U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2002
Commission File Number: 0-25505
[GRAPHIC OMITTED][GRAPHIC OMITTED]
NCRIC Group, Inc.
District of Columbia 52-2134774
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
(Address of principal executive offices) (Zip Code)
202-969-1866
------------
(Issuer's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 1, 2002, there were
3,711,427 shares of NCRIC Group, Inc. common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------
March 31, 2002 December 31, 2001
ASSETS -------------- -----------------
(unaudited)
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 96,556 $ 96,723
Equity securities 6,357 6,402
--------- ---------
Total securities available for sale 102,913 103,125
OTHER ASSETS:
Cash and cash equivalents 8,451 7,565
Reinsurance recoverable 31,460 30,077
Goodwill, net 7,291 7,291
Premiums and accounts receivable 14,474 4,802
Deferred income taxes 3,970 2,482
Other assets 5,392 5,660
--------- ---------
TOTAL ASSETS $ 173,951 $ 161,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 59,555 $ 56,802
Loss adjustment expenses 28,937 27,758
--------- ---------
Total losses and loss adjustment expenses 88,492 84,560
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 2,258 2,408
Unearned premiums 30,612 17,237
Advance premium 666 4,138
Reinsurance premium payable 1,259 2,452
Bank debt 1,499 1,662
Other liabilities 5,252 4,091
--------- ---------
TOTAL LIABILITIES 130,038 116,548
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized;
3,711,427 shares issued and outstanding (net of 31,428 treasury
shares) 37 37
Additional paid in capital 9,578 9,552
Unallocated common stock held by the ESOP (760) (786)
Common stock held by the stock award plan (305) (339)
Accumulated other comprehensive (loss) gain (687) 474
Retained earnings 36,310 35,776
Treasury stock, at cost (260) (260)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 43,913 44,454
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 173,951 $ 161,002
========= =========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Three Months Ended March 31,
2002 2001
------- -------
REVENUES:
Net premiums earned $ 6,566 $ 4,812
Net investment income 1,550 1,558
Net realized investment (losses) gains (36) 95
Practice management and related income 1,561 1,538
Other income 212 144
------- -------
Total revenues 9,853 8,147
------- -------
EXPENSES:
Losses and loss adjustment expenses 5,720 3,839
Underwriting expenses 1,568 1,269
Practice management and related expenses 1,522 1,339
Other expenses 365 328
------- -------
Total expenses 9,175 6,775
------- -------
INCOME BEFORE INCOME TAXES 678 1,372
------- -------
INCOME TAX PROVISION 144 442
------- -------
NET INCOME $ 534 $ 930
======= =======
OTHER COMPREHENSIVE INCOME (LOSS) GAIN (1,161) 961
------- -------
COMPREHENSIVE (LOSS) INCOME $ (627) $ 1,891
======= =======
Net income per common share:
Basic $ 0.15 $ 0.26
======= =======
Diluted $ 0.15 $ 0.26
======= =======
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 534 $ 930
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses (gains) 36 (95)
Amortization and depreciation 99 181
Deferred income taxes (854) (642)
Stock released for coverage of benefit plans 85 70
Changes in assets and liabilities:
Reinsurance recoverable (1,383) 275
Premiums and accounts receivable (9,672) (1,285)
Other assets 348 (948)
Losses and loss adjustment expenses 3,932 (1,475)
Retrospective premiums accrued under
reinsurance treaties (150) (1,874)
Unearned premiums 13,375 7,911
Advance premium (3,472) 602
Reinsurance premium payable (1,193) 28
Other liabilities 89 (717)
-------- --------
Net cash flows provided by operating activities 1,774 2,961
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (6,280) (3,939)
Sales, maturities and redemptions of investments 5,734 9,858
Investment in purchased business -- (1,550)
Purchases of property and equipment (179) (120)
-------- --------
Net cash flows (used in) provided by investing activities (725) 4,249
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 1,000
Repayment of long-term debt (163) --
-------- --------
Net cash flows (used in) provided by financing activities (163) 1,000
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 886 8,210
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,565 3,972
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,451 $ 12,182
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ -- $ 100
======== ========
Interest paid $ 18 $ --
======== ========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three-month period ended March 31, 2002 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2002. These condensed consolidated financial statements
and notes should be read in conjunction with the financial statements and
notes included in the audited consolidated financial statements of NCRIC
Group, Inc. (NCRIC Group) for the year ended December 31, 2001, which were
filed with the Securities and Exchange Commission on Form 10-K.
2. Reportable Segment Information
NCRIC Group has two reportable segments: Insurance and Practice Management
Services. The insurance segment provides medical professional liability and
other insurance. The practice management services segment provides medical
practice management services primarily to private practicing physicians.
NCRIC Group evaluates performance based on profit or loss from operations
before income taxes. The reportable segments are strategic business units
that offer different products and services and therefore are managed
separately.
Selected financial data is presented below for each business segment at or
for the three-month period ended March 31, 2002 and 2001 (in thousands):
At or For the Three Months
Ended March 31,
--------------------------
2002 2001
------- -------
Insurance
Revenues from external customers $ 6,760 $ 4,938
Net investment income 1,545 1,541
Depreciation and amortization 62 55
Segment profit before taxes 851 1,407
Segment assets 165,043 147,223
Segment liabilities 127,801 109,870
Expenditures for segment assets 174 67
Practice Management Services
Revenues from external customers $ 1,581 $ 1,558
Net investment income 6 19
Depreciation and amortization 37 126
Segment profit before taxes 58 230
Segment assets 9,645 8,239
Segment liabilities 4,175 2,769
Expenditures for segment assets 5 53
Total
Revenues from external customers $ 8,341 $ 6,496
Net investment income 1,551 1,560
Depreciation and amortization 99 181
Segment profit before taxes 909 1,637
Segment assets 174,688 155,462
Segment liabilities 131,976 112,639
Expenditures for segment assets 179 120
The following are reconciliations of reportable segment assets,
liabilities, revenues, net investment income, and profit before taxes to
NCRIC Group's consolidated totals (in thousands):
At or For the Three Months
Ended March 31,
---------------------------
2002 2001
--------- ----------
Assets:
Total assets for reportable segments $ 174,688 $ 155,462
Elimination of intersegment receivables (1,988) (1,213)
Elimination of affiliate receivables 1,052 295
Other unallocated amounts 209 400
--------- ---------
Consolidated total $ 173,951 $ 154,944
========= =========
Liabilities:
Total liabilities for reportable segments $ 131,976 $ 112,639
Elimination of intersegment payables (1,998) (1,213)
Other liabilities 60 108
--------- ---------
Consolidated total $ 130,038 $ 111,534
========= =========
Revenues from external customers:
Total revenues for reportable segments $ 8,341 $ 6,496
Elimination of intersegment revenues (2) (2)
------- -------
Consolidated total $ 8,339 $ 6,494
======= =======
Net investment income:
Total investment income for
reportable segments $ 1,551 $ 1,560
Elimination of intersegment income (1) (2)
------- -------
Consolidated total $ 1,550 $ 1,558
======= =======
Profit before taxes:
Total profit for reportable segments $ 909 $ 1,637
Other expenses (231) (265)
------- -------
Consolidated total $ 678 $ 1,372
======= =======
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
For the Three Months
Ended March 31,
-------------------------
2002 2001
-------- --------
Net income $ 534 $ 930
Weighted average common
shares outstanding - basic 3,547 3,526
Dilutive effect of stock options
and awards 83 88
------ ------
Weighted average common
shares outstanding - diluted 3,630 3,614
====== ======
Net income per common share:
Basic $ 0.15 $ 0.26
====== ======
Diluted $ 0.15 $ 0.26
====== ======
4. New Accounting Pronouncement
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of
goodwill ceased upon adoption of SFAS 142 on January 1, 2002. For the
quarter ended March 31, 2001 goodwill amortization was $85,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management
Services Segment. NCRIC has not yet completed its initial goodwill
impairment testing under SFAS 142.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
condensed consolidated financial statements and related notes included in this
Form 10-Q. References to "NCRIC" mean NCRIC Group and its subsidiaries,
including their predecessors.
General
The financial statements and data presented in the Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the
United States of America, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
In February 2002, NCRIC announced the formation of a joint venture with
Risk Services, LLC, to form National Capital Risk Services, LLC to offer a
complete range of alternative risk transfer services to healthcare clients
throughout the nation.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill ceased upon
adoption of SFAS 142 on January 1, 2002. For the quarter ended March 31, 2001
goodwill amortization was $85,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management Services
Segment. NCRIC has not yet completed its initial goodwill impairment testing
under SFAS 142.
Three months ended March 31, 2002 compared to three months ended March 31, 2001
Consolidated net income
Net income was $534,000 for the three months ended March 31, 2002 compared
to $930,000 for the three months ended March 31, 2001. Total revenue of $9.9
million was up 21% for the quarter compared to the same quarter in 2001. The
higher revenue was offset by an increase in loss and loss adjustment expenses
and in practice management expenses.
NCRIC's insurance segment experienced a significant increase in new
business written in the first quarter of 2002 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, increased incurred losses
reflecting severity trends and expense associated with the premium collection
litigation initiated by NCRIC in 2000 - see Premium Collection Litigation
section below.
NCRIC's practice management segment produced an increase in revenue
primarily as a result of one-time consulting assignments in the Employee
Benefits Services division. Higher revenue was offset by increased expenses,
primarily related to the transition of client service for two of the former
owners of the acquired businesses as they move towards retirement at the
termination of their employment contracts at the end of 2002.
Net premiums earned
Net premiums earned increased by $1.8 million, or 38%, to $6.6 million from
$4.8 million for the three months ended March 31, 2002 and 2001, respectively.
The increase is primarily reflective of the increase in policies in force as the
result of net new business written combined with the increase in premium rates.
Due to the 2001 decision to not provide a renewal premium credit for 2002
renewals, net premium earned increased $133,000 for the first quarter of 2002
compared to the first quarter of 2001. Additionally, net premiums earned for the
first quarter of 2002 decreased by $500,000 from the March 31, 2001 level due to
more favorable loss development in the hospital-sponsored retrospectively rated
programs in the first quarter of 2002. Under these programs, additional premiums
are either earned or returned based on a group's adverse or favorable loss
experience.
Gross premiums written of $22.9 million for the three months ended March
31, 2002 increased from $14.8 million for the three months ended March 31, 2001,
primarily due to net new business written combined with the premium rate
increases. The premium rate increases comprise approximately $2.3 million of the
increase in written premium.
The proportion of business produced directly by NCRIC's independent agency
force has continued to grow as a percentage of total new business written. In
the first quarter of 2002, the percentage of new business produced by agents
increased to 92% of total new business written from 87% during the same period
in 2001.
Three Months Ended March 31,
----------------------------
2002 2001
---------- ----------
Direct $ 350,000 $ 345,000
Agent 4,238,000 2,391,000
As the business produced by agents continues to be a significant source of
gross premium written, the distribution of written premium shows notable growth
in NCRIC's market areas outside of the District of Columbia. The following chart
illustrates the components of gross premium written by state for the first
quarter of 2002 compared to the same period in 2001.
Three Months Ended March 31,
-------------------------------------------------
(amounts in thousands)
2002 2001
-------------------- --------------------
District of Columbia $13,091 57% $10,850 73%
Virginia 3,671 16% 1,623 11%
Maryland 3,130 14% 1,772 12%
West Virginia 2,690 12% 423 3%
Delaware 266 1% 85 1%
Of the increase in written premium in 2002 over the first three months of
2001, 28% comes from business written in the District of Columbia, 28% from West
Virginia, 25% from Virginia, 17% from Maryland, and 2% from Delaware. These
increases are the results of new business written and premium rate increases on
renewing policies. NCRIC continues to maintain strict underwriting standards as
it expands its business.
Premium collection litigation. During 2000, it was determined that one of
NCRIC's hospital-sponsored retrospective programs would not be renewed. In
accordance with the terms of the contract, in 2000 NCRIC billed the hospital
sponsor $1.3 million, and an additional $800,000 was billed in January 2002
based on the actual accumulated loss experience of the terminated program. As a
result of the amount billed in 2002, written premium for the first quarter of
2002 increased by a net amount of $429,000 over the same period in 2001 while
net earned premium was unaffected.
Because the original 2000 bill was not paid when due, NCRIC initiated legal
proceedings to collect. NCRIC has filed a motion for summary judgment, which has
not yet been decided. The hospital sponsor has been unwilling to settle the
case. Since the amount due to NCRIC is significant, NCRIC will use all means
legally available to collect the amount it is due. Although NCRIC believes that
it will prevail, since the premium amount is disputed, an allowance for
uncollectibility has been established and is included in underwriting expense.
Additionally, first quarter 2002 legal fees for this action were approximately
$250,000 higher than in the first quarter of 2001. The discovery portion of the
litigation is complete; litigation legal fees are expected to be significantly
less in the following quarters of 2002 while awaiting judicial decision. If
NCRIC's motion for summary judgment is not granted, additional legal fees will
be incurred for the trial stage of litigation later in 2002. The ultimate
outcome cannot be determined at this time.
Net investment income
Net investment income decreased by $8,000 for the three months ended March
31, 2002 compared to the first quarter of 2001 due to a decrease in yields
partially offset by an increase in average invested funds. The average effective
yield was approximately 5.69% for the three months ended March 31, 2002 and
5.93% for the three months ended March 31, 2001. The tax equivalent yield was
approximately 6.26% for the first quarter of 2002 and 6.39% for the first
quarter of 2001. The decrease in investment income reflects the increase in
allocation of the portfolio to tax-advantaged securities in 2002 compared to
2001.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Three Months Ended
March 31,
------------------
2002 2001
---- ----
Practice management 40% 42%
Accounting 24 28
Tax & personal financial planning 15 10
Retirement plan accounting & admin 17 13
Other 4 7
--- ---
Total 100% 100%
=== ===
Practice management and related revenue of $1.6 million for the three
months ended March 31, 2002 compares to $1.5 million for the three months ended
March 31, 2001. The increase results primarily from one-time consulting
assignments that were recognized in the Employee Benefits Services division in
conducting plan restatements for all clients, as required by federal
regulations.
Loss and loss adjustment expenses and combined ratio results
NCRIC continues to experience pressure from the rise in severity of losses,
and it continues to take a cautious approach in evaluating reserves. The expense
for incurred losses and LAE net of reinsurance is summarized as follows (in
thousands):
Three Months Ended
March 31,
-------------------------------
2002 2001
------- --------
Incurred loss and LAE related to:
Current year - losses.......... $ 6,011 $ 5,031
Prior years - development...... (291) (1,192)
------- --------
Total incurred for the period........ $ 5,720 $ 3,839
======= ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Three Months Ended
March 31,
------------------------------
2002 2001
------ ------
Loss and LAE ratio............. 87.1% 79.8%
Underwriting expense ratio..... 23.9% 26.4%
Combined ratio................. 111.0% 106.2%
Total incurred loss and LAE expense of $5.7 million for the first quarter
of 2002 increased by $1.9 million from the $3.8 million incurred for the first
quarter of 2001. The increase in current year losses to $6.0 million for the
first quarter of 2002 reflects the increase in the level of exposure as a result
of premium growth and a rise in the cost of settling claims. The favorable
development of losses reported in prior years reflects the favorable experience
on the claims closed during the quarter, partially offset by the continuing
upward pressure of severity of losses as noted previously. Prior years
development results from the re-estimation and settlement of individual losses
not covered by reinsurance, which generally are losses under $500,000.
The combined ratio of 111.0% for the three months ended March 31, 2002
reflects the increase in loss and loss adjustment expenses as noted above. The
lower underwriting expense component reflects the stable level of core
underwriting expenses coupled with the higher level of premiums.
Expenses
Underwriting expenses of $1.6 million for the three months ended March 31,
2002 increased by $300,000 from $1.3 million for the three months ended March
31, 2001. In addition to the increase in legal fees associated with the premium
collection litigation discussed previously, the increase in expenses results
from increases in commissions, premium taxes, and travel related to the
increased level of new business, particularly agent produced business.
Practice management and related expenses totaled $1.5 million for the three
months ended March 31, 2002 and $1.3 million for the three months ended March
31, 2001. Expenses increased due to: expenses related to the integration of the
human resources function, with an improvement in the employee benefits package;
expenses for information technology infrastructure upgrades; expenses associated
with the transition of client service for two of the former owners as they move
towards retirement at the termination of their employment contracts at the end
of 2002; and interest expense on debt incurred related to the contingent
purchase payments made in 2001 to the prior owners of HealthCare Consulting,
Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $365,000 for the three months ended March 31, 2002 compare to
$328,000 for the three months ended March 31, 2001. Other expenses for the first
quarter of 2002 include $87,000 of start up expenses for the new captive
insurance company subsidiary compared to $13,000 during the first quarter of
2001.
Federal income taxes
The effective tax rate for NCRIC at 21% for the three months ended March
31, 2002 and 32% for 2001, is lower than the federal statutory rate principally
due to nontaxable investment income. The lower rate for 2002 compared to 2001 is
principally a result of the impact of the goodwill amortization provision of
SFAS 142; prior to 2002 some goodwill amortization was not deductible for tax
purposes, causing an increase to the effective tax rate. With the adoption of
FAS 142, NCRIC no longer amortizes goodwill in its financial statements.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the three months ended March 31, 2002, NCRIC had cash flows from
operations of $1.8 million compared to $3.0 million for the corresponding period
of 2001. The $1.2 million of decreased cash flow results primarily from a change
in the timing of receipt of premiums. Prior to 2002, a majority of insureds
financed their annual premium through an outside financing company, which then
remitted the full annual premium to NCRIC at the beginning of the policy year.
For policies with 2002 effective dates, the majority of policyholders financed
their premium directly with NCRIC. This has the impact of spreading the cash
receipts from premiums over the policy year. This reduced cash flow from
premiums was partially offset by lower payments for claims and LAE. Because of
the long-term nature of both the payments of claims and the settlement of
swing-rated reinsurance premiums due to the reinsurers, cash from operations for
a medical professional liability insurer like NCRIC can vary substantially from
year to year.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in corporate
and tax-exempt securities. As of March 31, 2002, the carrying value of the
securities portfolio was $102.9 million. The portfolio was invested as follows:
At March 31, At December 31,
2002 2001
---- ----
U. S. Government and agencies .......... 4% 4%
Asset and mortgage-backed securities.... 26 29
Tax-exempt securities .................. 24 19
Corporate bonds ........................ 40 42
Equity securities ...................... 6 6
Over 66% of the portfolio was invested in U.S. Government and agency
securities or had a rating of AAA or AA. For regulatory purposes, 89% of the
securities portfolio was rated "Class 1" for all periods presented, which is the
highest quality rated group as classified by the NAIC.
The $2.5 million line of credit available as of March 31, 2002 is
restricted to working capital for claims settlements. The line of credit is
unsecured and renewable annually. NCRIC has not drawn down on this facility.
NCRIC has no material commitments for capital expenditures.
Under terms of the purchase agreement between NCRIC and the previous owners
of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits
Services, Inc., additional purchase payments could be paid in cash if the
acquired companies achieved earnings targets. During 2001, $3.1 million was paid
according to this agreement. NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust
Bank to finance these payments. The term of the loan is three years at a
floating rate of LIBOR plus two and three-quarter percent. At March 31, 2002,
the interest rate was 4.66%. Principal and interest payments are due on a
monthly basis.
Effects of inflation
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that losses and LAE reserve levels and NCRIC's
ratemaking process adequately incorporate the effects of inflation.
Forward-Looking Information
A number of statements made by NCRIC in this document are forward-looking
statements which involve known and unknown risks and uncertainties which may
cause NCRIC's actual results to be materially different from historical results
or from the results expressed or implied by the forward-looking statements.
These risks and uncertainties include:
o general economic conditions including changes in interest rates and the
performance of financial markets;
o NCRIC, Inc.'s concentration in a single line of business principally in the
mid-Atlantic region;
o the impact of decreasing revenues to healthcare providers;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o uncertainties associated with expanding business, including uncertainties
associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance;
o the mutual insurance holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially
and adversely affect NCRIC's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NCRIC's investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At March 31, 2002, fixed maturity securities comprise
94% of total investments at market value. U.S. Government and agencies and
tax-exempt bonds represent 30% of the fixed maturity securities. Equity
securities, consisting primarily of preferred stock, account for the remainder
of the investment portfolio. NCRIC has classified its investments as available
for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure NCRIC has on its investment portfolio. In
general, the market value of NCRIC's fixed maturity portfolio increases or
decreases in an inverse relationship with fluctuation in interest rates. During
periods of rising interest rates, the fair value of NCRIC's investment portfolio
will generally decline resulting in decreases in NCRIC's stockholders' equity.
Conversely, during periods of falling interest rates, the fair value of NCRIC's
investment portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity. In addition, NCRIC's net investment income increases or
decreases in a direct relationship with interest rate changes on monies
reinvested from maturing securities and investments of positive cash flow from
operating activities.
Interest rates have increased during the first three months of 2002,
resulting in a decrease in the value of corporate bonds and reducing the
carrying value of NCRIC's fixed maturity portfolio. At March 31, 2002, NCRIC's
fixed maturities were valued at $2.1 million below amortized cost. At December
31, 2001, the value of the portfolio was $718,000 above amortized cost.
Generally, the longer the duration of the security, the more sensitive the
asset is to market interest rate fluctuations. To control the adverse effects of
the changes in interest rates, NCRIC's investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
NCRIC's investment policy also provides that all security purchases be limited
to rated securities or unrated securities approved by management on the
recommendation of NCRIC's investment advisor. Approximately 66% of the portfolio
is Treasury or Agency related or rated AAA, the highest rating for a security.
During the three months ended March 31, 2002, there was a change in the
allocation of NCRIC's portfolio increasing the percentage of tax-exempt bonds to
24% of the total fixed maturity securities compared to 19% at December 31, 2001.
Management of NCRIC, along with NCRIC's external investment managers, seeks to
maximize after-tax yields while minimizing portfolio credit risk. The decision
to reallocate the portfolio as funds became available was based on this goal.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See the Form 10-K for the fiscal year ended December 31, 2001 for
information on pending litigation.
Item 6. Exhibits and Reports on Form 8-K.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
May 15, 2002 /s/ R. Ray Pate, Jr.
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R. Ray Pate, Jr., President & Chief Executive Officer
(Duly Authorized Officer)
May 15, 2002 /s/ Rebecca B. Crunk
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Rebecca B. Crunk, Sr. Vice President
& Chief Financial Officer
(Principal Financial Officer)