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, 2004
Commission File Number: 0-25505
[LOGO(SM)] NCRIC Group, Inc.
Delaware 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)
Indicate by check mark 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 by check mark whether the registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act.
Yes |_| No |X|
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, 2004, there
were 6,898,865 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, 2004 December 31, 2003
ASSETS (unaudited)
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes (Amortized cost $170,306 and $161,876) $ 173,470 $ 162,744
Equity securities (Cost $18,316 and $10,269) 19,844 11,613
--------- ---------
Total securities available for sale 193,314 174,357
OTHER ASSETS:
Cash and cash equivalents 8,602 9,978
Reinsurance recoverable 52,752 48,100
Goodwill, net 7,296 7,296
Premiums and accounts receivable, net 6,177 9,333
Deferred income taxes 4,831 5,307
Other assets 8,030 8,175
--------- ---------
TOTAL ASSETS $ 281,002 $ 262,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 91,032 $ 87,778
Loss adjustment expenses 39,202 38,213
--------- ---------
Total losses and loss adjustment expenses 130,234 125,991
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 1,876 1,809
Unearned premiums 48,960 34,553
Advance premiums 248 3,110
Reinsurance premiums payable 476 1,538
Bank debt 109 289
Trust Preferred Securities 15,000 15,000
Other liabilities 3,797 2,277
--------- ---------
TOTAL LIABILITIES 200,700 184,567
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 12,000,000 shares authorized;
6,898,865 shares issued and outstanding (net of 33,339 treasury
shares) 70 70
Preferred stock $0.01 par value - 1,000,000 shares authorized, 0 shares issued -- --
Additional paid in capital 48,993 48,962
Unallocated common stock held by the ESOP (2,582) (2,616)
Common stock held by the stock award plan (1,494) (1,594)
Accumulated other comprehensive income 3,097 1,461
Retained earnings 32,568 32,046
Treasury stock, at cost (350) (350)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 80,302 77,979
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 281,002 $ 262,546
========= =========
See notes to condensed consolidated financial statements.
2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
2004 2003
REVENUES:
Net premiums earned $16,150 $ 11,449
Net investment income 1,670 1,322
Net realized investment gains 333 199
Practice management and related income 1,224 1,375
Other income 237 353
------- --------
Total revenues 19,614 14,698
------- --------
EXPENSES:
Losses and loss adjustment expenses 13,075 9,583
Underwriting expenses 3,533 2,471
Practice management and related expenses 1,234 1,403
Interest expense 202 201
Other expenses 952 442
------- --------
Total expenses 18,996 14,100
------- --------
INCOME BEFORE INCOME TAXES 618 598
------- --------
INCOME TAX PROVISION 96 84
------- --------
NET INCOME $ 522 $ 514
======= ========
OTHER COMPREHENSIVE INCOME (LOSS) 1,636 (137)
------- --------
COMPREHENSIVE INCOME $ 2,158 $ 377
======= ========
Net income per common share:
Basic:
Average shares outstanding 6,337 6,679
------- --------
Earnings Per Share $ 0.08 $ 0.08
======= ========
Diluted:
Weighted average shares outstanding 6,337 6,679
Dilutive effect of stock options 277 134
------- --------
Weighted average shares outstanding -diluted 6,614 6,813
------- --------
Earnings Per Share $ 0.08 $ 0.08
======= ========
See notes to condensed consolidated financial statements.
3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
Three Months Ended March 31,
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 522 $ 514
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (333) (199)
Amortization and depreciation 498 234
Deferred income taxes (367) (569)
Stock released for coverage of benefit plans 165 92
Changes in assets and liabilities:
Reinsurance recoverable (4,652) (202)
Premiums and accounts receivable 3,156 (7,263)
Other assets 237 (630)
Losses and loss adjustment expenses 4,243 4,362
Retrospective premiums accrued under
reinsurance treaties 67 --
Unearned premiums 14,407 14,528
Advance premium (2,862) (2,800)
Reinsurance premium payable (1,062) (564)
Other liabilities 1,520 2,907
-------- --------
Net cash flows provided by operating activities 15,539 10,410
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (46,039) (44,757)
Sales, maturities and redemptions of investments 29,545 42,882
Purchases of property and equipment (241) (83)
-------- --------
Net cash flows used in investing activities (16,735) (1,958)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (180) (173)
-------- --------
Net cash flows used in financing activities (180) (173)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,376) 8,279
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 9,978 10,550
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,602 $ 18,829
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ -- $ --
======== ========
Interest paid $ 204 $ 211
======== ========
See notes to condensed consolidated financial statements.
4
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the three-month period ended March 31, 2004 - 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, 2004 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2004. 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, 2003, which were filed with the Securities and Exchange Commission on
Form 10-K.
2. Reportable Segment Information
NCRIC Group has one reportable segment: Insurance. The insurance segment
provides medical professional liability and other insurance. The
reportable segment is a strategic business unit that offers products and
services and is therefore managed separately. NCRIC Group evaluates
performance based on profit or loss before income taxes. In previous
periods, NCRIC Group reported a second segment, Practice Management
Services. As noted in the Form 10-K for the year ended December 31, 2003,
effective beginning in 2004 NCRIC Group will no longer report this
business as a separate segment. The Insurance segment revenue has grown
significantly over the past several years while the practice management
revenue has not experienced the same growth. As a result, the practice
management revenue constitutes less than 10% of consolidated revenues and,
therefore, no longer meets the GAAP criteria for segment reporting. The
2003 data has been reclassified to reflect this change in reportable
segments. Selected financial data is presented for the business segment at
or for the three-month period ended March 31, 2004 and 2003 (in
thousands):
At or For the Three Months
Ended March 31,
-----------------------
2004 2003
-------- --------
Insurance Segment
Revenues from external customers $ 16,369 $ 11,729
Net investment income 1,571 1,287
Depreciation and amortization 447 204
Segment profit before taxes 1,317 1,056
Segment assets 263,824 219,575
Segment liabilities 184,614 166,674
Expenditures for segment assets 149 49
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):
5
At or For the Three Months
Ended March 31,
-------------------------
2004 2003
--------- ---------
Assets:
Total assets for reportable segment $ 263,824 $ 219,575
Other unallocated amounts 17,178 12,010
--------- ---------
Consolidated total $ 281,002 $ 231,585
========= =========
Liabilities:
Total liabilities for reportable segment $ 184,614 $ 166,674
Other liabilities 16,086 16,625
--------- ---------
Consolidated total $ 200,700 $ 183,299
========= =========
Revenues from external customers:
Total revenues for reportable segment $ 16,369 $ 11,729
Other income 1,242 1,448
--------- ---------
Consolidated total $ 17,611 $ 13,177
========= =========
Net investment income:
Total investment income for
reportable segment $ 1,571 $ 1,287
Other investment income 99 35
--------- ---------
Consolidated total $ 1,670 $ 1,322
========= =========
Profit before taxes:
Total profit for reportable segment $ 1,317 $ 1,056
Other expenses, net (699) (458)
--------- ---------
Consolidated total $ 618 $ 598
========= =========
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,
------------------
2004 2003
------ ------
Net income $ 522 $ 514
====== ======
Weighted average common
shares outstanding - basic 6,337 6,679
Dilutive effect of stock options
and awards 277 134
------ ------
Weighted average common
shares outstanding - diluted 6,614 6,813
====== ======
Net income per common share:
Basic $ 0.08 $ 0.08
====== ======
Diluted $ 0.08 $ 0.08
====== ======
6
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding. The share amounts for the first
quarter of 2003, prior to the June, 2003 conversion and stock offering,
have been revised to reflect the share exchange ratio of 1.8665 applied in
the conversion.
4. Litigation
On February 13, 2004, a District of Columbia Superior Court jury returned
a verdict in favor of Columbia Hospital for Women Medical Center, Inc.
(CHW) in the premium collection litigation between NCRIC, Inc. and CHW.
The verdict came in a civil action stemming from NCRIC, Inc.'s efforts to
collect payment for nearly $3 million in premiums that NCRIC alleges it is
owed by CHW under a contract with CHW that expired in 2000. The jury ruled
against the claim by NCRIC, Inc. and returned a verdict of $18.2 million
in favor of CHW counterclaims.
The verdict was entered as a judgment on February 20, 2004. On March 5,
2004, NCRIC filed post-trial motions for judgment as a matter of law and,
in the alternative, for a new trial. As a result of these post-trial
motions, the judgment is not final, and jurisdiction with respect to the
verdict remains with the trial judge. No decision has yet been rendered on
the post-trial motions. In connection with the filing of post-trial
motions, NCRIC secured a $19.5 million appellate bond and associated
letter of credit. The amount of the bond represents the verdict plus a
projection of post-trial interest. No amounts have been drawn upon the
letter of credit as of May 12, 2004. After the post-trial motions have
been ruled upon by the judge, any judgment will be entered as final, but
subject to appeal. No liability has been accrued in these financial
statements for any possible loss arising from this litigation because the
judgment is not yet final and remains with the trial judge and, NCRIC
believes that it has meritorious defenses and that it is not probable that
the preliminary judgment will prevail, nor is any potential final outcome
reasonably estimable at this time. Legal expenses to be incurred for this
litigation in 2004 are estimated to be approximately $750,000. The
expenses associated with the $19.5 million appellate bond and associated
letter of credit are estimated to be approximately $300,000.
Expenses incurred during the first quarter of 2004 for the trial portion
of the litigation were $503,000, reported as a component of underwriting
expenses, and for post-trial costs were $370,000 reported as a component
of other expenses. NCRIC Group, Inc. has indemnified NCRIC, Inc. for
post-trial costs expected to be incurred in 2004 and for any potential
final judgment up to $5.5 million after-tax, on an after-tax basis.
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.
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.
There have been no material changes to our accounting policies during the
quarter ended March 31, 2004. Following is a condensed summary of key financial
concepts and of those accounting policies which we believe to be the most
critical. That is, these are most important to the portrayal of our financial
condition and results of operations and they require management's most complex
judgments,
7
including the need to make estimates about the effect of insurance losses and
other matters that are inherently uncertain.
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. Net premiums
written are adjusted by any amount which has been billed but not yet earned
during the period in arriving at earned premiums. Extended reporting
endorsements premium is earned in the same period it is written.
For several large groups of policyholders, we have insurance programs
where the premiums are retrospectively determined based on losses during the
period. Under all of the current programs, the full premium level is determined
and billed at the inception of the policy term. The premium level could
potentially be reduced and a premium refund made if the program loss experience
is favorable.
Reserves for losses and loss adjustment expenses. We write one line of
business, medical professional liability. Losses and LAE reserves are estimates
of future payments for reported claims and related expenses of adjudicating
claims with respect to insured events that have occurred in the past. The change
in these reserves from period to period is reflected as an increase or decrease
to our losses and LAE expense incurred.
Medical professional liability losses and LAE reserves are established
based on an estimate of these future payments as reflected in our past
experience with similar cases and historical trends involving claim payment
patterns. Reserving for medical professional liability claims is a complex and
uncertain process, requiring the use of informed estimates and judgments.
Although we intend to estimate conservatively our future payments relating to
losses incurred, there can be no assurance that currently established reserves
will prove adequate in light of subsequent actual experience. Losses and LAE
expenses as stated in the statement of operations are reported net of
reinsurance recoveries.
Reinsurance. We manage our exposure to individual claim losses, annual
aggregate losses, and LAE through our reinsurance program. Reinsurance allows us
to obtain indemnification against a specified portion of losses associated with
insurance policies we have underwritten by entering into a reinsurance agreement
with other insurance enterprises or reinsurers. We pay or cede part of our
policyholder premium to reinsurers. The reinsurers in return agree to reimburse
us 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 us of liability to our insureds. We monitor the creditworthiness of
reinsurers on an ongoing basis. We also routinely evaluate for collectibility
amounts recoverable from reinsurers. No allowance for uncollectible reinsurance
recoverable has been determined to be necessary.
Investment portfolio. Our investment portfolio is composed principally of
fixed maturity securities classified as available-for-sale. All securities with
gross unrealized losses at the balance sheet date are evaluated for evidence of
other-than-temporary impairment on a quarterly basis. We write down to fair
value any security with an impairment that is deemed to be other-than-temporary
in the period the determination is made. The assessment of whether such
impairment has occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. The evaluation for
other-than-temporary impairments is a quantitative and qualitative process
involving judgments which is subject to risks and uncertainties. The risks and
uncertainties include changes in general economic conditions, the issuer's
financial condition and the effects of changes in interest rates.
Goodwill. Our goodwill asset, $7.3 million as of March 31, 2004, resulted
from the 1999 acquisition of three businesses which now operate as divisions of
NCRIC MSO, Inc., a subsidiary of Group. Our goodwill impairment testing under
SFAS 142 concludes that the goodwill asset was not impaired as of March 31,
2004. This impairment test utilizes a discounted cash flow analysis and
therefore is dependent upon the use of estimates and informed judgments as to
future performance of the underlying businesses as well as market conditions.
The result of the current analysis indicates the value of the
8
business is not significantly in excess of the threshold for indication of
impairment. If future circumstances require use of more negative assumptions
than used in the current analysis, the goodwill asset would be determined to be
impaired.
Overview
First quarter 2004 results were driven by a few key factors: earned
premium growth, moderation of claims frequency, realized investment gains and
litigation expenses. The positive business indicators of higher premiums and
claims moderation were largely offset by the litigation expenses. Book value per
share as of March 31, 2004 stood at $11.64 compared to $11.30 at December 31,
2003.
In April, the A. M. Best Company reaffirmed their rating of A- (excellent)
with a stable outlook for NCRIC, Inc.
As measured by premium, 44% of our policies have effective dates in the
first quarter of the year. In the first quarter, approximately 90% of policies
eligible for renewal did renew. As we have reported previously, in the first
quarter we began non-renewing policies in the West Virginia market at the end of
each policy term. We continue to see market pressures drive physicians to look
for less costly coverage alternatives, such as reducing their medical practice
specialty classification and alternative risk financing. As a result of
non-renewals initiated by NCRIC, both from the annual underwriting process
and from West Virginia, combined with attrition, the overall number of insurance
policies in force went down during the quarter. Nevertheless, earned premiums
grew due to the rate level increases and new business written in the past year.
Claims frequency, as measured by the number of claims reported, declined
in the first quarter of 2004 compared to the first quarter of 2003 and in
comparison to the 2003 full year quarterly average. While the severity of claims
continues to rise, lower frequency has a direct impact on financial results.
Expenses incurred in the first quarter related to the hospital premium
collection litigation total $873,000 consisting of trial-related legal fees of
$503,000 and post-trial costs of $370,000. The amount and timing of additional
post-trial costs will depend on the action of the court on our post-trial
motions. The full text of the post-trial motions is available on our web site at
www.ncric.com.
Three months ended March 31, 2004 compared to three months ended March 31, 2003
Consolidated net income
Net income was $522,000 for the three months ended March 31, 2004 compared
to $514,000 for the three months ended March 31, 2003. Total revenue for the
quarter of $19.6 million was up 33% compared to the same quarter in 2003. The
higher revenue was partially offset by increases in loss and loss adjustment
expenses and underwriting expenses, principally related to the growth in our
insurance business, in addition to expenses of $873,000 related to the CHW
litigation.
First quarter pre-tax income in our insurance segment increased to $1.3
million from $1.1 million for 2004 and 2003, respectively. In addition to the
increase in premiums stemming from 2004 new business and premium rate increases,
the significant increase in new business written during 2003 resulted in a rise
in net premiums earned during the first quarter of 2004 as compared to the first
quarter of 2003. 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 over the past year causes a strain on
current period earnings. Insurance segment earnings were also reduced in the
first quarter of 2004 by $503,000 for legal fees incurred for the trial portion
of the CHW litigation.
9
Net premiums earned
Net premiums earned increased by $4.7 million, or 41%, to $16.2 million
from $11.5 million for the three months ended March 31, 2004 and 2003,
respectively. The increase is primarily reflective of the increases in premium
rates which average 27%, plus an increase in premium for extended reporting
endorsements. Extended reporting endorsements premium is earned in the same
period it is written. Additionally, net premiums earned for the first quarter of
2004 decreased by $277,000 from the March 31, 2003 level due to favorable loss
development in the hospital-sponsored retrospectively rated programs in the
first quarter of 2004. Under these programs, additional premiums are either
earned or returned based on a group's adverse or favorable loss experience.
Gross premiums written of $34.3 million for the three months ended March
31, 2004 increased from $29.4 million for the three months ended March 31, 2003
due to the increase in premium rates and net new business written. The extended
reporting endorsement premium written for the first quarter of 2004 totaled $2.4
million compared to the first quarter 2003 total of $1.6 million. The increase
is primarily attributable to several groups of physicians that added this
endorsement to their expiring policies as we declined to renew their insurance
coverage at their renewal dates.
Following is a table displaying the new business produced in the first
quarter of 2004 and 2003.
Three Months Ended March 31,
----------------------------
2004 2003
-------- ----------
Direct $395,000 $ 166,000
Agent 637,000 1,259,000
The distribution of written premium continues to show notable growth in
our 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 2004 compared to the same period in 2003.
Three Months Ended March 31,
---------------------------------------------
(amounts in thousands)
2004 2003
--------------------- -----------------
District of Columbia $16,290 48% $15,965 54%
Virginia 7,820 23% 5,364 18%
Maryland 6,342 18% 4,583 16%
West Virginia 2,335 7% 2,692 9%
Delaware 1,466 4% 793 3%
------- ------- ------- ---
$34,253 100% $29,397 100%
======= ======= ======= ===
Premium collection litigation. During 2000, it was determined that one of
our hospital-sponsored retrospective programs would not be renewed. In
accordance with the terms of the contract, we billed the hospital sponsor,
Columbia Hospital for Women Medical Center, Inc. (CHW), based on the actual
accumulated loss experience of the terminated program. Because the original 2000
bill was not paid when due, we initiated legal proceedings to collect. As of
March 31, 2004 the amount due to NCRIC for this program was $3.0 million. No
amount of net receivable was accrued due to the pending litigation and
questionable collectability.
On February 13, 2004 a District of Columbia Superior Court jury ruled
against NCRIC's claim for premiums due and returned a verdict in favor of CHW in
counterclaims to the premium collection litigation initiated by NCRIC. The jury
awarded $18.2 million in damages to CHW.
NCRIC filed post-trial motions on March 5, 2004. CHW filed a reply to
NCRIC's motions on
10
March 26, 2004, and NCRIC filed renewed post-trial motions on April 5, 2004.
Since we believe the verdict against NCRIC was wrong and that we will ultimately
prevail, no liability has been accrued in the financial statements for any
possible loss arising from this litigation. Legal expenses incurred for this
litigation, for both the trial and post-trial motions, in the first quarter of
2004 total $761,000. The expenses associated with the $19.5 million appellate
bond and the collateral letter of credit were $112,000 in the first quarter of
2004.
Net investment income
Net investment income increased by $348,000 for the three months ended
March 31, 2004 compared to the first quarter of 2003 due to an increase in
average invested funds partially offset by a decrease in yields. The average
effective yield was approximately 3.55% for the three months ended March 31,
2004 and 3.91% for the three months ended March 31, 2003. The tax equivalent
yield was approximately 3.94% for the first quarter of 2004 and 4.43% for the
first quarter of 2003.
Net realized investment gains
Net realized investment gains of $333,000 in the first quarter of 2004
resulted from both fixed maturity and equity security trades made in the course
of routine portfolio management. The first quarter of 2003 included net realized
gains of $334,000 resulting from portfolio restructuring initiated by our new
fixed maturity investment portfolio manager, partially offset by the recognition
of an other than temporary impairment of $135,000 on an investment in common
stock. The circumstance giving rise to the other than temporary impairment
charge was a sharp decline in the value of the stock in 2003 which we do not
expect to be temporary based on available financial information of the issuer.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services for the following categories of services: practice management,
accounting, tax and personal financial planning, retirement plan accounting and
administration, and other services.
Practice management and related revenue of $1.2 million for the three
months ended March 31, 2004 compares to $1.4 million for the three months ended
March 31, 2003. The decrease is attributable to a continuing decline in the
utilization of our consulting and related financial services, partially offset
by an increase in revenue from retirement and other employee benefit plan
services.
Loss and loss adjustment expenses and combined ratio results
The expense for incurred losses and LAE net of reinsurance is summarized
as follows (in thousands):
Three Months Ended
March 31,
--------------------
2004 2003
------- -------
Incurred loss and LAE related to:
Current year - losses ................... $13,075 $ 9,733
Prior years - development ............... -- (150)
------- -------
Total incurred for the period ................. $13,075 $ 9,583
======= =======
11
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Three Months Ended
March 31,
-------------------
2004 2003
------ ------
Loss and LAE ratio ........... 81.0% 83.7%
Underwriting expense ratio ... 21.8% 21.6%
------ ------
Combined ratio ............... 102.8% 105.3%
Total incurred loss and LAE expense of $13.1 million for the first quarter
of 2004 increased by $3.5 million from the $9.6 million incurred for the first
quarter of 2003. The increase in current year losses to $13.1 million for the
first quarter of 2004 reflects the increase in the level of exposure as a result
of expanding business combined with a rise in the cost of resolving claims. The
frequency of claims reported in the first quarter of 2004 was lower than in the
first quarter of 2003, whereas, the severity of current losses incurred is
greater in recognition of the increased loss trends reported in the year-end
reserve valuation. Development of losses reported in prior years is neutral in
2004 reflecting favorable experience on claims closed during the quarter 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.
The combined ratio of 102.8% for the three months ended March 31, 2004
reflects the higher level of earned premiums in relation to the increase in loss
and loss adjustment expenses and the stable level of core underwriting expenses.
Underwriting expenses in the first quarter of 2004 include $503,000, or 3.1
points of the underwriting expense ratio, for legal fees associated with the
trial portion of the premium collection litigation. Additionally, the first
quarter of 2003 includes $364,000 stemming from a fraudulent act of a former
sales agent, as discussed in the following Expenses section. This expense item
added 3.2 points to the first quarter 2003 underwriting expense ratio.
Expenses
Underwriting expenses of $3.5 million for the three months ended March 31,
2004 increased from $2.5 million for the three months ended March 31, 2003,
primarily due to higher commissions and other expenses associated with the
increased level of business, particularly agent-produced business. Additionally,
in the first quarter of 2004 we incurred $503,000 in legal fees related to the
trial portion of the premium collection litigation. In the first quarter of 2003
we incurred an expense of $364,000 as a result of a fraudulent act of a former
sales agent. Although we believe it is reasonably possible that we could incur
additional expense as a result of the fraudulent act, the amount or timing of
the expense is not reasonably estimable at this time.
Practice management and related expenses totaled $1.2 million for the
three months ended March 31, 2004 and $1.4 million for the three months ended
March 31, 2003. Adjustments in staffing have been made to alleviate excess
capacity stemming from the decrease in utilization of services.
Interest expense is on the Trust Preferred Security debt. The rate is 400
basis points over the 3-month LIBOR.
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 $952,000 for the three months ended March 31, 2004 include $370,000
for post-trial costs associated with the CHW premium collection litigation.
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Federal income taxes
The effective tax rate for NCRIC, at 15% for the three months ended March
31, 2004 and 14% for 2003, is lower than the federal statutory rate principally
due to nontaxable investment income. The higher rate for 2004 compared to 2003
is principally a result of the increase in pre-tax income.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the three months ended March 31, 2004, we had cash flows from
operations of $15.5 million compared to $10.4 million for the corresponding
period of 2003. The $5.1 million of increased cash flow results primarily from
higher net premium receipts combined with an acceleration of the timing of
receipt of premium due to implementation of premium financing with a third party
premium finance company. This increased cash flow from premiums was partially
offset by higher 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 period to period.
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. Additionally, during the first quarter $6.5 million
was invested in high-yield bonds through a mutual fund vehicle. As of March 31,
2004, the carrying value of the securities portfolio was $193.3 million. The
portfolio was invested as follows:
At March 31, At December 31,
2004 2003
------------ ---------------
U. S. Government and agencies ............... 15% 17%
Asset and mortgage-backed securities ........ 28 31
Tax-exempt securities ....................... 23 21
Corporate bonds ............................. 24 24
High-yield bond fund ........................ 3 --
Equity securities ........................... 7 7
At March 31, 2004, over 76% of the portfolio was invested in U.S.
Government and agency securities or had a rating of AAA or AA. For regulatory
purposes, 88% of the securities portfolio was rated "Class 1", which is the
highest quality rated group as classified by the NAIC. The accumulated other
comprehensive income totaled $3.1 million at March 31, 2004, compared to $1.5
million at December 31, 2003. At March 31, 2004, the gross unrealized investment
gains totaled $5.3 million and the gross unrealized investment losses totaled
$582,000, with no concentration of unrealized loss in any security or industry.
As of March 31, 2004 NCRIC has committed $150,000 for the upgrade of its
policy database system and $200,000 for the acquisition of an imaging system.
During 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to
finance the contingent purchase payments from the 1999 acquisition of three
companies. The term of the loan is three years at a floating rate of LIBOR plus
one and one-half percent. At March 31, 2004, the outstanding balance was
$109,000 and the interest rate was 2.62%. Principal and interest payments are
due on a monthly basis. This debt is scheduled to be fully repaid in June, 2004.
Interest expense is reported as a component of practice management and related
expenses.
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In December, 2002, NCRIC Group issued trust preferred securities in the
amount of $15 million in a pooled transaction to unrelated investors. This debt
has a maturity of 30 years, and bears interest at an annual rate equal to
three-month LIBOR plus 4.0%, payable quarterly beginning March 4, 2003. Interest
is adjusted on a quarterly basis provided that prior to December 4, 2007, this
interest rate shall not exceed 12.50%. The debt is callable by NCRIC Group at
par beginning December 4, 2007. The interest rate as of March 31, 2004 was
5.12%. Interest expense is reported as a component of underwriting expenses.
Effects of inflation
The primary effect of inflation 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 our results cannot be conclusively
known until claims are ultimately settled. Based on actual results to date, we
believe that losses and LAE reserve levels and our ratemaking process adequately
incorporate the effects of inflation.
Forward-Looking Information
Certain statements made in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1033 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of those terms. These forward-looking statements are
subject to significant risks, assumptions and uncertainties, including, among
other things, the following important factors that could affect the actual
outcome of future events:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o inflation and changes in the interest rate environment and performance of
financial markets;
o adverse changes in the securities markets;
o changes in laws or government regulations affecting medical professional
liability insurance and practice management and financial services;
o NCRIC, Inc.'s concentration in a single line of business;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o changes to our ratings assigned by A.M. Best;
o the cost and availability of reinsurance;
o our ability to successfully integrate acquired entities;
o changes in accounting policies and practices, as may be adopted by our
regulatory agencies and the Financial Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and wish to
advise readers that the factors listed above could affect our financial
performance and could cause actual results for future period to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our 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
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resulting from broad movements in prices. At March 31, 2004, fixed maturity
securities comprise 90% of total investments at market value. U.S. Government
and tax-exempt bonds represent 42% of the fixed maturity securities. Equity
securities, consisting primarily of common stock, account for the remainder of
the investment portfolio. The investment in a mutual fund containing high-yield
securities is also classified with equity securities. We have classified our
investments as available for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure we have on our investment portfolio. In
general, the market value of our 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 our investment portfolio will generally
decline resulting in decreases in our stockholders' equity. Conversely, during
periods of falling interest rates, the fair value of our investment portfolio
will generally increase resulting in increases in our stockholders' equity. In
addition, our 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 continued at a low level during the first three months
of 2004. The decline in interest rate levels in the first quarter resulted in an
increase in the value of our fixed maturity portfolio. At March 31, 2004, our
portfolio was valued at $4.7 million above amortized cost. At December 31, 2003,
the value of the portfolio was $2.2 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, our investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
Our investment policy also provides that all security purchases be limited to
rated securities or unrated securities approved by management on the
recommendation of our investment advisor. Approximately 68% of the portfolio is
Treasury or Agency related or rated AAA, the highest rating for a security.
Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of March 31, 2004, that the 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 we file or submit 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 our internal control over financial reporting that
occurred during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 4 to the Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q for information on pending litigation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
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31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes- Oxley Act of 2002
(b) Filings on Form 8-K during the quarter ending March 31, 2004:
1) On February 18, 2004 the Company filed a Form 8-K pursuant to Item 5
which included a press release dated February 13, 2004 disclosing an
adverse jury verdict in premium collection litigation involving its wholly
owned subsidiary NCRIC, Inc. and a press release dated February 16, 2004
announcing a conference call to discuss fourth quarter earnings and year
end December 31, 2003 results and to provide a litigation update.
2) On March 3, 2004 the Company filed a Form 8-K pursuant to Item 5 which
included a press release dated February 27, 2004 announcing the addition
of Mr. Frank Ross to its Board of Directors and a press release pursuant
to Item 12 relating to earnings for the quarter and year end December 31,
2003.
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 12, 2004 /s/ R. Ray Pate, Jr.
--------------------
R. Ray Pate, Jr., President & Chief Executive Officer
(Duly Authorized Officer)
May 12, 2004 /s/ Rebecca B. Crunk
--------------------
Rebecca B. Crunk, Sr. Vice President & Chief Financial Officer
(Principal Financial Officer)
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