U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 2002
Commission File Number: 0-25505
NCRIC Group, Inc.
District of Columbia 52-2134774
- ------------------------------------- -----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
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(Issuer's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of November 1, 2002,
there were 3,708,399 shares of NCRIC Group, Inc. common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ----------------------------------------------------------------------------------------------------------------------
September 30, 2002 December 31, 2001
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 95,828 $ 96,723
Equity securities 6,596 6,402
--------- ---------
Total securities available for sale 102,424 103,125
OTHER ASSETS:
Cash and cash equivalents 12,002 7,565
Reinsurance recoverable 33,281 30,077
Goodwill, net 7,291 7,291
Premiums and accounts receivable 12,991 4,802
Deferred income taxes 3,777 2,482
Other assets 7,289 5,660
--------- ---------
TOTAL ASSETS $ 179,055 $ 161,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 63,015 $ 56,802
Loss adjustment expenses 30,848 27,758
--------- ---------
Total losses and loss adjustment expenses 93,863 84,560
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 713 2,408
Unearned premiums 28,439 17,237
Advance premium 1,165 4,138
Reinsurance premium payable 3,916 2,452
Bank debt 1,168 1,662
Other liabilities 3,019 4,091
--------- ---------
TOTAL LIABILITIES 132,283 116,548
--------- ---------
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 9,614 9,552
Unallocated common stock held by the ESOP (708) (786)
Common stock held by the stock award plan (237) (339)
Accumulated other comprehensive gain 2,609 474
Retained earnings 35,717 35,776
Treasury stock, at cost (260) (260)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 46,772 44,454
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 179,055 $ 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 September 30, Nine Months Ended September 30,
2002 2001 2002 2001
REVENUES:
Net premiums earned $ 7,856 $ 5,312 $ 21,367 $ 14,721
Net investment income 1,444 1,521 4,518 4,617
Net realized investment (losses)gains 6 97 (604) 194
Practice management and related
income 1,344 1,451 4,430 4,643
Other income 278 146 722 436
-------- -------- -------- --------
Total revenues 10,928 8,527 30,433 24,611
-------- -------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 7,372 4,386 19,072 12,905
Underwriting expenses 3,164 1,430 6,262 3,630
Practice management expenses 1,386 1,472 4,455 4,365
Other expenses 366 297 1,179 963
-------- -------- -------- --------
Total expenses 12,288 7,585 30,968 21,863
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (1,360) 942 (535) 2,748
INCOME TAX (BENEFIT) PROVISION (569) 296 (476) 857
-------- -------- -------- --------
NET INCOME (LOSS) $ (791) $ 646 $ (59) $ 1,891
======== ======== ======== ========
OTHER COMPREHENSIVE INCOME GAIN 2,618 $ 1,913 $ 2,401 $ 2,536
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 1,827 $ 2,559 $ 2,342 $ 4,427
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.22) $ 0.18 $ (0.02) $ 0.54
Diluted $ (0.22) $ 0.18 $ (0.02) $ 0.52
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (59) $ 1,891
Adjustments to reconcile net income (loss)
to net cash flows from operating activities:
Net realized investment losses (gains) 604 (194)
Amortization and depreciation 336 564
Deferred income taxes (2,396) (1,075)
Stock released for coverage of benefit plans 252 224
Changes in assets and liabilities:
Reinsurance recoverable (3,204) (3,647)
Premiums and accounts receivables (8,189) (3,419)
Other assets (1,187) (1,319)
Losses and loss adjustment expenses 9,303 3,208
Retrospective premiums accrued under
reinsurance treaties (1,695) (2,769)
Unearned premiums 11,202 8,217
Advanced premium (2,973) (145)
Reinsurance premium payable 1,464 1,042
Other liabilities (1,071) 441
-------- --------
Net cash flows provided by operating activities 2,378 3,019
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,180) (13,997)
Sales, maturities and redemption of investments 16,512 14,395
Investment in purchased business -- (3,014)
Purchases of property and equipment (779) (293)
-------- --------
Net cash flows provided by (used in) investing activities 2,553 (2,909)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock -- (129)
Repayment of long-term debt (494) (151)
Proceeds from long-term debt -- 1,971
-------- --------
Net cash flows provided by (used in) financing activities (494) 1,691
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 4,437 1,801
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,565 3,972
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 12,002 $ 5,773
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,060 $ 2,156
======== ========
Cash paid for interest $ 50 $ 19
======== ========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three and nine-month periods ended September 30,
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 currently has two reportable segments: Insurance and Practice
Management Services. The insurance segment provides medical professional
liability and other insurance. The practice management services segment
provides medical practice management services primarily to private
practicing physicians. NCRIC Group evaluates performance based on profit or
loss from operations before income taxes. The reportable segments are
strategic business units that offer different products and services and
therefore are managed separately.
Selected financial data is presented below for each business segment at or
for the three-month and nine-month periods ended September 30, 2002 and
2001 (in thousands):
For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Insurance
Revenues from external customers $ 8,111 $ 5,439 $ 22,030 $ 15,102
Net investment income 1,443 1,509 4,499 4,577
Net realized investment gains (losses) 6 97 (604) 194
Depreciation and amortization 87 61 231 152
Segment profit (loss) before taxes (1,160) 1,100 173 3,079
Segment assets 168,044 152,666
Segment liabilities 130,214 113,574
Expenditures for segment assets 44 45 627 133
Practice Management Services
Revenues from external customers $ 1,368 $ 1,472 $ 4,493 $ 4,705
Net investment income 2 13 22 45
Depreciation and amortization 32 150 105 412
Segment profit (loss) before taxes (21) 6 46 364
Segment assets 8,592 9,589
Segment liabilities 3,113 4,082
Expenditures for segment assets 136 50 152 160
Total
Revenues from external customers $ 9,479 $ 6,911 $ 26,523 $ 19,807
Net investment income 1,445 1,522 4,521 4,622
Net realized investment gains (losses) 6 97 (604) 194
Depreciation and amortization 119 211 336 564
Segment profit (loss) before taxes (1,181) 1,106 219 3,443
Segment assets 176,636 162,255
Segment liabilities 133,327 117,656
Expenditures for segment assets 180 95 779 293
The following are reconciliations of reportable segment assets,
liabilities, revenues, net investment income, and profit before taxes to
NCRIC Group's consolidated totals (in thousands):
September 30,
-------------
2002 2001
---- ----
Assets:
Total assets for reportable segments $ 176,636 $ 162,255
Elimination of intersegment receivables (1,140) (1,707)
Other unallocated amounts 3,559 1,490
--------- ---------
Consolidated total $ 179,055 $ 162,038
========= =========
Liabilities:
Total liabilities for reportable segments $ 133,327 $ 117,656
Elimination of intersegment payables (1,140) (1,707)
Other liabilities 96 95
--------- ---------
Consolidated total $ 132,283 $ 116,044
========= =========
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues from external customers:
Total revenues for reportable segments $ 9,479 $ 6,911 $ 26,523 $ 19,807
Elimination of reportable segments (1) (2) (4) (7)
-------- -------- -------- --------
Consolidated total $ 9,478 $ 6,909 $ 26,519 $ 19,800
======== ======== ======== ========
Net investment income:
Total investment income for reportable
segments $ 1,445 $ 1,522 $ 4,521 $ 4,622
Elimination of intersegment income (1) (1) (3) (5)
-------- -------- -------- --------
Consolidated total $ 1,444 $ 1,521 $ 4,518 $ 4,617
======== ======== ======== ========
Profit before taxes:
Total profit for reportable segments $ (1,181) $ 1,106 $ 219 $ 3,443
Other expenses (179) (164) (754) (695)
-------- -------- -------- --------
Consolidated total $ (1,360) $ 942 $ (535) $ 2,748
======== ======== ======== ========
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ (791) $ 646 $ (59) $ 1,891
======= ======= ======= =======
Weighted average common
shares outstanding - basic 3,558 3,524 3,526 3,552
Dilutive effect of stock options
and awards -- 83 -- 88
------- ------- ------- -------
Weighted average common
shares outstanding - diluted 3,558 3,609 3,526 3,612
======= ======= ======= =======
Net income (loss) per common share:
Basic $ (0.22) $ 0.18 $ (0.02) $ 0.54
======= ======= ======= =======
Diluted $ (0.22) $ 0.18 $ (0.02) $ 0.52
======= ======= ======= =======
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 nine
months ended September 30, 2001, goodwill amortization was $281,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management
Services Segment. NCRIC completed its initial goodwill impairment testing
under SFAS 142 and concluded that the goodwill asset was not impaired as of
the date of implementation of SFAS 142, nor was it impaired as of September
30, 2002.
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.
NCRIC's captive insurance subsidiary, American Captive Corporation (ACC),
developed its first protected-cell captive, the Princeton Community Hospital
Cell (Princeton Cell) in 2002. The Princeton Cell is sponsored by Princeton
Community Hospital in Princeton, West Virginia, to provide an alternative source
of risk financing for its admitting physicians. The Princeton Cell has received
required regulatory approvals; however, commencement of operations is pending a
response from the West Virginia Insurance Commissioner.
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 nine months ended September 30,
2001, goodwill amortization was $281,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management Services
Segment. NCRIC completed its initial goodwill impairment testing under SFAS 142
and concluded that the goodwill asset was not impaired as of the date of
implementation of SFAS 142, nor was it impaired as of September 30, 2002.
Consolidated net income
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Results for the three months ended September 30, 2002 were a net loss of
$791,000 compared to net income of $646,000 for the three months ended September
30, 2001. Net realized investment gains contributed $4,000 to the third quarter
2002 compared to $64,000 in the third quarter of 2001.
Earnings were reduced $814,000 for the increase in allowance for
uncollectible premiums receivable balance for a hospital-sponsored program, as
discussed further in the Premium Collection Litigation section below. Third
quarter results of both 2002 and 2001 include charges for guaranty fund
assessments, reducing earnings by $228,000 in 2002 and $160,000 in 2001. The
2002 assessment resulted from the PHICO insolvency; the 2001 assessment resulted
from the Reliance Insurance Company insolvency.
Net operating earnings before the charges for the premium receivable
allowance and the guaranty fund assessments were $247,000 and $742,000 in the
third quarter of 2002 and 2001, respectively. Higher revenue in the 2002 third
quarter was offset by an increase in loss and loss adjustment expenses,
principally in development of losses on claims reported in prior years, and in
underwriting expenses.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Results for the nine months ended September 30, 2002 were a net loss of
$59,000 compared to net income of $1.9 million for the nine months ended
September 30, 2001. Year-to-date 2002 results were negatively impacted by the
increase in allowance for uncollectible premium receivable, the guaranty fund
assessment, unfavorable development of losses on claims reported in prior years
and net realized investment losses.
Net realized investment losses, after tax, for the first nine months of
2002 totaled $399,000 compared to net realized investment gains of $128,000 for
the first nine months of 2001. Excluding the charges for the premium receivable
allowance and guaranty fund assessments, operating earnings for the 2002 nine
months were $1.4 million compared to $1.9 million for the 2001 nine months.
While premium revenue increased 45% for the nine months ended September 30, 2002
compared to September 30, 2001, the higher revenue was offset by an increase in
loss and loss adjustment expenses, principally in development of losses on
claims reported in prior years, and in underwriting expenses. During the second
quarter of 2002, NCRIC determined that the $650,000 of WorldCom bonds which it
holds in its $100 million investment portfolio had suffered an "other than
temporary" decline in value under the provisions of SFAS 115, and accordingly
reflected the reduction as a loss in the income statement rather than a
reduction in market value in accumulated other comprehensive gain. The after-tax
loss on WorldCom bonds in the second quarter was $524,000 or $0.14 per share on
a basic and diluted basis.
Segment results
The operating results of NCRIC's insurance segment for the three months and
nine months ended September 30, 2002 were primarily driven by the following
factors. In addition to the third quarter events discussed above, NCRIC
continued to experience a significant increase in new business written in 2002.
For the nine months ended September 30, 2002, new business written (excluding
the 100% ceded HCA program) was $10.2 million, up $2.2 million or 27%, from $8.0
million for the same nine month period in 2001. The rise in new business written
coupled with the increased premium rates resulted in a 45% increase in net
premiums earned. The strain on current period earnings as a result of the large
increase in new business written, combined with investment yield declines,
resulted in pressure on short-term profitability. While the cost for claims
reported in 2002 increased due to the rise in exposures, the development of
losses for claims originally reported in prior years reduced pre-tax earnings
for the 2002 third quarter and nine-month periods.
NCRIC's practice management segment earnings in 2002 decreased compared to
2001 primarily as a result of a decrease in client revenue combined with an
increase in expenses. Client revenue decreases stem from a reduction in
non-recurring consulting assignments; as medical practice income comes under
increasing pressure due to reductions in the payer system, physicians have less
discretionary funds available for consultant engagements. Expense increases are
primarily associated with the transition of client service for two of the former
owners as they move towards the expiration of their employment contracts at the
end of 2002 and other transitional costs associated with the continued
integration of the purchased companies. These expense increases were partially
offset by a reduction of expense due to the implementation of SFAS 142 which
eliminated goodwill amortization beginning January 1, 2002.
Net premiums earned
New programs - In 2002 NCRIC initiated a program to provide insurance
coverage to physicians at four HCA hospitals in West Virginia. Under this
arrangement, NCRIC cedes 100% of the insurance exposure to a captive insurance
company affiliated with the sponsoring hospitals. NCRIC receives a ceding
commission for providing complete policy underwriting, claims and administrative
services for these policies. While accounting standards require the premium
written to be included as a part of NCRIC's direct written premium, NCRIC has no
net written nor net earned premium from this program.
In anticipation of the initiation of the Princeton Cell within ACC, some
insurance has been underwritten by NCRIC during the first nine months of 2002
for policies that will be 100% reinsured by the Princeton Cell when it becomes
active. The Princeton Cell is sponsored by the Princeton Community Hospital in
Princeton, West Virginia, to provide an alternative source of risk-financing for
its admitting physicians. The premium amounts for these policies are separately
identified in the following premium comments to aid comparisons.
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Net premiums earned increased by $2.6 million, 49%, to $7.9 million from
$5.3 million for the three months ended September 30, 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 increases
in base premium rates. Net premiums earned in the third quarter include $101,000
for business related to the Princeton Cell program described above.
Gross premiums written of $14.6 million for the three months ended
September 30, 2002 increased by $5.4 million from $9.2 million for the three
months ended September 30, 2001, due to net new business written combined with
the premium rate increase effective January 1, 2002. The following chart shows
new premium written for the third quarter (in 000's):
Three Months Ended
September 30,
-------------
2002 2001
---- ----
Direct $1,210 $ 486
Agent 2,660 2,784
HCA 388 --
Princeton Cell 101 --
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Net premiums earned increased by 46% to $21.4 million from $14.7 million
for the nine months ended September 30, 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 not to provide a renewal premium credit for 2002
renewals, net premiums earned increased $320,000 for the first nine months of
2002 compared to the same period of 2001. Additionally, net premiums earned
through September 30, 2002, includes a decrease of $427,000 from the September
30, 2001 level due to favorable loss development in the hospital-sponsored
retrospectively rated programs. Under these programs, additional premiums are
either earned or returned based on a group's adverse or favorable loss
experience. Net premiums earned in the first nine months of 2002 include
$171,000 for business related to the Princeton Cell program described above.
Gross premiums written of $43.2 million for the nine months ended September
30, 2002 increased by $14.4 million from $28.8 million for the nine months ended
September 30, 2001, due to net new business written combined with the premium
rate increase. The following chart shows new business written through the third
quarter (in 000's):
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
Direct $1,736 $ 923
Agent 8,113 7,106
HCA 734 --
Princeton Cell 382 --
The distribution of premium written shows notable growth in NCRIC's market
areas outside of the District of Columbia. NCRIC continues to maintain strict
underwriting standards as it expands its business. The following chart
illustrates the components of gross premium written by state for the periods
ended September 30, 2002 and 2001.
Nine Months Ended September 30,
-------------------------------
(amounts in thousands)
----------------------
2002 2001
---- ----
District of Columbia $20,575 47% $17,224 60%
Virginia 11,189 26% 5,807 20%
Maryland 4,751 11% 4,243 15%
West Virginia 4,316 10% 854 3%
West Virginia - HCA 734 2% -- --
West Virginia -Princeton 382 1% -- --
Delaware 1,264 3% 722 2%
------- --- ------- ---
$43,211 100% $28,850 100%
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 $700,000 was billed during the first
nine months of 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 nine months of 2002 increased by a net amount of $372,000 over the
same period in 2001 while net earned premium was unaffected by the billing.
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 stopped admitting patients in May
2002 and sold its principal assets during the third quarter.
Although NCRIC continues to pursue the claim, based on information received
during the third quarter of 2002 and consultation with legal counsel, it appears
that the hospital assets may not be sufficient to cover its liabilities,
including NCRIC's claim. Accordingly, NCRIC increased its allowance for
uncollectibility by $1.2 million to cover 100% of the amount receivable. The
charge for the allowance is included in underwriting expense. Since the amount
due to NCRIC is significant, NCRIC will continue to pursue collection of the
amount it is due. Legal fees incurred through the nine-month period ended
September 30, 2002 for this action were approximately $180,000 higher than in
the same period in 2001.
Net investment income
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Net investment income decreased by $77,000 for the three months ended
September 30, 2002 compared to the third quarter of 2001 due to a decrease in
yields partially offset by an increase in average invested funds. The average
effective yield was approximately 5.28% for the three months ended September 30,
2002 and 5.77% for the three months ended September 30, 2001. The tax equivalent
yield was approximately 5.96% for the third quarter of 2002 and 6.25% for the
third quarter of 2001. The decrease in investment yields reflects the market
decrease in interest rates in 2002 compared to 2001.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Net investment income decreased by $99,000 for the nine months ended
September 30, 2002 compared to the first nine months of the prior year due to a
decrease in yields partially offset by an increase in average invested funds.
Average invested assets, which include cash equivalents, were higher in the
first nine months of 2002 by $4.2 million compared to the same period of 2001.
The average effective yield was approximately 5.53% for the nine months ended
September 30, 2002 and 5.87% for the nine months ended September 30, 2001. The
tax equivalent yield was approximately 6.14% for the first nine months of 2002
and 6.36% for the first nine months of 2001. The decrease in investment yields
reflects the market decrease in interest rates in 2002 compared to 2001.
Practice management and related income
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Practice management 41% 44%
Accounting 28% 25%
Tax & personal financial planning 13% 13%
Retirement plan accounting & admin 16% 11%
Other 2% 7%
--- ---
Total 100% 100%
=== ===
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Practice management and related revenue of $1.3 million for the three
months ended September 30, 2002 is lower by $107,000 compared to the three
months ended September 30, 2001. The decreased revenue was a result of a reduced
level of non-recurring consulting assignments compared to 2001.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Practice management and related revenue of $4.4 million for the nine months
ended September 30, 2002 is down from $4.6 million for the nine months ended
September 30, 2001. The decreased revenue was a result of a reduced level of
non-recurring consulting assignments compared to 2001.
Loss and loss adjustment expenses and combined ratio results
NCRIC continues to experience pressure from the rise in severity of losses,
and it continues to take a cautious approach in evaluating reserves. The expense
for incurred losses and LAE net of reinsurance is summarized as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Incurred loss and LAE related to:
Current year - losses ...... $ 6,449 $ 5,979 $ 17,304 $ 16,698
Prior years - development... 923 (1,593) 1,768 (3,793)
-------- -------- -------- --------
Total incurred for the period ....... $ 7,372 $ 4,386 $ 19,072 $ 12,905
======== ======== ======== ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums earned:
Nine Months Ended September 30,
-------------------------------
2002 2001
---- ----
Loss and LAE ratio ........... 89.3% 87.7%
Underwriting expense ratio.... 29.3% 24.6%
Combined ratio ............... 118.6% 112.3%
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Total incurred loss and LAE expense of $7.4 million for the third quarter
of 2002 increased by $3.0 million from the $4.4 million incurred for the third
quarter of 2001. The increase in current year losses to $6.4 million for the
third quarter of 2002 reflects the growth in exposures. The adverse development
of losses reported in prior years reflects the continuing upward pressure of
severity of losses as noted in previous reports. Prior year development results
from the re-estimation and settlement of individual losses not covered by
reinsurance, which generally are losses under $500,000.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Total incurred loss and LAE expense of $19.1 million for the first nine
months of 2002 increased by $6.2 million from the $12.9 million incurred for the
first nine months of 2001. The increase in current year losses to $17.3 million
for the first nine months of 2002 primarily reflects the increase in exposures
resulting from the growth in new business. The adverse development of losses
reported in prior years reflects the continuing upward pressure of severity of
losses as noted previously.
The combined ratio of 118.6% for the nine months ended September 30, 2002
compared to 112.3% for the first nine months of 2001 reflects the higher level
of earned premiums combined with the increase in severity of claims reported
initially in previous years, as noted above. The higher underwriting expense
component includes an impact of 5.8% for the increase in the allowance for
uncollectible premium receivable as discussed above. Core underwriting expenses
remained stable between periods.
Expenses
Three months ended September 30, 2002 compared to three months ended September
30, 2001
Underwriting expenses of $3.2 million for the three months ended September
30, 2002 compare to $1.4 million for the three months ended September 30, 2001.
In addition to the increase in legal fees and charge of $1.2 million associated
with the premium collection litigation discussed previously, the increase in
expenses results from increases in guaranty fund assessments received, premium
taxes, and administrative costs related to the increased level of business,
particularly agent produced business. Additional costs were incurred in 2002
related to software maintenance contracts. These increases were partially offset
by an increase in the ceding allowance earned based on premiums ceded to
unaffiliated reinsurers.
Practice management and related expenses were $1.4 million for the three
months ended September 30, 2002 and $1.5 million for the three months ended
September 30, 2001. Expense increases were largely offset by reduced goodwill
amortization of $109,000 as the result of implementing SFAS 142 as discussed
above. Expense increases were primarily for the transition of client service for
two of the former owners as they move towards the expiration of their employment
contracts at the end of 2002.
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 $366,000 for the three months ended September 30, 2002 compare to
$297,000 for the three months ended September 30, 2001. Other expenses for the
third quarter of 2002 include increased holding company expenses.
Nine months ended September 30, 2002 compared to nine months ended September 30,
2001
Underwriting expenses increased $2.7 million to $6.3 million for the nine
months ended September 30, 2002 from $3.6 million for the nine months ended
September 30, 2001. In addition to the increase in legal fees and allowance for
uncollectibility associated with the premium collection litigation discussed
previously, the increase in expenses results from additional costs incurred in
2002 related to software maintenance contracts, increased guaranty fund
assessments, increased auditing and consulting fees, and increases in
commissions, premium taxes, and administrative costs related to the increased
level of business.
Practice management and related expenses were $4.5 million for the nine
months ended September 30, 2002 and $4.4 million for the nine months ended
September 30, 2001. Expenses increased due to: integration of the human
resources function; an improvement in the employee benefits package; information
technology infrastructure upgrades; and transition of client service for two of
the former owners as they move towards the expiration of their employment
contracts at the end of 2002. These increases were partially offset by reduced
goodwill amortization as the result of implementing SFAS 142 as mentioned
previously.
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 $1.2 million for the nine months ended September 30, 2002 compare to
$1.0 million for the nine months ended September 30, 2001. Expense increases are
for captive start-up costs and holding company operations.
Federal income taxes
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income. The lower effective rate for
2002 compared to 2001 is principally a result of (1) 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;
and (2) the impact of the net realized investment losses in 2002.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the nine months ended September 30, 2002, NCRIC had cash flows from
operations of $2.4 million compared to $3.0 million for the corresponding period
of 2001. The $0.6 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. Because of the long-term nature of
both the payments of claims and the settlement of swing-rated reinsurance
premiums due to reinsurers, cash from operations for a medical professional
liability insurer like NCRIC can vary substantially from year to year.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in government
and tax-exempt securities. As of September 30, 2002, the carrying value of the
securities portfolio was $102.4 million. The portfolio was invested as follows:
At September 30, At December 31,
2002 2001
---- ----
U. S. Government and agencies ............ 4% 4%
Asset and mortgage-backed securities...... 25 29
Tax-exempt securities .................... 31 19
Corporate bonds .......................... 34 42
Equity securities ........................ 6 6
As of September 30, 2002 over 67% of the portfolio was invested in U.S.
Government/agency securities or had a rating of AAA or AA. For regulatory
purposes, 91% of the securities portfolio was rated "Class 1" for all periods
presented, which is the highest quality rated group as classified by the NAIC.
The $2.5 million line of credit available as of September 30, 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 September 30,
2002, the interest rate was 4.56%. 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.
Safe Harbor 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 and their related impact on the value of
securities;
o NCRIC, Inc.'s concentration in a single line of business principally in the
mid-Atlantic region (previously this risk factor solely identified NCRIC,
Inc.'s concentration in a single line of business principally in the
District of Columbia);
o the impact of decreasing revenues to healthcare providers;
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 inherent in the valuation of goodwill from the practice
management segment or other acquired businesses;
o uncertainties associated with expanding business, including uncertainties
associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best Company;
o the availability of bank financing and reinsurance;
o the mutual insurance holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially
and adversely affect NCRIC's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
NCRIC's investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At September 30, 2002, fixed maturity securities
comprise 94% of total investments at market value. U.S. Government and agencies
and tax-exempt bonds represent 38% 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.
At September 30, 2002, NCRIC's fixed maturities were valued at $4.1 million
above amortized cost. At December 31, 2001, the value of the portfolio was $1.0
million 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 54% of the portfolio
is Treasury or Agency related or rated AAA, the highest rating for a security.
During the nine months ended September 30, 2002, there was a change in the
allocation of NCRIC's portfolio increasing the percentage of tax-exempt bonds to
31% 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.
Item 4. Controls and Procedures
NCRIC's Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days prior to the filing date of this
report, that NCRIC's disclosure controls and procedures (as defined in
Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure
that information required to be disclosed in the reports that NCRIC files or
submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
NCRIC's internal controls or in other factors that could significantly affect
these controls subsequent to the date of the foregoing evaluation.
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.
Exhibit 99.1-Certification
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,
thereunder duly authorized.
NCRIC Group, Inc.
November 14, 2002 /s/ R. Ray Pate, Jr.
----------------------------------------------------
R. Ray Pate, Jr., President & Chief Executive Officer
(Duly Authorized Officer)
November 14, 2002 /s/ Rebecca B. Crunk
-------------------------------------------------
Rebecca B. Crunk, Sr. Vice President & Chief Financial Officer
(Principal Financial Officer)
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, R. Ray Pate, Jr., President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NCRIC Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 14, 2002 /s/ Ray Pate, Jr.
- ---------------- -------------------------------------
Date R. Ray Pate, Jr.
President and Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Rebecca B. Crunk, Senior Vice President and Chief Financial Officer, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of NCRIC Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 14, 2020 /s/ Rebecca B. Crunk
- ----------------- -------------------------------------------------
Date Rebecca B. Crunk
Senior Vice President and Chief Financial Officer