRIC's principal business operations are conducted from its leased
executive offices, which consist of approximately 18,156 square feet located at
1115 30th Street, N.W., Washington, D.C. 20007. The term of the lease is for ten
years, commencing April 15, 1998 and expiring April 30, 2008. Annual rental is
$421,476 with 2% annual increases for the first five years of the term. In the
sixth year of the term, the rent increases by $2.00 per rentable square foot and
remains at that level for the balance of the term. NCRIC has the option to renew
the lease for one additional term of five years. NCRIC also maintains office
space in Lynchburg, Richmond, and Fredericksburg, Virginia as well as in
Greensboro, North Carolina. Annual rental is $61,692 with the lease term
expiring in December, 2002. NCRIC and its subsidiaries lease additional office
space that management believes is adequate for its present needs.
Item 3. Legal Proceedings
NCRIC is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. NCRIC vigorously defends these
actions, unless a reasonable settlement appears appropriate. NCRIC believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on NCRIC's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock has been publicly traded on the Nasdaq
SmallCap Market since July 29, 1999 under the symbol "NCRI". At March 15, 2002,
the Company had 333 stockholders of record. The following table sets forth for
the periods indicated the price ranges per share in each quarter.
High Low
------ ------
2001
First quarter 9.750 8.250
Second quarter 14.000 8.000
Third quarter 12.120 9.900
Fourth quarter 12.000 9.750
2000
First quarter 9.000 6.875
Second quarter 8.875 7.375
Third quarter 9.000 6.625
Fourth quarter 10.000 8.000
1999
Third quarter 9.250 7.500
Fourth quarter 9.125 8.500
Item 6. Selected Financial Data
The selected consolidated financial data below should be read in conjunction
with the consolidated financial statements and their accompanying notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", which are included elsewhere in this Form 10-K.
Year Ended December 31,
----------------------------------------------------------
2001 2000 1999 1998 1997
---------- ----------- ---------- ---------- ---------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Gross premiums written ..................... $ 34,459 $ 22,727 $ 21,353 $ 19,214 $ 17,869
======== ======== ========= ======== =========
Net premiums written after renewal credits . $ 23,916 $ 15,610 $ 16,188 $ 21,014 $ 13,935
======== ======== ========= ======== =========
Net premiums earned ........................ $ 20,603 $ 14,611 $ 14,666 $18,459 $13,532
Net investment income ...................... 6,136 6,407 6,089 5,996 6,045
Net realized investment (losses) gains ..... (278) (5) (71) 159 90
Practice management and related income ..... 6,156 5,317 4,576 78 --
Other income ............................... 602 470 373 357 355
-------- -------- --------- -------- ---------
Total revenues ................... 33,219 26,800 25,633 25,049 20,022
Losses and LAE ............................. 18,858 11,946 12,867 15,677 15,591
Other underwriting expenses ................ 4,877 3,591 3,010 3,858 2,918
Practice management and related expenses ... 6,063 4,970 4,845 378 --
Other expenses ............................. 1,245 1,237 1,439 1,510 676
-------- -------- --------- -------- ---------
Total expenses .................. 31,043 21,744 22,161 21,423 19,185
Income before income taxes.................. 2,176 5,056 3,472 3,626 837
Income tax provision (benefit).............. 597 1,561 967 1,079 (122)
-------- -------- --------- -------- ---------
Net income.................................. $ 1,579 $ 3,495 $ 2,505 $ 2,547 $ 959
======== ======== ======== ======= =========
BALANCE SHEET DATA
Invested assets............................. $103,125 $98,045 $ 95,092 $ 96,348 $94,362
Total assets................................ 161,002 145,864 140,947 134,326 121,841
Total liabilities........................... 116,548 104,415 105,152 103,315 94,355
Total stockholders' equity.................. 44,454 41,449 35,795 31,011 27,486
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio.......................... 91.5% 81.7% 87.7% 84.9% 115.2%
Underwriting expense ratio.................. 23.7% 24.6% 20.5% 20.9% 21.6%
Combined ratio after renewal credits........ 115.2% 106.3% 108.2% 105.8% 136.8%
SELECTED STATUTORY DATA:
Loss and LAE ratio ......................... 90.0% 75.3% 80.8% 82.5% 99.9%
Underwriting expense ratio ................. 21.8% 19.7% 15.7% 15.1% 19.4%
Combined ratio ............................. 111.8% 95.0% 96.5% 97.6% 119.3%
Policyholders' surplus ..................... $ 32,759 $29,764 $29,212 $ 24,116 $ 23,258
In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to calculate
the GAAP loss and underwriting expense ratios. For statutory purposes, renewal
credits are not considered a reduction in premium income, and written premiums
are used to calculate the statutory underwriting expense ratio. Due to these
differences in treatment, GAAP combined ratios can differ significantly from
statutory combined ratios. See Note 11 to the consolidated financial statements
for a discussion of the differences between statutory and GAAP reporting.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------ ------------------------------------------------------------------------
of Operations
-------------
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
selected consolidated financial and operating data and consolidated financial
statements and related notes included elsewhere in this Form 10-K. References to
"NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
General
The financial statements and data presented in the Form 10-K have
been prepared in accordance with generally accepted accounting principles, GAAP,
unless otherwise noted. GAAP differs from statutory accounting practices used by
regulatory authorities in their oversight responsibilities of insurance
companies.
In April 2001, 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 $184,000 in costs associated with the start up of the
company during the year ended December 31, 2001; no captive protected cells have
yet begun operations.
On January 4, 1999, NCRIC Group acquired all the outstanding shares
of HealthCare Consulting, Inc., the interests of HCI Ventures, LLC, and the
assets of Employee Benefits Services, Inc. The acquisition was recorded as a
purchase. The results of operations for the years ended December 31, 2001, 2000,
and 1999 include the results of the acquired businesses for those periods. Under
terms of the purchase agreement, an additional purchase payment could be paid in
cash if the acquired business achieved an earnings target in 2000. 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 $1.46 million was accelerated, the
Operating Agreement was terminated and new employment contracts with the former
owners were executed.
See Note 11 to the consolidated financial statements for a
reconciliation of NCRIC's net income and equity between GAAP and statutory
accounting bases. Discussed below are selected key financial concepts:
Premium income. Gross premiums written represent the amounts billed
to policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Premiums
ceded to reinsurers represent the cost to NCRIC of reducing NCRIC's exposure to
medical professional liability losses by transferring agreed upon insurance
risks to reinsurers through a reinsurance contract or treaty. Renewal credits
are reductions in premium billings to renewing policyholders. Net premiums
written are adjusted by any amount, which has been billed but not yet earned
during the period in arriving at earned premiums. For several large groups of
policyholders, NCRIC has insurance programs where the premiums are
retrospectively determined based on losses during the period. Premiums billed
under retrospective programs are recorded as premiums written, while premium
refunds accrued under retrospective programs are recorded as unearned premiums.
Under retrospective programs, premiums earned are premiums written reduced by
premium refunds accrued. Premium refunds are accrued to reflect the risk-sharing
program results on a basis consistent with the underlying loss experience. The
program loss experience is that which is included in the determination of
NCRIC's losses and loss adjustment expenses. As described more fully below,
one component of the expense for losses and loss adjustment costs is the
estimate of future payments for claims and related expenses of adjudicating
claims.
Prior to 1997, NCRIC's policies were written with a January 1 renewal
date. Beginning in 1997 and continuing in 1998 and 1999, NCRIC began staggering
policy renewal dates throughout the year, which results in a one-time effect
when the policy is staggered. Written premiums are increased during the periods
when policies are being re-issued, returning to the previous level in the
subsequent period. In accordance with GAAP, premiums are earned ratably over the
terms of NCRIC's policies, so this change in renewal dates has no effect on
premiums earned for any period.
Unearned premiums represent premiums billed but not yet fully earned
at the end of the reporting period. Premiums receivable represent annual billed
premiums and retrospective program premiums which have not yet been collected.
Losses and loss adjustment expenses. Loss and LAE reserves are
estimates of future payments for reported and unreported claims and related
expenses of adjudicating claims with respect to insured events that have
occurred. The change in these reserves from year to year is reflected as an
increase or decrease to NCRIC's loss and loss adjustment expenses. Medical
professional liability loss and LAE reserves are established based on an
estimate of these future payments as reflected in NCRIC's past experience with
similar cases and historical trends involving claim payment patterns. Other
factors that modify past experience are also considered in setting reserves,
including court decisions; economic conditions; current trends in losses; and
inflation. Reserving for medical professional liability claims continues to be a
complex and uncertain process, requiring the use of informed estimates and
judgements. Although NCRIC intends to estimate conservatively its future
payments relating to losses incurred, there can be no assurance that currently
established reserves will prove adequate in light of subsequent actual
experience.
NCRIC, in consultation with its independent actuaries, utilizes
several methods in order to estimate loss and LAE reserves by projecting
ultimate losses. By utilizing and comparing the results of these methods, NCRIC
is better able to analyze loss data and establish an appropriate reserve. The
loss and LAE reserves are established by management on a monthly basis and
reviewed periodically by NCRIC's independent actuaries. The independent
actuarial review includes an evaluation of the appropriateness of methods used
as well as a reflection of updated experience.
The inherent uncertainty in establishing reserves is relatively
greater for companies writing long-tail casualty business, like NCRIC. Due to
the extended nature of the claim resolution process of professional liability
claims, established reserve estimates may be adversely impacted by: judicial
expansion of liability standards; unfavorable legislative actions; expansive
interpretations of contracts; inflation associated with medical claims; and the
propensity of individuals to file claims. These risk factors are amplified given
the increase in new business written in new markets because there is limited
historical data available which can be used to estimate current loss levels.
NCRIC refines reserve estimates as experience develops and additional claims are
reported or existing claims are closed; adjustments to losses reserved in prior
periods are reflected in the results of the periods in which the adjustments are
made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as stated on the
income statement are reported net of reinsurance recoveries.
Reinsurance. NCRIC manages its exposure to individual claim losses,
annual aggregate losses, and LAE through its reinsurance program. Reinsurance is
a customary practice in the industry. It allows NCRIC to obtain indemnification
against a specified portion of losses associated with insurance policies it has
underwritten by entering into a reinsurance agreement with other insurance
enterprises or reinsurers. NCRIC pays or cedes part of its policyholder premium
to reinsurers. The reinsurers in return agree to reimburse NCRIC for a specified
portion of any claims covered under the reinsurance contract. While reinsurance
arrangements are designed to limit losses from large exposures and to permit
recovery of a portion of direct losses, reinsurance does not relieve NCRIC of
liability to its insureds.
Under NCRIC's current primary reinsurance contract, the premium ceded
to the reinsurers is based on a fixed rate applied to policy premium for that
coverage layer. During the year, estimated payments are made to the reinsurers,
and a final adjustment is made at the end of year to reflect actual premium
earned in accordance with the treaty.
For 1999 and prior, in accordance with one of NCRIC's primary
reinsurance contracts, the portion of the policyholder premium ceded to the
reinsurers is "swing rated" or experience rated on a retrospective basis. This
swing rated cession program is subject to a minimum and maximum premium range to
be paid to the reinsurers in the future, depending upon the extent of losses
actually paid by the reinsurers. A deposit premium is paid by NCRIC during the
initial policy year. An additional liability, "retrospective premiums accrued
under reinsurance treaties" is recorded by NCRIC to represent an estimate of net
additional payments to be made to the reinsurers under the program, based on the
level of loss and LAE reserves recorded. Like loss and LAE reserves, adjustments
to prior year ceded premiums payable to the reinsurers are reflected in the
results of the periods in which the adjustments are made. The swing rated
reinsurance premiums are recorded in a manner consistent with the recording of
NCRIC's loss reserves.
NCRIC's practice for accounting for the liability for retrospective
premiums accrued under reinsurance treaties has been to record the current year
swing rated reinsurance premium at management's best estimate of the ultimate
liability, which has generally been the maximum rate payable under terms of the
treaty. Due to the long tail nature of the medical malpractice insurance
business, it takes several years for the losses for any given report year to
fully develop. Since the ultimate liability for reinsurance premiums depends on
the ultimate losses, among other things, it is several years after the initial
reinsurance premium accrual before the amount becomes known. During the
intervening periods, reevaluations are made and adjustments to the accrued
retrospective premiums are made as considered appropriate by management.
NCRIC has historically ceded to its reinsurers over 90% of its
exposure to individual losses in excess of $1 million, known as excess layer
coverage. Excess layer premiums are recorded as current year reinsurance ceded
costs. Under the excess layer treaties, effective January 1, 2000, NCRIC cedes
100% of its risks and premiums related to these coverage layers.
Recent industry performance. NCRIC's results of operations have
historically been influenced by factors affecting the medical professional
liability industry in general. The operating results of the U.S. medical
professional liability industry have been subject to significant variations over
time due to competition, general economic conditions, judicial trends and
fluctuations in interest rates. According to the January, 2001 Best's
Review/Preview published by A.M. Best Company, 2000 was a transition year for
the medical-malpractice market with prices beginning to firm as the result of
poor underwriting experience and increasing reinsurance costs. In this article
Best predicted 2001 trends to include sustained price increases and worsening
claims severity. In recent months, several companies operating in the medical
professional liability insurance market have experienced adverse financial
results and have had their ratings from A. M. Best Company downgraded. NCRIC
actively monitors these industry trends and considers them in relation to
NCRIC's circumstances when setting rates or establishing reserves.
Accounting Literature. 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 year ended December 31, 2001, the after tax impact on the
earnings due to the elimination of goodwill amortization would be an increase of
approximately $368,000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, SAB No. 101, summarizing certain of
the staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Based on a review of the NCRIC's
revenue recognition polices, the impact of the issuance of SAB No. 101 is not
material to its financial statements.
Consolidated net income - Years ended December 31, 2001, 2000 and 1999
Year ended December 31, 2001 compared to year ended December 31, 2000
Net income totaled $1.6 million for the year ended December 31, 2001
compared to $3.5 million for the year ended December 31, 2000. Excluding net
realized investment losses, operating earnings for the year 2001 were $1.8
million compared to $3.5 million for the year 2000. Total revenue in 2001
increased 24% over the 2000 level. The higher revenue was offset by an increase
in loss and loss adjustment expenses, in underwriting expenses, and in practice
management expenses.
NCRIC's insurance segment experienced a substantial increase in new
business written in the year ended December 31, 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 by 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 additional expenses associated with the execution of
the contingent purchase payouts. Similar to the insurance segment, in the
start-up of new client relationships, NCRIC incurs costs not covered by initial
client revenue; the design of the revenue stream is to recover the initial costs
through the on-going client relationship.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Results for the fourth quarter of 2001 are a net loss of $312,000
compared to net income of $924,000 in the fourth quarter of 2000. The 2001
fourth quarter result includes net realized investment losses, net of tax, of
$312,000. The insurance segment experienced a significant increase in new
business written, with the associated impact on net earnings as described above,
producing pre-tax earnings of $228,000 before realized investment losses,
compared to 2000 fourth quarter pre-tax earnings of $1.6 million. Practice
management segment revenues increased 25% in the fourth quarter of 2001 over
2000; the segment produced quarterly pre-tax results of a loss of $159,000
compared to pre-tax earnings of $41,000 in the fourth quarter of 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Net income totaled $3.5 million for the year ended December 31, 2000
compared to $2.5 million for the year ended December 31, 1999. Improvement both
in net underwriting results and in practice management results contributed to
the increased earnings. Practice management results in 2000 included improvement
due to lower legal fees relating to the litigation brought by the NCRIC
Physicians Organization and settled in 1999.
_______________________________
Net premiums earned
_______________________________
Following is a summary of NCRIC's net premiums earned:
Year Ended December 31,
-----------------------------------
2001 2000 1999
-------- -------- --------
(in thousands)
Gross premiums written* .............. $ 34,459 $ 22,727 $ 21,353
Change in unearned premiums .......... (6,267) (2,762) (2,521)
-------- -------- --------
Gross premiums earned before renewal
credits ........................... 28,192 19,965 18,832
Reinsurance premiums ceded related to:
current year ...................... (8,992) (5,982) (6,395)
prior years ....................... 1,696 1,872 3,418
-------- -------- --------
Total reinsurance premiums ceded .. (7,296) (4,110) (2,977)
-------- -------- --------
Net premiums earned before renewal
credits ........................... 20,896 15,855 15,855
Renewal credits ...................... (293) (1,244) (1,189)
-------- -------- --------
Net premiums earned .................. $ 20,603 $ 14,611 $ 14,666
======== ======== ========
*Net premiums written after renewal
credits ........................... $ 23,916 $ 15,610 $ 16,188
======== ======== ========
Year ended December 31, 2001 compared to year ended December 31, 2000
Gross premiums written increased by $11.8 million, or 52%, to $34.5
million for the year ended December 31, 2001 from $22.7 million for the year
ended December 31, 2000 due to net new business written combined with the
premium rate increases, which averaged 7.5%. The gross premiums written include
premiums for retrospectively rated programs of $1.4 million for the year ended
December 31, 2001 and $2.5 million for the year ended December 31, 2000. Written
premium in 2000 included $1.3 million for the billing of previously accrued
premium for one of the retrospectively rated risk sharing programs further
discussed below. Gross premiums written on excess layer coverage increased $1.8
million to $4.5 million for the year ended December 31, 2001 from $2.7 million
for the year ended December 31, 2000.
During 2000, it was determined that one of NCRIC's retrospective
programs would not be renewed at the September 1, 2000 renewal date. 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.
Under terms of the contract based on the actual accumulated loss
experience of the terminated program, NCRIC billed the hospital sponsor $1.3
million in 2000 and an additional $800,000 in January 2002. Based on the
continuing development of loss experience, during the year ended December 31,
2001, $500,000 of gross premium earned has been accrued related to additional
amounts due to NCRIC from the hospital sponsor.
Because the September 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 expenses. Pursuit of this
litigation requires an expense for legal fees, which is reported as an
underwriting expense, and reduces NCRIC's net earnings. However, NCRIC believes
that the significant level of the amount receivable justifies the expense. The
ultimate outcome cannot be determined at this time.
The change in unearned premiums for the period increased by $3.5
million to $6.3 million for the year ended December 31, 2001 from $2.8 million
for the year ended December 31, 2000. This increase resulted from net new
business written throughout the year.
Gross premiums earned before renewal credits increased $8.2 million,
or 41%, to $28.2 million for the year ended December 31, 2001 from $20.0 million
for the year ended December 31, 2000. The increase was primarily due to $6.8
million of additional premiums earned under basic medical malpractice insurance
and $1.6 million of additional gross premiums earned for excess limits coverage.
Reinsurance premiums ceded increased by $3.2 million to $7.3 million
for the year ended December 31, 2001 from $4.1 million for the year ended
December 31, 2000. The increase was primarily the result of the increase in
gross premiums earned. Reinsurance premiums are affected by current year
premiums payable to the reinsurers, as well as the retrospective adjustments to
accruals for prior year premiums.
Current year reinsurance premiums ceded increased by $3.0 million, or
50%, to $9.0 million for the year ended December 31, 2001 from $6.0 million for
the year ended December 31, 2000. This increase is due to the increased gross
premium reinsured. The reinsurance premium rates in 2001 were unchanged from the
2000 level.
Reinsurance premiums related to prior years under the swing rated
treaty were reduced by $1.7 million in 2001 and $1.9 million in 2000 due to
favorable loss development of reinsured losses compared to prior estimates by
NCRIC. Generally, losses covered by the swing rated treaty are in the range
excess of $500,000 to $1 million. The 2001 change is primarily reflective of the
favorable loss development in the 1992 and 1996 coverage years. The 2000 change
is primarily reflective of the favorable loss development in the 1993 through
1996 years. The liability "retrospective premiums accrued under reinsurance
treaties" decreased to $2.4 million at December 31, 2001 from $5.5 million at
December 31, 2000.
Renewal credits decreased to $293,000 for the year ended December 31,
2001 from $1.2 million for the year ended December 31, 2000, reflecting NCRIC's
decision to not provide a renewal premium credit for 2002 renewals. In general,
renewal credits apply to policies written in the District of Columbia. A growing
proportion of NCRIC's business is written in other jurisdictions where renewal
credits are not issued.
Net premiums earned before renewal credits increased $5.0 million, or
31%, to $20.9 million for the year ended December 31, 2001 from $15.9 million
for the year ended December 31, 2000. Net premiums earned after renewal credits
increased by $6.0 million, or 41%, to $20.6 million for the year ended December
31, 2001 from $14.6 million for the year ended December 31, 2000. The increase
reflects the $8.2 million growth in gross earned premiums and the lower renewal
credits, partially offset by the $3.2 million higher reinsurance premiums in
2001 compared to 2000.
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 90% of total new business written in 2001 from 59% during in
2000.
Year ended December 31,
------------------------------------
2001 2000
------------- -----------
Direct $ 1.2 million $ 1.8 million
Agent 11.0 million 2.6 million
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 2000, 26% comes from business written in Maryland,
39% from Virginia, 24% from West Virginia, and 8% from Delaware.
In 2001, premium written to clients of the Practice Management
Services Segment totaled $854,000 compared to $540,000 in 2000.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Gross premiums written increased to $5.6 million for the quarter
ended December 31, 2001 from $943,000 for the quarter ended December 31, 2000.
In addition to the premium rate increase effective for 2001 renewal dates, new
business written in the fourth quarter of 2001 significantly exceeded the prior
fourth quarter, as shown in the following chart:
Three months ended December 31,
------------------------------------
2001 2000
------------- ------------
Direct $0.2 million $0.5 million
Agent 3.9 million 0.3 million
Gross premiums earned increased $3.3 million to $8.1 million for the
three months ended December 31, 2001 compared to $4.8 million for the 2000
fourth quarter. Reinsurance premiums ceded increased by $1.3 million to $2.2
million for the fourth quarter of 2001. Current year reinsurance ceded premiums
increased by $1.0 million to $2.5 million for the fourth quarter of 2001
compared to the fourth quarter of 2000 corresponding to the increase in gross
premiums earned. Reinsurance premiums related to prior years under the
swing-rated treaty decreased by $279,000 to $301,000 for the fourth quarter of
2001 compared to $580,000 for the fourth quarter of 2000. Favorable development
of losses under the swing-rated treaty results in the reduction of premiums due
related to prior report years. The 2001 fourth quarter development was less
favorable than the 2000 fourth quarter development.
Net premiums earned for the three months ended December 31, 2001
increased $2.3 million to $5.9 million from $3.6 million for the three months
ended December 31, 2000, reflecting the increase in gross earned premiums
partially offset by the lower favorable development of prior years under the
swing-rated reinsurance treaty.
Year ended December 31, 2000 compared to year ended December 31, 1999
Gross premiums written increased by $1.4 million, or 6%, to $22.7
million for the year ended December 31, 2000 from $21.3 for the year ended
December 31, 1999. Starting in the fourth quarter of 1997 and continuing through
1999, NCRIC began staggering policy renewal dates. Premiums written for the year
ended December 31, 2000 did not include any additional premiums from the
staggering of renewal dates, while premiums written for the year ended December
31, 1999 included approximately $2.0 million due to the re-writing of policies.
There is a one-time effect when the policy renewal is staggered which increases
premiums written in the period in which the renewal date is moved; premiums
written will, all else being equal, return to the previous level in the
subsequent period. While the staggering of the renewal dates affects premiums
written, earned premiums are not affected for either period. The gross premiums
written include premiums for retrospectively rated programs of $2.5 million for
the year ended December 31, 2000 and $733,000 for the year ended December 31,
1999. The increase includes $1.3 million for the billing of previously accrued
premium for one of the risk sharing programs further discussed below.
Gross premiums written adjusted for the staggering of renewal dates
and retrospective program premiums increased by $1.7 million, or 9%. This
increase was due primarily to net new business written in 2000, increasing the
number of policyholders by 31%, offset partially by a change in the mix of
business in new policies written. Gross premiums written on excess layer
coverage increased $200,000 to $2.7 million for the year ended December 31, 2000
from $2.5 million for the year ended December 31, 1999.
Late in the second quarter it was determined that one of NCRIC's
retrospective programs would not be renewed at the September 1 renewal. 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.
This hospital-sponsored program, which terminated September 1,
included 70 physicians insured directly with NCRIC and accounted for
approximately $2.3 million in annualized premium. The majority of the physicians
formerly in this terminated program have renewed their coverage and initiated
participation in other hospital-sponsored programs where NCRIC provides the
insurance coverage. Based on the actual accumulated loss experience of the
terminated program through 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. Because the original bill was not paid when due, NCRIC
initiated legal proceedings to collect.
The change in unearned premiums for the period increased by $240,000
to $2.8 million for the year ended December 31, 2000 from $2.5 million for the
year ended December 31, 1999. This increase resulted primarily from net new
business written.
Gross premiums earned before renewal credits increased $1.2 million,
or 6%, to $20.0 million for the year ended December 31, 2000 from $18.8 million
for the year ended December 31, 1999. The increase was primarily due to $1.6
million of additional premiums earned under basic medical malpractice insurance
offset by $450,000 less in premiums earned from risk sharing programs due to
improved loss experience under the programs.
Reinsurance premiums ceded increased by $1.1 million to $4.1 million
for the year ended December 31, 2000 from $3.0 million for the year ended
December 31, 1999. Reinsurance premiums are affected by current year premiums
payable to the reinsurers, as well as the retrospective adjustments to accruals
for prior year premiums. The increase was the result of a decrease in the credit
from prior years premiums for favorable loss experience under the swing rated
reinsurance treaty.
Current year reinsurance premiums ceded decreased by $413,000, or 6%,
to $6.0 million for the year ended December 31, 2000 from $6.4 million for the
year ended December 31, 1999. This decrease is due to the reduced reinsurance
premium rate on the primary layer premium as the result of the reinsurance
treaty effective January 1, 2000 offset by increased gross premium reinsured.
The reinsurance premium due for excess layer coverage at $2.3 million for the
year was unchanged. The liability "retrospective premiums accrued under
reinsurance treaties" decreased to $5.5 million at December 31, 2000 from $7.2
million at December 31, 1999.
Reinsurance premiums related to prior years under the swing rated
treaty were reduced by $1.9 million in 2000 and $3.4 million in 1999 due to
favorable loss development of reinsured losses compared to prior estimates by
NCRIC. Generally, losses covered by the swing rated treaty are in the range
excess of $500,000 to $1 million. The 2000 change is primarily reflective of the
favorable loss development in the 1993 through 1996 years. The 1999 change is
primarily reflective of the favorable loss development in the 1992 though 1996
loss years.
Renewal credits increased $55,000 to $1.2 million for the year ended
December 31, 2000 reflecting an increase in premiums on policies eligible for
the renewal credit. In general, renewal credits apply to policies written in the
District of Columbia and Maryland. A growing proportion of NCRIC's business is
written in other jurisdictions where renewal credits are not issued.
Net premiums earned before renewal credits at $15.9 million for the
year ended December 31, 2000 are flat compared to the year ended December 31,
1999. Net premiums earned after renewal credits decreased by $55,000, less than
1%, to $14.6 million for the year ended December 31, 2000 from $14.7 million for
the year ended December 31, 1999. The decrease reflects the $1.5 million lower
reinsurance ceded favorable prior year development in 2000 compared to 1999
largely offset by the increase in gross earned premiums.
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 net earned premium in Virginia, largely as the result of sales by
agents and to clients of the Practice Management Services Segment. For the year
ended December 31, 2000, net earned premiums from Virginia totaled approximately
$1.7 million, an increase of $944,000 over the total of approximately $743,000
for the year ended December 31, 1999.
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
increased to 59% of total new business written in 2000 from 43% during the same
period in 1999.
Year ended December 31,
------------------------------------
2000 1999
------------- --------------
Direct $1.8 million $1.4 million
Agent 2.6 million 1.0 million
In 2000, new premium written to clients of the Practice Management
Services Segment totaled $483,000, or 11% of total new gross written premium,
compared to $56,000 in 1999, or 2% of new gross written premium.
_______________________________
Net investment income
_______________________________
Year ended December 31, 2001 compared to year ended December 31, 2000
Net investment income decreased by $271,000, or 4%, for the year
ended December 31, 2001 compared to the prior year reflecting a decrease in
yields partially offset by a higher base of average invested assets. Net
investment income for the year ended December 31, 2001 was $6.1 million compared
to $6.4 million for the year ended December 31, 2000. Average invested assets,
which include cash equivalents, increased by $4.1 million, or 4%, to $105.7
million at December 31, 2001. New investments were primarily directed to
corporate bonds and tax-exempt securities with the strategy of maximizing
after-tax returns with investment grade securities. The average effective yield
was approximately 5.80% for the year ended December 31, 2001 and 6.31% for the
year ended December 31, 2000. The tax equivalent yield was approximately 6.30%
at December 31, 2001 and 6.72% at December 31, 2000. The change in investment
yields is reflective of the market change in interest rates in 2001 compared to
2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Net investment income increased by $318,000, or 5%, for the year
ended December 31, 2000 compared to the prior year reflecting an increase in
yields, partially offset by a lower base of average invested assets. Net
investment income for the year ended December 31, 2000 was $6.4 million compared
to $6.1 million for the year ended December 31, 1999. Average invested assets,
which include cash equivalents, decreased by $4.2 million, or 4%, to $101.6
million at December 31, 2000. Maturing investments were primarily reinvested in
corporate and tax-exempt securities. The average effective yield was
approximately 6.31% for the year ended December 31, 2000 and 5.74% for the year
ended December 31, 1999. The tax equivalent yield was approximately 6.72% at
December 31, 2000 and 6.18% at December 31, 1999. The change in investment
yields is reflective of the market change in interest rates in 2000 compared to
1999.
_______________________________
Net realized investment losses
_______________________________
Year ended December 31, 2001 compared to year ended December 31, 2000
Net realized investment losses were $278,000 for the year ended
December 31, 2001 compared to $5,000 for the year ended December 31, 2000.
Through September 30, 2001, the net realized investment gains were comprised of
gains on sales of equity securities and corporate and agency bonds. The net
realized losses in the fourth quarter of 2001 were comprised of:
Osprey bond $(738,000)
E-Health Solutions Group (300,000)
Treasury securities 536,000
Miscellaneous gains 30,000
---------
Total $(472,000)
=========
The loss taken on the Osprey bond (an Enron partnership) represents
NCRIC's entire exposure to Enron securities. E-Health Solutions Group is an
equity investment representing seed money provided by NCRIC to a medical
information technology company that is developing software products for use by
health care providers. While the investment in E-Health Solutions Group may
produce value in future periods, an evaluation conducted during the fourth
quarter concluded that under Generally Accepted Accounting Principles, NCRIC
needed to write off the carrying value of the investment.
The realized investment losses in 2000 were from the sale of U.S.
government and agencies securities partially offset by realized gains from the
sale of asset and mortgage-backed securities.
Year ended December 31, 2000 compared to year ended December 31, 1999
Net realized investment losses were $5,000 for the year ended
December 31, 2000 compared to $71,000 for the year ended December 31, 1999. The
realized investment losses in 2000 were from the sale of U.S. government and
agencies securities partially offset by realized gains from the sale of asset
and mortgage-backed securities.
_______________________________
Practice management and related
income
_______________________________
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Year Ended December 31,
--------------------------
2001 2000 1999
---- ---- ----
Practice management 43% 44% 40%
Accounting 26 28 31
Tax & personal financial planning 12 11 11
Retirement plan accounting & admin 13 13 13
Other 6 4 5
--- --- ---
Total 100% 100% 100%
=== === ===
Year ended December 31, 2001 compared to year ended December 31, 2000
Practice management and related revenues increased by $839,000, or
16%, to $6.2 million for the year ended December 31, 2001, from $5.3 million for
the year ended December 31, 2000. This revenue consists of fees generated by
NCRIC MSO through HealthCare Consulting and Employee Benefits Services. The
increased revenue is a result of the focused efforts on new business development
through the addition of new clients in both recurring business and one-time
consulting assignments and the 2001 increase in consulting rates.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Practice management and related revenues increased by $304,000, or
25%, to $1.5 million for the fourth quarter of 2001 from $1.2 million for the
fourth quarter of 2000. This increase continues the trend of increasing revenues
as seen in earlier quarters of 2001, however, the fourth quarter increase at 25%
was ahead of the 13% increase in revenue experienced through the first nine
months of 2001.
Year ended December 31, 2000 compared to year ended December 31, 1999
Practice management and related revenues increased by $741,000, or
16%, to $5.3 million for the year ended December 31, 2000, from $4.6 million for
the year ended December 31, 1999. This revenue consists of fees generated by
NCRIC MSO through HealthCare Consulting and Employee Benefits Services. The
increase results from both recurring fee business and one-time consulting
assignments. Approximately $365,000 of revenue in 2000 results from services
provided to existing insureds of NCRIC reflecting results of the cross-selling
initiative.
_______________________________
Other income
_______________________________
Other income includes revenues from insurance brokerage, insurance
agency and physician services, as well as service charge income from NCRIC's
financing of physician premiums.
Year ended December 31, 2001 compared to year ended December 31, 2000
Other income increased $132,000, or 28%, to $602,000 for the year
ended December 31, 2001 from $470,000 for the year ended December 31, 2000. The
increased revenue resulted primarily from increased brokerage reinsurance treaty
commission income generated by the increased current year reinsurance ceded
premiums.
Year ended December 31, 2000 compared to year ended December 31, 1999
Other income increased $97,000, or 26%, to $470,000 for the year
ended December 31, 2000 from $373,000 for the year ended December 31, 1999. Of
the increase, $53,000 was in NCRIC Physicians Organization as a result of the
1999 litigation settlement.
_______________________________
Loss and loss adjustment expenses
incurred and combined ratio results
_______________________________
The expense for incurred losses and LAE for each year net of
reinsurance can be summarized as follows. All loss expense amounts incurred are
reported net of reinsurance amounts recoverable.
Year Ended December 31,
---------------------------
2001 2000 1999
------- ------- --------
(in thousands)
Incurred losses and LAE related to:
Current year - losses ........ $23,056 $17,829 $20,795
Prior years - development .... (4,198) (5,883) (7,928)
------- ------- -------
Total incurred for the year ....... $18,858 $11,946 $12,867
======= ======= =======
Traditionally, property and casualty insurer results are judged using
ratios of losses and underwriting expenses compared to net premiums earned.
Following is a summary of these ratios for each period.
Year Ended December 31,
-------------------------
2001 2000 1999
----- ----- -----
Loss and LAE ratio:
Current year losses .. 111.9% 122.0% 141.8%
Prior year losses .... (20.4) (40.3) (54.1)
----- ----- -----
Total Loss and LAE ratio . 91.5 81.7 87.7
Underwriting expense ratio 23.7 24.6 20.5
----- ----- -----
Combined ratio ........... 115.2% 106.3% 108.2%
===== ===== =====
Year ended December 31, 2001 compared to year ended December 31, 2000
Total incurred loss and LAE expense of $18.9 million for year ended
December 31, 2001 represented an increase of $7.0 million, or 59%, compared to
$11.9 million incurred for the year ended December 31, 2000.
The total incurred losses are broken into two components - incurred
losses related to the current coverage year and development on prior coverage
year losses. Current year incurred losses increased by $5.3 million, or 30%, to
$23.1 million for the year ended December 31, 2001 from $17.8 million for the
year ended December 31, 2000 reflecting the rise in the level of liability
exposure as a result of expanding business, an increase in the frequency of
reported claims, and a rise in the cost of adjudicating and settling claims. An
increase in severity was first noted in 1996 and continued through 2001. The
increase in severity reflects the growing size of plaintiff verdicts and
settlements. NCRIC's escalation in this adverse claims trend is similar to the
conditions faced by many medical professional liability insurance carriers
across the nation. While an increase in severity would tend to cause loss ratios
to deteriorate, NCRIC's reinsurance program for losses in excess of $500,000
provides protection against the increase in severity of losses.
NCRIC experienced favorable development on estimated losses for prior
year's claims for both years. Prior year development results from the
re-estimation and settlement of individual losses not covered by reinsurance,
which are generally losses under $500,000. The favorable loss development
related to prior years claims was $4.2 million for the year ended December 31,
2001, and $5.9 million for the year ended December 31, 2000. The total loss and
LAE ratio was reduced by 20 points for the year ended December 31, 2001 and 40
points for the year ended December 31, 2000, as a result of this favorable
development. The 2001 change is primarily reflective of the favorable loss
development for the 1992, 1996, 1997, and 1998 loss years, partially offset by
adverse development in the 1995 loss year; whereas, the 2000 change is primarily
reflective of the favorable loss development for the 1994, 1996, 1998 and 1999
loss years, partially offset by adverse development in the 1995 loss year. The
reduced level of favorable development in 2001 compared to 2000 reflects claims
closed as well as the continuing upward pressure of severity of losses noted
above.
The underwriting expense ratio decreased to 23.7% for the year ended
December 31, 2001 from 24.6% for the year ended December 31, 2000. This decrease
is reflective of the 31% increase in net earned premiums partially offset by the
36% increase in underwriting expenses. Underwriting expenses increased $1.3
million to $4.9 million for the year ended December 31, 2001 from $3.6 million
for the year ended December 31, 2000. Of the 36% increase in underwriting
expenses, 19% was attributed to a guaranty fund assessment of $243,000; this
translates into an addition of 1.2% to the underwriting expense ratio. See
"Underwriting expenses."
The combined ratio increased to 115.2% for the year ended December
31, 2001 from 106.3% for the year ended December 31, 2000. The primary factor
driving the increased combined ratio was the increase in incurred losses
stemming from the lower favorable prior year loss development.
The statutory combined ratio was 111.8% for the year ended December
31, 2001 compared to 95.0% for the year ended December 31, 2000. This increase
reflects the same premium and loss level factors noted previously.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
The fourth quarter expense for incurred losses and LAE net of
reinsurance is summarized as follows (in thousands):
Three Months
Ended December 31,
------------------
2001 2000
---- ----
Incurred losses and LAE related to:
Current year - losses ............ $ 6,358 $ 4,541
Prior years - development ........ (405) (1,520)
------- -------
Total incurred for the quarter $ 5,953 $ 3,021
======= =======
Total incurred loss and LAE expense of $6.0 million for the fourth
quarter of 2001 increased by $3.0 million over the fourth quarter of 2000. The
increase in current year losses to $6.4 million for the fourth quarter of 2001
reflects the increase in the level of liability exposure as a result of NCRIC's
expanding business and a rise in the cost of settling claims. The lower level of
favorable development of losses reported in prior years reflects the experience
on the claims closed during the quarter as well as the continuing upward
pressure of severity of losses as reported previously.
Year ended December 31, 2000 compared to year ended December 31, 1999
Total incurred loss and LAE expense of $11.9 million for year ended
December 31, 2000 represented a decrease of $921,000, or 7%, compared to $12.9
million incurred for the year ended December 31, 1999.
The total incurred losses are broken into two components - incurred
losses related to the current coverage year and development on prior coverage
year losses. Current year incurred losses decreased by $3.0 million, or 14%, to
$17.8 million for the year ended December 31, 2000 from $20.8 million for the
year ended December 31, 1999. The number of new claims reported in 2000 was
greater than in 1999; however, the frequency, the number of claims reported per
100 full time equivalent insureds, was flat in 2000 relative to the 1999 level.
An increase in severity was first noted in 1996 and continued through 2000. The
increase in severity reflects the growing size of plaintiff verdicts and
settlements. NCRIC's escalation in this adverse claims trend is similar to the
conditions faced by many medical professional liability insurance carriers
across the nation. While an increase in severity would tend to cause loss ratios
to deteriorate, NCRIC's reinsurance program for losses in excess of $500,000
provides protection against the increase in severity of losses.
NCRIC experienced favorable development on estimated losses for prior
year's claims for both years. Prior year development results from the
re-estimation and settlement of individual losses not covered by reinsurance,
which are generally losses under $500,000. The favorable loss development
related to prior years claims was $5.9 million for the year ended December 31,
2000, and $7.9 million for the year ended December 31, 1999. The total loss and
LAE ratio was reduced by 40 points for the year ended December 31, 2000 and 54
points for the year ended December 31, 1999, as a result of this favorable
development. The 2000 change is primarily reflective of the favorable loss
development for the 1994, 1996, 1998 and 1999 loss years, partially offset by
adverse development in the 1995 loss year; whereas, the 1999 change is primarily
reflective of the favorable loss development for the 1992 through 1996 loss
years. The reduced level of favorable development in 2000 compared to 1999
reflects the increase in severity noted above.
The underwriting expense ratio increased to 24.6% for the year ended
December 31, 2000 from 20.5% for the year ended December 31, 1999. This increase
is reflective of the 19% increase in underwriting expenses in addition to the
increase in reinsurance ceded premiums previously described. Underwriting
expenses increased $581,000 to $3.6 million for the year ended December 31, 2000
from $3.0 million for the year ended December 31, 1999. See "Underwriting
expenses."
The combined ratio decreased to 106.3% for the year ended December
31, 2000 from 108.2% for the year ended December 31, 1999. The decrease in
incurred losses resulted in a combined ratio at the second lowest level for the
1995 through 2000 period.
The statutory combined ratio was 95.0% for the year ended December
31, 2000 compared to 96.5% for the year ended December 31, 1999. This decrease
reflects the same premium and loss level factors noted previously.
_________________________________
Loss and loss adjustment
expenses liability
_______________________________
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
Year Ended December 31,
-----------------------
2001 2000
---- ----
(in thousands)
Liability for:
Losses ................................. $ 56,802 $ 55,785
Loss adjustment expenses ............... 27,758 25,349
-------- --------
$ 84,560 $ 81,134
======== ========
Reinsurance recoverable on losses ............... $ 30,077 $ 27,549
======== ========
Losses in the medical professional liability industry can take up to
eight to ten years, or occasionally more, to fully settle. Actual amounts are
not due from the reinsurers until NCRIC settles a claim.
NCRIC believes that all of its reinsurance recoverables are
collectible. See "Business - Reinsurance" for a discussion on the reinsurance
program.
______________________________
Underwriting expenses
_______________________________
Salaries and benefits accounted for approximately 35% of other
underwriting expenses; with professional fees, including legal, auditing and
director's fees, accounting for approximately another 15% of the underwriting
expenditures. Premium taxes and commissions related to the change in unearned
premiums are treated as deferred acquisition costs. Guaranty fund assessments
are based on industry loss experience in the jurisdictions where NCRIC does
business, which loss experience is not entirely predictable.
Year ended December 31, 2001 compared to year ended December 31, 2000
Underwriting expenses increased $1.3 million, or 36%, to $4.9 million
for the year ended December 31, 2001 from $3.6 million for the year ended
December 31, 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. Underwriting expenses also increased due to legal fees incurred
for the collection litigation initiated by NCRIC, as discussed in "Net Premiums
Earned", and for the allowance for potential uncollectible premiums. In
addition, NCRIC received a guaranty fund assessment from the D.C. Guaranty Fund
of $243,000 stemming from the insolvency of Reliance Insurance Company. There is
the possibility NCRIC could be assessed additional amounts in the future.
However, since the amount of any potential future assessment is not reasonably
estimable at this time, no additional expense accrual has been recorded. No
similar assessment was received in 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
Underwriting expenses increased $581,000, or 19%, to $3.6 million for
the year ended December 31, 2000 from $3.0 million for the year ended December
31, 1999. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in commission
and other underwriting costs, plus increased premium taxes and an increase in
the allowance for uncollectible premium receivables.
_______________________________
Practice management and related
expenses
_______________________________
Practice management and related expenses consist primarily of
expenses, such as salaries, general office expenses, and goodwill amortization
related to NCRIC MSO operations of the businesses acquired January 4, 1999. The
management services organization was established in 1997 to provide physicians
with a variety of administrative support and other services but did not have
substantive operations until 1998.
Year ended December 31, 2001 compared to year ended December 31, 2000
Practice management and related expenses increased $1.1 million, or
22%, to $6.1 million for the year ended December 31, 2001 compared to $5.0
million for the year ended December 31, 2000. Expenses increased as a result of
the growth in new business and business development efforts during 2001. In
addition, goodwill amortization increased by $131,000, interest expense
increased $75,000, and compensation expense increased by $70,000 as a result of
the contingent purchase payments made in 2001 to the prior owners of HealthCare
Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Practice management and related expenses of $1.7 million in the
fourth quarter of 2001 increased over the $1.2 million incurred in the fourth
quarter of 2000 due to the same factors influencing the growth of expenses
throughout the year 2001, that is, expenses associated with the growth of new
business and with the contingent purchase payments made in 2001. Additional
fourth quarter expense included increases for bad debts and employee
compensation.
Year ended December 31, 2000 compared to year ended December 31, 1999
Practice management and related expenses increased $125,000, or 3%,
to $5.0 million for the year ended December 31, 2000 compared to $4.8 million
for the year ended December 31, 2000. The increase is due to general increases
in operating expenses, principally compensation, related to supporting a growing
base of business.
_______________________________
Other expenses
_______________________________
Other expenses include expenditures for holding company and
subsidiary operations which are not directly related to the issuance of medical
professional liability insurance or practice management and related operations,
including insurance brokerage, insurance agency and captive development.
Year ended December 31, 2001 compared to year ended December 31, 2000
Other expenses of $1.2 million for the year ended December 31, 2001
are unchanged from the expense level for the year ended December 31, 2000. Other
expenses include amounts incurred to meet the various requirements associated
with having common stock traded in the public market; the expense of the stock
grants made in September, 2000 under the Stock Award Plan; and, in 2001,
$184,000 of start-up expenses for the new captive insurance company subsidiary.
Year ended December 31, 2000 compared to year ended December 31, 1999
Other expenses decreased $202,000 to $1.2 million for the year ended
December 31, 2000 from $1.4 million for the year ended December 31, 1999. The
primary component of the decrease was a reduction of legal expenses incurred in
connection with litigation brought by NCRIC Physicians Organization and settled
in 1999 as well as the non-recurrence of interest expense. These decreases were
partially offset by an increase in expenses due to meeting the various
requirements associated with having common stock traded in the public market and
the expense of the stock grants made in September, 2000 under the Stock Award
Plan.
_____________________________
Income taxes
_____________________________
The effective tax rate for NCRIC is lower than the federal statutory
rate principally due to nontaxable investment income.
Year Ended December 31,
-----------------------
2001 2000 1999
---- ---- ----
Federal income tax at statutory rates 34% 34% 34%
Tax exempt income ................... (12) (4) (7)
Dividends received .................. (4) (1) (2)
Goodwill amortization ............... 5 1 2
Other, net .......................... 4 1 1
-- -- --
Income tax at effective rates ....... 27% 31% 28%
== == ==
NCRIC's net deferred tax assets are created by temporary differences
that will result in tax benefits in future years due to the differing treatment
of items for tax and financial statement purposes. The primary difference is the
requirement to discount or reduce loss reserves for tax purposes because of
their long-term nature.
Year Ended December 31,
------------------------
2001 2000
----------- -----------
Deferred income tax asset ............. $ 2,482,000 $1,918,000
=========== ==========
Year ended December 31, 2001 compared to year ended December 31, 2000
Tax expense for the year ended December 31, 2001 was $597,000
compared to $1.6 million for the year ended December 31, 2000. The Federal
corporate income tax rate of 34% was reduced to an effective tax rate of 27% for
the year ended December 31, 2001 due to tax-exempt income and nontaxable
dividends received, partially offset by non-deductible goodwill amortization and
other, principally state income taxes. The effective rate of 31% for the year
ended December 31, 2000 was higher than the 2001 effective rate primarily due to
a lower level of tax-exempt income in 2000. The decrease in the provision for
income tax is reflective of the decreased income before tax combined with the
decrease in the effective tax rate.
Year ended December 31, 2000 compared to year ended December 31, 1999
Tax expense for the year ended December 31, 2000 was $1.6 million
compared to $1.0 million for the year ended December 31, 1999. The Federal
corporate income tax rate of 34% was reduced to an effective tax rate of 31% for
the year ended December 31, 2000 due to tax-exempt income and nontaxable
dividends received, partially offset by non-deductible goodwill amortization.
The effective rate of 28% for the year ended December 31, 1999 was lower than
the 2000 effective rate primarily due to a lower level of tax-exempt income in
2000. The increase in the provision for income tax is reflective of the
increased income before tax combined with the increase in the effective tax
rate.
Financial condition, liquidity and capital resources
NCRIC Group, parent company
Financial condition and capital resources. NCRIC Group is a stock
holding company whose operations and assets primarily consist of its ownership
of NCRIC, Inc. and NCRIC MSO, Inc. NCRIC Group assists its subsidiaries in their
efforts to compete effectively and create long-term growth. As a part of this
strategy, NCRIC Group may seek to take advantage of acquisition opportunities
and alternative financing.
Liquidity. Liquidity is a measure of an entity's ability to secure
enough cash to meet its contractual obligations and operating needs. NCRIC
Group's cash flow from operations consists of dividends from subsidiaries, if
declared and paid, and other permissible payments from its subsidiaries, offset
by fees paid to NCRIC, Inc., for management services and other expenses. NCRIC
Group intends to rely primarily on this cash flow from NCRIC, Inc. and NCRIC
MSO, Inc. to pay dividends on its common stock, if any. The amount of the future
cash flow available to NCRIC Group may be influenced by a variety of factors,
including NCRIC, Inc.'s financial results and regulation by the District of
Columbia Department of Insurance and Securities Regulation.
The payment of dividends to NCRIC Group by NCRIC, Inc. is subject to
limitations imposed by the District of Columbia Holding Company System Act of
1993. Under the DC Holding Company Act, NCRIC, Inc. must seek prior approval
from the Commissioner to pay any dividend which, combined with other dividends
made within the preceding 12 months, exceeds the lesser of (A) 10% of the
surplus at the end of the prior year or (B) the prior year's net income
excluding realized capital gains. Net income, excluding realized capital gains,
for the 2 years preceding the current year is carried forward for purposes of
the calculation to the extent not paid in dividends. The law also requires that
an insurer's statutory surplus following a dividend or other distribution be
reasonable in relation to the insurer's outstanding liabilities and adequate to
meet its financial needs. The District of Columbia permits the payment of
dividends only out of unassigned statutory surplus. Using these criteria, as of
December 31, 2001, NCRIC, Inc. had available approximately $3.3 million of
unassigned statutory surplus available for dividends.
NCRIC Group and Subsidiaries, consolidated
Liquidity. The primary sources of NCRIC's 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, taxes, and to purchase investments.
NCRIC had cash flows provided by (used in) operations for the years ended
December 31, as follows:
2001 $ 8.3 million
2000 $(0.8) million
1999 $ 4.3 million
The $9.1 million of increased cash flow provided by operations in
2001 compared to 2000 results primarily from an increase in net premiums
received partially offset by increases in payments for income taxes, $797,000,
and losses and LAE, $1.0 million. The $5.1 million of decreased cash flow in
2000 compared to 1999 results primarily from an increase in payments for losses
and LAE, $1.6 million, income taxes, $1.3 million, reinsurance under the swing
rated treaty, $2.4 million, partially offset by an increase in premiums
collected, $900,000. Because of the long-term nature of both payment of claims
and the settlement of swing rated reinsurance premiums due to the reinsurers,
cash from operations for a medical professional liability insurer can vary
substantially from year to year.
Comprehensive income was a gain of $2.8 million for the year ended
December 31, 2001 compared to a gain of $5.6 million for the year ended December
31, 2000. The decrease in comprehensive income results from the lower level of
increase in net unrealized investment gains, combined with lower net income.
Financial condition and capital resources. NCRIC invests its positive
cash flow from operations primarily in investment grade, fixed maturity
securities. As of December 31, 2001, the carrying value of the securities
portfolio was $103.1 million, compared to a carrying value of $98.0 million at
December 31, 2000. The portfolios were invested as follows:
December 31,
------------
2001 2000
---- ----
U.S. Government and agencies ....... 4% 14%
Asset and mortgage-backed securities 29 32
Tax-exempt securities .............. 19 16
Corporate bonds .................... 42 31
Equity securities .................. 6 7
Over 65% of the bond portfolio at December 31, 2001 was invested in
US Government and agency securities or has a rating of AAA or AA. For regulatory
purposes as of December 31, 2001, 87% of the securities portfolio is rated
"Class 1", which is the highest quality rated group as classified by the NAIC.
The accumulated other comprehensive gain totaled $474,000 at December
31, 2001 compared to a loss of $744,000 at December 31, 2000. This improvement
in asset values resulted primarily from the reduction in market interest rates.
NCRIC's investment portfolio includes a bond issued by Xerox, which carries an
8% coupon and a rating of BB/B. As of December 31, 2001, this security had a
carrying value of $562,000, which represents an unrealized pre-tax loss of
$484,000, an improvement of $326,000 over its unrealized pre-tax loss of
$810,000 as of December 31, 2000. Based on the financial success of Xerox
demonstrated over the past year and on the improvement in 2001 of the market
value of this issue, NCRIC expects the value of its investment to continue to
rise. NCRIC will continue to actively monitor the financial position and outlook
for this investment and take any action determined to be appropriate.
NCRIC believes that all of its fixed maturity securities are readily
marketable. Investment duration is closely monitored to provide adequate cash
flow to meet operational and maturing liability needs. Asset and liability
modeling, including sensitivity analyses and cash flow testing, are performed on
a regular basis.
The $2.5 million line of credit available as of December 31, 2001 is
restricted to working capital for claim settlements. The line of credit is
unsecured and renewable. NCRIC has not drawn down on this facility. NCRIC has no
material commitments for capital expenditures. NCRIC Group and its subsidiaries
are required to pay aggregate annual salaries in the amount of $1.1 million to
six persons under employment agreements.
Under terms of the purchase agreement between NCRIC and the previous
owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits
Services, Inc., contingency 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 $1.46 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 term of
the loan is 3 years at a floating rate of LIBOR plus two and three-quarter
percent. At December 31, 2001, the interest rate was 4.83%. Principal and
interest payments are due on a monthly basis.
The equity of NCRIC was $44.5 million at December 31, 2001 and $41.5
million at December 31, 2000. The $3.0 million increase for the year ended
December 31, 2001 was due primarily to $1.6 million of net income plus $1.2
million of net unrealized investment gains. The $5.7 million increase for the
year ended December 31, 2000 was primarily due to $3.5 million of net income
plus $2.1 million of net unrealized investment gains.
Effects of inflation and interest rate changes
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 loss and LAE reserve levels and NCRIC's ratemaking
process adequately incorporates the effects of inflation.
Interest rate changes expose NCRIC to a market risk on its investment
portfolio. This 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, such as interest rates. In general, the market value of NCRIC's fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, NCRIC's net investment income
increases or decreases in a direct relationship with interest rate changes on
monies re-invested from maturing securities and investments of positive cash
flow from operating activities.
Federal income tax matters
For tax years prior to the stock offering, NCRIC filed a consolidated
United States Federal income tax return with its parent and subsidiaries. For
tax years after the stock offering, NCRIC does not file as part of a
consolidated United States Federal income tax return with NCRIC, A Mutual
Holding Company or NCRIC Holdings because NCRIC, A Mutual Holding Company and
NCRIC Holdings own directly and indirectly less than 80% of the outstanding
shares of NCRIC Group. Tax years 1998, 1999 and 2000 are open but not currently
under audit. In 2000 the Internal Revenue Service approved a change in
accounting method for NCRIC relative to the timing of revenue recognition for
tax purposes.
Regulatory matters
NAIC statutory accounting codification. The National Association of
Insurance Commissioners or NAIC is an association of the insurance regulators of
all 50 states and the District of Columbia. The NAIC has codified the statutory
accounting practices, which are the accounting rules and guidelines prescribed
by the state insurance regulators. The project was intended to re-examine
current statutory accounting practices and to ensure uniform accounting
treatment from a regulatory standpoint. Many of the changes to statutory
accounting are based on generally accepted accounting principles with
modifications that emphasize the concept of conservatism and solvency inherent
in statutory accounting. The accounting mandated by the codification applies
commencing January 1, 2001. Statutory accounting changes resulting from this
codification will not have an effect on the financial statements prepared in
accordance with GAAP, which have been included in this document and filed with
the Securities and Exchange Commission. The effect on NCRIC's statutory surplus
on January 1, 2001 is an increase of $1.6 million. This increase is mainly due
to the effect of accounting changes related to the implementation of deferred
taxes and the removal of the excess of statutory reserves over statement
reserves penalty, offset by charges to surplus for overdue receivables.
NAIC IRIS ratios. The NAIC Insurance Regulatory Information System
(IRIS), is an early warning system that is primarily intended to be utilized by
the state and District of Columbia insurance department regulators to assist in
their review and oversight of the financial condition and results of operations
of insurance companies operating in their respective jurisdictions. IRIS is a
ratio analysis system that is administered by the NAIC. The NAIC provides the
state and District of Columbia insurance department regulators with ratio
reports for each insurer within their jurisdiction based on standardized annual
financial statements submitted by the insurers. IRIS identifies 12 ratios to be
analyzed for a property-casualty insurer, and specifies a range of values for
each of these ratios. The ratios address various aspects of each insurer's
financial condition and stability including profitability, liquidity, reserve
adequacy and overall analytical ratios. Departure from the usual range of a
ratio may require the submission of an explanation to the state or District of
Columbia insurance regulator. Departure from the usual range on four or more
ratios may lead to increased regulatory oversight.
For 2001 and 2000, NCRIC's subsidiary CML was outside the usual range
on three ratios. The ratio results were impacted by two primary factors: the
rapid increase in new premium written in CML and the increase in severity for
losses, particularly the adverse development in losses of one prior year. In the
opinion of management, because of the reasons for the ratio results for the
current year, the ratio results are not indicative of operational problems in
this subsidiary. For 2001, another subsidiary, NCRIC, Inc., was outside the
usual range for two ratios as the result of the rapid increase in new premium
written; for 1999 it was outside the usual range for two ratios as the result of
fluctuations in reinsurance ceded premiums under the swing rated reinsurance
program.
NAIC risk-based capital. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital or "RBC" formula is
designed to allow state and District of Columbia insurance regulators to
identify potentially under-capitalized companies. For property-casualty
insurers, the formula takes into account risks related to the insurer's assets -
including risks related to its investment portfolio and the insurer's
liabilities - including risks related to the adverse development of coverages
underwritten. The RBC rules provide for different levels of regulatory attention
depending on the ratio of the insurer's total adjusted capital to the
"authorized control level" of RBC. The first level of regulatory action, a
review by the domiciliary insurance commissioner of a company prepared RBC plan,
is instituted at the point a company's total adjusted capital is at a level
equal to or less than two times greater than the authorized control level
risk-based capital. For all periods presented, the total adjusted capital levels
for NCRIC Inc. and Commonwealth Medical Liability Insurance Company were
significantly in excess of the authorized control level of RBC. As a result, the
RBC requirements are not expected to have an impact upon NCRIC's operations.
Following is a presentation of the total adjusted capital for NCRIC, Inc. and
Commonwealth Medical Liability Insurance Company compared to the authorized
control level of RBC:
Authorized Control Level
Risk-based Capital Total Adjusted Capital
------------------ ----------------------
NCRIC, Inc. CML NCRIC, Inc. CML
----------- --- ----------- ---
(in millions)
December 31, 2001.... $4.7 $0.17 $32.8 $4.3
December 31, 2000.... 3.7 0.19 29.8 4.5
December 31, 1999.... 4.1 0.17 29.2 5.0
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 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 7A. 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 December 31, 2001, fixed maturity securities
comprised 94% of total investments at market value. U.S. government and
tax-exempt bonds represent 25% of the fixed maturity securities. Equity
securities, consisting 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.
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
65% of the portfolio is Treasury or Agency related or rated AAA, the highest
rating for a security.
During 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.
One common measure of the interest sensitivity of fixed maturity securities
is effective duration. Effective duration utilizes maturities, yields, and call
terms to calculate an average age of expected cash flows. The following table
shows the estimated fair value of NCRIC's fixed maturity portfolio based on
fluctuations in the market interest rates.
Projected Market Value
Yield Change (bp) Market Yield (in thousands)
----------------- ------------ --------------
-300 2.63 $120.7
-200 3.60 114.5
-100 4.58 108.7
Current Yield** 5.56 103.1
100 6.54 97.8
200 7.52 92.9
300 8.50 88.4
**Current yield is as of December 31, 2001.
The actual impact of the market interest rate changes on the securities may
differ from those shown in the sensitivity analysis above.
Item 8.
- -------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
Page
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT 76
Consolidated Balance Sheets as of December 31, 2001 and 2000 77
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000, and 1999 78
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000, and 1999 79
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999 80
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999 81
Schedule I - Summary of Investments - Other Than Investments in Related Parties 99
Schedule II - Condensed Financial Information of Registrant 100
Schedule III - Supplementary Insurance Information 104
Schedule IV - Reinsurance 105
Schedule V - Valuation and Qualifying Accounts 106
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance
Companies 107
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
NCRIC Group, Inc. and Subsidiaries
Washington, D.C.
We have audited the accompanying consolidated balance sheets of NCRIC Group,
Inc. and Subsidiaries (the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ending December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NCRIC Group, Inc. and Subsidiaries
as of December 31, 2001 and 2000, and the results of their operations, and their
cash flows for each of the three years in the period ending December 31, 2001,
in conformity with accounting principles generally accepted in the United States
of America.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional schedules listed in the
table of contents are presented for the purpose of additional analysis and are
not a required part of the basic financial statements. The additional schedules
are the responsibility of the Company's management. Such information has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole.
Deloitte & Touche LLP
February 5, 2002
McLean, Virginia
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ------------------------------------------------------------------------------------------------------------
2001 2000
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 96,723 $ 91,482
Equity securities 6,402 6,563
--------- ----------
Total securities available for sale 103,125 98,045
OTHER ASSETS:
Cash and cash equivalents 7,565 3,972
Reinsurance recoverable 30,077 27,549
Goodwill, net 7,291 6,218
Premiums and accounts receivable 4,802 3,438
Deferred income taxes 2,482 1,918
Other assets 5,660 4,724
--------- ----------
TOTAL ASSETS $ 161,002 $ 145,864
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 56,802 $ 55,785
Loss adjustment expenses 27,758 25,349
--------- ----------
Total losses and loss adjustment expenses 84,560 81,134
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 2,408 5,478
Unearned premiums 17,237 11,472
Advance premium 4,138 766
Reinsurance premium payable 2,452 804
Bank debt 1,662 --
Other liabilities 4,091 4,761
--------- ----------
TOTAL LIABILITIES 116,548 104,415
--------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 9)
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized;
as of December 31, 2001, 3,711,427 shares issued and outstanding
(net of 31,428 treasury shares); as of December 31, 2000, 3,725,355
shares issued and outstanding (net of 17,500 treasury shares) 37 37
Additional paid in capital 9,552 9,455
Unallocated common stock held by the ESOP (786) (889)
Common stock held by the stock award plan (339) (476)
Accumulated other comprehensive gain (loss) 474 (744)
Retained earnings 35,776 34,197
Treasury stock, at cost (260) (131)
--------- ----------
TOTAL STOCKHOLDERS' EQUITY 44,454 41,449
--------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 161,002 $ 145,864
========= ==========
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------
2001 2000 1999
REVENUES:
Net premiums earned $ 20,603 $ 14,611 $ 14,666
Net investment income 6,136 6,407 6,089
Net realized investment losses (278) (5) (71)
Practice management and related income 6,156 5,317 4,576
Other income 602 470 373
-------- -------- --------
Total revenues 33,219 26,800 25,633
-------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 18,858 11,946 12,867
Underwriting expenses 4,877 3,591 3,010
Practice management and related expenses 6,063 4,970 4,845
Other expenses 1,245 1,237 1,439
-------- -------- --------
Total expenses 31,043 21,744 22,161
-------- -------- --------
INCOME BEFORE INCOME TAXES 2,176 5,056 3,472
-------- -------- --------
INCOME TAX PROVISION 597 1,561 967
-------- -------- --------
NET INCOME $ 1,579 $ 3,495 $ 2,505
======== ======== ========
OTHER COMPREHENSIVE INCOME GAIN (LOSS), NET OF TAX:
Unrealized holding gains (losses) on securities $ 1,567 $ 2,119 $ (4,835)
Reclassification adjustment for (losses) gains included in net income (349) 3 (47)
-------- -------- --------
OTHER COMPREHENSIVE INCOME GAIN (LOSS) 1,218 2,122 (4,882)
-------- -------- --------
COMPREHENSIVE INCOME (LOSS) $ 2,797 $ 5,617 $ (2,377)
======== ======== ========
Net income per common share:
Basic $ 0.45 $ 0.99 $ 0.90
======== ======== ========
Diluted $ 0.44 $ 0.98 $ 0.90
======== ======== ========
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Unallocated Stock Other Total
Common Paid In ESOP Award Treasury Comprehensive Retained Stockholders'
Stock Capital Shares Shares Stock Income (Loss) Earnings Equity
----- ------- ------ ------ ----- ------------- -------- ------
BALANCE, JANUARY 1, 1999 $ 22 $ 776 $ -- $ -- $ -- $ 2,016 $ 28,197 $ 31,011
Net income 2,505 2,505
Other comprehensive loss (4,882) (4,882)
Issuance of common stock 15 8,647 (1,036) (518) -- -- -- 7,108
ESOP shares released -- 10 43 -- -- -- -- 53
-------- --------- ------------ ------------- -------- --------------- -------------- ------------
BALANCE, DECEMBER 31, 1999 37 9,433 (993) (518) - (2,866) 30,702 35,795
Net income 3,495 3,495
Other comprehensive income 2,122 2,122
Acquistion of treasury stock (131) (131)
Shares released -- 22 104 42 -- -- -- 168
-------- --------- ------------ ------------- -------- --------------- -------------- ------------
BALANCE, DECEMBER 31, 2000 37 9,455 (889) (476) (131) (744) 34,197 41,449
Net income 1,579 1,579
Other comprehensive income 1,218 1,218
Acquistion of treasury stock (129) (129)
Shares released -- 97 103 137 337
-------- --------- ------------ ------------- -------- --------------- -------------- ------------
BALANCE, DECEMBER 31, 2001 $ 37 $ 9,552 $ (786) $ (339) $ (260) $ 474 $ 35,776 $ 44,454
======== ========= ============ ============= ======== =============== ============== ============
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,579 $ 3,495 $ 2,505
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses 278 5 71
Amortization and depreciation 748 656 651
Deferred income taxes (914) 287 1,734
Stock released for coverage of benefit plans 337 168 52
Changes in assets and liabilities:
Reinsurance recoverable (2,528) (922) (1,683)
Premiums and accounts receivable (1,364) (1,060) (1,518)
Other assets 658 (1,176) 975
Losses and loss adjustment expenses 3,426 (3,148) (313)
Retrospective premiums accrued under
reinsurance treaties (3,070) (1,686) 672
Unearned premiums 5,765 2,574 2,445
Advance premium 3,372 151 128
Reinsurance premium payable 1,649 70 313
Other liabilities (1,682) (248) (1,683)
------- ------- -------
Net cash flows provided by (used in) operating activities 8,254 (834) 4,349
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (24,736) (10,286) (72,341)
Sales, maturities and redemptions of investments 21,956 10,543 66,129
Investment in purchased business, net of cash acquired (3,014) - (5,238)
Purchases of property and equipment (400) (727) (383)
------- ------- -------
Net cash flows used in investing activities (6,194) (470) (11,833)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock - - 6,808
Payments to acquire treasury stock (129) (131) -
Proceeds from long-term debt 1,971
Repayment of long-term debt (309) - -
------- ------- -------
Net cash flows provided by (used in) financing activities 1,533 (131) 6,808
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,593 (1,435) (676)
------- ------- -------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 3,972 5,407 6,083
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,565 $ 3,972 $ 5,407
======= ======= =======
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,172 $ 1,375 $ 100
======= ======= =======
Interest paid $ 72 $ - $ 120
======== ======= =======
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
- ----------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - On April 20, 1998, the Board of
Governors of National Capital Reciprocal Insurance Company adopted a
plan of reorganization which authorized the formation of NCRIC, A
Mutual Holding Company (Mutual Holding Company) and the conversion
into NCRIC, Inc. (NCRIC), a stock medical professional liability
insurance company. The reorganization became effective on December
31, 1998.
The reorganization separated the contract rights and the membership
interests of the policyholders so that their contract rights remain
with NCRIC while their membership interests are in the Mutual Holding
Company. Each policyholder of a policy that was in force as of
December 31, 1998, and who was a member of National Capital
Reciprocal Insurance Company, pursuant to the reorganization, became
a member of the Mutual Holding Company.
Through a series of stock transfers effected in connection with the
reorganization, Mutual Holding Company owns all of the outstanding
shares of NCRIC Holdings, Inc., which owns all of the outstanding
shares of NCRIC Group, Inc. (Company) which owns all of the
outstanding shares of NCRIC. District of Columbia law provides that
the Mutual Holding Company must at all times own, directly or
indirectly, a majority of the outstanding voting stock of NCRIC.
On January 4, 1999, the Company acquired all of the outstanding
shares of HealthCare Consulting, Inc., all of the outstanding
interests of HCI Ventures, LLC, and all the assets of Employee
Benefit Services, Inc. (See Note 2.)
On July 29, 1999, the Company completed an initial public offering of
1,480,000 shares, which generated net proceeds of $8.4 million. The
proceeds were used to repay the indebtedness incurred in connection
with the HealthCare Consulting acquisition, to establish an employee
stock ownership plan and a stock award plan, and to expand current
corporate operations. The reconciliation of gross to net proceeds is
as follows (in thousands):
Gross offering proceeds $ 10,360
Less offering expenses (1,998)
--------
Net proceeds 8,362
Less: ESOP loan (1,036)
Stock Award Plan loan (518)
--------
Net proceeds, as adjusted $ 6,808
========
The accompanying financial statements present the consolidated
financial position and results of operations of NCRIC Group, Inc. and
subsidiaries.
The Company provides comprehensive professional liability and office
premises liability insurance under nonassessable policies to
physicians having their principal practice in the District of
Columbia, Maryland, Virginia, West Virginia, or Delaware. A majority
of the Company's insurance business is written in the District of
Columbia.
The Company also provides (i) practice management services,
accounting and tax services, and personal financial planning services
to medical and dental practices and (ii) retirement planning services
and administration to medical and dental practices and certain other
businesses throughout the Mid-Atlantic Region.
The Company has issued policies on both an occurrence and a
claims-made basis. However, subsequent to June 1, 1986, substantially
all policies have been issued on the claims-made basis.
Occurrence-basis policies provide coverage to the policyholder for
losses incurred during the policy year regardless of when the related
claims are reported. Claims-made basis policies provide coverage to
the policyholder for covered claims reported during the current
policy year provided the related losses were incurred while
claims-made basis policies were in effect.
Tail coverage is offered for doctors terminating their insurance
policies. This coverage extends ad infinitum the period in which to
report future claims resulting from incidents occurring while a
claims-made policy was in effect. Beginning in 1988, prior acts
insurance coverage was first issued, subject to underwriting criteria
for new insureds. Such coverage extends the effective date of
claims-made policies to designated periods prior to initial coverage.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
significant intercompany transactions have been eliminated in the
consolidation.
The accompanying financial statements have been prepared in
conformity with generally accepted accounting principles (GAAP),
which differ from statutory accounting practices prescribed or
permitted for insurance companies by regulatory authorities.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity
of three months or less to be cash equivalents.
Investments - The Company has classified its investments as available
for sale and has reported them at fair value, with unrealized gains
and losses excluded from earnings and reported, net of deferred
taxes, as a component of equity and other comprehensive income.
Realized gains and losses are determined using the specific
identification method.
Goodwill - Goodwill arising from the Company's acquisition of the
outstanding shares of HealthCare Consulting, Inc., all of the
outstanding interests of HCI Ventures, LLC, and all the assets of
Employee Benefit Services is amortized on a straight-line basis over
20 years. Goodwill is shown net of accumulated amortization of
$909,000 and $525,000 as of December 31, 2001 and 2000, respectively.
Property and Equipment - Fixed assets are recorded at cost and
reported as a component of other assets. Depreciation is recorded
using the straight-line method over estimated useful lives ranging
from three to five years for computer software and equipment and
furniture and fixtures and ten years for leasehold improvements. The
balances of fixed assets at December 31, 2001 and 2000 of $1,585,000
and $1,542,000, respectively, are net of accumulated depreciation of
$1,835,000 and $1,477,000.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for
losses and loss adjustment expenses are established on the basis of
reported losses and a provision for losses incurred but not reported
and related loss adjustment expenses. These amounts are based on the
estimates of management and are subject to risks and uncertainties.
As facts become known, adjustments to these estimates are reflected
in earnings.
The Company protects itself from excessive losses by reinsuring
certain levels of risk in various areas of exposure. Amounts
recoverable from reinsurance are estimated in a manner consistent
with the loss and loss adjustment expense reserve associated with the
reinsured loss.
Income Taxes - The Company uses the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes
are recognized for tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The Company files a
consolidated Federal income tax return.
Impairment of Long-Lived Assets - The Company reviews long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
During the years ended December 31, 2001 and 2000, the Company did
not find it necessary to record a provision for impairment of assets.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
accounts subject to management estimates are reinsurance recoverable,
liabilities for losses and loss adjustment expenses, and
retrospective premiums accrued under reinsurance treaties.
Concentrations of Credit Risk - Financial instruments which
potentially expose the Company to concentrations of risk consist
principally of cash equivalent investments, investments in securities
and reinsurance recoverables. Concentrations of credit risk for
investments are limited due to the large number of such investments
and their distributions across many different industries and
geographical areas. Concentrations of credit risk for reinsurance
recoverables are limited due to the large number of reinsurers
participating in the program.
Litigation - The Company is subject to claims arising in the normal
course of its business. Management does not believe that any such
claims or assessments will have a material effect on the Company's
financial position, results of operations, or cash flows.
Revenue Recognition - Premiums revenue is earned pro rata over the
terms of the policies. The portion of premiums that will be earned in
the future are deferred and reported as unearned premiums. In 2000
and 1999, the Company declared renewal credit dividends to its
policyholders, which are payable in the form of a premium credit on
the succeeding year's policy premiums. Policyholder renewal credit
dividends are accrued as reductions to premium income in the policy
year declared.
Practice management revenue is recognized as services are performed
under terms of management and other contracts. Revenue is generally
billed in the month following the performance of related services.
New Accounting Pronouncements and Standards - 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.
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 year ended December 31, 2001, the after tax
impact on the annual earnings due to the elimination of goodwill
amortization would be an increase of approximately $368,000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements, SAB No. 101, summarizing
certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements.
Based on a review of the Company's revenue recognition polices, the
impact of adopting SAB No. 101 is not material to its financial
statements.
2. ACQUISITION
On January 4, 1999, NCRIC Group acquired all of the outstanding
shares of HealthCare Consulting, Inc., all of the outstanding
interests of HCI Ventures, LLC, and all the assets of Employee
Benefits Services, Inc. for $5.1 million in cash and mandatorily
convertible notes in the aggregate principal amount of $300,000. The
notes were converted to 42,855 shares of common stock upon completion
of the initial public offering described in Note 3. Under terms of
the purchase agreement, an additional $3.1 million could be paid in
cash if the acquired companies achieve earnings targets in 2000, 2001
and 2002. These companies provide practice management, employee
benefit services and financial services to physicians throughout the
Mid-Atlantic region.
The acquisition has been accounted for using the purchase method.
Goodwill has been amortized over 20 years on a straight-line basis.
With the adoption of SFAS 142 on January 1, 2002, the amortization of
goodwill will cease.
In connection with the acquisition, NCRIC Group borrowed $2.2 million
from Sequoia National Bank to finance a portion of the purchase
price. The loan was repaid in full on July 29, 1999 from proceeds of
the stock offering, and $107,000 in interest was paid for the period
of time that the loan was outstanding. The President of Sequoia
National Bank serves on NCRIC Group's Board of Directors.
The acquired companies achieved the earnings target for 2000, 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 $1.46 million, the present
value of the remaining payments, to the prior owners. These payments
have been added to the balance of goodwill as of December 31, 2001.
During March 2001, SunTrust Bank loaned NCRIC $1,000,000 at an annual
rate equal to LIBOR plus one and three-quarter percent to finance the
2001 contingency payment. 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 December 31,
2001, the interest rate was 4.83%. Principal and interest payments
are due on a monthly basis.
3. INITIAL PUBLIC OFFERING
The initial public offering (IPO) of common stock closed on July 29,
1999 for a total offering of 1,480,000 shares with net proceeds of
$8.4 million.
The composition of shares issued in conjunction with the IPO is as
follows (in thousands):
Issued in initial public offering 1,480
Issued to NCRIC Holdings 2,220
-----
3,700
Issued in exchange of convertible notes 43
-----
Total shares issued July 29, 1999 3,743
ESOP loan shares (148)
Stock Award Plan loan shares (74)
-----
Net shares outstanding as of July 29, 1999 3,521
=====
The 2,220,000 shares issued to NCRIC Holdings has been recognized as
a stock split in which its initial 1,000 shares of outstanding stock were
replaced by 2,220,000 shares effective with the conclusion of the IPO
retroactive to December 31, 1998.
4. INVESTMENTS
The following tables show the amortized cost and fair value of
investments (in thousands):
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
As of December 31, 2001
U.S. Government and agencies $ 4,600 $ 161 $ -- $ 4,761
Corporate 43,739 977 (1,311) 43,405
Tax-exempt obligations 19,304 634 (134) 19,804
Asset and mortgage-backed
securities 28,073 695 (15) 28,753
-------- ------ ------- --------
95,716 2,467 (1,460) 96,723
Equity securities 6,691 118 (407) 6,402
-------- ------ ------- --------
Total $102,407 $2,585 $(1,867) $103,125
======== ====== ======= ========
As of December 31, 2000
U.S. Government and agencies $ 13,037 $ 490 $ (14) $13,513
Corporate 32,301 181 (1,763) 30,719
Tax-exempt obligations 15,379 631 -- 16,010
Asset and mortgage-backed
securities 31,335 208 (303) 31,240
-------- ------ ------- -------
Equity 92,052 1,510 (2,080) 91,482
securities 7,121 45 (603) 6,563
-------- ------ ------- -------
Total $99,173 $1,555 $(2,683) $98,045
======= ====== ======= =======
The amortized cost and fair value of debt securities at December 31,
2001 and 2000 are shown by maturity. Actual maturities will differ
from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
December 31, 2001 December 31, 2000
-------------------------- ---------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
(in thousands)
Due in one year or less $ 757 $ 778 $ 300 $ 299
Due after one year through five years 14,645 15,152 19,717 19,771
Due after five years through ten years 22,778 23,486 17,203 17,456
Due after ten years 29,463 28,554 23,497 22,716
--------- --------- -------- --------
67,643 67,970 60,717 60,242
Equity securities 6,691 6,402 7,121 6,563
Asset and mortgage-backed securities 28,073 28,753 31,335 31,240
--------- --------- -------- --------
Total $ 102,407 $ 103,125 $ 99,173 $ 98,045
========= ========= ======== ========
Proceeds from bond maturities and redemptions of available for sale
investments during the years ended December 31, 2001, 2000, and 1999,
were $22.0 million, $10.5 million, and $66.1 million, respectively.
Gross gains of $787,000, $16,000, and $260,000, and gross losses of
$1,065,000, $21,000, and $331,000, were realized on bond redemptions
and available for sale investments during years ended December 31,
2001, 2000, and 1999, respectively.
For the years ended December 31, 2001, 2000, and 1999 net investment
income earned was as follows (in thousands):
2001 2000 1999
------- ------- -------
U. S Government and agencies $ 470 $ 811 $ 988
Corporate 3,144 2,252 1,424
Tax-exempt obligations 895 727 723
Asset and mortgage-backed securities 1,266 2,167 2,584
Equity securities 433 360 289
Short term investments 241 381 412
------- ------- -------
Total investment income earned 6,449 6,698 6,420
Investment expenses (313) (291) (331)
------- ------- -------
Net investment income $ 6,136 $ 6,407 $ 6,089
======= ======= =======
5. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses represent
an estimate of the ultimate net cost of all losses that are unpaid at
the balance sheet date and are based on the loss and loss adjustment
expense factors inherent in the Company's experience and
expectations. Estimation factors used by the Company reflect current
case-basis estimates, supplemented by industry statistical data, and
give effect to estimates of trends in claim severity and frequency.
These estimates are continually reviewed, and adjustments, reflected
in current operations are made as deemed necessary.
Although the Company believes the liabilities for losses and loss
adjustment expenses are reasonable and adequate for the
circumstances, it is possible that the Company's actual incurred
losses and loss adjustment expenses will not conform to the
assumptions inherent in the determination of the liabilities.
Accordingly, the ultimate settlement of losses and the related loss
adjustment expenses may vary from the amounts included in the
financial statements.
Activity in the liabilities for losses and loss adjustment expenses
is summarized as follows (in thousands):
Year Ended December 31,
-------------------------------
2001 2000 1999
-------- -------- -------
BALANCE, Beginning of year ......... $ 81,134 $ 84,282 $84,595
Less reinsurance recoverable on
unpaid claims .................... 27,312 25,815 24,546
-------- -------- -------
NET BALANCE ........................ 53,822 58,467 60,049
-------- -------- -------
Incurred related to:
Current year .............. 23,056 17,829 20,795
Prior years ............... (4,198) (5,883) (7,928
-------- -------- -------
Total incurred .......... 18,858 11,946 12,867
Paid related to:
Current year .............. 1,599 917 817
Prior years .............. 16,145 15,674 13,632
-------- -------- -------
Total paid .............. 17,744 16,591 14,449
-------- -------- -------
54,936 53,822 58,467
NET BALANCE
Plus reinsurance recoverable on
unpaid claims ............... 29,624 27,312 25,815
BALANCE, End of year................ -------- -------- -------
$ 84,560 $ 81,134 $84,282
======== ======== =======
The net reduction in incurred losses related to prior years
represents development of net losses incurred in prior years. This
development results from the re-estimation and settlement of
individual losses not covered by reinsurance, which are generally
losses under $500,000. The 2001 change is primarily reflective of the
favorable loss development for the 1992, 1996, 1997, and 1998 loss
years, partially offset by adverse development in the 1995 loss year;
whereas, the 2000 change is primarily reflective of the favorable
loss development for the 1994, 1996, 1998 and 1999 loss years,
partially offset by adverse development in the 1995 loss year. The
1999 change is primarily reflective of the favorable loss development
for the 1992 through 1996 loss years. The reduced level of favorable
development in 2001 compared to 2000 reflects the increase in
severity, which reflects the growing size of plaintiff verdicts and
settlements.
6. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to
write policies with higher coverage limits than it is individually
capable or desirous of retaining by reinsuring the amount in excess
of its retention. The Company has both excess of loss treaties and
quota share treaties.
The Company is contingently liable in the event the reinsurers are
unable to meet their obligations under these contracts. There were
unused letters of credit executed by reinsurers in favor of the
Company of $128,000 and $149,000 at December 31, 2001 and 2000,
respectively. Such letters of credit are issued as security against
ceded losses recoverable in the future.
The effect of reinsurance on premiums written and earned for the
years ended are as follows (in thousands):
December 31,
---------------------------------------------------------------------------------------
2001 2000 1999
---------------------------- ------------------------------ -------------------------
Written Earned Written Earned Written Earned
Direct $ 34,459 $ 28,192 $ 22,727 $ 19,965 $ 21,353 $ 18,832
Ceded
Current year (12,238) (8,992) (7,746) (5,982) (7,545) (6,395)
Prior year 1,696 1,696 1,872 1,872 3,418 3,418
------- ------ ------ ------ ------ ------
Total ceded (10,542) (7,296) (5,874) (4,110) (4,127) (2,977)
------- ------ ------ ------ ------ ------
Net $ 23,917 $ 20,896 $ 16,853 $ 15,855 $ 17,226 $ 15,855
======== ======== ======== ======== ======== ========
7. INCOME TAXES
Deferred income tax is created by temporary differences that will
result in net taxable amounts in future years due to the differing
treatment of certain items for tax and financial statement purposes.
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities consist of the following (in thousands):
As of December 31,
------------------
2001 2000
---- ----
Deferred tax assets:
Unearned premiums .............. $ 903 $ 825
Discounted loss reserves ....... 2,709 2,755
Fair valuation of investments .. -- 383
Depreciation and amortization .. 71 7
Capital loss carryforwards ..... 107 13
Allowance for doubtful accounts 165 81
Other .......................... 156 148
------ ------
4,111 4,212
Deferred tax liabilities:
Change in tax accounting method . (1,084) (2,208)
Fair valuation of investments ... (244) --
Deferred policy acquisition costs (289) (86)
Other ........................... (12) --
------ ------
(1,629) (2,294)
Net deferred tax assets ............ $ 2,482 $ 1,918
======= =======
The capital losses can be carried forward for five years. Management
expects to utilize the current capital loss carryforwards within that
period.
The income tax provision consists of the following:
For the Year Ended December 31,
----------------------------------
2001 2000 1999
---- ---- ----
Federal:
Current $1,734 $1,220 $ (810)
Deferred (1,206) 298 1,742
----- ----- -----
528 1,518 932
----- ----- -----
State:
Current 83 53 43
Deferred (14) (10) (8)
----- ----- -----
69 43 35
----- ----- -----
$ 597 $1,561 $ 967
===== ===== =====
Federal income tax expense differs from that calculated using the
established corporate rate primarily due to nontaxable investment
income, as follows (in thousands):
For the Year Ended December 31,
-----------------------------------------------------------------------------------------
2000 1999 2001
---------------------------- ---------------------------- -----------------------------
Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income
Federal income tax
at statutory rates $ 740 34% $ 1,719 34% $ 1,180 34%
Tax-exempt income (259) (12) (209) (4) (250) (7)
Dividends received (88) (4) (73) (1) (59) (2)
Goodwill 115 5 74 1 74 2
Other 89 4 50 1 22 1
----- ---- ------- ---- -------- ----
Income tax at
effective rates $ 597 27% $ 1,561 31% $ 967 28%
===== ==== ======= ==== ======= ====
8. 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 Year Ended December 31,
-------------------------------
2001 2000 1999
------ ------ ------
Net income $1,579 $3,495 $2,505
====== ====== ======
Weighted average common shares outstanding - basic 3,529 3,526 2,777
Dilutive effect of stock options 86 33 6
------ ------ ------
Weighted average common shares outstanding - diluted 3,615 3,559 2,783
------ ------ ------
Net income per common share:
Basic $ 0.45 $ 0.99 $ 0.90
====== ====== ======
Diluted $ 0.44 $ 0.98 $ 0.90
====== ====== ======
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding for the period. The calculation
of weighted average shares outstanding includes 2,220,000 shares for
the period from January 1, 1999 through July 28, 1999 and the total
of 3,520,855 outstanding shares, as described in Note 3 above, plus
shares released for the ESOP, as described in Note 10, for the period
from July 29, 1999 through December 31, 1999. Had the calculation
been made using 3,520,855 as the weighted- average outstanding shares
for both periods, that is as if the stock offered in the initial
public offering had been outstanding on January 1, 1999, basic
earnings per share would have been $0.71 for the year ended December
31, 1999.
9. COMMITMENTS
NCRIC entered into an operating lease for office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are
for 10 years with a monthly base rent of $35,000 and a 2.0% annual
escalator. The Company also maintains office space in Lynchburg,
Richmond, and Fredericksburg, Virginia as well as in Greensboro,
North Carolina.
As of December 31, 2001, the future minimum annual commitments under
noncancellable leases are as follows (in thousands):
2002 $ 629,000
2003 505,000
2004 498,000
2005 507,000
2006 518,000
Thereafter 705,000
------------
Total $ 3,362,000
============
Rent expense during the years ended December 31, 2001, 2000, and 1999
was $662,000, $678,000, and $676,000, respectively.
On December 22, 1997, NCRIC entered into a line-of-credit agreement
with a bank for $2,500,000. This line of credit is unsecured and
renewable. As of December 31, 2001, NCRIC had not drawn on this
facility.
NCRIC has established two letters of credit to secure specified
amounts of appellate bonds for cases, which are in the District of
Columbia appellate process. As of December 31, 2001, these letters of
credit totaled $1.5 million.
The Company and its subsidiaries have entered into six employment
agreements with certain key employees. These agreements include
covenants not to compete and provide for aggregate annual
compensation of $1.1 million. Another agreement provides an employee
with severance based on his final 12 month's compensation. The
Company's estimated obligation for such severance of $90,000 is
reflected as an other liability as of December 31, 2001 and 2000.
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 $1.46 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 December 31,
2001, the interest rate was 4.83%. Principal and interest payments
are due on a monthly basis.
10. BENEFIT PLANS
Defined Contribution Plans - NCRIC sponsors a defined contribution
401(k) profit-sharing plan. Employees who are 21 years or older and
have completed 90 days of service are eligible for participation in
the plan. Employees may elect to contribute up to 15% of total
compensation, and all contributions are 100% vested. NCRIC is not
required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by NCRIC
for the years ended December 31, 2001, 2000, and 1999, were $145,000,
$177,000, and $171,000.
NCRIC MSO sponsors two plans for its employees. The first plan is a
defined contribution money purchase plan in which employees who are
21 years or older and have two years of service are eligible to
participate. Under the plan, NCRIC MSO contributes 3% of each
participant's total annual compensation. All contributions are 100%
vested. The contributions from NCRIC MSO for the years ended December
31, 2001, 2000, and 1999 were $67,000, $57,000, and $97,000.
The second plan is a defined contribution 401(k) profit-sharing plan.
Employees who are 21 years or older and have one year of service are
eligible for participation in the plan. Employees may elect to
contribute up to 15% of total compensation. All contributions are
100% vested. NCRIC MSO is not required to make matching contributions
to the plan, but may make discretionary contributions. Total
contributions to the plan by NCRIC MSO for year ended December 31,
2000 were $76,000. No contribution was made for the year ended
December 31, 2001.
Stock Option Plan - NCRIC Group has a stock option plan for directors
and officers of Mutual Holding Company and its subsidiaries. Options
for common stock in an aggregate amount of 74,000 shares were granted
at July 29, 1999. The options have terms of ten years and an exercise
price of $7 per share, the fair market value of the common stock at
the date of grant. The options will become first exercisable at a
rate of 33-1/3% at the end of each 12 months of service with NCRIC
Group or its subsidiaries after the date of grant.
NCRIC Group accounts for compensation cost using the intrinsic value
based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, no compensation expense was
recognized since the stock options granted were at an exercise price
equal to the fair market value of the common stock on the date the
options were granted. Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, requires disclosure of
the pro forma net income and earnings per share as if the Company had
accounted for its stock options under the fair value method defined
in that Statement.
The exercise price per share for the 74,000 options outstanding at
December 31, 2001 is $7.00. The weighted average remaining
contractual life of those options is 7.6 years, 8.6 years, and 9.6
years at December 31, 2001, 2000, and 1999, respectively. There was
no change in the number of options outstanding or the exercise price
since December 31, 1999.
The Company's pro forma information using the Black-Scholes valuation
model follows:
2001 2000 1999
---- ---- ----
Pro forma net income (in thousands) $1,515 $3,431 $2,479
Pro forma earnings per share - Basic $ 0.43 $ 0.97 $ 0.89
- Diluted $ 0.42 $ 0.96 $ 0.89
For pro forma disclosure purposes, the fair value of stock options
was estimated at the date of grant using a Black-Scholes option
pricing model using the following assumptions: risk free rate of
return of 5.29%; no dividends granted during the life of the option;
volatility factors of the expected market price of the Company's
common stock ranging from .489 to .843; and an expected life of the
option of 10 years.
Employee Stock Ownership Plan - NCRIC Group has an ESOP for employees
who have attained age 21 and completed one year of service. As part
of the stock offering, the ESOP borrowed $1.0 million from NCRIC
Group to purchase 148,000 shares, which are held in a trust account
for allocation among participants as the loan is repaid. For shares
allocated to the accounts of the ESOP participants as the result of
payments made to reduce the ESOP loan, the compensation charge is
based upon the average fair value of the shares over the service
period. Scheduled loan repayments on December 31, 2001, 2000, and
1999 have been made. During the years ended December 31, 2001, 2000,
and 1999 contributions were made to the plan of $162,800, $120,000
and $53,000, respectively. During 2001 and 2000, 14,800 shares were
allocated to the plan. In 1999, 6,167 shares were allocated.
Stock Award Plan - NCRIC Group has a stock award plan under which
directors, officers and employees of Mutual Holding Company and its
subsidiaries would be awarded common stock. As a part of the stock
offering, the stock award plan borrowed $518,000 from NCRIC Group to
purchase 74,000 shares, which are held in a trust account for
allocation among participants. Scheduled loan repayments on December
31, 2001, 2000, and 1999 have been made. On September 10, 2000, NCRIC
Group granted 74,000 shares of common stock to directors and officers
under its stock award plan. The compensation expense is measured at
the fair value of the stock on the grant date, $7.875 per share, over
the vesting period. For the years ended December 31, 2001 and 2000,
the expense was $153,800 and $47,200, respectively.
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences
between the statutory basis of accounting prescribed or permitted by
the District of Columbia Department of Insurance and Securities
Regulation (DISR) and GAAP are summarized below (in thousands):
December 31,
-------------------------------
2001 2000 1999
-------- ------- --------
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $32,759 $29,764 $29,212
Fair valuation of investments 474 (744) (2,866)
Deferred taxes 2,726 1,535 1,821
Group stock issuance 7,353 7,145 7,108
Nonadmitted assets and other 1,142 3,749 520
------- ------- -------
STOCKHOLDERS' EQUITY - GAAP BASIS $44,454 $41,449 $35,795
======= ======= =======
NET INCOME - STATUTORY BASIS $ 593 $ 4,409 $ 5,528
Deferred taxes 1,220 (287) (1,734)
GAAP consolidation (234) (627) (1,289)
------- ------- -------
NET INCOME - GAAP BASIS $ 1,579 $ 3,495 $ 2,505
======= ======= =======
As of December 31, 2001, 2000, and 1999, statutory capital and
surplus for NCRIC was sufficient to satisfy regulatory requirements.
Each insurance company is restricted under the applicable Insurance
Code as to the amount of dividends it may pay without regulatory
consent.
During 1999, NCRIC received permission from DISR to include as
admitted assets its investments in asset-backed securities, which are
not specifically authorized as permitted investments under D.C.
regulations as the total investment exceeds five percent of total
admitted assets.
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles
(Codification). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, was
effective January 1, 2001. The effect on NCRIC's statutory surplus on
January 1, 2001 was an increase of $1.6 million. This increase is
primarily due to the effect of the recognition of deferred taxes and
the removal of the excess of statutory reserves over statement
reserves penalty, partially offset by charges to surplus for overdue
premium receivables.
12. REPORTABLE SEGMENT INFORMATION
The Company 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 to
private practicing physicians. The accounting policies of the
segments are the same as those described in the summary of
significant accounting policies. The Company evaluates performance
based on profit and loss from operations before income taxes.
The Company's 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
for the year ended December 31 (in thousands):
2001 2000 1999
--------- --------- ---------
Insurance
Revenues from external customers $ 21,118 $ 14,990 $ 15,020
Net investment income 6,087 6,317 6,137
Depreciation and amortization 193 208 226
Segment profit before taxes 2,834 5,394 4,880
Segment assets 152,130 137,618 134,482
Segment liabilities 114,424 102,542 104,647
Expenditures for segment assets 153 677 252
Practice Management Services
Revenues from external customers $ 6,239 $ 5,396 $ 4,603
Net investment income 55 84 53
Depreciation and amortization 555 448 425
Segment profit(loss) before taxes 205 456 (759)
Segment assets 9,188 8,114 6,613
Segment liabilities 3,762 2,541 1,294
Expenditures for segment assets 247 50 131
Total
Revenues from external customers $ 27,357 $ 20,386 $ 19,623
Net investment income 6,142 6,401 6,190
Depreciation and amortization 748 656 651
Segment profit before taxes 3,039 5,850 4,121
Segment assets 161,318 145,732 141,095
Segment liabilities 118,186 105,083 105,941
Expenditures for segment assets 400 727 383
The following are reconciliations of reportable segment revenues, net
investment income, assets, liabilities, and profit to the Company's
consolidated totals (in thousands):
2001 2000 1999
-------- -------- --------
Revenues:
Total revenues for reportable segments $ 27,357 $ 20,386 $ 19,623
Other income 12 23 --
Elimination of intersegment revenues (8) (11) (8)
-------- -------- --------
Consolidated total $ 27,361 $ 20,398 $ 19,615
-------- -------- --------
Net Investment Income:
Total investment income for reportable segments $ 6,142 $ 6,401 $ 6,190
Elimination of intersegment income (6) -- (141)
Other unallocated amounts -- 6 40
-------- -------- --------
Consolidated total $ 6,136 $ 6,407 $ 6,089
======== ======== ========
Assets:
Total assets for reportable segments $ 161,318 $ 145,732 $ 141,095
Elimination of intersegment receivables (1,675) (740) (840)
Elimination of affiliate receivables 1,139 487 (282)
Other unallocated amounts 220 385 974
--------- --------- ---------
Consolidated total $ 161,002 $ 145,864 $ 140,947
========= ========= =========
Liabilities:
Total liabilities for reportable segments $ 118,186 $ 105,083 $ 105,941
Elimination of intersegment payables (1,675) (740) (840)
Other liabilities 37 72 51
--------- --------- ---------
Consolidated total $ 116,548 $ 104,415 $ 105,152
========= ========= =========
Profit before taxes:
Total profit for reportable segments $ 3,039 $ 5,850 $ 4,121
Other unallocated amounts (863) (794) (649)
------- ------- -------
Consolidated total $ 2,176 $ 5,056 $ 3,472
======= ======= =======
13. TRANSACTIONS WITH AFFILIATES
NCRIC MSO rents an office building for one of its divisions from a
partnership whose partners are HealthCare Consulting senior
executives. For this property, NCRIC MSO paid approximately $62,000
in rent for the years ended December 31, 2001, 2000 and 1999.
During 2001, 2000, and 1999, members of the Company's Board of
Directors paid NCRIC MSO approximately $183,000, $157,000 and
$150,000, respectively, for practice management related services.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations for 2001, 2000 and 1999:
Year Ended December 31, 2001
FIRST SECOND THIRD FOURTH
------ -------- ------- --------
Premiums earned and other revenues $6,494 $6,397 $6,909 $ 7,561
Net investment income 1,558 1,538 1,521 1,519
Realized investment gains (losses) 95 2 97 (472)
Net income (loss) 930 315 646 (312)
Basic earnings per share of common
stock $ 0.26 $ 0.09 $ 0.18 ($ 0.09)
Diluted earnings per share of
common stock $ 0.26 $ 0.09 $ 0.18 ($ 0.09)
Year Ended December 31, 2000
FIRST SECOND THIRD FOURTH
------ -------- ------- --------
Premiums earned and other revenues $5,106 $5,094 $5,224 $ 4,974
Net investment income 1,594 1,588 1,632 1,593
Realized investment gains (losses) -- -- -- (5)
Net income 878 851 842 924
Basic earnings per share of
common stock $ 0.25 $ 0.24 $ 0.24 $ 0.26
Diluted earnings per share of
common stock $ 0.25 $ 0.24 $ 0.24 $ 0.26
Year Ended December 31, 1999
FIRST SECOND THIRD FOURTH
------ -------- ------- --------
Premiums earned and other revenues $4,939 $ 4,140 $4,641 $5,895
Net investment income 1,418 1,496 1,567 1,608
Realized investment gains (losses) 52 (199) 45 31
Net Income 299 581 775 850
Basic earnings per share of
common stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
Diluted earnings per share of
common stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2001 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN IN
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
Fixed Maturities:
United States Government and government
agencies and authorities $ 4,600 $ 4,761 $ 4,761
States, municipalities, and political subdivisions 19,304 19,804 19,804
All other corporate bonds 43,739 43,405 43,405
Asset and mortgage-backed securities 28,073 28,753 28,753
Redeemable preferred stocks 5,691 5,344 5,344
---------- ---------- ----------
Total fixed maturities 101,407 102,067 102,067
Equity securities:
Industrial, miscellaneous, and all other -- -- --
Nonredeemable preferred stocks 1,000 1,058 1,058
---------- ---------- ----------
Total equity securities 1,000 1,058 1,058
Total investments $ 102,407 $ 103,125 $ 103,125
========== ========== ==========
(1) Original cost of equity securities, and, as to fixed maturities, original
costs reduced by repayments and adjusted for amortization of premiums or accrual
of discounts.
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
- -------------------------------------------------------------------------
2001 2000
ASSETS
INVESTMENTS:
Investments in subsidiaries* $ 42,248 $ 39,767
Bonds - -
-------- --------
Total investments 42,248 39,767
OTHER ASSETS:
Cash and cash equivalents 25 106
Receivables 133 197
Property and equipment, net 904 882
Due from subsidiaries* 1,162 487
Other assets 18 81
-------- --------
TOTAL ASSETS $ 44,490 $ 41,520
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to subsidiaries* $ - $ -
Other liabilities 36 71
-------- --------
TOTAL LIABILITIES 36 71
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 37 37
Other stockholders' equity,
including unrealized gains
or losses on securities of subsidiaries 44,417 41,412
-------- --------
TOTAL STOCKHOLDERS' EQUITY 44,454 41,449
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,490 $ 41,520
======== ========
* Eliminated in consolidation.
See notes to condensed financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
- -----------------------------------------------------------------
2001 2000
REVENUES:
Net investment income $ -- $ 7
Dividends from subsidiaries* 1,500 1,500
Other income 12 22
------- -------
Total revenues 1,512 1,529
------- -------
EXPENSES:
Other operating expenses 875 824
------- -------
Total expenses 875 824
------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 637 705
Equity in undistributed earnings of subsidiaries 942 2,790
------- -------
NET INCOME $ 1,579 $ 3,495
======== =======
* Eliminated in consolidation.
See notes to condensed financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
- ------------------------------------------------------------------------------
2001 2000
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,579 $ 3,495
Adjustments to reconcile net income
to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries (942) (2,790)
Amortization and depreciation 51 70
Stock released for coverage of benefit plans 337 168
Other changes in assets and liabilities: (604) (846)
------- -------
Net cash flows from operating activities 421 97
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales, maturities and redemptions of investments -- 743
Investment in purchased business (300) --
Purchases of property and equipment (73) (604)
------- -------
Net cash flows from investing activities (373) 139
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock -- --
Payments to acquire treasury stock (129) (131)
------- -------
Net cash flows from financing activities (129) (131)
NET CHANGE IN CASH AND CASH EQUIVALENTS 81 105
------- -------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 106 1
------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 25 $ 106
======= =======
SUPPLEMENTARY INFORMATION:
Interest paid $ -- $ --
======= =======
See notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes of NCRIC Group, Inc. and
Subsidiaries.
I. REORGANIZATION
On December 31, 1998, National Capital Reciprocal Insurance Company consummated
its plan of reorganization from a reciprocal insurer to a stock insurance
company and became a wholly owned subsidiary of NCRIC Group, Inc. (Group) and
converted into NCRIC, Inc. Group has no historical operations and was organized
in December, 1998, as part of the plan to reorganize its corporate structure.
II. BASIS OF PRESENTATION
In Group's financial statements investment in subsidiaries is stated at cost
plus equity in undistributed earnings of subsidiaries since date of
reorganization plus unrealized gains and losses of subsidiaries' investments.
III. ACQUISITION
On January 4, 1999, Group acquired all of the outstanding shares of HealthCare
Consulting, Inc., all of the outstanding interests of HCI Ventures, LLC, and all
the assets of Employee Benefit Services. See Note 2 of the Notes to the
Consolidated Financial Statements.
IV. INVESTMENTS
See Investments in the Consolidated Financial Statements and in Note 4 of the
Notes to the Consolidated Financial Statements.
V. COMPREHENSIVE INCOME
See Comprehensive Income in the consolidated financial statements.
VI. INCOME TAXES
Group and its eligible subsidiaries file a consolidated U.S Federal Income tax
return. Income tax liabilities or benefits are recorded by each subsidiary based
upon separate return calculations.
For further information on income taxes, see Income Taxes in Note 7 of the Notes
to the Consolidated Financial Statements.
VII. ACCOUNTING CHANGES
For information concerning new accounting standards adopted in 2001 and 2000,
see Note 1 of the Notes to the Consolidated Financial Statements.
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS)
- -------------------------------------------------
DEFERRED FUTURE POLICY OTHER POLICY
POLICY BENEFITS, LOSSES, CLAIMS AND
ACQUISITION CLAIMS, AND UNEARNED BENEFITS PREMIUM
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE
Insurance: ----- ------------- -------- ------- -------
2001 $ 851 $ 84,560 $ 17,237 $ -- $ 20,603
2000 $ 252 $ 81,134 $ 11,472 $ -- $ 14,611
1999 $ 136 $ 84,282 $ 8,898 $ -- $ 14,666
AMORTIZATION
BENEFITS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT LOSS ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN
Insurance: ------ -------- ----- -------- -------
2001 $ 6,136 $ 18,858 $ 1,337 $ 3,705 $ 34,459
2000 $ 6,407 $ 11,946 $ 645 $ 3,310 $ 22,727
1999 $ 6,089 $ 12,867 $ 386 $ 2,945 $ 21,353
<Page>
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
- ------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
PROPERTY AND GROSS TO OTHER FROM OTHER NET OF ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
------ --------- --------- ------ ------
2001 $ 28,192 $ (7,296) $ - $ 20,896 0%
2000 $ 19,965 $ (4,110) $ - $ 15,855 0%
1999 $ 18,832 $ (2,977) $ - $ 15,855 0%
<page>
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2001 AND 2000 (IN THOUSANDS)
- ----------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
2001 ------- -------- ---------- -------
Allowance for Doubtful
Accounts $ 350 $ 415 $ (203) $ 562
2000
Allowance for Doubtful
Accounts $ 137 $ 238 $ - $ 350
<page>
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE COMPANIES
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DEFERRED RESERVE FOR
POLICY UNPAID CLAIMS NET NET
ACQUISITION AND CLAIM UNEARNED PREMIUMS INVESTMENT
COSTS ADJUSTMENT EXPENSES PREMIUMS EARNED INCOME
----- ------------------- -------- ------ ------
2001 $ 851 $ 84,560 $ 17,237 $ 20,603 $ 6,136
2000 $ 252 $ 81,134 $ 11,472 $ 14,611 $ 6,407
1999 $ 136 $ 84,282 $ 8,898 $ 14,666 $ 6,089
AMORTIZATION
LOSS AND LOSS OF DEFERRED PAID LOSS
ADJUSTMENT EXPENSES POLICY AND LOSS
RELATED TO : (1) ACQUISITION ADJUSTMENT PREMIUMS
CURRENT YEAR PRIOR YEAR COSTS EXPENSES (1) WRITTEN
------------ ---------- ----- ------------ -------
2001
$ 23,056 $ (4,198) $ 1,337 $ 17,744 $ 34,459
2000
$ 17,829 $ (5,883) $ 645 $ 16,591 $ 22,727
1999
$ 20,795 $ (7,928) $ 386 $ 14,449 $ 21,353
(1) Loss and loss adjustment expenses shown net of reinsurance
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- -----------------------------------------------------------------------
Financial Disclosure
--------------------
Not applicable.
PART III
Item 10. Directors and Officers of the Registrant
- ------- ----------------------------------------
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2002 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 11. Executive Compensation
- ------- ------------------------
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2002 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2002 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2002 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ---------------------------------------------------------------
(a) 1. Financial Statements. The following consolidated financial statements of
NCRIC Group, Inc. and subsidiaries are included herein in accordance with
Item 8 of Part II of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2001, 2000, and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2001, 2000, and 1999
PAGE>
2. Financial Statement Schedules. The following consolidated financial
statement schedules of NCRIC Group, Inc. and subsidiaries are included
herein in accordance with Item 8 of Part II of this report.
I. Summary of Investments - Other Than Investments in Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
VI. Supplemental Information Concerning Property-Casualty Insurance
Companies
3. Exhibits. The following exhibits are filed as part of this report.
(a) 10.9 Employment Agreement between NCRIC Group, Inc. and Stephen
S. Fargis*
10.17 Employment Agreement between NCRIC Group, Inc., NCRIC Inc.,
and R. Ray Pate, Jr.
10.18 Employment Agreement between NCRIC Group, Inc, NCRIC, Inc.
and Rebecca B. Crunk
10.19 Employment Agreement between NCRIC MSO, Inc. and L.E.
Shepherd, Jr.
10.20 Employment Agreement between NCRIC MSO, Inc. and William A.
Hunter, Jr.
10.21 Employment Agreement between NCRIC MSO, Inc. and Barry S.
Pillow
10.22 Termination Agreement and Release between NCRIC
Group, Inc., NCRIC MSO, Inc., HCI Ventures, LLC, and L.E.
Shepherd Jr., William A. Hunter, Jr. and Barry S. Pillow.
23.2 Consent of Deloitte & Touche LLP
(b) Reports on Form 8-K
None
* Incorporated herein by reference into this document from the
Exhibits to Form 10-K filed on March 23, 2001.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCRIC GROUP, INC.
Date: March 22, 2002 By: /s/ R. Ray Pate, Jr.
-------------------------
R. Ray Pate, Jr.
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Nelson P. Trujillo, M.D. Chair of the Board of Directors March 22, 2002
- ----------------------------
Nelson P. Trujillo, M.D.
/s/ R. Ray Pate, Jr. President, Chief Executive Officer March 22, 2002
- ---------------------------- and Director (Principal Executive
R. Ray Pate, Jr. Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 22, 2002
- ---------------------------- Financial Officer (Principal
Rebecca B. Crunk Financial and Accounting Officer)
/s/ Vincent C. Burke, III Director March 22, 2002
- ----------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman, M.D. Director March 22, 2002
- ----------------------------
Pamela W. Coleman, M.D.
/s/ Martin W. Dukes, Jr., M.D. Director March 22, 2002
- ----------------------------
Martin W. Dukes, M.D.
/s/ Leonard M. Glassman, M.D. Director March 22, 2002
- ----------------------------
Leonard M. Glassman, M.D.
/s/ Luther W. Gray, Jr., M.D. Director March 22, 2002
- ----------------------------
Luther W. Gray, Jr., M.D.
/s/ Prudence P. Kline, M.D Director March 22, 2002
- ----------------------------
Prudence P. Kline, M.D.
/s/ Edward G. Koch, M.D. Director March 22, 2002
- ----------------------------
Edward G. Koch, M.D.
/s/ J. Paul McNamara Director March 22, 2002
- ----------------------------
J. Paul McNamara
/s/ Leonard M. Parver, M.D. Director March 22, 2002
- ----------------------------
Leonard M. Parver, M.D.
/s/ Raymond Scalettar, M.D. Director March 22, 2002
- ----------------------------
Raymond Scalettar, M.D.
/s/ David M. Seitzman, M.D. Director March 22, 2002
- ----------------------------
David M. Seitzman, M.D.
/s/ Robert L. Simmons, M.D. Director March 22, 2002
- ----------------------------
Robert L. Simmons, M.D.