SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 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 Number)
1115 30th Street, N.W., Washington, D.C. 20007
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(Address of Principal Executive Offices)
202-969-1866
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(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
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 preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. NO |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
As of March 15, 2005, there were issued and outstanding 6,892,517 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the last trade
price of the Common Stock as of June 30, 2004 was $59.9 million.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of this Annual Report on Form
10-K:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2005 Annual
Meeting of Shareholders are incorporated by reference into certain items
of Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business ............................................................... 2
Item 2. Properties ............................................................. 28
Item 3. Legal Proceedings ...................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders .................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .. 29
Item 6. Selected Financial Data ................................................ 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 31
Item 7A. Quantitative and Qualitative Disclosures About Market Price ............ 54
Item 8. Financial Statements and Supplementing Data ............................ 56
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 93
Item 9A. Controls and Procedures ................................................ 93
Item 9B. Other Information ...................................................... 93
PART III
Item 10. Directors and Executive Officers of the Registrant ..................... 93
Item 11. Executive Compensation ................................................. 93
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................ 93
Item 13. Certain Relationships and Related Transactions ......................... 93
Item 14. Principal Accountant Fees and Services ................................. 93
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........ 93
PART I
Item 1. Business
General
NCRIC Group, Inc. is a holding company for a specialty property and
casualty insurance company focused on the medical professional liability
insurance market and a physician business management company. Our executive
offices are located at 1115 30th Street, NW, Washington, D.C. 20007 and our
telephone number is (202) 969-1866. Our stock trades on the National Association
of Securities Dealers (Nasdaq) Stock Exchange under the symbol "NCRI."
We maintain a website at www.ncric.com and provide, free of charge, online
access to all of the reports that we file with the Securities and Exchange
Commission, SEC, including our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to these reports.
These reports, as well as Forms 3, 4 and 5 detailing stock trading by corporate
insiders, are made available as soon as reasonably practical after such material
is electronically filed with or furnished to the SEC. We also provide access to
news releases, earnings conference calls, and quarterly and annual statutory
financial statements filed with the District of Columbia Department of
Insurance, Securities and Banking. All of the previously named documents can be
accessed within the Investor Relations section of our website and are available
for a minimum of one year after their filing or release.
Corporate Organization and History
National Capital Reciprocal Insurance Company, NCRIC, the predecessor
company of our primary insurance subsidiary, NCRIC, Inc., was founded in 1980 by
Washington, D.C. physicians, with the assistance of the Medical Society of the
District of Columbia. NCRIC was formed in response to a medical professional
liability insurance crisis in the District of Columbia. As a physician-governed
reciprocal insurance company, NCRIC began its operations with approximately 500
policyholders, offering a single insurance product. By the mid 1980s, NCRIC
insured more physicians in the District of Columbia than any other carrier, a
distinction we maintain today.
In the late 1990s, with the advent of managed care and the changing
climate affecting the practice of medicine, physicians began to look to us for
assistance in more areas than solely medical professional liability insurance.
In order to raise additional capital, effective December 31, 1998, the
reciprocal was reorganized as a stock insurance company, called NCRIC, Inc.,
with a mutual holding company parent, NCRIC, A Mutual Holding Company. In
addition, two intermediate holding companies were created, and the mutual
holding company became the parent of NCRIC Holdings, Inc., which in turn owned a
majority of the outstanding shares of NCRIC Group, Inc., an insurance holding
company incorporated in Delaware.
In July 1999, we completed an initial public offering and issued 2.2
million shares of NCRIC Group, Inc. common stock to NCRIC Holdings, Inc. and
sold 1.5 million shares to the public. The capital raised in this transaction
was used to purchase HealthCare Consulting, a company that assists physicians in
managing their practices more efficiently through integrated business and
financial management services.
On June 25, 2003, we completed a plan of conversion and reorganization in
which NCRIC Group, Inc. became a fully public company. In the conversion and
related stock offering, NCRIC, A Mutual Holding Company offered for sale its 60%
ownership in NCRIC Group, Inc., and as a result, NCRIC, A Mutual Holding Company
and NCRIC Holdings, Inc. ceased to exist. In the conversion and stock offering,
4.1 million shares of the common stock of NCRIC Group, Inc. were sold to
eligible members, employee benefit plans, directors, officers and employees and
to members of the general public in a subscription and community offering.
The additional capital raised in the 2003 conversion offering, which
totaled $41.4 million in gross proceeds, was used to pursue growth opportunities
in our core market territories in the mid-Atlantic region. Today, as a result of
this expansion, we are the leading medical professional liability insurance
carrier in
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both Delaware and the District of Columbia, and among the top writers in
Virginia and Maryland. We also have a limited market presence in West Virginia.
On February 28, 2005, we announced that the Board of Directors had
approved an agreement to merge NCRIC Group, Inc. into ProAssurance Corporation
in a stock-for-stock transaction that values NCRIC Group at $10.10 per share,
based on the closing price of ProAssurance common stock on Friday, February 25,
2005. Under the terms of the agreement each holder of common stock of NCRIC
Group will have the right to receive 0.25 of a share of ProAssurance common
stock for each share of NCRIC Group. This exchange ratio is subject to
adjustment in the event that the market price of the ProAssurance stock prior to
the closing of the transaction either exceeds $44.00 or is less than $36.00 such
that the exchange ratio would then be adjusted such that the value per NCRIC
Group share would neither exceed $11.00 nor be less than $9.00, respectively.
The transaction is subject to required regulatory approvals and a vote of NCRIC
Group stockholders and is expected to close early in the third quarter of 2005.
Business Overview
We own NCRIC, Inc., a medical professional liability insurance company,
through which we provide individual physicians, groups of physicians and other
healthcare providers with stable, high-quality medical professional liability
insurance. We also own ConsiCare, Inc., formerly known as NCRIC MSO, Inc. d/b/a
HealthCare Consulting and Employee Benefits Services, a business management
company, through which we provide a comprehensive range of integrated business
and financial services to help physicians, dentists and other non-healthcare
related entities operate successfully.
We offer medical professional liability insurance and integrated business
and financial services to physicians and other healthcare providers in Delaware,
the District of Columbia, Maryland, North Carolina, Virginia and West Virginia.
We provide our insurance product and business management services to
approximately 4,700 physicians throughout this market area as of December 31,
2004. The following table shows our insurance segment policy count and gross
premiums written over the last ten years.
Gross
Premiums
Policy Written (in
Count thousands)
------ -----------
1995 1,223 $19,506
1996 1,231 19,017
1997 1,250 17,869
1998 1,328 19,214
1999 1,532 21,353
2000 2,010 22,727
2001 2,953 34,459
2002 3,785 51,799
2003 4,229 71,365
2004 3,942 87,229
As reflected in the table above, we have experienced significant growth
since 1999, and not during the soft-market pricing environment of the
mid-to-late 1990s. We have maintained a disciplined approach towards
underwriting, product pricing and loss reserves, and we have remained focused on
selective expansion in our core markets as pricing conditions have improved.
Beginning in 2001, our market presence expanded significantly throughout
Delaware, Virginia and West Virginia as competing medical professional liability
insurers were forced to either restrict their premium writings or exit the
market completely due to financial difficulties. In 2004, our total policy count
declined due to several key factors, including the lower pricing strategies of
several competitors in the Virginia market, our decision to non-renew policies
in the West Virginia market and attrition in the physician population in the
District of Columbia market.
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According to the most recent available market share data from A.M. Best
Company, which considers premiums written for all forms of medical professional
liability coverage including physicians, hospitals and ancillary healthcare
providers, in 2003 we were the highest ranked company in terms of market share
in the District of Columbia and Delaware at 62.4% and 25.2%, respectively. The
following table shows a comparison of our market share by jurisdiction in 2003
and 2002 as reported by A.M. Best:
NCRIC Market Share
------------------
2003 2002
---- ----
District of Columbia 62.4% 56.5%
Delaware 25.2 7.7
Virginia 9.8 8.7
Maryland 4.3 3.3
West Virginia 10.5 7.5
Our medical professional liability insurance company maintains a strong
presence in its local markets. Five jurisdictions represented 100% of our gross
written premiums for the years ended December 31, 2004 and 2003, as displayed in
the following chart:
Year Ended December 31,
--------------------------------------------
2004 2003
------------------- -------------------
(dollars in thousands)
Amount % Amount %
------- ------- ------- -------
District of Columbia ... $25,650 30% $23,216 33%
Virginia ............... 29,612 34 22,640 32
Maryland ............... 11,451 13 8,819 12
West Virginia .......... 7,174 8 7,935 11
Delaware ............... 13,342 15 8,755 12
------- ------- ------- -------
Total ............. $87,229 100% $71,365 100%
======= ======= ======= =======
For the year ended December 31, 2004, our medical professional liability
insurance company produced a combined ratio of 124.8%, consisting of a current
year loss ratio of 80.0% and prior year development of 25.8%. The combined ratio
is a formula used to relate premium income to claims and underwriting expenses
and is calculated by dividing the sum of incurred losses and expenses by earned
premium. It indicates the profitability of an insurer's operations by combining
the loss ratio with expense ratio (including dividends if any). A combined ratio
below 100% generally indicates profitable underwriting prior to the
consideration of investment income.
For the year ended December 31, 2004, we generated $87.2 million of gross
premiums written, $66.5 million of net premiums earned and $79.4 million of
total revenues. At December 31, 2004, we had consolidated assets of $292.9
million, liabilities of $220.9 million, and stockholders' equity of $72.0
million. Our insurance subsidiary is rated "B++" (Very Good) by A.M. Best
Company.
As a result of significant premium rate increases, healthcare providers
are seeking alternative methods to secure medical professional liability
coverage. We established American Captive Corporation, ACC, under District of
Columbia Law in 2001 to form independent protected captive cells to accommodate
affinity groups seeking to manage their own risk through an alternative risk
transfer structure. Alternative risk transfer is broadly defined as the use of
alternative insurance mechanisms as a substitute for traditional risk-transfer
products offered by insurers. ACC is well-positioned to meet current
professional liability insurance market needs due to our ability to manage risk
and provide access to increasingly unavailable reinsurance markets. We believe
this venture is strategically placed to capitalize on the emerging opportunities
as demand for these specialized services increases. We are competing with
established national brokerage and specialty companies to provide both the risk
transfer vehicle and services to support
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and manage captives. We also compete on a regulatory level with other
jurisdictions and varying regulatory requirements in such domiciles as Hawaii,
Bermuda, the Caribbean and Europe. As of December 31, 2004, ACC had no active
cells.
We offer integrated business management and financial services to
physicians and other business entities in the District of Columbia, North
Carolina and Virginia. These services are heavily concentrated in North Carolina
and Virginia and are utilized by approximately 800 physicians and 250
non-healthcare related businesses. We compete most often with single source
providers of individual services who target small businesses. In our accounting,
tax, and financial services we also compete with local and regional certified
public accounting firms. In our retirement plan administration we compete with
large brokerage firms; with respect to our payroll services we compete with
national companies. In 2004, upon the completion of a branding analysis, the
decision was made to re-introduce this business to the market in early 2005
under the brand name of ConsiCare. We believe that this initiative will
differentiate the business management operations from its competitors and
contribute to the establishment of a consistent and distinguishable brand
identity. In addition, a strategic business plan has been developed with the
primary objective of creating growth through the establishment of partnerships
with other successful practice management entities and an increased focus on the
marketing and delivery of an integrated suite of services to new and existing
management services clients.
Management
Our executive management team is led by R. Ray Pate, Jr., president and
chief executive officer. Mr. Pate joined us in 1996 and has more than 20 years
of experience in the medical professional liability insurance business. Rebecca
B. Crunk, senior vice president and chief financial officer, began with us in
1998. Ms. Crunk is a certified public accountant with more than 27 years of
accounting experience in the insurance industry. William E. Burgess, senior vice
president, has been with us for 25 years and is responsible for our risk
management and claims processing functions. Eric R. Anderson is senior vice
president, corporate communications and investor relations. He joined us in 1993
and has 12 years of experience in the medical professional liability insurance
industry and 15 years of experience in the field of corporate communications.
Anne K. Missett is senior vice president, marketing and underwriting for our
primary insurance subsidiary, NCRIC, Inc. Ms. Missett began with us in 2001 and
has more than 20 years of experience in the healthcare industry.
Forward-Looking Statements
This document contains historical information as well as forward-looking
statements that are based upon our estimates and anticipation of future events
that are subject to certain risks and uncertainties that could cause actual
results to vary materially from the expected results described in the
forward-looking statements. The words "anticipate," "believe," "estimate,"
"expect," "hopeful," "intend," "may," "optimistic," "preliminary," "project,"
"should," "will," and similar expressions are intended to identify these
forward-looking statements. There are numerous important factors that could
cause our actual results to differ materially from those in the forward-looking
statements. Thus, sentences and phrases that we use to convey our view of future
events and trends are expressly designated as forward-looking statements as are
statements clearly identified as giving our outlook on future business. 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 regulatory and legislative actions or decisions that adversely
affect our business plans or operations;
o price competition;
o inflation and changes in the interest rate environment;
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o the performance of financial markets and/or changes in the
securities markets that adversely affect the fair value of our
investments or operations;
o changes in laws or government regulations affecting medical
professional liability insurance and practice management and
financial services;
o changes to our rating assigned by A.M. Best;
o the effect of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o changes in the availability, cost, quality, or collectibility of
reinsurance;
o significantly increased competition among insurance providers and
related pricing weaknesses in some markets;
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 periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements. We do not undertake and specifically decline
any obligation to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Competition
Medical professional liability insurance is a competitive industry. A
number of carriers that operate in our market territory have higher financial
ratings or have significantly larger financial resources than we do. In
addition, a number of factors, including, but not limited to, the quality of
service, brand recognition, size, financial stability, coverage features and
product pricing, impact our ability to compete successfully in our market area.
We believe that we compare favorably to our competitors based on our depth of
knowledge and history in the markets in which we operate, superior claims
handling ability, physician leadership, excellent customer service reputation,
medical community relationships, established product distribution network,
longevity and name recognition, particularly in the District of Columbia and
Virginia markets.
Our current competition is primarily composed of a number of mono-line
specialty writers that focus on confined, contiguous geographic areas and one
physician-directed national specialty writer. These competitors may have
existing relationships with insurance agents or other distribution channels,
which we may be unable to supplant.
We have seen, however, some indications that a shift in the market may be
underway. Prior to the withdrawal of The St. Paul Companies in 2001, multi-line
commercial writers comprised approximately 35% of the national medical
professional liability insurance market. Subsequent to St. Paul's exit, other
multi-line commercial carriers such as Farmers Insurance Group and Fireman's
Fund also withdrew from the market. With the departure of these significant
commercial carriers, it has not been clear which segment of the market would
fill this void. Based on recent data from the National Underwriters Insurance
Data Services, it appears that GE Insurance Solutions and American International
Group have filled this capacity gap, as each grew their premium writings to more
than $800 million in 2003, up from $200 million and $400 million, respectively,
in 2001. While both of these companies have a presence in our market
territories, at the present time only GE Insurance Solutions presents a
competitive challenge as American International Group focuses primarily on
hospital liability coverage.
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We also believe that several carriers are employing low pricing strategies
in one of our primary markets, Virginia. We experienced a 7.7% reduction in the
number of policies written in Virginia in 2004, and we believe that this
attrition is due to the fact that our product is priced at the high end of the
market.
The following is a brief competitive analysis of the jurisdictions in
which we operate. The A.M. Best market share data considers premiums written for
all forms of medical professional liability coverage including physicians,
hospitals and ancillary healthcare providers.
District of Columbia. We are the leading carrier writing medical
professional liability insurance policies in Washington, D.C. According to A.M.
Best 2003 data, the most recent available, we have 62.4% of the District of
Columbia medical professional liability market share. Professionals Advocate, a
member of The Medical Mutual Group of Maryland, holds an 11.8% market share in
the District of Columbia. The Doctors Company Insurance Group and American
International Group hold market shares of 6.1% and 5.3%, respectively. We
anticipate that growth in the District of Columbia physician population will be
constrained in the near term due to environmental factors. However, recent
medical liability legislation enacted in the state of Maryland may result in
capacity constraints for Professionals Advocate and thus provide us with an
opportunity to increase our District of Columbia market share.
Delaware. Our market share in Delaware increased significantly in 2003 as
a result of the withdrawal from the physician professional liability market by
Fireman's Fund, PHICO, CNA Insurance Companies, and Princeton Insurance Company.
As reported in 2003 data from A.M. Best, we are the state's largest writer, with
25.2% of the market share. CNA is the second leading carrier, with a market
share of 24.2%, however the majority of this business is related to hospital
liability coverage. Other companies licensed in the state include American
International Group, GE Insurance Solutions, and SCPIE Holdings, Inc. which hold
market shares of 10.7%, 7.7% and 7.1%, respectively.
Maryland. While we have been issuing coverage in Maryland since 1980, a
number of these policies have been written to accommodate District of Columbia
policyholders who have elected to relocate their practices to Maryland.
Currently, we hold a 4.3% share of the market. Our primary competitor in the
state is The Medical Mutual Group of Maryland, a physician-governed carrier that
has 41.8% of the market share. Other carriers in the state include American
International Group with an 11.3% market share, GE Insurance Solutions with a
9.0% market share and the Doctors' Company Insurance Group with a 7.3% market
share. We are currently re-evaluating growth plans in Maryland due to the
medical liability reform legislation passed by the Maryland General Assembly in
January 2005.
Virginia. Over the last three years, the Virginia market has offered
considerable expansion opportunities with the departures of The St. Paul
Companies, Princeton Insurance Company, CNA Insurance Companies and MIIX Group,
Inc. in 2002 and the January 2003 exit of the Doctors Insurance Reciprocal. We
experienced significant growth in this market during 2002 and 2003. However,
more recently, due to the low pricing strategies of several carriers in the
market, we have limited our new premium writings in this state. Market share in
Virginia is fragmented among a number of companies. According to A.M. Best 2003
data, we have a 9.8% share of the market. Our primary competitors in the
Virginia marketplace include GE Insurance Solutions with an 11.7% share,
Doctors' Company Insurance Group with an 11.6% share, The Medical Mutual Group
of Maryland with an 11.2% share, American International Group with a 9.4% share,
and Medical Mutual of North Carolina with a 9.1% share. Also competing in
Virginia are State Volunteer Mutual Insurance Company, MAG Mutual Insurance
Company, and ProAssurance Group. Medical liability legislation enacted in the
state of Maryland may result in capacity constraints for The Medical Mutual
Group of Maryland and thus provide an opportunity for growth in the Virginia
market.
West Virginia. In January 2004, we informed the West Virginia Commissioner
of Insurance of our intention to non-renew West Virginia policyholders and began
this process with policies expiring in March 2004. This decision was based on
our inability to achieve an adequate rate level for our West Virginia exposure.
In the third quarter of 2004, we re-filed for a rate increase in the state. This
filing was subsequently approved by the West Virginia Department of Insurance
and we began renewing select West Virginia policies effective September 1, 2004.
We have experienced a reduction in our West Virginia
7
business as a result of the non-renewals and the price differential between our
product and the West Virginia Physicians Mutual Insurance Company, the leading
writer in the state. We do not anticipate a significant change in market
position in 2005.
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Insurance Activities
General. We provide medical professional liability insurance for
independent physicians who practice individually or in small groups. Our
insurance protects policyholders against losses arising from professional
liability claims as a result of patient injuries that occur from any act,
omission, or series of related acts or omissions that take place in the
furnishing of professional medical services. The most common policy limit or
amount of coverage that we sell is $1 million of coverage for any one incident
with a $3 million annual aggregate limit for incidents reported within the
policy year. Our policies are written on a claims-made basis and include
coverage for the entire defense cost of the claim. These policies provide
coverage for claims arising from incidents that both occur and are reported to
us while the policy is in force. A claims-made policy is in force from the
starting date of the initial policy period and continues in force from that date
through each subsequent renewal. Policyholders can purchase up to $4 million
dollars of excess coverage that provides coverage for losses up to $5 million
with an annual aggregate limit of $7 million. Optional coverage is available for
the professional corporations under which physicians practice.
Underwriting. Our underwriting department is responsible for the
evaluation of applicants for medical professional liability coverage, the
issuance of policies and the establishment and implementation of underwriting
standards. In addition, this department provides information to the D.C.
Underwriting Committee and Virginia and Delaware Physician Advisory Boards.
These boards are comprised of physicians who represent a cross-discipline of
medical specialties and provide valued input on local standards of care as they
relate to understanding medical risk and underwriting in each area. We believe
this combination of medical and insurance industry professionals provides a
competitive advantage in underwriting services when compared to our competitors.
We adhere to consistent and strict underwriting procedures with respect to
the issuance of all physician medical professional liability policies. Each
applicant or member of an applicant medical group is required to complete and
sign a detailed application that provides a personal and professional history,
the type and nature of the applicant's professional practice, information
relating to specific practice procedures, hospital and professional
affiliations, and a complete history of any prior claims and incidents.
We also perform a continuous process of underwriting policyholders at
renewal. Information concerning physicians with large losses, a high frequency
of claims, or changing or unusual practice characteristics is developed through
renewal applications, claims history and risk management reports.
Claims. Our claims department is responsible for claims investigation,
establishment of appropriate case reserves for losses and LAE, defense planning
and coordination, monitoring of attorneys engaged to defend policyholders
against claims, and negotiation of the settlement or other disposition of
claims.
We emphasize early evaluation and aggressive management of claims. When a
claim is reported, our claims professionals complete a preliminary evaluation
and set an initial reserve. After a full evaluation of the claim has been
completed, which generally occurs within seven months, the initial reserve may
be adjusted.
As of December 31, 2004, we had approximately 653 open cases with an
average of 73 cases being handled by each claims representative. Our claims
department consists of 12 claims professionals and includes experienced claims
adjusters, certified paralegals and individuals who have earned juris doctor
degrees. The current professional claims staff has an average of 11 years of
experience handling medical professional liability and related insurance cases.
We limit the number of claims handled by each representative to fewer than 90
cases. We believe this number is lower than other companies in the medical
professional liability insurance industry.
Our objective is to maintain a local presence in the jurisdictions where
we write coverage. We have obtained an understanding of the medical and legal
climates where we write policies through on-site visits, interviews and ongoing
communication with local law firms and discussions with policyholders. We
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retain locally-based attorneys to represent our policyholders. These litigators
specialize in medical professional liability defense and understand and share
our claims philosophy. We also retain the services of medical experts who are
leaders in their specialties and who bring credibility and expertise to the
litigation process.
Our D.C. claims committee is composed of nine physicians from various
specialties and meets monthly to provide evaluation and guidance on claims. The
multi-specialty approach of these physicians adds a unique perspective to the
claims handling process as it provides an opportunity to obtain the opinions of
several different specialists meeting to share their knowledge in the area of
liability evaluation and general peer review.
Our objective of local physician claims guidance is carried out in
Delaware and Virginia through our physician advisory boards. These boards meet
to review medical incidents, assess claims and practice characteristics of
current and prospective policyholders, and bring to our attention all matters of
special interest to healthcare providers in their states.
Risk management. The goal of our risk management staff is to assist our
policyholders in identifying potential areas of exposure to loss and to develop
strategies to reduce or eliminate such risk. Our risk management committee, a
group of eight physicians comprising various specialties, lends their individual
expertise in the development of risk management services tailored to the needs
of the individual policyholders to aid in this endeavor.
Our risk management staff presents educational seminars throughout the
year in locations convenient to our policyholders. Programs designed to address
the needs and interests of physicians are held throughout the District of
Columbia, Delaware, Maryland and Virginia, and cover a wide variety of topics.
Our staff is also available to present customized programs, as requested, to
individual physician groups or office staff.
Physicians unable to attend a live seminar are given the opportunity to
access our risk management services in other ways. Currently, four home study
courses are available and accessible online. Those physicians wanting a more
involved approach to dealing with their risk management concerns may participate
in an office assessment conducted by one of our risk management staff members.
CME accreditation through the Medical Society of the District of Columbia,
MSDC, allows us to award Category 1 CME credit to those physicians who attend a
live seminar, successfully complete a home study course, or undergo an office
assessment. Participation in one of these activities also entitles policyholders
to a 5% policy premium credit.
Marketing. Within the District of Columbia, we market directly to
individual physicians and other prospective policyholders through our sponsored
relationship with the MSDC, referrals by existing policyholders, advertisements
in medical journals, and direct solicitation to licensed physicians. We attract
new physicians by targeting medical residents and physicians just entering
medical practice. In addition, we participate as a sponsor and participant in
various medical group and hospital administrators' programs, medical association
and specialty society conventions and similar events. We believe that our
comprehensive approach, market knowledge and insurance expertise all play key
roles in the successful direct marketing of our medical professional liability
insurance in this jurisdiction.
Our primary marketing channel in Delaware, Maryland, Virginia and West
Virginia is our independent agent network. In 2004, our agent network totaled 30
agencies. These agents produced 63% of renewing premiums in 2004. Physicians
frequently utilize agents when they purchase professional liability insurance.
Therefore, we believe that developing our agent relationships in these states is
important to maintain our market share. We select agents who have demonstrated
experience and stability in the medical professional liability insurance
industry. Agents receive market rate commissions and other incentives averaging
9% based on the business they produce and maintain. We strive to foster
relationships with those agents who are committed to promoting our products and
are successful in producing business for us. In 2002, we created the President's
Gold Circle to recognize agencies that contribute growth in
10
excess of $1 million in premium and to foster enhanced communications with these
top producers. Currently, four of our agents are members of this group.
Account information is communicated to all policyholders and agents
through our marketing and underwriting departments. We strive to maintain a
close relationship with the medical groups and individual practitioners insured
by us as well as the agents who make up our agent network. To best serve clients
and agents, we deploy client service representatives who can answer most
inquiries and, in other instances, provide immediate access to an appropriate
individual who has the expertise to provide a response. For large and mid-size
medical groups, we have an account manager assigned to each group who leads a
team comprised of underwriting, risk management and claims management
representatives, each of whom may be contacted directly by the policyholder.
Over the years, we believe this approach has resulted in our high customer
retention and satisfaction rate.
Risk Sharing Arrangements. As of December 31, 2004, we have ended all
agreements for risk sharing programs for physicians at hospitals in the
Washington, D.C. metropolitan area. The type of risk sharing arrangement we
previously offered involved the initial funding of a portion of a premium being
held to pay losses. In these arrangements, we received full gross premium, less
applicable credits otherwise granted. After quota share losses were determined,
if loss development was favorable, any premium in excess of the losses was
returned.
Rates. We establish rates and rating classifications for physician and
medical group policyholders in the District of Columbia based on the losses and
LAE experience we have developed over the past 25 years. For our other market
areas, we rely on losses and LAE experience data from the medical professional
liability industry. We have various rating classifications based on practice
location, medical specialty and other factors. We utilize premium credits,
including credits for part-time practice, physicians just entering medical
practice, cost-free physicians and risk management participation. Generally,
total credits granted to a policyholder do not exceed 25% of the base premium.
In addition, surcharges generally do not exceed 25% of the base premium.
Effective rates equal our base rate, less any discounts, plus any surcharges to
the policyholder.
Our rates are established based on previous loss experience, loss
adjustment expenses, anticipated policyholder discounts or surcharges, and fixed
and variable operating expenses. In recognition of the increase in the severity
of losses and the need to provide a return to our shareholders, the weighted
average rate increase for our base premiums was 20% effective January 1, 2005,
27% effective January 1, 2004 and 28.0% effective January 1, 2003.
Reserves for Losses and LAE. The determination of losses and LAE reserves
involves projection of ultimate losses through an actuarial analysis of our
claims history and other medical professional liability insurers, subject to
adjustments deemed appropriate by us due to changing circumstances. Included in
our claims history are losses and LAE paid by us in prior periods, and case
reserves for losses and LAE developed by our claims department as claims are
reported and investigated. Actuaries rely primarily on historical loss
experience in determining reserve levels on the assumption that historical loss
experience provides a good indication of future loss experience despite the
uncertainties in loss trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss reserves might be revised. Any increase or decrease in the amount of
reserves, including reserves for insured events of prior years, would have a
corresponding adverse or beneficial effect on our results of operations for the
period in which the adjustments are made.
Our estimates of the ultimate cost of settling the claims are based on
numerous factors including, but not limited to:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and severity;
o predictions of future inflation rates;
11
o judicial theories of liability;
o judicial interpretations of insurance contracts; and
o legislative activity.
The inherent uncertainty of establishing reserves is greater for medical
professional liability insurance because lengthy periods may elapse before
notice of a claim or a determination of liability. Medical professional
liability insurance policies are long tail policies, which means that claims and
expenses may be paid over a period of ten or more years. This is longer than
most property and casualty claims. As a result of these long payment periods,
trends in medical professional liability policies may be slow to emerge, and we
may not promptly modify our underwriting practices and change our premium rates
to reflect underlying loss trends. Finally, changes in the practice of medicine
and healthcare delivery, like the emergence of new, larger medical groups that
do not have an established claims history, and additional claims resulting from
restrictions on treatment by managed care organizations, may not be fully
reflected in our underwriting and reserving practices.
Our independent actuary reviews our reserves for losses and LAE
periodically and prepares semi-annual reports that include a recommended level
of reserves. We consider this recommendation as well as other factors, like loss
retention levels and anticipated or estimated changes in frequency and severity
of claims, in establishing the amount of our reserves for losses and LAE. We
continually refine reserve estimates as experience develops and claims are
settled. Medical professional liability insurance is a line of business for
which the initial losses and LAE estimates may change significantly as a result
of events occurring long after the reporting of the claim. For example, losses
and LAE estimates may prove to be inadequate because of sudden severe inflation
or adverse judicial or legislative decisions.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands)
Balance, beginning of year .................. $ 125,991 $ 104,022 $ 84,560
Less reinsurance recoverable on unpaid
claims ................................... (44,673) (42,412) (29,624)
--------- --------- ---------
Net balance ................................. 81,318 61,610 54,936
--------- --------- ---------
Incurred related to:
Current year ............................. 53,158 44,588 24,063
Prior years .............................. 17,152 5,885 2,766
--------- --------- ---------
Total incurred ......................... 70,310 50,473 26,829
--------- --------- ---------
Paid related to:
Current year ............................. 3,457 4,383 1,491
Prior years .............................. 34,520 26,382 18,664
--------- --------- ---------
Total paid ............................. 37,977 30,765 20,155
--------- --------- ---------
Net balance ................................. 113,651 81,318 61,610
Plus reinsurance recoverable on unpaid
claims ................................... 39,591 44,673 42,412
--------- --------- ---------
Balance, end of year ........................ $ 153,242 $ 125,991 $ 104,022
========= ========= =========
The amounts shown above and the reserve for unpaid losses and LAE on the
chart located on the next page are presented in conformity with accounting
principles generally accepted in the United States of America, GAAP.
The following table reflects the development of reserves for unpaid losses
and LAE for the years indicated, at the end of that year and each subsequent
year. The first line shows the reserves, as originally reported at the end of
the stated year. Each calendar year-end reserve includes the estimated unpaid
liabilities for that coverage year and for all prior coverage years. The section
under the caption "Cumulative Liability Paid Through End of Year" shows the
cumulative amounts paid through each
12
subsequent year on those claims for which reserves were carried as of each
specific year-end. The section under the caption "Re-estimated Liability" shows
the original recorded reserve as adjusted as of the end of each subsequent year
to reflect the cumulative amounts paid and any other facts and circumstances
discovered during each year. The line "Redundancy (deficiency)" sets forth the
difference between the latest re-estimated liability and the liability as
originally established.
The table reflects the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1996 to be $100,000 was first reserved in
1993 at $150,000, the $50,000 favorable loss development, being the original
estimate minus the actual loss, would be included in the cumulative redundancy
in each of the years 1993 through 1996 shown below. This table presents
development data by calendar year and does not relate the data to the year in
which the claim was reported or the incident actually occurred. Conditions and
trends that have affected the development of these reserves in the past will not
necessarily recur in the future.
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Reserve for Unpaid
Losses and LAE ......... $ 77,647 $ 68,928 $ 68,101 $ 72,031 $ 84,595 $ 84,282 $ 81,134 $ 84,560 $104,022 $125,991
Cumulative Liability
Paid Through End of
Year:
One year later ...... 21,667 16,084 14,916 9,667 13,865 20,813 20,828 21,995 31,872 45,255
Two years later ..... 34,829 27,634 22,237 21,810 32,778 38,078 34,253 45,764 61,973
Three years later ... 43,237 32,409 29,135 36,310 42,381 44,696 47,273 64,389
Four years later .... 45,219 34,657 39,938 42,553 44,352 50,634 51,927
Five years later .... 45,682 41,578 44,297 43,581 48,120 53,756
Six years later ..... 51,450 43,753 44,724 46,324 48,893
Seven years later ... 52,551 43,962 46,385 47,015
Eight years later ... 52,737 44,058 46,438
Nine years later .... 52,824 44,095
Ten years later ..... 52,861
Re-estimated Liability:
One year later ...... 68,891 62,028 61,121 71,419 72,575 77,373 73,582 86,534 107,980 138,338
Two years later ..... 66,439 53,429 62,097 64,980 66,733 71,489 73,654 87,074 108,836
Three years later ... 60,858 55,883 58,169 61,336 60,752 68,439 68,528 87,553
Four years later .... 62,625 53,400 54,324 54,996 59,069 63,028 66,024
Five years later .... 61,077 50,744 50,977 53,952 55,191 60,842
Six years later ..... 58,220 47,946 50,666 51,136 53,909
Seven years later ... 55,739 47,099 47,994 50,633
Eight years later ... 55,156 45,329 47,689
Nine years later .... 53,927 45,113
Ten years later ..... 53,795
Redundancy
(deficiency) ........... $ 23,852 $ 23,815 $ 20,412 $ 21,398 $ 30,686 $ 23,440 $ 15,110 $ (2,993) $ (4,814) $(12,347)
General office premises liability incurred losses have been less than 1%
of medical professional liability incurred losses in the last five years. We do
not have reserves for pollution claims as our policies exclude liability for
pollution. We have never been presented with a pollution claim brought against
us or our insureds.
Reinsurance. We follow customary industry practice by reinsuring a portion
of our risks and paying a reinsurance premium based upon the premiums received
on all policies subject to reinsurance. By reducing our potential liability on
individual risks, reinsurance protects us against large losses. We have full
underwriting authority for medical professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The 2003 and 2004
13
reinsurance program cedes to the reinsurers up to the maximum reinsurance policy
limit those risks insured by us in excess of our $1 million retention.
Although reinsurance does not discharge us from our primary liability for
the full amount of our insurance policies, it contractually obligates the
reinsurer to pay successful claims against us to the extent of risk ceded. Our
current reinsurance program is designed to provide coverage through separate
reinsurance treaties for two layers of risk.
Losses in excess of $1,000,000 per claim up to $2,000,000. Effective
January 1, 2003 to January 1, 2006, the treaty, which reinsures us for losses in
excess of $1,000,000 per claim up to $2,000,000, is a fixed rate treaty. The
reinsurance premium is agreed upon as a fixed percentage of gross net earned
premium income. Gross net earned premium income is our gross premium earned net
of discounts for coverage limits up to $2,000,000.
Effective January 1, 2000 to January 1, 2003 our primary treaty reinsures
losses in excess of $500,000 per claim up to $1,000,000 and is a fixed rate
treaty. Our first excess cession treaty covers losses up to $1,000,000 in excess
of $1,000,000 per claim. For risks related to claims submitted January 1, 2000
to January 1, 2003, under this first excess cession treaty, we cede 100% of our
risks and premium.
For claims submitted for 1999 and prior years, we have a swing-rated
treaty which reinsures us for losses in excess of $500,000 per claim up to
$1,000,000, subject to an inner aggregate deductible of 5% of gross net earned
premium income. The ultimate reinsurance premium is subject to incurred losses
and ranges between a minimum premium of 4% of gross net earned premium income
and a maximum premium of 22.5% of gross net earned premium income. The inner
aggregate deductible means that we must pay losses within the reinsurance layer
until the inner aggregate deductible is satisfied. We paid a deposit premium
equal to 14% of gross net earned premium income that is ultimately increased or
decreased based on actual losses, subject to the minimum and maximum premium.
Following are the reinsurance premium terms for the swing-rated treaty for
calendar years 1999, 1998, 1997 and 1996.
Percentage of Gross Net Earned
Premium Income
-----------------------------------
1999 1998 1997 1996
----- ----- ----- -----
Deposit premium .............. 14.0% 14.0% 14.0% 14.0%
Maximum premium .............. 22.5 22.5 22.5 30.0
Minimum premium .............. 4.0 4.0 4.0 4.0
Inner aggregate deductible ... 5.0 5.0 5.0 10.0
We have recorded, based on actuarial analysis, management's best estimate
of premium expense under the terms of the swing-rated treaty. In the initial
year of development for each coverage year, the premium was capped at the
maximum rate. We then adjust the liability and expense as losses develop in
subsequent years.
For claims related to 1999 and prior years, we cede 91% of our risks and
premium to the $1,000,000 excess layer treaty program and retain 9% of the risks
and premium. We receive a ceding commission from the reinsurers to cover the
costs associated with issuing this coverage.
Losses up to $9,000,000 in excess of $2,000,000 per claim. An excess
cession layer treaty covers losses up to $9,000,000 in excess of $2,000,000 per
claim. We cede 100% of our risks to the $2,000,000 excess layer treaty program
and retain none of the risks. The premium for the $2,000,000 excess layer treaty
is 100% of the premium collected from insureds for this coverage. We receive a
ceding commission from the reinsurers to cover the costs associated with issuing
this coverage.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the excess layer, are deducted from other underwriting expenses. Ceding
commissions were $457,000, $833,000 and $1.1 million in 2004, 2003 and 2002,
respectively.
14
Additionally, our reinsurance program protects us from paying multiple
retentions for claims arising out of one event. In most situations we will only
pay one retention regardless of the number of original policies or claimants
involved. We also have protection against losses in excess of our existing
reinsurance. We may provide higher policy limits reinsured through facultative
reinsurance programs. Facultative reinsurance programs are reinsurance programs
which are specifically designed for a particular risk not covered by our
existing reinsurance arrangements.
We determine the amount and scope of reinsurance coverage to purchase each
year based upon evaluation of the risks accepted, consultations with reinsurance
consultants and a review of market conditions, including the availability and
pricing of reinsurance. Our primary reinsurance treaty is placed with
non-affiliated reinsurers for a three-year term with annual renegotiations. Our
current three-year treaty expires January 1, 2006.
The reinsurance program is placed with a number of individual reinsurance
companies and Lloyds' syndicates to mitigate the concentrations of reinsurance
credit risk. Most of the reinsurers are European companies or Lloyds'
syndicates; there is a small percentage placed with domestic reinsurers. As of
December 31, 2004, the amounts recoverable from reinsurers attributable to
Lloyds of London represents a total of 48 syndicates. We rely on our
wholly-owned brokerage firm, National Capital Insurance Brokerage, Ltd., Willis
Re, Inc., and a London-based intermediary to assist in the analysis of the
credit quality of reinsurers. We also require reinsurers that are not authorized
to do business in the District of Columbia to post a letter of credit to secure
reinsurance recoverable on paid losses.
15
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 2004 by reinsurer:
Reinsurance A.M. Best
Reinsurer Recoverable Rating
--------- ----------- ---------
(in thousands)
Lloyd's of London syndicates ................. $22,637 A
Hanover Rueckversicherungs - AG .............. 6,149 A
AXA Reassurance .............................. 4,754 A-
Transatlantic Reinsurance Company ............ 1,835 A+
Aspen Reinsurance Limited .................... 1,569 A
CX Reinsurance LTD ........................... 1,464 NR5
Alea London Limited .......................... 1,304 A-
Unionamerica Insurance ....................... 972 NR3
Terra Nova Insurance Company LTD ............. 691 A-
Other reinsurers ............................. 3,471 A/A-
Total ................................... $44,846
=======
The two reinsurers that are not rated by A.M. Best, CX Reinsurance LTD and
Unionamerica Insurance, have made all requested payments on a timely basis.
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2004, 2003 and 2002 is as follows:
Year Ended December 31,
------------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(in thousands)
Direct ........................... $ 87,229 $ 80,992 $ 71,365 $ 61,023 $ 51,799 $ 44,113
Ceded ............................ (14,693) (14,530) (12,088) (13,759) (18,003) (14,023)
-------- -------- -------- -------- -------- --------
Net .............................. $ 72,536 $ 66,462 $ 59,277 $ 47,264 $ 33,796 $ 30,090
======== ======== ======== ======== ======== ========
In late 1999, we introduced PracticeGard Plus, which provides errors and
omissions coverage on Medicare/Medicaid billing to healthcare providers. This
coverage provides up to $1 million in indemnity and expense protection and only
pays indemnity on civil fines and penalties. We reinsure 100% of this risk and
receive a ceding commission. We intend to evaluate our level of risk acceptance
based on how losses develop in the future. Since this coverage protects a new
risk based on recently passed national legislation, current loss development is
uncertain.
Investment Portfolio. Investment income is an important component in
support of our operating results. We utilize external investment managers who
adhere to policies established and supervised by our investment committee. Our
current investment policy has placed primary emphasis on investment grade,
fixed-income securities and seeks to maximize after-tax yields while minimizing
portfolio credit risk. Toward achieving this goal, our investment guidelines,
which set the parameters for our investment policy, permit investments in
high-yield bonds, tax-advantaged securities such as municipal bonds and
preferred stock, and common stock. During 2003, an allocation to common stock
was implemented as a measure to provide a level of protection against the rising
interest rate environment. An allocation of the portfolio to high-yield
securities was funded in January 2004. Our investment guidelines document is
reviewed and updated as needed, at least annually.
Deutsche Asset Management (DeAM), previously Zurich Scudder Insurance
Asset Management, was the external investment manager for our fixed-income
securities including tax advantaged preferred stocks for the year ended December
31, 2002. Effective January 1, 2003, Standish Mellon Asset
16
Management became the external investment manager for our fixed-income
portfolio. We utilize three different managers, each with a different investment
objective, for our equity securities portfolio. The high-yield bond allocation
is invested through a mutual fund instrument in order to achieve adequate
diversity of underlying credits.
Each year we, along with our investment manager, have conducted extensive
financial analyses of the investment portfolio using stochastic models to
develop a risk-appropriate investment portfolio given the business environment
and risks relevant to us. Standish Mellon supplemented stochastic modeling with
the output from their independent investment research and strategy group to
develop a tailored investment approach for us. Analysis of our capital structure
and risk-bearing ability, valuation, peer comparisons, as well as proprietary
and third-party modeling, determine the optimal level of tax-advantaged
investments and provide strategy input.
Standish Mellon used Dynamic Financial Analysis (DFA), a total company
tool, to test our capital structure and business plan under numerous potential
future economic scenarios. The results of DFA, in the form of probability
distributions on key financial statistics, allow us to make risk-informed
decisions on the structure of our investment portfolio as it relates to our
business profile. DFA output has been especially useful in setting portfolio
policy regarding average duration and optimizing potential equity exposure.
We have classified our investments as available for sale and report them
at fair value, with unrealized gains and losses excluded from net income and
reported, net of deferred taxes, as a component of stockholders' equity. During
periods of rising interest rates, as experienced during mid-year 2004, the fair
value of our fixed-income investment portfolio will generally decline resulting
in decreases in our stockholders' equity. Conversely, during periods of falling
interest rates, as experienced during 2002, the fair value of our investment
portfolio will generally increase resulting in increases in our stockholders'
equity.
17
The following table sets forth the fair value and the cost or amortized
cost of our investment portfolio at the dates indicated.
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(in thousands)
At December 31, 2004
U.S. Government and agencies ........... $ 37,355 $ 211 $ (253) $ 37,313
Corporate .............................. 48,184 603 (407) 48,380
Tax-exempt obligations ................. 42,571 1,124 (166) 43,529
Asset and mortgage-backed securities ... 50,322 89 (634) 49,777
--------- --------- --------- ---------
178,432 2,027 (1,460) 178,999
--------- --------- --------- ---------
Equity securities ...................... 20,679 2,660 (31) 23,308
--------- --------- --------- ---------
Total ............................... $ 199,111 $ 4,687 $ (1,491) $ 202,307
========= ========= ========= =========
At December 31, 2003
U.S. Government and agencies ........... $ 29,328 $ 75 $ (118) $ 29,285
Corporate .............................. 41,773 247 (720) 41,300
Tax-exempt obligations ................. 35,329 1,907 (78) 37,158
Asset and mortgage-backed securities ... 55,446 186 (631) 55,001
--------- --------- --------- ---------
161,876 2,415 (1,547) 162,744
--------- --------- --------- ---------
Equity securities ...................... 10,269 1,373 (29) 11,613
--------- --------- --------- ---------
Total ............................... $ 172,145 $ 3,788 $ (1,576) $ 174,357
========= ========= ========= =========
Our investment portfolio of fixed-maturity securities consists primarily
of intermediate-term, investment-grade securities. Our investment policy
provides that all security purchases be limited to rated securities or unrated
securities approved by management on the recommendation of our investment
advisor. At December 31, 2004, we held 116 asset and mortgage-related
securities, most of which had a quality of Agency/AAA. Collectively, our
mortgage-related securities had an average yield to maturity of approximately
4.4%. Approximately 83% of the mortgage-related securities are pass-through
securities. We do not have any interest only or principal only pass-through
securities.
The following table contains the investment quality distribution of our
fixed maturity investments at December 31, 2004.
Type/Ratings of Investment Percentage
-------------------------------- ----------
Treasury/Agency ................ 40.2%
AAA ............................ 24.3
AA ............................. 7.2
A .............................. 16.6
BBB ............................ 11.7
-----
100.0%
=====
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation.
The following table sets forth information concerning the maturities of
fixed-maturity securities in our investment portfolio as of December 31, 2004,
by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
18
At December 31, 2004
-------------------------------------
Cost or Percentage
Amortized of Fair
Cost Fair Value Value
--------- ---------- ----------
(in thousands)
Due in one year or less ................... $ 8,091 $ 8,084 4%
Due after one year through five years ..... 49,124 49,074 24
Due after five years through ten years .... 44,107 44,516 22
Due after ten years ....................... 26,788 27,549 14
-------- -------- --------
128,110 129,223 64%
Equity securities ......................... 20,679 23,308 12
Asset and mortgage-backed securities ...... 50,322 49,776 24
-------- -------- --------
Total ................................. $199,111 $202,307 100%
======== ======== ========
Proceeds from bond maturities, sales and redemptions of available-for-sale
investments during the years 2004, 2003, and 2002 were $67.9 million, $138.6
million and $39.0 million, respectively. Gross gains of $917,000, $3,441,000 and
$1,437,000 and gross losses of $442,000, $1,511,000 and $1,568,000 were realized
on available for sale investment redemptions during 2004, 2003, and 2002,
respectively.
The average duration of the securities in our fixed-maturity portfolio as
of December 31, 2004 and 2003 was 4.4 years and 4.8 years, respectively.
A.M. Best Company Ratings
As of December 31, 2004, A.M. Best Company, which rates insurance
companies based on factors of concern to policyholders, rated NCRIC, Inc. "A-"
(Excellent). This is the fourth highest rating of the 15 ratings that A.M. Best
assigns. NCRIC, Inc. received its initial rating of "B" in 1988, was upgraded to
"B+" in 1989, to "B++" in 1996 and was upgraded to "A-" in 1997. A.M. Best
reaffirmed the "A-" rating of NCRIC, Inc. in 2004. On March 4, 2005, A.M. Best
downgraded the rating of NCRIC, Inc. from "A-" to "B++" (Very Good) under review
with negative implications. A "B++" is A.M. Best's fifth highest rating out of
its 15 possible rating classifications. This action followed the February 28,
2005 announcement of NCRIC Group, Inc.'s fourth quarter and year-end 2004
results of a net loss of $8.3 million and $7.1 million, respectively. On
February 28, 2005, we also announced a definitive agreement to merge with
ProAssurance Corporation. The rating will remain under review pending A.M.
Best's review of NCRIC, Inc.'s loss reserves, completion of the merger with
ProAssurance and discussions with management. Our goal is to restore the rating
to its previous level of "A-" once A.M. Best has more time to factor in the
financial strength provided by the proposed transaction with ProAssurance.
A.M. Best's "B++" rating is assigned to those companies that in A.M.
Best's opinion have a good ability to meet their obligations to policyholders
over a long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews:
o the company's profitability, leverage and liquidity;
o its book of business;
o the adequacy and soundness of its reinsurance;
o the quality and estimated market value of its assets;
o the adequacy of its reserves and surplus;
o its capital structure;
o the experience and competence of its management; and
o its market presence.
19
Risk Factors
Our results may be affected if actual insured losses differ from our loss
reserves
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to us and our payment of that loss. To
recognize liabilities for unpaid losses, we establish reserves as balance sheet
liabilities representing estimates of amounts needed to pay reported losses and
the related loss adjustment expenses. The process of estimating loss reserves is
a difficult and complex exercise involving many variables and subjective
judgments. We regularly review our reserving techniques and our overall level of
reserves. As part of the reserving process, we review historical data and
consider the impact of various factors such as:
o trends in claim frequency and severity;
o changes in operations;
o emerging economic and social trends;
o inflation; and
o changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate, but not
necessarily accurate, basis for predicting future events. There is no precise
method for evaluating the impact of any specific factor on the adequacy of
reserves, and actual results are likely to differ from original estimates. To
the extent loss reserves prove to be inadequate in the future, we would need to
increase our loss reserves and incur a charge to earnings in the period the
reserves are increased, which could have a material adverse impact on our
financial condition and results of operations. 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. Our ultimate liability will be known only after
all claims are closed, which is likely to be several years into the future.
The loss reserves of our insurance subsidiary also may be affected by
court decisions that expand liability on our policies after they have been
priced and issued. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserved amounts. Our policy to aggressively litigate claims
against our insureds that we consider unwarranted or claims where settlement
resolution cannot be achieved may increase the risk that we may be required to
make such payments.
The change in our reinsurance program effective January 1, 2003 exposes us to
larger losses
In 2003, we increased our retention of loss from $500,000 to $1,000,000
for each and every loss. As a result, we expect a higher level of losses and are
subject to a higher level of loss volatility since it is more difficult to
predict the number and timing of losses in excess of $500,000.
We purchase limited reinsurance for protection against more than one
insured being involved in a single incident so that we are exposed to no more
than one retention of loss in a single medical incident. The limited protection
may not be adequate if there are several policyholders involved in a single
medical incident and a jury returns an extraordinarily high verdict against all
defendants.
Our earnings may not increase as a result of growth in new business in states in
which we have limited operating experience
In recent years we have expanded our business in Delaware, Virginia and
West Virginia. We utilize publicly available information on loss experience of
our competitors when we price our products in states when we can not rely on our
own experience. The use of competitor data does not provide the same level of
confidence as when we can use our own historical data from territories we have
been operating in for many years, i.e., the District of Columbia. The increase
in uncertainty is a result of us not knowing the
20
effectiveness of our underwriting and claims adjudication process in the new
states. This risk impacted results of operations in 2004 and 2003 and could
impact future results of operations.
Our revenues and income may fluctuate with interest rates and investment results
We generally rely on the positive performance of our investment portfolio
to offset insurance losses and to contribute to our profitability. As our
investment portfolio is primarily comprised of interest-earning assets,
prevailing economic conditions, particularly changes in market interest rates,
may significantly affect our operating results. Changes in interest rates also
can affect the value of our interest-earning assets, which are principally
comprised of fixed-rate investment securities. Generally, the value of
fixed-rate investment securities fluctuates inversely with changes in interest
rates. Interest rate fluctuation could adversely affect our GAAP stockholders'
equity, total comprehensive income, and/or cash flows. As of December 31, 2004,
$179 million of our $202 million investment portfolio was invested in fixed
maturities. Unrealized pre-tax net investment gains on investments in fixed
maturities were $567,000 and $868,000 as of December 31, 2004, and 2003,
respectively.
In accordance with our investment policies, the duration of our investment
portfolio is intended to be similar to our expectation for the duration of our
loss reserves. Changes in the actual duration of our loss reserves from our
expectations may affect our results. Our investment portfolio, however, is
subject to prepayment risk primarily due to our investments in mortgage-backed
and other asset-backed securities. An investment has prepayment risk when there
is a risk that the timing of cash flows that result from the repayment of
principal might occur earlier than anticipated because of declining interest
rates or later than anticipated because of rising interest rates. We are subject
to reinvestment risk to the extent that we are not able to reinvest prepayments
at rates comparable to the rates on the maturing investments.
Regulatory changes could have a material impact on our operations
Our insurance businesses are subject to extensive regulation by state
insurance authorities in each state in which we operate. Regulation is intended
for the benefit of policyholders rather than stockholders. In addition to the
amount of dividends and other payments that can be made by our insurance
subsidiaries, these regulatory authorities have broad administrative and
supervisory power relating to:
o rates charged to insurance customers;
o licensing requirements;
o trade practices;
o capital and surplus requirements; and
o investment practices.
These regulations may impede or impose burdensome conditions on rate
increases or other actions that we may want to take to enhance our operating
results, and could affect our ability to pay dividends on our common stock. In
addition, we may incur significant costs in the course of complying with
regulatory requirements. Most states also regulate insurance holding companies
like us in a variety of matters such as acquisitions, changes of control, and
the terms of affiliated transactions. Future legislative or regulatory changes
may adversely affect our business operations.
The unpredictability of court decisions could have a material impact on our
financial results
The financial position of our insurance subsidiary may be affected by
court decisions that expand insurance coverage beyond the intention of the
insurer at the time it originally issued an insurance policy or by a judiciary's
decision to accelerate the resolution of claims through an expedited court
calendar, thereby reducing the amount of investment income we would have earned
on related reserves. In addition, a significant jury award, or series of awards,
against one or more of our policyholders could require us to pay large sums of
money in excess of our reserve amount.
21
Our revenues and operating performance may fluctuate with insurance business
cycles
Growth in premiums written in the medical professional liability industry
has fluctuated significantly over the past 10 years as a result of, among other
factors, changing premium rates. The cyclical pattern of such fluctuation has
been generally consistent with similar patterns for the broader property and
casualty insurance industry, due in part to the participation in the medical
professional liability industry of insurers and reinsurers which also
participate in many other lines of property and casualty insurance and
reinsurance. Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions, a soft insurance market, followed by a period of capital
shortage, lesser competition and increasing premium rates, a hard insurance
market.
For several years in the 1990s, the medical professional liability
industry faced a soft insurance market that generally resulted in lower premium
rates. The medical professional liability industry is currently in a hard
insurance market cycle. We cannot predict whether, or the extent to which, the
recent increase in premium rates will continue.
Our geographic concentration ties our performance to the economic, regulatory
and demographic conditions of the mid-Atlantic region
Our revenues and profitability are subject to prevailing economic,
regulatory, demographic and other conditions in the region in which we write
insurance. We write our medical professional liability insurance in the District
of Columbia, Delaware, Maryland, Virginia and West Virginia. Because our
business is concentrated in a limited number of states, we may be exposed to
adverse developments that may have a greater affect on us than the risks of
doing business in a broader market area.
Our business could be adversely affected if we are not able to attract and
retain independent agents
We depend in part on the services of independent agents in marketing our
insurance products. We face competition from other insurance companies for the
services and allegiance of our independent agents. Changes in commissions,
services or products offered by our competitors could make it more difficult for
us to attract and retain independent agents to sell our insurance products.
If we are unable to maintain a favorable A.M. Best Company rating, it may be
more difficult for us to write new business or renew our existing business
A.M. Best assesses and rates the financial strength and claims-paying
ability of insurers based upon its criteria. The financial strength ratings
assigned by A.M. Best to insurance companies represent independent opinions of
financial strength and ability to meet policyholder obligations, and are not
directed toward the protection of investors. A.M. Best ratings are not ratings
of securities or recommendations to buy, hold or sell any security.
As of December 31, 2004, A.M. Best Company rated NCRIC, Inc. "A-"
(Excellent). On March 4, 2005, A.M. Best downgraded the rating of NCRIC, Inc.
from "A-" to "B++" (Very Good) under review with negative implications. A "B++"
rating is A.M. Best's fifth highest rating out of its 15 possible rating
classifications. This action followed the February 28, 2005 announcement of
NCRIC Group, Inc.'s fourth quarter and year-end 2004 results of a net loss of
$8.3 million and $7.1 million, respectively. On February 28, 2005, we also
announced a definitive agreement to merge with ProAssurance Corporation. The
rating will remain under review pending A.M. Best's review of NCRIC, Inc.'s loss
reserves, completion of the merger with ProAssurance and discussions with
management. Our goal is to restore the rating to its previous level of "A-" once
A.M. Best has more time to factor in the financial strength provided by the
proposed transaction with ProAssurance.
Financial strength ratings are used by agents and customers as an
important means of assessing the financial strength and quality of insurers. If
our financial position deteriorates, we may not maintain our
22
favorable rating. This downgrade or any further downgrade or withdrawal of any
such rating could severely limit or prevent us from writing desirable business
or renewing our existing business.
If market conditions cause reinsurance to be more costly or unavailable, we may
be required to bear increased risks or reduce the level of our underwriting
commitments
As part of our overall risk and capacity management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our insurance
company subsidiary. Market conditions beyond our control determine the
availability and cost of the reinsurance we purchase, which may affect the level
of our business and profitability. We may be unable to maintain our current
reinsurance coverage or to obtain other reinsurance coverage in adequate amounts
and at favorable rates. If we are unable to renew our expiring reinsurance
coverage or to obtain new reinsurance coverage, either our net risk exposures
would increase or, if we are unwilling to bear an increase in net risk
exposures, we would have to reduce the amount of risk we underwrite.
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all,
and, as a result, we could experience losses
We transfer some of the risk we have assumed to reinsurance companies in
exchange for part of the premium we receive in connection with the risk.
Although reinsurance coverage makes the reinsurer liable to us to the extent the
risk is transferred, it does not relieve us of our liability to our
policyholders. If our reinsurers fail to pay us or fail to pay us on a timely
basis, our financial results would be adversely affected.
The guaranty fund assessments that we are required to pay to state guaranty
associations may increase and our results of operations and financial conditions
could be adversely affected
Each jurisdiction in which we operate has separate insurance guaranty fund
laws requiring property and casualty insurance companies doing business within
their respective jurisdictions to be members of their guaranty associations.
These associations are organized to pay covered claims (as defined and limited
by the various guaranty association statutes) under insurance policies issued by
insolvent insurance companies. Most guaranty association laws enable the
associations to make assessments against member insurers to obtain funds to pay
covered claims after a member insurer becomes insolvent. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the covered lines of business in that state. Maximum assessments
permitted by law in any one year generally vary between 1% and 2% of annual
premiums written by a member in that state.
Property and casualty guaranty fund assessments incurred by us totaled
$15,000 for 2004. We received a refund of $25,000 and accrued an assessment of
$137,000 in 2003. Our policy is to accrue the guaranty fund assessments when
notified and in accordance with accounting principles generally accepted in the
United States of America, GAAP. We cannot reasonably estimate liabilities for
insolvency because of the lack of adequate financial data on insolvent
companies.
Our business could be adversely affected by the loss of one or more employees
We are heavily dependent upon our senior management and the loss of
services of our senior executives could adversely affect our business. Our
success has been, and will continue to be, dependent on our ability to retain
the services of our existing key employees and to attract and retain additional
qualified personnel in the future. The loss of services of any of our senior
management or any other key employee, or the inability to identify, hire and
retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of our business operations. While we have
employment agreements with our senior executives, we currently do not maintain
key employee insurance with respect to any of our employees.
23
We are a holding company and are dependent on dividends and other payments from
our operating subsidiaries, which are subject to dividend restrictions
We are a holding company whose principal source of funds is cash dividends
and other permitted payments from our operating subsidiaries, principally NCRIC,
Inc. If our subsidiaries are unable to make payments to us, or are able to pay
only limited amounts, we may be unable to pay dividends or make payments on our
indebtedness. The payment of dividends by these operating subsidiaries is
subject to restrictions set forth in the insurance laws and regulations of the
District of Columbia. See "Insurance Regulatory Matters - Regulation of
Dividends and Other Payments From Our Operating Subsidiaries."
Our profitability could be adversely affected by market-driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to efficiently
conduct a traditional medical practice. As a result, many physicians have joined
or affiliated with managed care organizations, healthcare delivery systems or
practice management organizations. The impact of managed care and tightened
Medicare/Medicaid reimbursement may impact a physician's decision to continue
purchasing consulting and practice management services, shifting a purchase
decision from quality and value to price only. Larger healthcare systems
generally retain more risk by accepting higher deductibles and self-insured
retentions or form their own captive insurance companies. This consolidation has
reduced the role of the individual physician and the small medical group, which
represents a significant portion of our policyholders, in the medical
professional liability insurance purchasing decision.
Rising interest rates would increase interest costs associated with the trust
preferred securities issued by us
In December 2002 we issued $15,000,000 of trust preferred securities. The
trust preferred securities bear interest at a rate of 400 basis points over the
three-month London Interbank Offered Rate (LIBOR) and adjust quarterly subject
to a maximum interest rate of 12.5%. Our interest expense will increase if the
three-month LIBOR increases.
State insurance regulators may not be willing to approve our captive insurance
operations
While higher pricing and reduced availability of traditional insurance
sources have created favorable market conditions for this risk financing
vehicle, state insurance regulators may not be willing to approve our captive
insurance operations or market conditions may change.
A decline in revenue and profitability in ConsiCare, Inc. could result in a
goodwill impairment charge
ConsiCare's revenue is subject to clients facing declining reimbursement
for their services. Therefore, in an effort to pare their own expenses to
improve their net profitability, our clients may not order new services, or may
diminish and possibly cease using our existing services. This could result in a
reduction of revenue to us, thereby reducing net income and resulting in an
impairment charge relative to the goodwill ascribed to ConsiCare.
The premium collection litigation may reduce earnings and stockholders' equity
As disclosed elsewhere in this report, a jury returned an $18.2 million
judgment against NCRIC, Inc. in connection with the premium collection
litigation initiated by NCRIC, Inc. against Columbia Hospital for Women, CHW.
NCRIC, Inc. intends to appeal this verdict, and has filed post-trial motions,
including motions to set aside and to reduce the verdict. The outcome of the
post-trial motions and potential appellate process is not predictable. An
outcome that requires NCRIC to pay a significant amount to CHW would reduce
stockholders' equity and would reduce the statutory measure of policyholders'
surplus and therefore could potentially reduce our capacity to write insurance.
In addition, expenses incurred in appealing the verdict are expected to be
significant and will reduce earnings.
24
Insurance Company Regulation
General. NCRIC, Inc. is subject to supervision and regulation by the
District of Columbia Department of Insurance, Securities and Banking and
insurance authorities in Delaware, Maryland, Virginia and West Virginia. This
regulation is concerned primarily with the protection of policyholders'
interests rather than stockholders' interests. Accordingly, decisions of
insurance authorities made with a view to protecting the interests of
policyholders may reduce our profitability. The extent of regulation varies by
jurisdiction, but this regulation usually includes:
o regulating premium rates and policy forms;
o setting minimum capital and surplus requirements;
o regulating guaranty fund assessments;
o licensing of insurers and agents;
o approving accounting methods and methods of setting statutory loss
and expense reserves;
o underwriting limitations;
o restrictions on transactions with affiliates;
o setting requirements for and limiting the types and amounts of
investments;
o establishing requirements for the filing of annual statements and
other financial reports;
o conducting periodic statutory examinations of the affairs of
insurance companies;
o approving proposed changes of control; and
o limiting the amounts of dividends that may be paid without prior
regulatory approval.
Without the approval of the District of Columbia Commissioner of
Insurance, Securities and Banking, NCRIC, Inc. may not diversify out of the
healthcare and insurance fields through an acquisition or otherwise.
Guaranty fund laws. Each of the jurisdictions in which we do business has
guaranty fund laws under which insurers doing business in those jurisdictions
can be assessed on the basis of premiums written by the insurer in that
jurisdiction in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. In the District of
Columbia, insurance companies are assessed in three categories: (i) automobile;
(ii) workers' compensation; and (iii) all other. An insurance company licensed
to do business in the District of Columbia is only liable to pay an assessment
if another insurance company within its category becomes insolvent. We are in
the "all other" category.
Significant assessments could have a material adverse effect on our
financial condition or results of operations. While we will not necessarily be
liable to pay assessments each year, the insolvency of another insurance company
within our category of insurance could result in the maximum assessment being
imposed on us over several years. We cannot predict the amount of future
assessments. In 2002, PHICO Insurance Company went into receivership; this
resulted in guaranty fund assessments to us of $355,000. Our 2003 assessment
covered PHICO, Legion and Reciprocal of America. In each of the jurisdictions in
which we conduct business, the amount of the assessment cannot exceed 2% of our
direct premiums written per year in that jurisdiction.
Examination of insurance companies. Every insurance company is subject to
a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other jurisdiction interested
in participating in a periodic examination may do so. The last completed
periodic financial examination of NCRIC, Inc., based on December 31, 2003
financial statements, was completed and a final report was issued on December 7,
2004. The final report positively assessed our financial stability and operating
procedures.
Approval of rates and policies. The District of Columbia, Virginia and
Delaware require us to submit rates to regulators on a "file and use" basis.
Under a file and use system, an insurer is permitted to
25
bring new rates and policies into effect on filing them with the appropriate
regulator, subject to the right of the regulator to object within a fixed period
of days. In each of the District of Columbia, Delaware and Virginia, rating
plans, policies and endorsements must be submitted to the regulators 30 days
prior to their effectiveness. Maryland and West Virginia are "prior approval"
jurisdictions. The possibility exists that we may be unable to implement desired
rates, policies, endorsements, forms or manuals if these items are not approved
by an insurance commissioner.
Medical professional liability reports. We principally write medical
professional liability insurance and, as such, requirements are placed upon us
to report detailed information with regard to settlements or judgments against
our insureds. In addition, we are required to report to the D.C. Department of
Insurance, Securities and Banking or state regulatory agencies or the National
Practitioner Data Bank payments, claims closed without payments and actions such
as terminations or premiums surcharges with respect to our insureds. Penalties
may attach if we fail to report to either the D.C. Department of Insurance,
Securities and Banking or an applicable state insurance regulator or the
National Practitioner Data Bank.
Changes in government regulation of the healthcare system. Federal and
state governments recently have considered reforming the healthcare system.
While some of the proposals could be beneficial to our business, the adoption of
others could adversely affect us. Public discussion of a broad range of
healthcare reform measures will likely continue in the future. These measures
that would affect our medical professional liability insurance business and our
practice management products and services include, but are not limited to:
o spending limits;
o price controls;
o limits on increases in insurance premiums;
o limits on the liability of doctors and hospitals for tort claims;
and
o changes in the healthcare insurance system.
Insurance Holding Company Regulation. The Commissioner of Insurance,
Securities and Banking of the District of Columbia has jurisdiction over NCRIC
Group as an insurance holding company. We are required to file information
periodically with the Department of Insurance, Securities and Banking, including
information relating to our capital structure, ownership, financial condition
and general business operations. In the District of Columbia, transactions by an
insurance company with affiliates involving loans, sales, purchases, exchanges,
extensions of credit, investments, guarantees or other contingent obligations,
which within any 12-month period aggregate at least 3% of the insurance
company's admitted assets or 25% of its surplus, whichever is greater, require
prior approval. Prior approval is also required for all management agreements,
service contracts and cost-sharing arrangements between an insurance company and
its affiliates. Some reinsurance agreements or modifications also require prior
approval.
District of Columbia insurance laws also provide that the acquisition or
change of control of a domestic insurance company or of any person or entity
that controls an insurance company cannot be consummated without prior
regulatory approval. A change in control is generally defined as the acquisition
of 10% or more of the issued and outstanding shares of an insurance holding
company.
Regulation of dividends from insurance subsidiaries. The District of
Columbia insurance laws limit the ability of NCRIC, Inc. to pay dividends.
Without prior notice to and approval of the Commissioner of Insurance,
Securities and Banking, NCRIC, Inc. may not declare or pay an extraordinary
dividend, which is defined as any dividend or distribution of cash or other
property whose fair market value, together with other dividends or distributions
made, within the preceding 12 months exceeds the lesser of (1) 10% of NCRIC,
Inc.'s statutory surplus as of the preceding December 31, or (2) NCRIC, Inc.'s
statutory net income excluding realized capital gains, for the 12-month period
ending the preceding December 31, but does not include pro rata distributions of
any class of our own securities. In calculating net income under the test,
NCRIC, Inc. may carry forward net income, excluding realized capital gains,
26
from the previous two calendar years that has not been paid out as dividends.
District of Columbia law gives the Commissioner of Insurance, Securities and
Banking broad discretion to disapprove dividends even if the dividends are
within the above-described limits. The District of Columbia permits the payment
of dividends only out of unassigned statutory surplus. Using these criteria, as
of December 31, 2004, because of the statutory loss from operations in 2003 and
2004, NCRIC, Inc. has no amounts available for dividends without regulatory
approval.
Our Companies
We were organized in December 1998 in connection with the reorganization
of National Capital Reciprocal Insurance Company into a mutual holding company
structure. NCRIC, A Mutual Holding Company owned all of the outstanding shares
of NCRIC Holdings, Inc. Effective July 29, 1999, we completed an initial public
offering and issued 2,220,000 shares of the common stock to NCRIC Holdings, Inc.
and 1,480,000 shares of the common stock in a subscription and community
offering.
On June 24, 2003, a plan of conversion and reorganization was approved by
the members of NCRIC, A Mutual Holding Company and by the shareholders of NCRIC
Group, Inc. In the conversion and related stock offering, the Mutual Holding
Company offered for sale its 60% ownership interest in NCRIC Group. As a result
of the conversion and stock offering, the Mutual Holding Company ceased to
exist, and NCRIC Group became a fully public company.
NCRIC, Inc. NCRIC, Inc., a wholly owned subsidiary of NCRIC Group, Inc.,
is the former National Capital Reciprocal Insurance Company incorporated in 1980
and is a licensed property and casualty insurance company domiciled in the
District of Columbia. NCRIC, Inc. provides professional liability insurance to
physicians in the District of Columbia, Delaware, Maryland, Virginia and West
Virginia. Commonwealth Medical Liability Insurance Company, CML, was merged into
NCRIC, Inc. as of December 31, 2003. CML was originally incorporated in 1989.
CML provided professional liability insurance to physicians in Delaware,
Maryland, Virginia and West Virginia.
National Capital Insurance Brokerage, Ltd. National Capital Insurance
Brokerage, Ltd., a wholly owned subsidiary of NCRIC, Inc. incorporated in 1984,
is a licensed insurance brokerage that provides reinsurance brokerage services
to NCRIC, Inc. and protected cells within American Captive Corporation.
American Captive Corporation. American Captive Corporation, ACC, a wholly
owned subsidiary of NCRIC, Inc. incorporated in 2001, is an organization that is
authorized to form independent protected cells to accommodate affinity groups
seeking to manage their own risk through an alternative risk transfer structure.
In February 2002, we announced formation of a joint venture with Risk Services,
LLC, to form National Capital Risk Services, LLC to offer a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
As of December 31, 2004, ACC had no active cells.
NCRIC Insurance Agency, Inc. NCRIC Insurance Agency, Inc., a wholly owned
subsidiary of NCRIC, Inc. incorporated in 1989, is a licensed insurance agency
that has strategic partnerships with experienced brokers to provide life,
health, disability, and long term care coverage to our clients. These products
are not underwritten by us.
ConsiCare, Inc. ConsiCare, Inc., a wholly owned subsidiary of NCRIC Group,
Inc. incorporated in 1998, provides business management services and employee
benefits services to physicians, dentists and other non-healthcare related
entities in Virginia, North Carolina and the District of Columbia. ConsiCare was
formerly known as NCRIC MSO, Inc. d/b/a HealthCare Consulting, Inc. and Employee
Benefits Services, Inc. The name of this subsidiary was changed to ConsiCare
upon the completion of a branding analysis in the fourth quarter of 2004. In the
first quarter of 2005, this business was re-introduced to the market under the
brand name of ConsiCare. We believe that this initiative will differentiate the
practice management operations from its competitors and contribute to the
establishment of a consistent and distinguishable brand identity.
27
NCRIC Physicians Organization, Inc. NCRIC Physicians Organization, Inc., a
wholly owned subsidiary of ConsiCare, Inc., was organized in 1994 to provide a
network for managed care contracting with third party payers. NCRIC Physicians
Organization no longer contracts as a network and effective October 1, 2004
reached the end of a settlement agreement with a former health plan partner,
American Medical Services.
NCRIC Statutory Trust I. NCRIC Statutory Trust I was formed in 2002 as a
special purpose entity for the purpose of issuing trust preferred securities.
Personnel
As of December 31, 2004, we employed 107 full-time persons. Sixty-five of
these individuals were employed by NCRIC, Inc. and 42 were employed by
ConsiCare. None of our employees are represented by a collective bargaining unit
and we consider our relationship with our employees to be good.
Item 2. Properties
Our principal business operations are conducted from our leased executive
offices, which consist of approximately 18,156 square feet located at 1115 30th
Street, N.W., Washington, D.C. 20007. The term of the lease is for ten years,
commencing April 15, 1998 and expiring April 30, 2008. Annual rental is $421,476
with 2% annual increases, except in the sixth year of the term when the rent
increases by $2.00 per rentable square foot. We have the option to renew the
lease for one additional term of five years. In November 2003, we leased
additional space across the street from our executive offices at 1055 Thomas
Jefferson Street, N.W., Washington, D.C. 20007. We also maintain office space in
Lynchburg, Fredericksburg and Richmond, Virginia; Greensboro, North Carolina;
Wilmington, Delaware; and Charleston, West Virginia.
The following table sets forth the facilities leased by us at December 31,
2004, along with the applicable lease expiration date:
Property Location Lease Expiration Date
-------------------------------------------------------------------------------- ---------------------
Offices:
1115 30th Street, N.W., Washington, D.C. 20007 April 30, 2008
1055 Thomas Jefferson Street, N.W. Washington, D.C. 20007 May 31, 2008
424 Graves Mill Road, Lynchburg, Virginia 24502 October 31, 2007
4701 Cox Road, Richmond, Virginia 23060 April 30, 2006
1708 Fall Hill Avenue, Suite 201, Fredericksburg, Virginia 22401 Month-to-Month
600 Green Valley Road, Greensboro, North Carolina 27408 March 31, 2008
1201 N. Orange Street, Suite 901, Wilmington, Delaware 19801 July 31, 2005
300 Association Drive, North Gate Business Park, Charleston, West Virginia 25311 Month-to-Month
Item 3. Legal Proceedings
We are from time to time named as a defendant in various lawsuits
incidental to our insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. We vigorously defend these
actions, unless a reasonable settlement appears appropriate. Aside from the
matter reported in Note 14 to the Consolidated Financial Statements included in
Item 8 of this Form 10-K, we believe that these legal proceedings in the
aggregate are not material to our consolidated financial condition.
28
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
We do not currently pay cash dividends on our common stock and we do not
intend to pay any cash dividends in the foreseeable future. As a holding company
with no direct operations, we rely on cash dividends and other permitted
payments from our insurance subsidiaries to pay any future dividends to our
stockholders. State insurance laws and restrictions under our credit agreement
limit the amounts that may be paid to us by our insurance subsidiaries (see
"Business of NCRIC Group - Insurance Company Regulation" and "Regulation of
dividends from insurance subsidiaries").
Our common stock is traded on the Nasdaq National Market under the symbol
"NCRI." The following table sets forth the high and low closing prices for
shares of our common stock for the periods indicated. As of December 31, 2004,
there were 6,892,517 publicly held shares of our common stock issued and
outstanding held by approximately 539 shareholders of record. Note: the stock
prices for dates prior to the June 2003 conversion and stock offering have been
adjusted to reflect the conversion and issuance of additional shares. There were
no repurchases of common stock in the fourth quarter of 2004.
Year Ended December 31, 2004 High Low
---------------------------- ------- -------
Fourth quarter $10.060 $ 8.380
Third quarter 10.020 8.370
Second quarter 10.140 9.110
First quarter 11.920 9.450
Year Ended December 31, 2003 High Low
---------------------------- ------- -------
Fourth quarter $11.510 $ 9.110
Third quarter 11.560 10.150
Second quarter 10.600 8.203
First quarter 12.858 5.992
Set forth below is information as of December 31, 2004 as to any equity
compensation plans of the Company that provides for the award of equity
securities or the grant of options, warrants or rights to purchase equity
securities of the Company.
=============================================================================================================
Number of securities to
be issued upon exercise Number of securities
Equity compensation plans of outstanding options Weighted average remaining available for
approved by shareholders and rights exercise price issuance under plan
- -------------------------------------------------------------------------------------------------------------
Stock Option Plan - 1999 ..... 107,737 $ 3.75 0
- -------------------------------------------------------------------------------------------------------------
Stock Option Plan - 2003 ..... 320,101 $ 10.90 94,269
- -------------------------------------------------------------------------------------------------------------
Stock Award Plan - 1999 ...... 14,365(1) Not Applicable 0
- -------------------------------------------------------------------------------------------------------------
Stock Award Plan - 2003 ...... 109,174(1) Not Applicable 22,540
- -------------------------------------------------------------------------------------------------------------
Equity compensation plans None None None
not approved
by shareholders
- -------------------------------------------------------------------------------------------------------------
Total .................. 551,377 Not Applicable 116,809
=============================================================================================================
- ----------
(1) Represents shares that have been granted but have not yet vested.
29
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of NCRIC Group for the years and at the dates indicated and are
derived in part from and should be read together with the audited consolidated
financial statements and notes thereto of NCRIC Group, as well as with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere in this Form 10-K.
At or for the Year Ended December 31,
---------------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(in thousands)
Statement of Operations Data:
Gross premiums written ............................ $ 87,229 $ 71,365 $ 51,799 $ 34,459 $ 22,727
========= ========= ========= ========= =========
Net premiums written .............................. $ 72,536 $ 59,277 $ 33,804 $ 23,624 $ 15,610
========= ========= ========= ========= =========
Net premiums earned ............................... $ 66,462 $ 47,264 $ 30,098 $ 20,603 $ 14,611
Net investment income ............................. 7,256 6,008 5,915 6,136 6,407
Net realized investment gains (losses) ............ 475 1,930 (131) (278) (5)
Practice management and related income ............ 4,395 4,906 5,800 6,156 5,317
Other income ...................................... 820 1,155 1,013 602 470
--------- --------- --------- --------- ---------
Total revenues ................................ 79,408 61,263 42,695 33,219 26,800
Losses and loss adjustment expenses ............... 70,310 50,473 26,829 18,858 11,946
Underwriting expenses ............................. 12,635 10,003 8,168 4,877 3,591
Practice management and related expenses .......... 5,016 5,222 5,811 6,063 4,970
Interest expense on Trust Preferred Securities .... 857 826 62 0 0
Other expenses .................................... 2,514 1,651 1,405 1,245 1,237
--------- --------- --------- --------- ---------
Total expenses ................................ 91,332 68,175 42,275 31,043 21,744
--------- --------- --------- --------- ---------
(Loss) income before income taxes ................. (11,924) (6,912) 420 2,176 5,056
Income tax (benefit) provision .................... (4,804) (2,694) (322) 597 1,561
--------- --------- --------- --------- ---------
Net (loss) income ................................. $ (7,120) $ (4,218) $ 742 $ 1,579 $ 3,495
========= ========= ========= ========= =========
Net (loss) earnings per share
Basic ....................................... $ (1.12) $ (0.65) $ 0.11 $ 0.45 $ 0.99
Diluted ..................................... $ (1.12) $ (0.65) $ 0.11 $ 0.44 $ 0.98
Balance Sheet Data:
Invested assets ................................... $ 202,307 $ 174,357 $ 120,120 $ 103,125 $ 98,045
Total assets ...................................... 292,899 262,546 202,687 161,002 145,864
Reserves for losses and loss adjustment expenses .. 153,242 125,991 104,022 84,560 81,134
Total liabilities ................................. 220,884(1) 184,567(1) 154,870(1) 116,548 104,415
Total stockholders' equity ........................ 72,015 77,979 47,817 44,454 41,449
Selected GAAP Underwriting Ratios(2):
Losses and loss adjustment expenses ratio ......... 105.8% 106.8% 89.1% 91.5% 81.7%
Underwriting expense ratio ........................ 19.0% 21.2% 27.2% 23.7% 24.6%
Combined ratio .................................... 124.8% 128.0% 116.3% 115.2% 106.3%
Selected Statutory Data:
Losses and loss adjustment expenses ratio ......... 105.8% 106.8% 89.2% 90.0% 75.3%
Underwriting expense ratio ........................ 20.7% 22.6% 22.6% 21.8% 19.7%
Combined ratio .................................... 126.5% 129.4% 111.8% 111.8% 95.0%
Operating ratio(3) ................................ 115.6% 113.3% 92.4% 84.3% 63.6%
Ratio of net premiums written to policyholders'
surplus ........................................ 1.15 0.84 0.83 0.77 0.60
Policyholders' surplus ............................ $ 62,994 $ 70,372 $ 44,269 $ 32,759 $ 29,764
- ----------
(1) Includes $15.0 million of Trust Preferred Securities.
(2) In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to
calculate the GAAP loss and underwriting expense ratios. For statutory
purposes, renewal credits are not considered a reduction in premium
income, and written premiums are used to calculate the statutory
underwriting expense ratio. Due to these differences in treatment, GAAP
combined ratios can differ significantly from statutory combined ratios.
See Note 11 to the consolidated financial statements for a discussion of
the differences between statutory and GAAP reporting.
(3) The operating ratio is the statutory combined ratio offset by the benefit
of investment income expressed as a percentage of premiums earned.
30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The financial statements and data presented herein have been prepared in
accordance with GAAP, unless otherwise noted. GAAP differs from statutory
accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies. See Note 11 to the consolidated
financial statements for a reconciliation of our net income and equity between
GAAP and statutory accounting bases.
CRITICAL ACCOUNTING POLICIES
Following is a discussion 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, 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. Premiums
ceded to reinsurers represent the cost to us of reducing our exposure to medical
professional liability losses by transferring agreed upon insurance risks to
reinsurers through a reinsurance contract or treaty. Renewal credits are
reductions in premium billings to renewing policyholders. Net premiums written
are adjusted by any amount which has been billed but not yet earned during the
period in arriving at earned premiums. 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. Premiums billed under retrospective programs are recorded as
premiums written, while premium refunds accrued under retrospective programs are
recorded as unearned premiums. When an accrued premium refund is paid, written
premiums are reduced with no change to earned premium. Under retrospective
programs, premiums earned are premiums written reduced by premium refunds
accrued. Premium refunds are accrued to reflect the risk-sharing program results
on a basis consistent with the underlying loss experience. The program loss
experience is that which is included in the determination of our losses and loss
adjustment expenses (LAE). As described more fully below, one component of the
expense for losses and LAE is the estimate of future payments for claims and
related expenses of adjudicating claims.
Unearned premiums represent premiums billed but not yet fully earned at
the end of the reporting period. Premiums receivable represent annual billed and
unbilled premiums which have not yet been collected.
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 year to year 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. Other factors that modify past experience are also considered in
setting reserves, including court decisions, economic conditions, current trends
in losses, and inflation. Reserving for medical professional liability claims 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.
31
The estimation process is an extensive effort. It begins in our claims
department with the initial report of a claim. For each claim reported, a case
reserve is established by the claims department based on analysis of the facts
of the particular case and the judgment of claims management. This estimation
process is not by formula but is driven by the investigation of facts combined
with the experience and insight of claims management applied to each individual
case. The timing of establishing case reserves follows established protocols
based on the underlying facts and circumstances on a case by case basis.
Specific factors considered include: the claimant's assertion of loss; the
amount of documented damages asserted; an expert medical assessment; the
jurisdiction where the incident occurred; our experience with any similar cases
in the past; and any other factors pertinent to the specific case.
Each quarter, the aggregate of case reserves by report year is compiled
and subjected to extensive analysis. Semiannually, our independent actuary
performs an actuarial valuation of reserves based on the data comprising our
detailed claims experience since inception.
The actuarial valuation entails application of various statistically based
actuarial formulae, an analysis of trends, and a series of judgments to produce
an aggregate estimate of our liability at the balance sheet date. Specific
factors included in the estimation process include: the level of case reserves
by jurisdiction by report year; the change in case reserves between each
evaluation date; historical trends in the development of our initial case
reserves to final conclusion; expected losses and LAE levels based on past
experience relative to the level of premium earned; reinsurance treaty terms;
and any other pertinent factors that may arise.
In consultation with our independent actuary, we utilize several methods
in order to estimate losses and LAE reserves by projecting ultimate losses. By
utilizing and comparing the results of these methods, we are better able to
analyze loss data and establish an appropriate reserve. Our independent actuary
provides a point estimate for loss reserves rather than a range of estimates.
The statistical accuracy of the actuarial estimate indicates that the actual
ultimate value of reserved losses will be in the range of approximately plus or
minus 10% of the calculated point estimate. The actuarial valuation of reserves
is a critical component of the financial reporting process and provides the
foundation for the determination of reserve levels. In addition to reporting
under GAAP, we file financial statements with state regulatory authorities based
on statutory accounting requirements. These requirements include a certification
of reserves by an appointed actuary. The reserves in our statutory filings have
been certified by an independent medical professional liability insurance
actuary.
Our ultimate liability will be known after all claims are closed, which is
likely to be several years into the future. For example, as of December 31,
2004, the oldest report date of an open claim is 1993. Incurred losses for each
report year will develop with a change in estimate in each subsequent calendar
year until all claims are closed for that report year. Loss development could
potentially have a significant impact on our results of operations. Developments
changing the ultimate aggregate liability as little as 1% could have a material
impact on our reported operating results.
The inherent uncertainty in establishing reserves is relatively greater
for companies writing long-tail medical professional liability business. Each
claim reported has the potential to be significant in amount. For the three-year
period ended December 31, 2004, the average indemnity payment per paid closed
claim was $301,000 with total indemnity payments of $31.4 million, $22.2 million
and $12.9 million for the years ended December 31, 2004, 2003 and 2002,
respectively. The cost of individual indemnity payments over this three-year
period ranged from $1,500 to $2.4 million. Due to the extended nature of the
claim resolution process and the wide range of potential outcomes of
professional liability claims, established reserve estimates may be adversely
impacted by: judicial expansion of liability standards; unfavorable legislative
actions; expansive interpretations of contracts; inflation associated with
medical claims; lack of a legislated cap on non-economic damages; and the
propensity of individuals to file claims. These risk factors are amplified given
the increase in new business written in new markets because there is limited
historical data available which can be used to estimate current loss levels. We
refine reserve estimates as experience develops and additional claims are
reported or existing claims are closed; adjustments to losses reserved in prior
periods are reflected in the results of the periods in which the adjustments are
made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as reported in
the statement of operations are reported net of reinsurance recoveries.
32
Reinsurance. We manage our exposure to individual claim losses, annual
aggregate losses, and LAE through our reinsurance program. Reinsurance is a
customary practice in the industry. It 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 insured policyholders. 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.
Under our current primary reinsurance contract, the premium ceded to the
reinsurers is based on a fixed rate applied to policy premium for that coverage
layer. During the year, estimated premium payments are made to the reinsurers,
and a final adjustment is made at the end of the year to reflect actual premium
earned in accordance with the treaty. For the years through 2002, we retained
risk exposure up to $500,000 for each and every claim. Beginning January 1,
2003, the retention level increased to $1,000,000 for each and every claim.
For 1999 and prior years, in accordance with one of our primary
reinsurance contracts, the portion of the policyholder premium ceded to the
reinsurers was swing-rated or experience-rated on a retrospective basis. This
swing-rated cession program is subject to a minimum and maximum premium range to
be paid to the reinsurers in the future, depending upon the extent of losses
actually paid by the reinsurers. A deposit premium is paid by us during the
initial policy year. An additional liability, "retrospective premiums accrued
under reinsurance treaties," is recorded by us to represent an estimate of net
additional payments to be made to the reinsurers under the program, based on the
level of loss and LAE reserves recorded. Like loss and LAE reserves, adjustments
to prior year ceded premiums payable to the reinsurers are reflected in the
results of the periods in which the adjustments are made. The swing-rated
reinsurance premiums are estimated in a manner consistent with the estimation of
our loss reserves, and therefore contain uncertainties like those inherent in
the loss reserve estimate.
Our practice for accounting for the liability for retrospective premiums
accrued under reinsurance treaties is to record the current year swing-rated
reinsurance premium at management's best estimate of the ultimate liability,
which was generally the maximum rate payable under terms of the treaty. Due to
the long tail nature of the medical professional liability insurance business,
it takes several years for the losses for any given report year to fully
develop. Since the ultimate liability for reinsurance premiums depends on the
ultimate losses, among other things, it is several years after the initial
reinsurance premium accrual before the amount becomes known. During the
intervening periods, reevaluations are made and adjustments to the accrued
retrospective premiums are made as considered appropriate by management. As of
December 31, 2004, twenty open claims are from report years covered by the
swing-rated reinsurance treaties.
Exposure to individual losses in excess of $1 million is known as excess
layer coverage. Excess layer premiums are recorded as current year reinsurance
ceded costs. Under the excess layer treaties, prior to 2000 we ceded to our
reinsurers over 90% of our exposure. Effective since January 1, 2000, we cede
100% of our risks and related to these coverage layers.
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. Management considers a wide
range of factors and uses its best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the
prospects for near-term recovery. Factors considered in the evaluation include
but are not limited to: (1) interest rates; (2) market-related factors other
than interest rates; and (3) financial conditions, business prospects and other
fundamental factors specific to the securities issuer. Declines attributable to
issuer fundamentals are reviewed in further detail. We have a security
monitoring process which includes quarterly review by an investment committee
comprised of members of our Board of Directors. Our CEO and CFO also participate
in the committee meetings in which our professional investment advisors review
with the committee and management the analysis prepared by our investment
managers
33
of each security that has certain characteristics, reviewing: deterioration of
the financial condition of the issuer; the magnitude and duration of unrealized
losses; and the credit rating and industry of the issuer. The primary factors
considered in evaluating whether a decline in value is other-than-temporary
include: the length of time and the extent to which the fair value has been less
than cost; the financial condition and near-term prospects of the issuer;
whether the issuer is current on contractually obligated interest and principal
payments; and our intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery.
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. 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.
Our goodwill asset, $7.3 million as of December 31, 2004, resulted from
the 1999 acquisition of three businesses which now operate as divisions of our
practice management services. We completed our goodwill impairment testing under
SFAS 142 and concluded that the goodwill asset was not impaired as of the annual
evaluation date, nor was it impaired as of December 31, 2004.
The basic steps involved in the goodwill impairment test are (1)
identification of the reporting unit to be tested; and (2) calculation of the
current fair value of the reporting unit and comparing it to the carrying value.
If the current fair value of the reporting unit exceeds the carrying value,
goodwill is not impaired. Because the acquired divisions are not publicly
traded, a discounted cash value calculation is used to determine the current
fair value of the unit.
Estimates as to future performance of the divisions along with current
market value indicators provide the basis for determination of the current fair
value of the unit. There is no guarantee of either the accuracy of the estimate
of future performance of the divisions or of the accuracy of current market
value indicators, since the real test of market value is what a potential
acquirer is willing to pay.
New accounting guidance. In July 2004, the Emerging Issues Task Force of
the Financial Accounting Standards Board reached a consensus with respect to
guidance to be used in determining whether an investment within the scope of
EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, is other than temporarily impaired. The
guidance was to be applied in other-than-temporary impairment evaluations made
in reporting periods beginning after June 15, 2004. In September 2004, the FASB
issued, and the Company adopted, FSP EITF Issue 03-1-1, which deferred the
effective date of the impairment measurement and recognition provisions
contained in EITF 03-1 until final guidance is adopted. The disclosure
requirements of EITF 03-1 were previously adopted by the Company as of December
31, 2003 for investments accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. For all other investments
within the scope of EITF 03-01, the disclosures are effective and have been
adopted by the Company as of December 31, 2004. As this accounting guidance
develops, we will continue to review it to assess any potential impact to our
fixed income portfolio and our asset management policy.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment (SFAS 123R.) This statement replaces Statement No. 123, Accounting for
Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and its related implementation guidance. The statement
requires the adoption of a fair-value-based method of accounting for share-based
transactions with employees. Adoption is required by the first interim or annual
period after June 15, 2005. The Company is in the process of evaluating the
requirements of SFAS 123R to comply with the new pronouncement by the third
quarter of 2005.
34
OVERVIEW
Financial results for 2004 were very disappointing. While over-shadowed by
the financial results, we achieved significant accomplishments during the year.
Results were driven by a few key factors: earned premium growth, increase in
claims severity, and moderation of claims frequency. Earned premiums grew due
primarily to the rate level increases. Approximately 89% of policies eligible
for renewal did renew during 2004. 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 by 287, or 6.8%, during the year. As we have reported previously, in the
first quarter of 2004, we began non-renewing policies in the West Virginia
market at the end of each policy term. After the approval of a rate increase
effective September 1, we again began to renew business in West Virginia.
Claims frequency, as measured by the number of claims reported per 100
exposures, was lower by 23% in 2004 compared to 2003, was lower by 18% compared
to 2002 and was lower by 34% compared to 2001. While the severity of claims
continues to rise, lower frequency also has a direct impact on financial
results.
Claims severity increases impact both claims reported in the current
calendar year and claims originally reported in prior years. In the first half
of 2004, we incurred an increase in the severity of losses, principally from the
2001 report year claims in Virginia and the 2000 report year claims in the
District of Columbia. The fourth quarter adverse development of claims reported
in prior years stemmed from claims reported in 2001, 2002 and 2003 across all
our market territories except West Virginia.
On February 28, 2005, the Company announced its Board had approved an
agreement to merge NCRIC Group, Inc. into ProAssurance Corporation in a
stock-for-stock transaction that values the Company at $10.10 per share, based
on the closing price of ProAssurance common stock on Friday, February 25, 2005.
Under the terms of the agreement each holder of common stock of the Company will
have the right to receive 0.25 of a share of ProAssurance common stock for each
share of NCRIC Group. This exchange ratio is subject to adjustment in the event
that the market price of the ProAssurance stock prior to the closing of the
transaction either exceeds $44.00 or is less than $36.00 such that the exchange
ratio would then be adjusted such that the value per NCRIC Group share would
neither exceed $11.00 nor be less than $9.00, respectively. The transaction is
subject to required regulatory approvals and a vote of NCRIC Group stockholders
and is expected to close early in the third quarter of 2005.
On March 4, 2005 we announced that the financial rating of our primary
insurance subsidiary, NCRIC, Inc., was changed by A.M. Best Company from "A-"
(Excellent) to "B++" (Very Good) with negative implications. The action by A. M.
Best followed announcement of our fourth quarter and year-end 2004 results of a
net loss of $8.3 million and $7.1 million, respectively. The results were driven
primarily by adverse development on claims reported in prior years. The rating
will remain under review pending A. M. Best's review of NCRIC, Inc.'s loss
reserves, completion of the transaction and discussions with management.
CONSOLIDATED NET INCOME Years ended December 31, 2004, 2003 and 2002
Year ended December 31, 2004 compared to year ended December 31, 2003
Net results were a loss of $7.1 million for the year ended December 31,
2004 compared to a loss of $4.2 million for the year ended December 31, 2003.
2004 results were negatively impacted by adverse development of claims
originally reported in earlier years.
The operating results of our insurance segment for the year ended December
31, 2004 were primarily driven by growth in earned premiums and the increase in
the estimate of loss reserves for claims reported in prior years. Primarily due
to increased premium rates, net premiums earned increased by 41%. While the cost
for claims reported in 2004 increased due to severity, the development of losses
for claims originally reported in 2001, 2002 and 2003 reduced earnings for 2004.
The re-estimation of losses was driven by two primary factors -- increases in
the estimate of direct losses, primarily for the 2001, 2002 and 2003 report
years, and a change in estimate of the level of reinsurance to be recovered for
the losses reported in the years 2001 and 2002.
35
Net income for the fourth quarter of 2004 was a loss of $8.3 million
driven by adverse development on losses originally reported in prior years. The
section on Losses and Loss Adjustment Expenses provides a discussion of these
loss costs.
Year ended December 31, 2003 compared to year ended December 31, 2002
Net income was a loss of $4.2 million for the year ended December 31, 2003
compared to income of $742,000 for the prior year. 2003 results were negatively
impacted by adverse development of claims originally reported in earlier years.
The operating results of our insurance segment for the year ended December
31, 2003 were primarily driven by growth in new business written and the
increase in the estimate of loss reserves for claims reported in prior years.
For the year, new business premium written was $10.5 million compared to $12.7
million for 2002. The new business written coupled with the increased premium
rates resulted in a 57% 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 2003 increased due to the
rise in exposures, the development of losses for claims originally reported in
2001 and 2002 reduced pre-tax earnings for 2003. The re-estimation of losses was
driven by two primary factors -- increases in the estimate of direct losses,
primarily in Virginia for the 2001 and 2002 report years, and a change in
estimate of the level of reinsurance to be recovered for the losses reported in
the years 2000, 2001 and 2002.
The 2003 fourth quarter loss of $5.6 million was driven by adverse
development of $6.0 million on prior year losses in addition to an increased
reserving level on 2003 losses. The loss reserve development was estimated based
on new information on specific losses and related revision of estimates of loss
trends, primarily in report years 2001 and 2002, combined with a re-estimation
of reinsurance to be recovered on losses in the 2000, 2001 and 2002 report years
based on actual development as those years mature. Related to the change in
estimate of losses, the reinsurance premium on prior year losses covered by the
swing-rated reinsurance program was a charge of $931,000 in the fourth quarter
of 2003 compared to a credit of $106,000 in the fourth quarter of 2002.
NET PREMIUMS EARNED
The following table is a summary of our net premiums earned:
Year ended December 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(in thousands)
Gross premiums written ....................... $ 87,229 $ 71,365 $ 51,799
Change in unearned premiums .................. (6,237) (10,342) (7,686)
-------- -------- --------
Gross premiums earned ........................ 80,992 61,023 44,113
Reinsurance premiums ceded related to:
Current year .............................. (14,531) (12,833) (14,429)
Prior years ............................... 1 (926) 406
-------- -------- --------
Total reinsurance premiums ceded ....... (14,530) (13,759) (14,023)
-------- -------- --------
Net premiums earned before renewal credits ... 66,462 47,264 30,090
Renewal credits .............................. -- -- 8
-------- -------- --------
Net premiums earned .......................... $ 66,462 $ 47,264 $ 30,098
======== ======== ========
Year ended December 31, 2004 compared to year ended December 31, 2003
Gross premiums written increased by $15.8 million, or 22%, to $87.2
million for the year ended December 31, 2004 from $71.4 million for the year
ended December 31, 2003, due to net new business written, which is new business
net of lost business, combined with the premium rate increases, which averaged
27%. The gross premiums written include premiums for retrospectively rated
programs of $218,000 for the year ended
36
December 31, 2004 and $1.1 million for the year ended December 31, 2003,
decreasing primarily due to a return of premium under the terms of the
retrospective rating program. Gross premiums written also include $7.5 million
in 2004 and $3.2 million in 2003 for extended reporting endorsements. Gross
premiums written on excess layer coverage increased $3.1 million to $13.3
million for the year ended December 31, 2004 from $10.2 million for the year
ended December 31, 2003.
The change in unearned premiums for the period decreased by $4.1 million
to $6.2 million for the year ended December 31, 2004 from $10.3 million for the
year ended December 31, 2003. This decrease resulted from policy cancellations
and the refund of previously accrued retrospective rating program premium,
partially offset by premium rate increases and new business written.
Gross premiums earned increased $20.0 million, or 33%, to $81.0 million
for the year ended December 31, 2004 from $61.0 million for the year ended
December 31, 2003. The increase consists of $16.2 million for premiums earned
under basic medical professional liability insurance and $3.8 million for excess
limits coverage. Extended reporting endorsements premium is earned in the same
period as it is written.
Reinsurance premiums ceded increased by $0.7 million, or 5.6% to $14.5
million for the year ended December 31, 2004 from $13.8 million for the year
ended December 31, 2003. Current year reinsurance premiums ceded increased by
$1.7 million, or 13%, to $14.5 million for the year ended December 31, 2004 from
$12.8 million for the year ended December 31, 2003 as the result of higher gross
earned premiums. Reinsurance premiums are affected by current year premiums
payable to the reinsurers, as well as the retrospective adjustments to accruals
for prior year premiums.
Reinsurance premiums related to prior years under the swing-rated treaty
were a benefit of $1,000 in 2004 and a charge of $0.9 million in 2003 due to
loss development of reinsured losses compared to our prior estimates. Generally,
losses covered by the swing-rated treaty are in the range excess of $500,000 to
$1 million. Loss development results from the re-estimation and settlement of
individual losses. As claims are brought to conclusion, each year there are
fewer outstanding claims in the years covered by this reinsurance treaty. While
the potential for loss development impacting this reinsurance coverage is
reduced each year as the inventory of open claims is reduced, until all claims
covered by the treaty are closed the potential remains for changes from current
estimates. As of December 31, 2004, there are 20 open claims in the years
covered by swing-rated reinsurance compared to 36 open claims as of December 31,
2003. The liability "retrospective premiums accrued under reinsurance treaties"
decreased to $351,000 at December 31, 2004 from $1.8 million at December 31,
2003.
Renewal credits for the years ended December 31, 2004 and 2003 reflect our
decision to not provide a renewal premium credit for 2004 or 2005 renewals.
Net premiums earned increased by $19.2 million, or 40.6%, to $66.5 million
for the year ended December 31, 2004 from $47.3 million for the year ended
December 31, 2003. The increase reflects the $20.0 million growth in gross
earned premiums offset by the higher reinsurance premiums ceded in 2004 compared
to 2003.
In 2002, we initiated a program to provide insurance coverage to
physicians at four HCA hospitals in West Virginia. Under this arrangement, we
ceded 100% of the insurance exposure to a captive insurance company affiliated
with the sponsoring hospitals. We received 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 our direct written premium, we have no net written nor net earned
premium from this program. This program was terminated effective with July 1,
2003 renewals.
Direct new business comes primarily from the District of Columbia.
Agent-produced new business in 2004 came primarily from Delaware and Virginia.
The following chart of new written premiums shows the composition of new
business by distribution channel.
37
Year Ended December 31,
------------------------
2004 2003
------- -------
(in thousands)
Direct ............. $ 775 $ 618
Agent .............. 2,295 9,900
------- -------
$ 3,070 $10,518
======= =======
The overall level of new business produced in 2004 is lower than in 2003,
as planned. In 2003 our business in Delaware expanded to place us in the top
market share position, therefore, the opportunity for growth in Delaware in 2004
was limited. The other territory identified for growth is Virginia. We continue
to write new business in Virginia, however, our product is priced at the high
end of the market, which has the result of constraining growth. We believe our
price level is required by the loss characteristics of the Virginia market. We
continue to maintain that pricing integrity is critical to long-term viability.
The distribution of premium written continues to show notable growth in
our market areas outside of the District of Columbia. For seven months in 2004
in West Virginia we stopped writing new business and non-renewed policies at
their anniversary dates due to inadequate rate levels allowed by the West
Virginia Department of Insurance. After receiving approval for a rate increase
effective September 1, 2004, we began offering renewals on some West Virginia
business.
The following chart reports the components of gross premium written by
state as follows:
Year Ended December 31,
--------------------------------------------
2004 2003
------------------- -------------------
(dollars in thousands)
Amount % Amount %
------- ------- ------- -------
District of Columbia .... $25,650 30% $23,216 33%
Virginia ................ 29,612 34 22,640 32
Maryland ................ 11,451 13 8,819 12
West Virginia ........... 7,174 8 7,935 11
Delaware ................ 13,342 15 8,755 12
------- ------- ------- -------
Total .............. $87,229 100% $71,365 100%
======= ======= ======= =======
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, NCRIC billed the hospital sponsor,
Columbia Hospital for Women Medical Center, Inc., for premium due 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 December 31, 2004 the amount due to NCRIC for this program was
$2.9 million. NCRIC has accrued no amount of net receivable due to the pending
litigation and questionable collectibility.
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
38
plus a projection of post-trial interest. No amounts have been drawn upon the
letter of credit as of March 18, 2005. 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 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 incurred for
this litigation in 2004 were $734,000. The expenses associated with the $19.5
million appellate bond and associated letter of credit were $261,000.
Expenses incurred in 2004 for the trial portion of the litigation were
$525,000, reported as a component of underwriting expenses, and post-trial costs
were $620,000, 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, on an after-tax basis.
Year ended December 31, 2003 compared to year ended December 31, 2002
Gross premiums written increased by $19.6 million, or 38%, to $71.4
million for the year ended December 31, 2003 from $51.8 million for the year
ended December 31, 2002, due to net new business written, which is new business
net of lost business, combined with the premium rate increases, which averaged
27%. The gross premiums written include premiums for retrospectively rated
programs of $1.1 million for the year ended December 31, 2003 and $2.2 million
for the year ended December 31, 2002. Gross premiums written also include $3.2
million in 2003 and $1.3 million in 2002 for extended reporting endorsements.
Gross premiums written on excess layer coverage increased $3.6 million to $10.2
million for the year ended December 31, 2003 from $6.6 million for the year
ended December 31, 2002.
The change in unearned premiums for the period increased by $2.6 million
to $10.3 million for the year ended December 31, 2003 from $7.7 million for the
year ended December 31, 2002. This increase resulted from net new business
written throughout the year combined with premium rate increases.
Gross premiums earned increased $16.9 million, or 38%, to $61.0 million
for the year ended December 31, 2003 from $44.1 million for the year ended
December 31, 2002. The increase was primarily due to $14.3 million for premiums
earned under basic medical professional liability insurance and $2.5 million for
excess limits coverage. Extended reporting endorsements premium is earned in the
same period as it is written.
Reinsurance premiums ceded decreased by $0.2 million to $13.8 million for
the year ended December 31, 2003 from $14.0 million for the year ended December
31, 2002. The decrease was the result of lower reinsurance premium rates,
partially offset by higher gross earned premiums and additional premium ceded
related to prior years. Reinsurance premiums are affected by current year
premiums payable to the reinsurers, as well as the retrospective adjustments to
accruals for prior year premiums.
Current year reinsurance premiums ceded decreased by $1.6 million, or
11.4%, to $12.8 million for the year ended December 31, 2003 from $14.4 million
for the year ended December 31, 2002. This decrease was due to lower reinsurance
premium rates charged by reinsurers as a result of the increase in NCRIC's
retention level to $1 million from $500,000, partially offset by the increase in
gross earned premiums.
Reinsurance premiums related to prior years under the swing-rated treaty
were a charge of $0.9 million in 2003 and a benefit of $0.4 million in 2002 due
to loss development of reinsured losses compared to our prior estimates.
Generally, losses covered by the swing-rated treaty are in the range excess of
$500,000 to $1 million. Loss development results from the re-estimation and
settlement of individual losses. The 2003 change is due to an increase in the
estimate of losses covered by the swing-rated treaty in the 1997 and 1999 years.
The 2002 change is primarily reflective of the favorable loss development in the
1995, 1997 and 1998 coverage years. As claims are brought to conclusion, each
year there are fewer outstanding claims in the years covered by this reinsurance
treaty. While the potential for loss development impacting this reinsurance
coverage is reduced each year as the inventory of open claims is reduced, until
all claims covered by the treaty are closed the potential remains for changes
from current estimates. As of December 31, 2003, there are 36 open claims in the
years covered by swing-rated reinsurance compared to 48 open claims as of
December 31, 2002. The liability "retrospective premiums accrued under
reinsurance treaties" increased to $1.8 million at December 31, 2003 from $0.6
million at December 31, 2002.
39
Renewal credits for the years ended December 31, 2003 and 2002, reflect
our decision to not provide a renewal premium credit for 2003 or 2004 renewals.
Net premiums earned increased by $17.2 million, or 57.1%, to $47.3 million
for the year ended December 31, 2003 from $30.1 million for the year ended
December 31, 2002. The increase reflects the $16.9 million growth in gross
earned premiums supplemented by the lower reinsurance premiums ceded in 2003
compared to 2002.
In 2002, we initiated a program to provide insurance coverage to
physicians at four HCA hospitals in West Virginia. Under this arrangement, we
cede 100% of the insurance exposure to a captive insurance company affiliated
with the sponsoring hospitals. We receive 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 our direct written premium, we have no net written nor net earned
premium from this program. This program was terminated effective with July 1,
2003 renewals.
The mix of business produced directly by us versus by agents has changed
between years as shown on the following chart of new gross written premiums.
Year Ended December 31,
-----------------------
2003 2002
------- -------
(in thousands)
Direct ....... $ 618 $ 2,309
Agent ........ 9,900 10,391
HCA .......... 0 793
------- -------
$10,518 $13,493
======= =======
Direct new business is primarily in the District of Columbia. The D.C.
market does not provide significant opportunity for new business production.
Agent-produced new business in 2003 came primarily from Delaware and Virginia.
In 2002, agent new business also included $403,000 for the Princeton hospital
program which was discontinued in 2003.
The distribution of premium written shows notable growth in our market
areas outside of the District of Columbia. The following chart illustrates the
components of gross premium written by state.
Year Ended December 31,
--------------------------------------------
2003 2002
------------------- -------------------
(dollars in thousands)
Amount % Amount %
------- ------- ------- -------
District of Columbia .... $23,216 33% $21,796 42%
Virginia ................ 22,640 32 14,863 29
Maryland ................ 8,819 12 5,663 11
West Virginia ........... 7,935 11 7,688 15
Delaware ................ 8,755 12 1,789 3
------- ------- ------- -------
Total .............. $71,365 100% $51,799 100%
======= ======= ======= =======
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, NCRIC billed the hospital sponsor,
Columbia Hospital for Women Medical Center, Inc., for premium due 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 December 31, 2003 the amount due to NCRIC for this program was
$3.0 million. NCRIC has accrued no amount of net receivable due to the pending
litigation and questionable collectibility.
40
On February 13, 2004, a District of Columbia Superior Court jury rejected
NCRIC's claim for premiums due and returned a verdict in favor of Columbia
Hospital for Women Medical Center, Inc. (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, to set aside the verdict
or reduce the amount of the award. No liability has been accrued in the
financial statements for any possible loss arising from this litigation.
NET INVESTMENT INCOME
Year ended December 31, 2004 compared to year ended December 31, 2003
Net investment income increased by $1.3 million, or 22%, for the year
ended December 31, 2004 compared to the prior year reflecting a higher base of
average invested assets partially offset by a decrease in yields. Net investment
income for the year ended December 31, 2004 was $7.3 million compared to $6.0
million for the year ended December 31, 2003. Average invested assets, which
include cash equivalents, increased by $40.4 million, or 26%, to $194.1 million
for the year ended December 31, 2004, due to the proceeds from the mid-2003
issuance of stock and cash from operations. The investment portfolio continues
to overweight mortgage-backed securities, and maintains an allocation to common
stocks as part of the strategy to protect the portfolio in a rising interest
rate environment. The average effective yield was approximately 3.7% for the
year ended December 31, 2004 and 3.9% for the year ended December 31, 2003. The
tax equivalent yield was approximately 4.2% at December 31, 2004 and 4.4% at
December 31, 2003. The change in investment yields is reflective of the market
change in interest rates in 2004 compared to 2003 as well as the allocation to
lower-yielding common stocks.
Year ended December 31, 2003 compared to year ended December 31, 2002
Net investment income increased by $93,000, or 2%, for the year ended
December 31, 2003 compared to the prior year reflecting a higher base of average
invested assets partially offset by a decrease in yields. Net investment income
for the year ended December 31, 2003 was $6.0 million compared to $5.9 million
for the year ended December 31, 2002. Average invested assets, which include
cash equivalents, increased by $42.3 million, or 38%, to $153.7 million for the
year ended December 31, 2003, due to the proceeds from the issuance of stock and
cash from operations. New investments were primarily directed to mortgage-backed
securities; in addition, the investment portfolio added an allocation to common
stocks as part of the strategy to protect the portfolio in a rising interest
rate environment. The average effective yield was approximately 3.9% for the
year ended December 31, 2003 and 5.3% for the year ended December 31, 2002. The
tax equivalent yield was approximately 4.4% at December 31, 2003 and 5.9% at
December 31, 2002. The change in investment yields is reflective of the market
change in interest rates in 2003 compared to 2002 as well as being reflective of
the new allocation to lower-yielding common stocks and the portfolio
restructuring executed in the first half of 2003. Securities sold as a part of
the restructuring generally had above market coupon rates and were therefore
sold at gains. New securities acquired brought current market rate yields into
the portfolio, thereby reducing the overall portfolio yield.
NET REALIZED INVESTMENT GAINS (LOSSES)
Year ended December 31, 2004 compared to year ended December 31, 2003
Net realized investment gains were $475,000 for the year ended December
31, 2004 compared to net realized investment gains of $1.9 million for the year
ended December 31, 2003. The 2004 gains resulted from routine portfolio
management activity, partially offset by the recognition of an other-than-
temporary impairment of $15,000 on an investment in common stock. The
circumstance giving rise to the other-than-temporary impairment charge was a
decline in the value of the stock in 2004, which we do not expect to be
temporary based on available financial information of the issuer.
41
Year ended December 31, 2003 compared to year ended December 31, 2002
Net realized investment gains were $1.9 million for the year ended
December 31, 2003 compared to net realized investment losses of $131,000 for the
year ended December 31, 2002. The 2003 gains resulted from portfolio
restructuring implemented by our new fixed-income investment portfolio manager
to replace weak credits with stronger rated bonds as well as from routine
portfolio management activity, partially offset by the recognition of an other-
than-temporary impairment loss 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. 2002 realized
losses included an other-than-temporary impairment charge of $557,000 for a
fixed maturity security issued by WorldCom.
PRACTICE MANAGEMENT AND RELATED INCOME
Revenue for practice management and related services is comprised of fees
for the following categories of services provided: practice management;
accounting; tax and personal financial planning; retirement plan accounting and
administration; and other services.
Year ended December 31, 2004 compared to year ended December 31, 2003
Practice management and related revenues decreased by $0.5 million, or
10.2%, to $4.4 million for the year ended December 31, 2004, from $4.9 million
for the year ended December 31, 2003. This revenue consists of fees generated by
ConsiCare through its HealthCare Consulting and Employee Benefits Services
divisions. The decreased revenue was primarily a result of a reduced level of
non-recurring assignments in the HealthCare Consulting division compared to
2003.
Year ended December 31, 2003 compared to year ended December 31, 2002
Practice management and related revenues decreased by $0.9 million, or
15.5%, to $4.9 million for the year ended December 31, 2003, from $5.8 million
for the year ended December 31, 2002. This revenue consists of fees generated by
ConsiCare through its HealthCare Consulting and Employee Benefits Services
divisions. The decreased revenue was primarily a result of a reduced level of
non-recurring and recurring assignments in the HealthCare Consulting division
compared to 2002. Additionally, in the later part of 2003, there was some loss
of clients and revenue resulting from the departure from NCRIC of two
consultants.
OTHER INCOME
Other income includes revenues from insurance brokerage, insurance agency
and physician services, as well as service charge income from installment
payments for our insurance premium billings.
Year ended December 31, 2004 compared to year ended December 31, 2003
Other income decreased $335,000, or 29%, to $820,000 for the year ended
December 31, 2004 from $1.2 million for the year ended December 31, 2003. The
decreased revenue resulted from a decrease of $500,000 in service charge income
due to the initiation of an installment billing program through a third party
premium finance company, partially offset by an increase of $126,000 in
brokerage commission income resulting from the increase in ceded premium and a
small increase in insurance agency commissions.
Year ended December 31, 2003 compared to year ended December 31, 2002
Other income increased $142,000, or 14%, to $1,155,000 for the year ended
December 31, 2003 from $1.0 million for the year ended December 31, 2002. The
increased revenue resulted primarily from service charge income from installment
payments for our insurance premium billings.
42
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED AND COMBINED RATIO RESULTS
The expense for incurred losses and LAE for each year is summarized as
follows. All loss expense amounts incurred are reported net of reinsurance
amounts recoverable.
Year Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
(in thousands)
Incurred losses and LAE related to:
Current year losses ................. $53,158 $44,588 $24,063
Prior years loss development ........ 17,152 5,885 2,766
------- ------- -------
Total incurred for the year ........ $70,310 $50,473 $26,829
======= ======= =======
Traditionally, property and casualty insurer results are judged using
ratios of losses and underwriting expenses compared to net premiums earned.
Following is a summary of these ratios for each period.
Year Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Losses and LAE ratio:
Current year losses .................. 80.0% 94.3% 79.9%
Prior years loss development ......... 25.8 12.5 9.2
------- ------- -------
Total losses and LAE ratio ............. 105.8 106.8 89.1
Underwriting expense ratio ............. 19.0 21.2 27.2
------- ------- -------
Combined ratio ......................... 124.8% 128.0% 116.3%
======= ======= =======
The combined ratio and its component loss and underwriting expense ratios
are profitability measures used throughout the insurance industry as a relative
measure of underwriting performance. Insurance premium rates are designed to
cover the costs of providing insurance coverage. These costs include loss
expenses arising from indemnity claims, costs required to adjudicate claims, and
costs to issue and service insurance policies. The calculations show the cost of
each expense component as a percentage of earned premium income. A general guide
for interpreting the combined ratio is a lower ratio indicates greater
profitability than does a higher ratio.
The resolution of some of the claims reported to us is determined through
a trial. Following is a summary of the trial results for each period.
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Plaintiff verdicts ............ 7 11 5
Defense verdicts .............. 38 22 13
Mistrials or hung juries ...... 2 0 4
---- ---- ----
Total trials .................. 47 33 22
==== ==== ====
Of the seven plaintiff verdicts in 2004, all were awarded in excess of our
applicable retention limits. Under the clash protection provided by our
reinsurance program, our exposure to the retention limit was limited in three of
the seven verdicts. Of the 11 plaintiff verdicts in 2003, five verdicts were
awarded in excess of our applicable retention limits. Under the clash protection
provided by our reinsurance program, our exposure to the retention limit was
limited in three of the five verdicts. Of the five plaintiff verdicts in 2002,
three verdicts were awarded in excess of our $500,000 retention.
Year ended December 31, 2004 compared to year ended December 31, 2003
Total incurred losses and LAE expense of $70.3 million for year ended
December 31, 2004 represents an increase of $19.8 million compared to $50.5
million incurred for the year ended December 31, 2003.
43
The total incurred losses are broken into two components -- incurred
losses related to the current coverage year and development on prior coverage
year losses. Current year incurred losses increased by $8.6 million to $53.2
million for the year ended December 31, 2004 from $44.6 million for the year
ended December 31, 2003, reflecting an increase in severity of reported claims
and an increase in exposures for extended reporting endorsements.
Prior year development results from the re-estimation and resolution of
individual losses not covered by reinsurance, which are generally losses under
$500,000 for losses reported prior to 2003 and under $1 million for losses
reported in 2003. In 2004 we experienced unfavorable development of $17.1
million on estimated losses for prior years' claims. The re-estimation of loss
cost takes into consideration a variety of factors including recent claims
settlement experience, new information on open claims, and changes in the
judicial environment. The primary factors driving development in 2004, which is
comprised of adverse development in the 2001, 2002 and 2003 report years,
include additional information on claims originally reported in prior years and
interpretation of emerging settlement trends in all our market areas.
As described in the opening section of this MD&A, the process for
determining our estimates of loss cost begins with the establishment of case
reserves within our claims department. Evaluations of individual claims are
updated when additional information on each case is determined, often as a part
of the preparation for trial. Case reserves on individual claims are raised when
new information indicates a greater loss exposure. Case reserves are decreased
either when a case is resolved at a lower level than previously estimated or
when reinsurance recoverable becomes applicable. Actuarial reserves are
established based on case reserves combined with historical loss development
trends utilizing a complex mathematical analysis to determine the actuarially
based estimate of losses.
In 2004 the estimate of losses on claims reported in prior years on a case
reserve basis was a net reduction in estimate. In contrast, the actuarially
calculated losses on prior years' claims produced a net increase in estimate.
We rely on the guidance of our consulting actuary to establish reserves
and each year-end we book the point estimate provided by the actuarial reserve
calculation. However, over the past two years we have subsequently experienced
various factors that have required an increase in the initial actuarial reserve
estimates. The factors leading to the reserve adjustment include: the emergence
over the past two years of our own experience in our new market territories;
increasing severity trends that have been experienced by insurance carriers on a
nationwide basis; claims development within the net retained layer resulting in
less recovery from reinsurance; and environmental factors, such as the rise in
Virginia's total loss cap on awards.
Since we have experienced a significant level of adverse development of
losses two years in a row, we engaged a second consulting actuarial firm to
independently calculate the reserve estimate as of December 31, 2004. The
results of this study confirmed the estimate of losses at the level being
reported as of December 31, 2004.
The lower loss ratio on current year losses at 80.0% in 2004 compared to
94.3% in 2003 reflects both the increase in premium rates and lower frequency of
reported losses in 2004. The total loss ratio was increased by 26 points for the
year ended December 31, 2004 and was increased by 13 points for the year ended
December 31, 2003 as a result of the re-estimation of losses reported in prior
years.
The underwriting expense ratio decreased to 19.0% for the year ended
December 31, 2004 from 21.2% for the year ended December 31, 2003. Premiums
increased proportionately more than underwriting expenses, resulting in a
decrease in the underwriting expense ratio. Underwriting expenses increased $2.6
million to $12.6 million for the year ended December 31, 2004 from $10.0 million
for the year ended December 31, 2003. The 26% increase in underwriting expenses
was primarily attributable to the growth in expenses, consisting primarily of
commissions, directly related to the expansion in business, consistent with the
growth in premium.
The statutory combined ratio was 126.5% for the year ended December 31,
2004, and 129.4% for the year ended December 31, 2003. This decrease stems from
the same factors noted previously.
Current year losses in the fourth quarter of 2004 totaled $14.1 million,
increasing over the level of the fourth quarter of 2003 and over the level of
the prior quarters of 2004. The higher level of current year losses primarily
reflects reserves for losses incurred but not reported on extended reporting
endorsements issued and was
44
established with consideration to the prior year loss development trends that
emerged during the year-end actuarial valuation. The loss ratio on current year
losses at 79.1%, lower than in previous quarters in 2004, reflects the reduced
claims frequency in the quarter.
Development on losses reported in prior years totaled $15.6 million in the
fourth quarter of 2004. This adverse loss development emerged during the fourth
quarter from two primary sources:
o upward development on claims in the 2001, 2002 and 2003 report
years; and
o a lower estimate of reinsurance to be recovered on losses in
the 2001 and 2002 report years.
Approximately 66% of the net adverse development emerged from the 2003
report year. In the past during the first year of development following the
initial report year, we have observed a general loss development pattern; in the
fourth quarter of 2004, the case basis reserves across all jurisdictions
appeared to be developing differently from that pattern, thus indicating an
overall higher loss level. This higher level of indicated losses was recognized
as adverse development in the fourth quarter.
Year ended December 31, 2003 compared to year ended December 31, 2002
Total incurred losses and LAE expense of $50.5 million for year ended
December 31, 2003 represents an increase of $23.7 million compared to $26.8
million incurred for the year ended December 31, 2002.
The total incurred losses are broken into two components -- incurred
losses related to the current coverage year and development on prior coverage
year losses. Current year incurred losses increased by $20.5 million to $44.6
million for the year ended December 31, 2003 from $24.1 million for the year
ended December 31, 2002, reflecting an increase in severity of reported claims,
the rise in the level of liability exposure as a result of expanding business,
and the increase in retention under our reinsurance program to $1 million for
each and every loss from $500,000 for each and every loss in 2002.
Prior year development results from the re-estimation and resolution of
individual losses not covered by reinsurance, which are generally losses under
$500,000. In 2003 we experienced unfavorable development of $5.9 million on
estimated losses for prior years' claims. The re-estimation of loss cost takes
into consideration a variety of factors including recent claims settlement
experience, new information on open claims, and changes in the judicial
environment. The primary factors driving our 2003 development, which is
comprised of favorable development in the 1999 report year offset by adverse
development in the 2000, 2001 and 2002 report years, include additional
information on claims originally reported in prior years and interpretation of
emerging settlement trends in our expansion market areas. The primary market
territory driving the adverse loss development experience is Virginia claims
reported in 2001 and 2002. Additionally, one 2001 claim in West Virginia and
2002 Maryland claims contributed to the adverse development. In addition, the
estimate of reinsurance recoverable, primarily on 2000, 2001 and 2002 losses
across all our market territories, declined.
An increase in severity was first noted in 1996 and continued through 2003
for claims reported in the District of Columbia. The increase in severity
reflects the growing size of plaintiff verdicts and settlements. Our escalation
in this adverse claims trend is similar to the conditions faced by many medical
professional liability insurance carriers across the nation. While an increase
in severity would tend to cause loss ratios to deteriorate, our reinsurance
program provides a layer of protection against the increase in severity of
losses.
In the market territories outside of the District of Columbia, or our
expansion market areas, our experience covers a time-period insufficient to make
a complete determination on severity trends. In these new market areas, we
carefully evaluate developing data to identify and recognize emerging trends as
soon as possible.
The total losses and LAE ratio was increased by 13 points for the year
ended December 31, 2003 and was increased by 9 points for the year ended
December 31, 2002 as a result of prior years loss development. The 2003 change
is primarily reflective of favorable loss development for the 1999 report years,
more than offset by adverse development in the 2000, 2001 and 2002 loss years;
whereas, the 2002 change is primarily reflective of favorable loss development
for the 1996 and 1999 loss years, more than offset by adverse development in the
1998, 2000 and 2001 loss years.
45
The underwriting expense ratio decreased to 21.2% for the year ended
December 31, 2003 from 27.2% for the year ended December 31, 2002. In 2002
underwriting expenses included $1.2 million for a reserve against the
hospital-sponsored program receivable, as previously discussed. A similar charge
was unnecessary in 2003, contributing 4.1 points of improvement to the
underwriting expense ratio. Underwriting expenses increased $1.8 million to
$10.0 million for the year ended December 31, 2003 from $8.2 million for the
year ended December 31, 2002. The 22% increase in underwriting expenses was
primarily attributable to the growth in expenses, consisting primarily of
commissions, directly related to the expansion in business, consistent with the
growth in premium.
The combined ratio increased to 128.0% for the year ended December 31,
2003 from 116.3% for the year ended December 31, 2002. The primary factor
driving the increased combined ratio was the adverse development of losses
reported in prior years. While adverse development directly contributed 3.3
points of the increase, the experience on 2001 and 2002 adverse development was
factored into the estimate of 2003 incurred losses, resulting in an increase in
the current year component of the combined ratio.
The statutory combined ratio was 129.4% for the year ended December 31,
2003, and 111.8% for the year ended December 31, 2002. This increase stems from
the same factors noted previously.
Current year losses in the fourth quarter of 2003 totaled $13.4 million,
increasing over the level of the prior quarters of 2003. While the number of new
claims reported in the fourth quarter was the lowest experienced in 2003, the
higher level of current year losses was established to take into consideration
the prior year loss development trends that emerged during the year-end
actuarial valuation. The loss ratio on current year losses at 108.2%, higher
than previous quarters in 2003, reflects this recognition of higher severity.
Development on losses reported in prior years totaled $6.0 million in the
fourth quarter of 2003. This adverse loss development emerged during the fourth
quarter from two primary sources:
o upward development on claims, primarily in Virginia and
Maryland in 2001 and 2002; and
o a lower estimate of reinsurance to be recovered on losses in
the 2000, 2001 and 2002 report years across all territories.
Evaluations of individual claims are updated when additional information
on each case is determined, often as a part of the preparation for trial. Case
reserves on individual claims are raised when new information indicates a
greater loss exposure. Actuarial reserves are established based on case reserves
combined with historical loss development trends. The upward development in the
fourth quarter on case reserves of individual claims was not consistent with
trends experienced previously. Therefore, in addition to the recognition of the
upward development on individual claims, the actuarial estimates of losses were
increased.
NCRIC's retention of losses in the 2000, 2001 and 2002 report years is
$500,000 for each and every loss. The estimate of reinsurance amounts to be
recovered from reinsurers is based primarily on historical trends, combined with
information on individual claims. In the first three quarters of 2003 NCRIC
recognized in its losses a lesser estimate of reinsurance recoveries. The
revised estimate prepared as of year-end 2003 further reduced the amount of
estimated reinsurance recoveries on losses initially reported in prior years.
46
LOSSES AND LOSS ADJUSTMENT EXPENSES LIABILITY
The losses and LAE reserve liabilities for unpaid claims as of each period
are as follows:
At December 31,
---------------------
2004 2003
-------- --------
(in thousands)
Liability for:
Loss .............................. $107,746 $ 87,778
Loss adjustment expense ........... 45,496 38,213
-------- --------
Total liability ..................... $153,242 $125,991
======== ========
Reinsurance recoverable on losses ... $ 44,846 $ 48,100
======== ========
Number of cases pending ............. 653 616
Each case represents claims against one or more policyholders relating to
a single incident. Losses in the medical professional liability industry can
take up to eight to ten years, or occasionally more, to fully resolve. Amounts
are not due from the reinsurers until we pay a claim. We believe that all of our
reinsurance recoverables are collectible. See "Business - Reinsurance" for a
discussion on the reinsurance program.
UNDERWRITING EXPENSES
For 2004, salaries and benefits accounted for approximately 24% of other
underwriting expenses, commissions and brokerage expenses 28%, with professional
fees, including legal, auditing and director's fees, accounting for
approximately 16% of the underwriting expenditures. Premium taxes and guaranty
fund assessments comprise the majority of the remaining balance. Guaranty fund
assessments are based on industry loss experience in the jurisdictions where we
do business, and are not predictable.
Year ended December 31, 2004 compared to year ended December 31, 2003
Underwriting expenses increased $2.6 million, or 26%, to $12.6 million for
the year ended December 31, 2004 from $10.0 million for the year ended December
31, 2003. The increase in expenses primarily stems from the increase in new
business, particularly agent-produced business, through increases in
commissions, travel, and other underwriting costs. In addition, legal fees
incurred included $525,000 for the collection litigation initiated by us as more
fully discussed in the section "Net Premiums Earned," and $613,000 of expense
resulting from a fraudulent act of a former sales agent.
Year ended December 31, 2003 compared to year ended December 31, 2002
Underwriting expenses increased $1.8 million, or 22%, to $10.0 million for
the year ended December 31, 2003 from $8.2 million for the year ended December
31, 2002. The increase in expenses primarily stems from the increase in new
business, particularly agent-produced business, through increases in
commissions, travel, and other underwriting costs. In addition, expenses
increased for ceding allowances as a result of the change in the primary
reinsurance treaty effective for 2003, legal fees incurred for the collection
litigation initiated by us as more fully discussed in the section "Net Premiums
Earned," and $364,000 of expense resulting from 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
any expense is not reasonably estimable at this time.
PRACTICE MANAGEMENT AND RELATED EXPENSES
Practice management and related expenses consist primarily of expenses,
such as salaries, general office expenses and interest on debt, related to
ConsiCare operations of the businesses acquired January 4, 1999. The management
services organization was established in 1997 to provide physicians with a
variety of administrative support and other services but did not have
substantive operations until 1998.
47
Year ended December 31, 2004 compared to year ended December 31, 2003
Practice management and related expenses decreased $0.2 million, or 4%, to
$5.0 million for the year ended December 31, 2004 compared to $5.2 million for
the year ended December 31, 2003. Expense decreased primarily due to reductions
in staffing commensurate with the reductions in revenue. The expense decrease
was net of increased expenses for branding, resulting in the name change to
ConsiCare, and for strategic business development.
Year ended December 31, 2003 compared to year ended December 31, 2002
Practice management and related expenses decreased $589,000, or 10%, to
$5.2 million for the year ended December 31, 2003 compared to $5.8 million for
the year ended December 31, 2002. Expense decreased primarily due to reductions
in staffing commensurate with the reductions in revenue. A portion of this
decrease stemmed from the elimination of costs associated with the transition of
client service for two of the former owners as their employment contracts
expired.
INTEREST EXPENSE
Interest expense incurred is for the debt service on the Trust Preferred
Securities issued in December, 2002. The stated annual interest rate is 400
basis points over LIBOR, adjusted quarterly.
Year ended December 31, 2004 compared to year ended December 31, 2003
Interest expense increased $31,000, or 3.75%, to $857,000 for the year
ended December 31, 2004 compared to $826,000 for the year ended December 31,
2003. The interest rate in 2004 averaged 5.54% while the interest rate in 2003
averaged 5.31%.
Year ended December 31, 2003 compared to year ended December 31, 2002
Interest expense for the year ended December 31, 2003 totaled $826,000, a
full year of interest, compared to $62,000, a partial month of interest in the
prior year. The interest rate in 2003 averaged 5.31% and the interest rate in
2002 was 5.42%.
OTHER EXPENSES
Other expenses include expenditures for holding company and subsidiary
operations which are not directly related to the issuance of medical
professional liability insurance or practice management and related operations,
including insurance brokerage, insurance agency, and captive development.
In 2001 we formed ACC, a wholly owned captive insurance company
subsidiary, to provide an alternative risk-financing vehicle for affinity
groups. The captive program is marketed to organizations and groups wishing to
finance and manage their own risk. During 2004, ACC incurred $163,000 in
expenses. As of December 31, 2004, ACC does not have any active protected cells.
Year ended December 31, 2004 compared to year ended December 31, 2003
Other expenses of $2.5 million for the year ended December 31, 2004
compares to other expense of $1.7 million for the year ended December 31, 2003.
The primary component of the expense increase is $619,000 for post-trial
expenses for the premium collection litigation. The remainder of the increase is
for holding company operations.
48
Year ended December 31, 2003 compared to year ended December 31, 2002
Other expenses of $1.7 million for the year ended December 31, 2003
compares to other expense of $1.4 million for the year ended December 31, 2002.
Expense increases are for holding company operations.
INCOME TAXES
Our effective tax rate is lower than the federal statutory rate
principally due to nontaxable investment income.
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
Federal income tax at statutory rates . 34% 34% 34%
Tax exempt income ..................... 4 6 (89)
Dividends received .................... 1 0 (21)
Other, net ............................ 1 (1) (1)
---- ---- ----
Income tax benefit at effective rates . 40% 39% (77)%
==== ==== ====
Our net deferred tax assets are created by temporary differences that will
result in tax benefits in future years due to the differing treatment of items
for tax and financial statement purposes. The primary difference is the
requirement to discount or reduce loss reserves for tax purposes because of
their long-term nature. Additionally, the deferred income tax asset includes
$1.9 million for net operating loss carryforwards, NOLs, which are available to
reduce tax return taxable income in future years.
At December 31,
------------------------
2004 2003
---------- ----------
Deferred income tax asset .... $8,404,000 $5,307,000
Year ended December 31, 2004 compared to year ended December 31, 2003
The tax benefit for the year ended December 31, 2004 was $4.8 million
compared to $2.7 million for the year ended December 31, 2003. A federal tax
benefit was incurred in 2004 due primarily to the pre-tax loss. In addition, the
effective tax benefit rate was improved by 4% due to tax exempt income.
The increase in the deferred income tax asset to a balance of $8.4 million
as of December 31, 2004 resulted from the growth of the insurance business,
particularly in unearned premiums and loss reserves where the timing of
recognition for financial statement and tax return reporting differ and from the
tax benefits, NOLs and minimum tax credits, associated with the net loss for the
year 2004.
Year ended December 31, 2003 compared to year ended December 31, 2002
The tax benefit for the year ended December 31, 2003 was $2.7 million
compared to $0.3 million for the year ended December 31, 2002. A federal tax
benefit was incurred in 2003 due primarily to the pre-tax loss. In addition, the
effective tax benefit rate was improved by 6% due to tax exempt income.
The increase in the deferred income tax asset to a balance of $5.3 million
as of December 31, 2003 resulted primarily from the growth of the insurance
business, particularly in unearned premiums and loss reserves where the timing
of recognition for financial statement and tax return reporting differ.
49
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
NCRIC Group, parent company
Financial condition and capital resources. We are a stock holding company
whose operations and assets primarily consist of our ownership of NCRIC, Inc.
and ConsiCare, Inc. We assist our subsidiaries in their efforts to compete
effectively and create long-term growth.
Second Step Conversion and Public Offering. On June 24, 2003, a plan of
conversion and reorganization was approved by the members of NCRIC, A Mutual
Holding Company and by the shareholders of NCRIC Group, Inc. In the conversion
and related stock offering, the Mutual Holding Company offered for sale its 60%
ownership interest in NCRIC Group. As a result of the conversion and stock
offering, the Mutual Holding Company ceased to exist, and NCRIC Group became a
fully public company.
In the conversion and stock offering, 4,143,701 shares of the common stock
of NCRIC Group were sold to Eligible Members, Employee Benefit Plans, Directors,
Officers and Employees and to members of the general public in a Subscription
and Community Offering at $10.00 per share. As part of the conversion, 2,778,144
shares were issued to the former public stockholders of NCRIC Group. The
exchange ratio was 1.8665 new shares for each share of NCRIC Group held by
public stockholders as of the close of business on June 25, 2003. Accordingly,
after the conversion, NCRIC Group had 6,921,845 shares outstanding.
Trust Preferred Securities. In December 2002, we completed the private
placement sale of $15 million of 30-year floating rate trust preferred
securities. The securities are callable at par five years from the date of
issuance. The interest rate on the securities is floating at the 3-month London
Interbank Offered Rate (LIBOR) plus 400 basis points. We contributed $13.5
million of the funds raised to the statutory surplus of our insurance subsidiary
NCRIC, Inc.
Liquidity. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. Our cash flow from
operations consists of dividends from our subsidiaries, if declared and paid,
and other permissible payments from our subsidiaries, offset by holding company
expenses, which consist of costs for corporate management and interest on the
trust preferred securities. The amount of the future cash flow available to us
may be influenced by a variety of factors, including NCRIC, Inc.'s financial
results and regulation by the District of Columbia Department of Insurance,
Securities and Banking.
The payment of dividends to us by NCRIC, Inc. is subject to limitations
imposed by the District of Columbia Holding Company System Act of 1993. Under
the DC Holding Company Act, NCRIC, Inc. must seek prior approval from the
Commissioner to pay any dividend which, combined with other dividends made
within the preceding 12 months, exceeds the lesser of (A) 10% of the surplus at
the end of the prior year or (B) the prior year's net income excluding realized
capital gains. Net income, excluding realized capital gains, for the two years
preceding the current year is carried forward for purposes of the calculation to
the extent not paid in dividends. The law also requires that an insurer's
statutory surplus following a dividend or other distribution be reasonable in
relation to the insurer's outstanding liabilities and adequate to meet its
financial needs. The District of Columbia permits the payment of dividends only
out of unassigned statutory surplus. As of December 31, 2004, NCRIC, Inc. had
approximately $63 million of unassigned statutory surplus. Any dividend payment
by NCRIC, Inc. would require the approval of the Commissioner.
NCRIC Group and subsidiaries, consolidated
Liquidity. The primary sources of our 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 losses and LAE, operating expenses, reinsurance
premiums, taxes, and to purchase investments.
50
We had cash flows provided by operations for the years ended December 31,
as follows:
2004................ $33.2 million
2003................ $20.6 million
2002................ $ 3.4 million
Comprehensive income was a loss of $6.5 million for the year ended
December 31, 2004 compared to a loss of $5.6 million for the year ended December
31, 2003. The decrease in comprehensive income results from the $7.1 million net
loss, partially offset by the $648,000 increase in net unrealized investment
gains for the year ended December 31, 2004.
Financial condition and capital resources. We invest our positive cash
flow from operations primarily in investment grade, fixed maturity securities.
As of December 31, 2004, the carrying value of the securities portfolio was
$202.3 million, compared to a carrying value of $174.4 million at December 31,
2003. The portfolios were invested as follows:
At December 31,
---------------
2004 2003
---- ----
U.S. Government and agencies ........... 18% 17%
Asset and mortgage-backed securities ... 24 31
Tax exempt securities .................. 21 21
Corporate bonds ........................ 25 24
Equity securities ...................... 12 7
---- ----
100% 100%
==== ====
Approximately 72% of the bond portfolio at December 31, 2004 was invested
in U.S. Government and agency securities or had a rating of AAA or AA. The
entire bond portfolio as of December 31, 2004 was held in investment grade (BBB
or better) securities as rated by Standard & Poor's. For regulatory purposes, as
of December 31, 2004, 88% of the portfolio is rated Class 1 which is the highest
quality rated group as classified by the NAIC. The accumulated other
comprehensive income totaled $2.1 million at December 31, 2004 compared to $1.5
million at December 31, 2003. This increase in asset values resulted primarily
from the improvement in fair values of investments in the equity component of
the portfolio.
At December 31, 2004, our portfolio included total gross unrealized gains
of $4.7 million, or 2.3% of the $202.3 million carrying value of the portfolio,
and total unrealized losses of $1.5 million, or less than 1% of the carrying
value of the portfolio. The total unrealized losses are comprised of six equity
securities and 191 fixed maturity securities, including 12 Treasury Note issues,
179 corporate debt and municipal bonds (all of which are investment grade), with
lengths of time to maturity ranging from one to 44 years. All of the fixed
maturity securities are meeting and are expected to continue to meet all
contractual obligations for interest payments.
At December 31, 2004, the aggregate fair value of the securities with
unrealized losses was $112.8 million, or 99% of the amortized cost of those
securities of $114.3 million. The largest single security with an unrealized
loss at December 31, 2004 relates to a FNMA pool which matures in 2018 and
carries a coupon rate of 5.0%. The unrealized pre-tax loss relating to this
security is approximately $115,000 based on the fair value of $4.5 million at
December 31, 2004. Unrealized losses related to other securities are not
individually significant, nor is there any concentration of unrealized losses
with respect to the type of security or industry.
51
The following table displays characteristics of the securities with an
unrealized loss in value as of December 31, 2004. No concentrations of
industries exist in these securities.
Total securities Equity securities
-------------------------------------- -------------------------------------
Length of time in Amortized Fair Unrealized Amortized Unrealized
unrealized loss position Cost Value Loss Cost Fair Value Loss
- ------------------------ --------- -------- ---------- --------- ---------- ----------
(in thousands)
Less than 1 year ....... $ 54,279 $ 53,708 $ 571 $ 244 $ 235 $ 9
Over 1 year ............ 59,998 59,078 920 402 380 22
-------- -------- -------- -------- -------- --------
Total .................. $114,277 $112,786 $ 1,491 $ 646 $ 615 $ 31
======== ======== ======== ======== ======== ========
The following table displays the maturity distribution of those fixed
maturity securities with an unrealized loss in value as of December 31, 2004:
Fixed maturity securities
--------------------------------------
Amortized Fair Unrealized
Cost Value Loss
--------- -------- ----------
(in thousands)
During one year or less ................... $ 7,990 $ 7,982 $ 8
Due after one year through five years ..... 40,023 39,592 431
Due after five years through ten years .... 21,382 20,998 384
Due after ten through twenty years ........ 12,338 12,043 295
Due after twenty years .................... 31,898 31,556 342
-------- -------- --------
$113,631 $112,171 $ 1,460
======== ======== ========
We believe that all of our fixed maturity securities are readily
marketable. Investment duration is closely monitored to provide adequate cash
flow to meet operational and maturing liability needs. Asset and liability
modeling, including sensitivity analyses and cash flow testing, are performed on
a regular basis.
We are required to pay aggregate annual salaries in the amount of $966,400
to four persons under employment agreements.
Under terms of the purchase agreement between the previous owners of
HealthCare Consulting, Inc., HCI Ventures, LLC, Employee Benefits Services, Inc.
and us, contingency payments totaling $3.1 million could be paid in cash if the
acquired companies achieved earnings targets in 2000, 2001, and 2002. During
June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance
these payments. The term of the loan was three years at a floating rate of LIBOR
plus one and one-half percent. The balance of the loan was paid in May of 2004.
The interest rate at the time of the payoff was 2.68%, and 2.67% as of December
31, 2003. Principal and interest payments were paid on a monthly basis until
payoff.
The following table summarizes our contractual obligations as of December
31, 2004, in thousands:
Over
One Over three More
year one year years to than
or to three five five
Total less years years years
-------- -------- -------- -------- --------
Long-term debt $ 15,000 $ -- $ -- $ -- $ 15,000
Losses & LAE 153,242 47,731 71,202 24,510 9,799
Operating leases 2,965 917 1,779 269 --
-------- -------- -------- -------- --------
$171,207 $ 48,648 $ 72,981 $ 24,779 $ 24,799
-------- -------- -------- -------- --------
52
Operating leases consist of office rental commitments. The table excludes
purchase obligations which consist of routine acquisitions of office supplies
which represent minimal commitments generally spanning one month or less. As an
insurance company, we have liabilities for losses and related loss adjustment
expenses in the normal course of business. Since these liabilities arise due to
contractual obligations under the insurance policies we issue, estimates of the
amounts to be paid at undetermined future dates are included in this table.
Interest on long-term debt is variable rate and therefore is not included in
this table.
Our stockholders' equity totaled $72.0 million at December 31, 2004 and
$78.0 million at December 31, 2003. The $6.0 million decrease for the year ended
December 31, 2004 was due primarily to the net loss of $7.1 million, offset by
the increase of $648,000 in net unrealized investment gains.
Stock options
On July 7, 2004, the Board of Directors accelerated the vesting of the
384,322 outstanding stock options granted in 2003. The options were originally
scheduled to vest during the period from August, 2004 to August, 2008. On the
accelerated vesting date, the per share market value of NCRIC stock of $10.00
was less than the strike price of the options, which ranges from $10.86 to
$11.00 per share.
The acceleration eliminates future compensation expense we would otherwise
recognize in our future income statements with respect to these options after
FASB Statement No. 123R, Share-Based Payment, becomes effective in 2005. The pro
forma note disclosure to the 2004 financial statements includes the maximum
amount of expense which would have been reported in future years.
Effects of inflation and interest rate changes
The primary effect of inflation on us 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 loss and LAE reserve levels and our ratemaking process adequately
incorporate the effects of inflation.
Interest rate changes expose us to market risk on our investment
portfolio. This market risk is the potential for financial losses due to the
decrease in the value or price of an asset resulting from broad movements in
prices, such as interest rates. In general, the market value of our fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, our net investment income increases
or decreases in a direct relationship with interest rate changes on monies
re-invested from maturing securities and investments of positive cash flow from
operating activities.
Federal income tax matters
NCRIC Group and its subsidiaries file a consolidated income tax return
with the Internal Revenue Service. Tax years 2001, 2002 and 2003 are open but
not currently under audit.
Regulatory matters
NAIC Risk-Based Capital. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital (RBC) formula is
designed to allow state and District of Columbia insurance regulators to
identify potentially under-capitalized companies. For property-casualty
insurers, the formula takes into account risks related to the insurer's assets
including risks related to its investment
53
portfolio, and the insurer's liabilities, including risks related to the adverse
development of coverages underwritten. The RBC rules provide for different
levels of regulatory attention depending on the ratio of the insurer's total
adjusted capital to the authorized control level of RBC. The first level of
regulatory action, a review by the domiciliary insurance commissioner of a
company-prepared RBC plan, is instituted at the point a company's total adjusted
capital is at a level equal to or less than two times greater than the
authorized control level risk-based capital. For all periods presented, the
total adjusted capital levels for NCRIC, Inc. and CML were significantly in
excess of the authorized control level of RBC. As a result, the RBC requirements
are not expected to have an impact on our operations. Following is a
presentation of the total adjusted capital for NCRIC, Inc. and CML compared to
the authorized control level of RBC. Since CML was merged into NCRIC, Inc.
effective December 31, 2003, results for 2003 and 2004 of NCRIC, Inc. include
the impact of the merged business of CML.
Authorized control
level Total
risk-based capital adjusted capital
------------------ ----------------
NCRIC, NCRIC,
Inc. CML Inc. CML
------ ----- ------ -----
(in millions)
December 31, 2004 .......... $13.8 -- $63.0 --
December 31, 2003 .......... $10.5 -- $70.4 --
December 31, 2002 .......... $ 6.7 $0.49 $44.3 $ 4.7
Item 7A. Quantitative and Qualitative Disclosures About Market Price
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 resulting from
broad movements in prices. At December 31, 2004, fixed maturity securities
comprised 88% of total investments at fair value. U.S. government and agencies
and tax-exempt bonds represent 45% of the fixed maturity securities. Equity
securities, consisting of common stocks, account for the remainder of the
investment portfolio. We have classified our investments as available for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the greatest 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.
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 fixed income portfolio at December 31, 2004 reflected an average effective
maturity of 6.17 years and an average modified duration of 4.25 years. 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. The entire bond portfolio as of December 31, 2004 was
held in investment grade securities.
One common measure of the interest sensitivity of fixed maturity
securities is effective duration. Effective duration utilizes maturities,
yields, and call terms to calculate an average age of expected cash flows. The
following table shows the estimated fair value of our fixed maturity portfolio
based on fluctuations in the market interest rates.
54
Projected
Yield Change Market
(bp) Market Yield Value
------------ ------------ (in millions)
-------------
-300 0.69% $201.8
-200 1.69 194.2
-100 2.69 186.6
Current Yield** 3.69 179.0
100 4.69 171.4
200 5.69 163.8
300 6.69 156.2
** Current yield is as of December 31, 2004.
The actual impact of the market interest rate changes on the securities
may differ from those shown in the sensitivity analysis above.
55
Item 8. Financial Statements and Supplementing Data
- ------
INDEX TO FINANCIAL STATEMENTS
Page
NCRIC GROUP, INC. AND SUBSIDIARIES
Report of Independent Registered Public Accounting Firm 57
Consolidated Balance Sheets as of December 31, 2004 and 2003 58
Consolidated Statements of Operations for the Years Ended
December 31, 2004, 2003, and 2002 59
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2004, 2003, and 2002 60
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003, and 2002 61
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2004, 2003, and 2002 62
Schedule I - Summary of Investments - Other Than Investments in Related Parties 84
Schedule II - Condensed Financial Information of Registrant 85
Schedule III - Supplementary Insurance Information 89
Schedule IV - Reinsurance 90
Schedule V - Valuation and Qualifying Accounts 91
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance
Companies 92
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
NCRIC Group, Inc. and Subsidiaries
Washington, DC
We have audited the accompanying consolidated balance sheets of NCRIC Group,
Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2004. Our audits
also included the financial statement schedules listed in the table of contents.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NCRIC Group, Inc. and subsidiaries
as of December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 15 to the consolidated financial statements, the Company
announced that its Board of Directors had approved an agreement to merge NCRIC
Group, Inc. into ProAssurance Corporation in a stock-for-stock transaction. The
transaction is subject to required regulatory approvals and a vote of NCRIC
Group, Inc. stockholders.
/s/ Deliotte & Touche LLP
McLean, VA
March 17, 2005
57
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- --------------------------------------------------------------------------------
2004 2003
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes (Amortized cost $178,432 and $161,876) $ 178,999 $ 162,744
Equity securities (Cost $20,679 and $10,269) 23,308 11,613
--------- ---------
Total securities available for sale 202,307 174,357
OTHER ASSETS:
Cash and cash equivalents 13,658 9,978
Reinsurance recoverable 44,846 48,100
Goodwill, net 7,296 7,296
Premiums and accounts receivable, net 7,526 9,333
Deferred income taxes 8,404 5,307
Other assets 8,862 8,175
--------- ---------
TOTAL ASSETS $ 292,899 $ 262,546
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 107,746 $ 87,778
Loss adjustment expenses 45,496 38,213
--------- ---------
Total losses and loss adjustment expenses 153,242 125,991
Other liabilities:
Retrospective premiums accrued under reinsurance treaties 351 1,809
Unearned premiums 40,790 34,553
Advance premium 5,520 3,110
Reinsurance premium payable 766 1,538
Bank debt -- 289
Trust preferred securities 15,000 15,000
Other liabilities 5,215 2,277
--------- ---------
TOTAL LIABILITIES 220,884 184,567
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, and 9)
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 12,000,000 shares authorized;
6,892,517 shares issued and outstanding (net of 56,134 treasury shares) at
December 31, 2004; 6,898,865 shares issued and outstanding (net of
33,339 treasury shares) at December 31, 2003 70 70
Preferred stock $0.01 par value - 1,000,000 shares authorized, 0 shares issued -- --
Additional paid in capital 49,161 48,962
Unallocated common stock held by the ESOP (2,478) (2,616)
Common stock held by the stock award plan (1,218) (1,594)
Accumulated other comprehensive income 2,109 1,461
Retained earnings 24,926 32,046
Treasury stock, at cost (555) (350)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 72,015 77,979
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 292,899 $ 262,546
========= =========
See notes to consolidated financial statements.
58
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
2004 2003 2002
REVENUES:
Net premiums earned $ 66,462 $ 47,264 $ 30,098
Net investment income 7,256 6,008 5,915
Net realized investment gains (losses) 475 1,930 (131)
Practice management and related income 4,395 4,906 5,800
Other income 820 1,155 1,013
-------- -------- --------
Total revenues 79,408 61,263 42,695
-------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 70,310 50,473 26,829
Underwriting expenses 12,635 10,003 8,168
Practice management and related expenses 5,016 5,222 5,811
Interest expense on Trust Preferred Securities 857 826 62
Other expenses 2,514 1,651 1,405
-------- -------- --------
Total expenses 91,332 68,175 42,275
-------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES (11,924) (6,912) 420
-------- -------- --------
INCOME TAX BENEFIT (4,804) (2,694) (322)
-------- -------- --------
NET (LOSS) INCOME $ (7,120) $ (4,218) $ 742
======== ======== ========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized holding gains (losses) on securities $ 1,233 $ (724) $ 2,478
Reclassification adjustment for gains included in net income (585) (621) (146)
-------- -------- --------
OTHER COMPREHENSIVE INCOME (LOSS) 648 (1,345) 2,332
-------- -------- --------
COMPREHENSIVE (LOSS) INCOME $ (6,472) $ (5,563) $ 3,074
======== ======== ========
Net (loss) income per common share:
Basic:
Average shares outstanding 6,357 6,486 6,639
-------- -------- --------
(Loss) Earnings Per Share $ (1.12) $ (0.65) $ 0.11
======== ======== ========
Diluted:
Average shares outstanding 6,357 6,486 6,639
Dilutive effect of stock options -- -- 140
-------- -------- --------
Average shares outstanding -diluted 6,357 6,486 6,779
-------- -------- --------
(Loss) Earnings Per Share $ (1.12) $ (0.65) $ 0.11
======== ======== ========
See notes to consolidated financial statements.
59
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(IN THOUSANDS)
- --------------------------------------------------------------------------------
Additional Unallocated Stock
Common Paid In ESOP Award
Stock Capital Shares Shares
-------- ---------- ------------ --------
BALANCE, JANUARY 1, 2002 $ 37 $ 9,552 $ (786) $ (339)
Net income -- -- -- --
Other comprehensive income -- -- -- --
Acquisition of treasury stock -- -- -- --
Shares released -- 78 104 137
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 37 9,630 (682) (202)
Net loss -- -- -- --
Other comprehensive loss -- -- -- --
Public stock offering 32 39,190 (2,072) (1,657)
Conversion of mutual holding company -- -- -- --
Acquisition of treasury stock -- -- -- --
Shares released 1 142 138 265
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2003 70 48,962 (2,616) (1,594)
Net loss -- -- -- --
Other comprehensive income -- -- -- --
Acquisition of treasury stock -- -- -- --
Shares released -- 199 138 376
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2004 $ 70 $ 49,161 $ (2,478) $ (1,218)
======== ======== ======== ========
Accumulated
Other Total
Treasury Comprehensive Retained Stockholders'
Stock Income Earnings Equity
-------- ------------- -------- -------------
BALANCE, JANUARY 1, 2002 $ (260) $ 474 $ 35,776 $ 44,454
Net income -- -- 742 742
Other comprehensive income -- 2,332 -- 2,332
Acquisition of treasury stock (30) -- -- (30)
Shares released -- -- -- 319
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2002 (290) 2,806 36,518 47,817
Net loss -- -- (4,218) (4,218)
Other comprehensive loss -- (1,345) -- (1,345)
Public stock offering 290 -- -- 35,783
Conversion of mutual holding company -- -- (254) (254)
Acquisition of treasury stock (350) -- -- (350)
Shares released -- -- -- 546
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2003 (350) 1,461 32,046 77,979
Net loss -- -- (7,120) (7,120)
Other comprehensive income -- 648 -- 648
Acquisition of treasury stock (205) -- -- (205)
Shares released -- -- -- 713
-------- -------- -------- --------
BALANCE, DECEMBER 31, 2004 $ (555) $ 2,109 $ 24,926 $ 72,015
======== ======== ======== ========
See notes to consolidated financial statements.
60
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (7,120) $ (4,218) $ 742
Adjustments to reconcile net (loss) income
to net cash flows from operating activities:
Net realized investment (gains) losses (475) (1,930) 131
Amortization and depreciation 2,069 1,503 661
Provision for uncollectable receivables 108 486 1,362
Deferred income taxes (3,431) (825) (2,508)
Stock released for coverage of benefit plans 683 546 319
Changes in assets and liabilities:
Reinsurance recoverable 3,254 (4,869) (13,154)
Premiums and accounts receivable 1,699 (342) (6,037)
Other assets (200) (151) (2,132)
Losses and loss adjustment expenses 27,251 21,969 19,462
Retrospective premiums accrued under
reinsurance treaties (1,458) 1,202 (1,801)
Unearned premiums 6,237 10,342 6,974
Advance premium 2,410 139 (1,167)
Reinsurance premium payable (772) (3,507) 2,593
Other liabilities 2,938 257 (2,071)
--------- --------- ---------
Net cash flows provided by operating activities 33,193 20,602 3,374
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (95,842) (193,911) (52,824)
Sales, maturities and redemptions of investments 67,927 138,607 39,027
Purchases of property and equipment (1,134) (597) (895)
--------- --------- ---------
Net cash flows used in investing activities (29,049) (55,901) (14,692)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering -- 35,783 --
Proceeds from the issuance of trust preferred securities -- -- 15,000
Proceeds from exercise of stock options 30 -- --
Purchase of Treasury Stock (205) (350) (30)
Repayment of bank debt (289) (706) (667)
--------- --------- ---------
Net cash flows (used in) provided by financing activities (464) 34,727 14,303
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,680 (572) 2,985
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 9,978 10,550 7,565
--------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 13,658 $ 9,978 $ 10,550
========= ========= =========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 720 $ 1,200 $ 2,200
========= ========= =========
Interest paid $ 844 $ 858 $ 61
========= ========= =========
See notes to consolidated financial statements.
61
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
- ----------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - NCRIC, Group, Inc. (the Company) is
a healthcare financial services organization that provides individual
physicians and groups of physicians and other healthcare providers with
professional liability insurance and practice management services through
its subsidiary companies.
On April 20, 1998, the Board of Governors of National Capital Reciprocal
Insurance Company adopted a plan of reorganization that authorized the
formation of NCRIC, A Mutual Holding Company (Mutual Holding Company) and
the conversion into NCRIC, Inc. (NCRIC), a stock medical professional
liability insurance company domiciled in the District of Columbia. The
reorganization became effective on December 31, 1998. In 1999, the Company
completed an initial public offering of 1,480,000 shares, which
represented approximately 40% of its outstanding shares. Prior to the plan
of conversion discussed above, the Mutual Holding Company owned
approximately 60% of the outstanding shares of the Company.
On December 4, 2002, the Company formed NCRIC Statutory Trust I for the
purpose of issuing $15,000,000 in trust preferred securities in a pooled
transaction to unrelated investors. (See Note 5.)
On June 24, 2003, a plan of conversion and reorganization was approved by
the members of NCRIC, A Mutual Holding Company and by the shareholders of
NCRIC Group, Inc. In the conversion and related stock offering, NCRIC, A
Mutual Holding Company offered for sale its 60% ownership interest in
NCRIC Group, Inc. As a result of the conversion and stock offering, NCRIC,
A Mutual Holding Company ceased to exist, and NCRIC Group, Inc. became a
fully public company. (See Note 2.)
Through its property-casualty insurance company subsidiary, NCRIC, Inc.,
the Company provides comprehensive professional liability and office
premises liability insurance under nonassessable policies to physicians
having their principal practice in the District of Columbia, Maryland,
Virginia, West Virginia, or Delaware. Effective December 31, 2003, the
Insurance Commissioner of the District of Columbia approved the statutory
merger of NCRIC, Inc. and Commonwealth Medical Liability Insurance
Company, CML. As a result, the assets, liabilities and policyholder
obligations of CML were transferred, at book value, to NCRIC, Inc. and CML
ceased to exist as a separate entity.
The Company also provides (i) practice management services, accounting and
tax services, and personal financial planning services to medical and
dental practices and (ii) retirement planning services and administration
to medical and dental practices and certain other businesses throughout
the mid-Atlantic region.
62
The Company has issued policies on both an occurrence and a claims-made
basis. However, subsequent to June 1, 1986, substantially all policies
have been issued on the claims-made basis. Occurrence-basis policies
provide coverage to the policyholder for losses incurred during the policy
year regardless of when the related claims are reported. Claims-made basis
policies provide coverage to the policyholder for covered claims reported
during the current policy year, provided the related losses were incurred
while claims-made basis policies were in effect.
Tail coverage is offered for doctors terminating their insurance policies.
This coverage extends ad infinitum the period in which to report future
claims resulting from incidents occurring while a claims-made policy was
in effect. Beginning in 1988, prior acts insurance coverage was first
issued, subject to underwriting criteria for new insureds. Such coverage
extends the effective date of claims-made policies to designated periods
prior to initial coverage.
Principles of Consolidation - The accompanying financial statements
present the consolidated financial position and results of operations of
the Company and its subsidiaries. All significant intercompany
transactions have been eliminated in the consolidation.
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America (GAAP), which differ from statutory accounting practices
prescribed or permitted for insurance companies by regulatory authorities.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of
three months or less to be cash equivalents.
Investments - The Company has classified its investments as available for
sale and has reported them at fair value, with unrealized gains and losses
excluded from earnings and reported, net of deferred taxes, as a component
of equity and other comprehensive income. Realized gains and losses are
determined using the specific identification method.
Investment securities are exposed to various risks such as interest rate,
market and credit risk. Fair values of securities fluctuate based on the
magnitude of changing market conditions; significant changed market
conditions could materially affect the portfolio value in the near term.
When a security has a decline in fair value that is other-than-temporary,
the Company reduces the carrying value of the security to its current fair
value.
The Company evaluates investments for other-than-temporary impairment
whenever events or changes in circumstances, such as business environment,
legal issues and other relevant data, indicate that the carrying amount of
an investment may not be recoverable. Any resulting impairment loss is
reported as a realized investment loss. During each of the years ended
December 31, 2004 and December 31, 2003, the Company determined that an
equity security experienced an other-than-temporary impairment.
Accordingly, the Company recorded a pre-tax impairment loss of $15,000 and
$135,000 during 2004 and 2003, respectively. In the third quarter of 2004,
the Company recorded a pre-tax impairment of $24,000 on a fixed-income
security. The security was subsequently sold in the fourth quarter.
63
In the second quarter of 2002, the Company recorded a pre-tax impairment
loss of $557,000 on fixed-income securities. These securities were
subsequently sold during 2002.
Goodwill - 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.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses, which now operate as divisions of the Practice Management
Services Segment. NCRIC Group, Inc. completed its initial goodwill
impairment testing under SFAS 142 as of March 31, 2002 and tests goodwill
for impairment on a quarterly basis. The goodwill asset was not impaired
as of the date of implementation of SFAS 142, nor was it impaired as of
December 31, 2004. Goodwill is reported net of accumulated amortization of
$909,000 as of December 31, 2004 and 2003.
Deferred Policy Acquisition Costs - Commissions and premium taxes
associated with acquiring insurance that vary with and are directly
related to the production of new and renewal business are deferred and
amortized over the terms of the policies to which they relate. Deferred
policy acquisition costs totaled approximately $2.7 million and $2.4
million as of December 31, 2004 and 2003, respectively, and are reported
as a component of other assets. Since NCRIC's insurance policies are
generally written for a term of one year, the entire year-end balance is
amortized in the following year. Amortization of acquisition costs is
reported as a component of underwriting expense.
Property and Equipment - Fixed assets are recorded at cost and reported as
a component of other assets. Depreciation is recorded using the
straight-line method over estimated useful lives ranging from three to
five years for computer software and equipment and furniture and fixtures
and ten years for leasehold improvements. The balances of fixed assets of
$2.6 million and $2.1 million as of December 31, 2004 and 2003,
respectively, are net of accumulated depreciation of $3.0 million and $2.5
million. Depreciation expense for the years ended December 31, 2004, 2003,
and 2002 was $646,500, $559,800, and $457,700.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for
losses and loss adjustment expenses are established on the basis of
reported losses and loss adjustment expenses and a provision for losses
incurred but not reported. These amounts are based on management's
estimates and are subject to risks and uncertainties. As facts become
known, adjustments to these estimates are reflected in earnings.
The Company protects itself from excessive losses by reinsuring certain
levels of risk in various areas of exposure. Amounts recoverable from
reinsurance are estimated in a manner consistent with the liability for
loss and loss adjustment expenses associated with the reinsured loss.
Income Taxes - The Company uses the asset and liability method of
accounting for income
64
taxes. Under this method, deferred income taxes are recognized for tax
consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities. The Company files a consolidated Federal income tax return.
Impairment of Long-Lived Assets - The Company reviews long-lived assets
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. During the years
ended December 31, 2004 and 2003, the Company did not find it necessary to
record a provision for impairment of assets.
Use of Estimates - The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant
accounts subject to management estimates are reinsurance recoverable,
liabilities for losses and loss adjustment expenses, retrospective
premiums accrued under reinsurance treaties, retrospective premiums
accrued under risk-sharing programs and impairment of goodwill.
Concentrations of Credit Risk - Financial instruments that potentially
expose the Company to concentrations of risk consist principally of cash
equivalent investments, investments in securities and reinsurance
recoverables. Concentrations of credit risk for investments are limited
due to the large number of such investments and their distributions across
many different industries and geographical areas. Concentrations of credit
risk for reinsurance recoverables are limited due to the large number of
reinsurers participating in the program.
Litigation - The Company is subject to claims arising in the normal course
of its business. Management does not believe that any such claims or
assessments will have a material effect on the Company's financial
position, results of operations or cash flows, except for the premium
collection litigation discussed in Note 14.
Revenue Recognition - Premium revenue is earned pro rata over the terms of
the policies. The portion of premiums that will be earned in the future
are deferred and reported as unearned premiums. Premiums received prior to
the term of policy coverage are excluded from premium revenue and reported
as advance premium.
The Company writes policies under certain retrospectively rated programs.
Premium revenue related to these contracts is earned based on the
contractual terms and estimated losses under those contracts. Earned
premiums are premiums written reduced by premium refunds accrued. Premium
refunds are accrued to reflect the risk-sharing program results on a basis
consistent with the underlying loss experience.
Practice management revenue is recognized as services are performed under
terms of management and other contracts. Revenue is generally billed in
the month following the performance of related services.
65
Stock-based Compensation - As of December 31, 2004 and 2003 the Company
has a stock option plan, which is described more fully in Note 10. NCRIC
Group, Inc. accounts for compensation cost using the intrinsic value based
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees. Accordingly, no compensation expense was recognized since the
stock options granted were at an exercise price equal to the fair market
value of the common stock on the date the options were granted.
The Company's pro forma net income per share information using the fair
value method and the Black-Scholes valuation model follows (in thousands):
2004 2003 2002
--------- --------- ---------
Net (loss) income as reported ($7,120) ($4,218) $742
Add: Compensation expense from stock award
plans, net of related tax effect 280 198 102
Less: Total stock-based employee compensation,
net of related tax effect (1,535) (67) (37)
--------- --------- ---------
Pro forma net (loss) income ($8,375) ($4,087) $807
========= ========= =========
(Loss) earnings per share - Basic as reported $(1.12) $(0.65) $0.11
Basic pro forma $(1.32) $(0.63) $0.12
Diluted as reported $(1.12) $(0.65) $0.11
Diluted pro forma $(1.32) $(0.63) $0.12
New Accounting Pronouncements - In July 2004, the Emerging Issues Task
Force of the Financial Accounting Standards Board (FASB) reached a
consensus with respect to guidance to be used in determining whether an
investment within the scope of EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, is other than temporarily impaired. The guidance was to be
applied in other-than-temporary impairment evaluations made in reporting
periods beginning after June 15, 2004. In September 2004, the FASB issued,
and the Company adopted, FSP EITF Issue 03-1-1, which deferred the
effective date of the impairment measurement and recognition provisions
contained in EITF 03-1 until final guidance is adopted. The disclosure
requirements of EITF 03-1 were previously adopted by the Company as of
December 31, 2003 for investments accounted for under SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities. For all
other investments within the scope of EITF 03-1, the disclosures are
effective and have been adopted by the Company as of December 31, 2004. As
this accounting guidance develops, we will continue to review it to assess
any potential impact to our fixed income portfolio and our asset
management policy.
In December 2004, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R.) This statement replaces Statement No.
123, Accounting for Stock-Based Compensation and supercedes APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. The statement requires the adoption of a
fair-value-based method of accounting for share-based transactions with
employees. Adoption is required by the first interim or annual period
after June 15, 2005. The Company is in the process of evaluating
66
the requirements of SFAS 123R to comply with the new pronouncement by the
third quarter of 2005.
2. SECOND STEP CONVERSION AND PUBLIC OFFERING
On June 24, 2003, a plan of conversion and reorganization was approved by
the members of NCRIC, A Mutual Holding Company and by the shareholders of
NCRIC Group, Inc. In the conversion and related stock offering, the Mutual
Holding Company offered for sale its 60% ownership interest in NCRIC
Group. As a result of the conversion and stock offering, the Mutual
Holding Company ceased to exist, and NCRIC Group, Inc. became a fully
public company.
In the conversion and stock offering, 4,143,701 shares of the common stock
of NCRIC Group, Inc. were sold to Eligible Members, Employee Benefit
Plans, Directors, Officers and Employees and to members of the general
public in a Subscription and Community Offering priced at $10.00 per
share. The Subscription stock offering period expired on June 16, 2003.
All stock purchase orders received in the offering were satisfied.
As part of the conversion, 2,778,144 shares were issued to the former
public stockholders of NCRIC Group, Inc. The exchange ratio was 1.8665 new
shares for each share of NCRIC Group, Inc. held by public stockholders as
of the close of business on June 25, 2003. Accordingly, after the
conversion, the Company had 6,921,845 shares outstanding immediately
following the offering. For the earnings per share calculations, the share
amounts for periods prior to the conversion and stock offering have been
revised to reflect the share exchange ratio applied in the conversion. The
issuance of the shares of common stock in the subscription and community
offering and in the exchange offering to existing stockholders was
registered on Form S-1 filed with the SEC (No. 333-104023), which
registration statement was declared effective on May 14, 2003.
The net proceeds of the offering have been deployed as follows:
o 75% has been added to the capital of NCRIC, Inc.;
o 9% has been used to provide loans to the employee stock ownership
plan and stock award plan to fund the purchase of shares of common
stock in the offering; and
o the remaining amount has been retained for general corporate
purposes.
The reconciliation of gross to net proceeds is as follows (in thousands):
Gross offering proceeds $ 41,437
Less: Offering expenses (1,924)
--------
Net proceeds 39,513
ESOP loan (2,072)
Stock Award Plan loan (1,657)
--------
Net proceeds as adjusted $ 35,784
========
67
The composition of shares after the second step conversion and public
offering is as follows (in thousands):
Issued in the conversion and stock offering 4,144
Issued to existing public shareholders of NCRIC Group 2,778
------
Total shares issued June 25, 2003 6,922
ESOP loan shares (270)
Stock Award Plan loan shares (179)
------
Net shares outstanding as of June 25, 2003 6,473
======
3. INVESTMENTS
The following tables show the cost or amortized cost and fair value of
investments (in thousands):
Cost or Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses
As of December 31, 2004
U.S. Government and agencies $ 37,355 $ 211 $ (253) $ 37,313
Corporate 48,184 603 (407) 48,380
Tax-exempt obligations 42,571 1,124 (166) 43,529
Asset and mortgage-backed
securities 50,322 89 (634) 49,777
--------- --------- --------- ---------
178,432 2,027 (1,460) 178,999
Equity securities 20,679 2,660 (31) 23,308
--------- --------- --------- ---------
Total $ 199,111 $ 4,687 $ (1,491) $ 202,307
========= ========= ========= =========
Cost or Gross Gross
Amortized Unrealized Unrealized Fair Value
Cost Gains Losses
As of December 31, 2003
U.S. Government and agencies $ 29,328 $ 75 $ (118) $ 29,285
Corporate 41,773 247 (720) 41,300
Tax-exempt obligations 35,329 1,907 (78) 37,158
Asset and mortgage-backed
securities 55,446 186 (631) 55,001
--------- --------- --------- ---------
161,876 2,415 (1,547) 162,744
Equity securities 10,269 1,373 (29) 11,613
--------- --------- --------- ---------
Total $ 172,145 $ 3,788 $ (1,576) $ 174,357
========= ========= ========= =========
The amortized cost and fair value of debt securities at December 31, 2004
and 2003 are shown by maturity (in thousands). Actual maturities will
differ from contractual maturities
68
because borrowers may have the right to prepay obligations with or without
prepayment penalties.
December 31, 2004 December 31, 2003
--------------------- ---------------------
Cost or Fair Cost or Fair
Amortized Value Amortized Value
Cost Cost
--------- -------- --------- --------
Due in one year or less $ 8,091 $ 8,084 $ 1,912 $ 1,923
Due after one year through five years 49,124 49,074 39,363 39,886
Due after five years through ten years 44,107 44,516 45,918 46,483
Due after ten years 26,788 27,549 19,237 19,451
-------- -------- -------- --------
128,110 129,223 106,430 107,743
Equity securities 20,679 23,308 10,269 11,613
Asset and mortgage-backed securities 50,322 49,776 55,446 55,001
-------- -------- -------- --------
Total $199,111 $202,307 $172,145 $174,357
======== ======== ======== ========
Proceeds from bond maturities and redemptions of available-for-sale
investments during the years ended December 31, 2004, 2003, and 2002, were
$67.9 million, $138.6 million, and $39.0 million, respectively. Gross
gains of $917,000, $3,441,000, and $1,437,000, and gross losses of
$442,000, $1,511,000, and $1,568,000, were realized on security sales,
redemptions and impairments during years ended December 31, 2004, 2003,
and 2002, respectively.
Net investment income consists of the following (in thousands):
For the Year Ended December 31,
2004 2003 2002
------- ------- -------
U. S Government and agencies $ 1,072 $ 654 $ 255
Corporate 2,329 1,794 3,038
Tax-exempt obligations 1,628 1,462 1,290
Asset and mortgage-backed
securities 2,229 2,313 1,178
Equity securities 479 124 431
Short-term investments 30 91 103
------- ------- -------
Total investment income earned 7,767 6,438 6,295
Investment expenses (511) (430) (380)
------- ------- -------
Net investment income $ 7,256 $ 6,008 $ 5,915
======= ======= =======
At December 31, 2004, our portfolio included total gross unrealized gains
of $4.7 million, or 2.3% of the $202.3 million carrying value of the
portfolio, and total unrealized losses of $1.5 million, or less than 1% of
the carrying value of the portfolio. The total unrealized losses are
comprised of six equity securities and 191 fixed maturity securities,
including 12 Treasury Note issues, 179 corporate debt and municipal
bonds (all of which are investment grade), with lengths of time to
maturity ranging from one to 44 years. All of the fixed maturity
securities are meeting and are expected to continue to meet all
contractual obligations for interest payments.
69
At December 31, 2004, the aggregate fair value of the securities with
unrealized losses was $112.8 million, or 99% of the amortized cost of
those securities of $114.3 million. The largest single security with an
unrealized loss at December 31, 2004 relates to a FNMA pool which matures
in 2018 and carries a coupon rate of 5.0%. The unrealized pre-tax loss
relating to this security is approximately $115,000 based on the fair
value of $4.5 million at December 31, 2004. Unrealized losses related to
other securities are not individually significant, nor is there any
concentration of unrealized losses with respect to the type of security or
industry.
The following table displays characteristics of the securities with an
unrealized loss in value as of December 31, 2004. No concentrations of
industries exist in these securities.
Total securities Equity securities
-------------------------------------- --------------------------------------
Length of
time in
unrealized
loss Amortized Fair Unrealized Amortized Fair Unrealized
position Cost Value Loss Cost Value Loss
----------- --------- -------- ---------- --------- -------- ----------
(in thousands)
Less than 1
year $ 54,279 $ 53,708 $ 571 $ 244 $ 235 $ 9
Over 1 year 59,998 59,078 920 402 380 22
-------- -------- -------- -------- -------- --------
Total $114,277 $112,786 $ 1,491 $ 646 $ 615 $ 31
======== ======== ======== ======== ======== ========
The following table displays the maturity distribution of those fixed
maturity securities with an unrealized loss in value as of December 31,
2004:
Fixed maturity securities
--------------------------------------
Amortized Fair Unrealized
Cost Value Loss
--------- -------- ----------
(in thousands)
During one year or less $ 7,990 $ 7,982 $ 8
Due after one year through five years 40,023 39,592 431
Due after five years through ten years 21,382 20,998 384
Due after ten through twenty years 12,338 12,043 295
Due after twenty years 31,898 31,556 342
-------- -------- --------
$113,631 $112,171 $ 1,460
======== ======== ========
4. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses (LAE) represent
an estimate of the ultimate net cost of all losses that are unpaid at the
balance sheet date and are based on the loss and loss adjustment expense
factors inherent in the Company's experience and
70
expectations. Estimation factors used by the Company reflect current
case-basis estimates, supplemented by industry statistical data, and give
effect to estimates of trends in claim severity and frequency. These
estimates are continually reviewed, and adjustments, reflected in current
operations are made as deemed necessary.
Although the Company believes the liabilities for losses and loss
adjustment expenses are reasonable and adequate for the circumstances, it
is possible that the Company's actual incurred losses and loss adjustment
expenses will not conform to the assumptions inherent in the determination
of the liabilities. Accordingly, the ultimate settlement of losses and the
related loss adjustment expenses may vary from the amounts included in the
financial statements.
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
Year Ended December 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------
BALANCE, Beginning of the year $ 125,991 $ 104,022 $ 84,560
Less reinsurance recoverable on
unpaid claims (44,673) (42,412) (29,624)
--------- --------- ---------
NET BALANCE 81,318 61,610 54,936
Incurred related to:
Current year 53,158 44,588 24,063
Prior years 17,152 5,885 2,766
--------- --------- ---------
Total incurred 70,310 50,473 26,829
--------- --------- ---------
Paid related to:
Current year 3,457 4,383 1,491
Prior years 34,520 26,382 18,664
--------- --------- ---------
Total paid 37,977 30,765 20,155
--------- --------- ---------
NET BALANCE 113,651 81,318 61,610
Plus reinsurance recoverable on
unpaid claims 39,591 44,673 42,412
--------- --------- ---------
BALANCE, End of the year $ 153,242 $ 125,991 $ 104,022
========= ========= =========
Incurred losses related to prior years represents development of net
losses incurred in prior years. This development results from the
re-estimation and settlement of individual losses not covered by
reinsurance, which generally are losses under $500,000 for losses reported
prior to 2003 and under $1 million for losses reported in 2003 and 2004.
The 2004 change in incurred losses related to prior years stems primarily
from the reestimation of losses incurred initially in 2003 but also from
the losses reported initially in 2002 and 2001. The 2003 change stems from
adverse development on losses, primarily those reported initially in 2002
and 2001 in Virginia, as well as from a change in estimate of the amount
of reinsurance
71
recoverable. The 2002 change is primarily reflective of adverse loss
development for the 2001 and 2000 loss years, partially offset by
favorable development in the 1999 and 1996 loss years. The change in
development over the three-year period ended December 31, 2004, reflects a
continuing increase in severity caused by the growing size of plaintiff
verdicts and settlements.
5. TRUST PREFERRED SECURITIES
On December 4, 2002, the Company issued trust preferred securities (TPS)
in the amount of $15,000,000 in a pooled transaction to unrelated
investors. The Company estimates that the fair value of the TPS issued
approximates the proceeds of cash received at the time of issuance. The
Company contributed $13,500,000 of the funds raised to the statutory
surplus of its insurance subsidiaries.
The TPS have a maturity of thirty years, and bear 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 12.5%. The
Company may defer payment of interest on the TPS for up to 20 consecutive
quarters. The TPS are callable by the Company at par beginning December 4,
2007.
The average interest rate was 5.54%, 5.31% and 5.42% and interest of
$857,000, $826,000 and $62,000 was incurred for the years ended December
31, 2004, 2003 and 2002, respectively. Issuance costs of $451,000 were
incurred related to the TPS and included in other assets. Issuance costs
are being amortized over 30 years as a component of other expense.
The Company formed NCRIC Statutory Trust I for the purpose of issuing the
TPS. The gross proceeds from issuance were used to purchase Junior
Subordinated Deferrable Interest Debentures (the Debentures), from the
Company. The Debentures are the sole assets of the NCRIC Statutory Trust
I. The Debentures have a maturity of 30 years, and bear 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, the interest rate shall not
exceed 12.5%. The Debentures are callable by the Company at par beginning
December 4, 2007. The Debentures are unsecured obligations of the Company
and are junior in the right of payment to all future senior indebtedness
of the Company. The Debentures and related investment in NCRIC Statutory
Trust I have been eliminated in consolidation.
6. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to write
policies with higher coverage limits than it is individually capable or
desirous of retaining by reinsuring the amount in excess of its retention.
The Company has both excess of loss treaties and quota share treaties.
72
The Company is liable in the event the reinsurers are unable to meet their
obligations under these contracts. NCRIC, Inc. holds letters of credit
executed by reinsurers in the amount of $6.2 million and $1.3 million at
December 31, 2004 and 2003, respectively. Such letters of credit are
issued as security against ceded losses recoverable in the future.
The effect of reinsurance on premiums written and earned for the years
ended are as follows (in thousands):
December 31
-------------------------------------------------------------------------
2004 2003 2002
--------------------- --------------------- ---------------------
Written Earned Written Earned Written Earned
Direct $ 87,229 $ 80,992 $ 71,365 $ 61,023 $ 51,799 $ 44,113
Ceded
Current year (14,694) (14,531) (11,162) (12,833) (18,409) (14,429)
Prior year 1 1 (926) (926) 406 406
-------- -------- -------- -------- -------- --------
Total ceded (14,693) (14,530) (12,088) (13,759) (18,003) (14,023)
-------- -------- -------- -------- -------- --------
Net premiums
before renewal
credits $ 72,536 $ 66,462 $ 59,277 $ 47,264 $ 33,796 $ 30,090
======== ======== ======== ======== ======== ========
7. INCOME TAXES
Deferred income tax is created by temporary differences that will result
in net taxable amounts in future years due to the differing treatment of
certain items for tax and financial statement purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist
of the following (in thousands):
As of December 31,
---------------------
2004 2003
-------- --------
Deferred tax assets:
Unearned premiums $ 2,921 $ 2,367
Discounted loss reserves 4,721 3,805
Net operating loss carryforwards 2,054 127
Alternative minimum tax credits 639 --
Allowance for doubtful accounts 70 640
Other 433 210
-------- --------
10,838 7,149
Valuation allowance (127) (127)
-------- --------
10,711 7,022
Deferred tax liabilities
Unrealized gain on investments (1,087) (753)
Deferred policy acquisition costs (924) (802)
Depreciation and amortization (296) (64)
Other -- (96)
-------- --------
(2,307) (1,715)
-------- --------
Net deferred tax assets $ 8,404 $ 5,307
======== ========
73
The income tax benefit consists of the following (in thousands):
For the Year Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Federal:
Current $(1,375) $(1,919) $ 2,214
Deferred (3,407) (831) (2,501)
------- ------- -------
(4,782) (2,750) (287)
State:
Current 2 50 (28)
Deferred (24) 6 (7)
------- ------- -------
(22) 56 (35)
------- ------- -------
Total benefit $(4,804) $(2,694) $ (322)
======= ======= =======
Federal income tax benefit differs from that calculated using the
established corporate rate primarily due to nontaxable investment income,
as follows (in thousands):
For the Year Ended December 31,
--------------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Federal income tax
at statutory rates $(4,054) 34% $(2,350) 34% $ 142 34%
Tax-exempt income (454) 4 (425) 6 (374) (89)
Dividends received (97) 1 (25) -- (87) (21)
Other (199) 1 106 (1) (3) (1)
------- ------- ------- ------- ------- -------
Income tax benefit at
effective rates $(4,804) 40% $(2,694) 39% $ (322) (77)%
======= ======= ======= ======= ======= =======
At December 31, 2004, the Company had regular federal net operating loss
carryforwards of approximately $6.0 million which will begin to expire in
2018. Since a portion of these losses are subject to certain limitations
under the Internal Revenue Code, a valuation allowance of $127,000 was
established to offset the deferred tax asset associated with these net
operating loss carryforwards.
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
74
For the Year Ended December 31,
-------------------------------
2004 2003 2002
------- ------- -------
Net (loss) income $(7,120) $(4,218) $ 742
======= ======= =======
Weighted average common shares
outstanding - basic 6,357 6,486 6,639
Dilutive effect of stock options -- -- 140
------- ------- -------
Weighted average common shares
outstanding - diluted 6,357 6,486 6,779
------- ------- -------
Net (loss) income per common share:
Basic $ (1.12) $ (0.65) $ 0.11
======= ======= =======
Diluted $ (1.12) $ (0.65) $ 0.11
======= ======= =======
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding for the period. Incremental shares are
not included in 2004 and 2003 because they would be anti-dilutive. The
share amounts for periods prior to the conversion and stock offering have
been revised to reflect the share exchange ratio applied in the
conversion.
9. COMMITMENTS
NCRIC entered into an operating lease for office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are for ten
years with a monthly base rent of $35,000 and a 2.0% annual escalator.
During 2003, the Company entered in to an operating lease for additional
office space in Washington, D.C. The lease term is for 54 months with a
monthly base rent of $14,000 and a 2.5% annual escalator. The Company also
maintains office space in Wilmington, Delaware, Lynchburg and Richmond,
Virginia as well as in Greensboro, North Carolina.
As of December 31, 2004, the future minimum annual commitments under
noncancellable leases are as follows:
2005 $ 917,000
2006 896,000
2007 883,000
2008 269,000
----------
$2,965,000
==========
Rent expense during the years ended December 31, 2004, 2003, and 2002 was
$950,000, $721,000, and $634,000, respectively.
75
NCRIC has established seven letters of credit to secure specified amounts
of appellate bonds for cases, which are in the Commonwealth of Virginia or
District of Columbia appellate process. As of December 31, 2004, and 2003
these letters of credit totaled $11.2 million and $4.8 million,
respectively.
The Company and its subsidiaries have entered into four employment
agreements with certain key employees. These agreements include covenants
not to compete and provide for aggregate annual compensation of $966,400
through December 31, 2005.
NCRIC MSO, Inc. (NCRIC MSO), the practice management services segment of
NCRIC Group, Inc. provides medical practice management services primarily
to private practicing physicians. In June 2001, NCRIC MSO borrowed
$1,971,000 from SunTrust Bank to finance payments made in accordance with
the purchase of HealthCare Consulting, Inc., HCI Ventures, LLC, and
Employee Benefits Services, Inc. In September, 2002, the Company pledged
securities to collateralize this loan lowering the interest rate from a
floating rate of LIBOR plus two and three-quarter percent to plus one and
one-half percent. The term of the loan is 3 years. The balance of the loan
was paid in May of 2004. The interest rate at the time of the payoff was
2.68%, and 2.67% as of December 31, 2003. Principal and interest payments
were paid on a monthly basis until payoff.
10. BENEFIT PLANS
Defined Contribution Plans - NCRIC sponsors a defined contribution 401(k)
profit-sharing plan. Employees who are 21 years or older and have
completed 30 days of service are eligible for participation in the plan.
Employees may elect to contribute up to 15% of total compensation, and all
employee contributions are 100% vested. Effective January 1, 2002, the
NCRIC and MSO plans were merged into NCRIC Group, Inc.'s plan. The Company
is not required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by the
Company for the years ended December 31, 2004, 2003, and 2002, were
$411,500, $374,000, and $328,000, respectively.
Stock Option Plan - NCRIC Group, Inc. has a stock option plan for
directors and officers of the Company and its subsidiaries. The options
have terms of ten years and an exercise price equal to the fair market
value of the common stock at the date of grant. For the stock options
granted in 2003, on July 7, 2004, the Board of Directors accelerated the
vesting of the stock options to that date. The options were originally
scheduled to vest during the period from August, 2004 to August, 2008. On
the accelerated vesting date, the $10.00 per share market value of NCRIC
stock was less than the strike price of the options, which ranges from
$10.86 to $11.00 per share.
NCRIC Group accounts for compensation cost using the intrinsic value based
method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense was recognized since the
stock options granted were at an exercise price equal to the fair market
value of the common stock on the date the options were granted. Statement
of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, requires disclosure of the pro
forma
76
net income and earnings per share as if the Company had accounted for its
stock options under the fair value method defined in that Statement.
The acceleration of vesting eliminates future compensation expense the
Company would otherwise recognize in its future income statements with
respect to these options after FASB Statement No. 123R, Share-Based
Payment, becomes effective in 2005. The pro forma note disclosure in Note
1 includes the maximum amount of expense which would have been reported in
future years.
A summary of the status of the stock option plans as of December 31, 2004
and changes during each of the three years then ended are presented below.
As a part of the stock offering completed during 2003, the number and
exercise price of existing stock options granted to officers and directors
of the Company and its subsidiaries were converted at the exchange ratio
of 1.8665.
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Exercisable Price
-------- -------- ----------- --------
December 31, 2001 74,000 $ 7.00 49,333 $ 7.00
Vested -- $ -- 24,667 $ 7.00
-------- -------- -------- --------
December 31, 2002 74,000 $ 7.00 74,000 $ 7.00
Stock Conversion 64,123 $ 3.75 64,123 $ 3.75
Granted 392,615 $ 10.90 -- --
Exercised (10,359) $ 3.75 (10,359) $ 3.75
Forfeited (3,453) $ 3.75 (3,453) $ 3.75
-------- -------- -------- --------
December 31, 2003 516,926 $ 9.18 124,311 $ 3.75
Vested -- -- 365,681 $ 10.90
Exercised (16,574) $ 3.75 (16,574) $ 3.75
Forfeited (72,514) $ 10.90 (45,580) $ 11.00
-------- -------- -------- --------
December 31, 2004 427,838 $ 9.10 427,838 $ 9.10
======== ======== ======== ========
The following table summarizes information for options outstanding and
exercisable at December 31, 2004:
77
Options Outstanding and Exercisable
-----------------------------------
Weighted
Number Average Weighted
Outstanding Remaining Average
Range of Prices and Contractual Exercise
per Share Exercisable Life Price
$3.75 - $8.49 107,737 4.60 $ 3.75
$8.50 - $11.00 320,101 8.83 $ 10.90
For pro forma disclosure purposes, the fair value of stock options was
estimated at the date of grant using a Black-Scholes option pricing model
using the following assumptions for grants made during 2003 and 1999,
respectively: risk free rate of return of 4.41% and 3.50%; no dividends
granted during the life of the option; volatility factors of the expected
market price of the Company's common stock ranging from .386 to .829 and
.489 to .843; and an expected life of the option of 9.15 and 10 years. The
weighted average fair value of the options granted during 2003 as of the
grant date was $6.20. There were no options granted in 2004.
Employee Stock Ownership Plan - NCRIC Group, Inc. has an Employee Stock
Ownership Plan (ESOP) for employees who have attained age 21 and completed
one year of service. As part of the 1999 stock offering, the ESOP borrowed
$1.0 million from NCRIC Group, Inc. to purchase 148,000 shares (276,247
shares on a converted basis), which are held in a trust account for
allocation among participants as the loan is repaid. For shares allocated
to the accounts of the ESOP participants as the result of payments made to
reduce the ESOP loan, the compensation charge is based upon the average
fair value of the shares over the service period. Scheduled loan
repayments on December 31, 2004, 2003, and 2002 have been made. During the
years ended December 31, 2004, 2003, and 2002 contributions were made to
the plan of $188,700, $207,200 and $162,800 respectively.
Stock Award Plans - The Company has established two Stock Award Plans
under which certain employees and directors may be awarded restricted
common stock vesting over a three to five year period. The trusts
established under each of the plans have borrowed funds from the Company
to support the purchase of NCRIC Group, Inc. common stock. All of the
scheduled loan repayments have been made. In September 2000, the Board of
Directors granted 74,000 shares to certain directors and officers under
the original Plan. During August 2003, the Board granted 159,120 shares
under the 2003 Stock Award Plan. The Company amortizes compensation
expense equal to the fair value of the stock on the date of award evenly
over the vesting period. During the years ended December 31, 2004, 2003
and 2002, compensation expense related to the Stock Award Plans was
$424,900, $299,400 and $153,800, respectively.
Executive Deferred Compensation Plan - In 2003, NCRIC established a
deferred compensation plan which is a non-qualified, unfunded plan under
which the directors and officers of NCRIC Group may defer a portion of
their compensation. The Company will provide a match for deferrals of 5%
of compensation for officers. Deferred amounts are credited with interest
at the rate of 6% per year. The matching expense under this plan totaled
$57,000 and $49,000 for the years ended December 31, 2004 and 2003,
respectively.
78
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences between
the statutory basis of accounting prescribed or permitted by the District
of Columbia Department of Insurance and Securities Regulation (DISR) and
GAAP are summarized below (in thousands):
December 31,
---------------------------------
2004 2003 2002
-------- -------- --------
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $ 62,994 $ 70,372 $ 44,269
Fair valuation of investments 536 904 2,806
Deferred taxes (1,932) (1,771) 3,012
Group stock issuance 8,346 7,838 7,642
Capital contribution -- -- (13,500)
Non-admitted assets and other 2,071 636 3,588
-------- -------- --------
STOCKHOLDERS' EQUITY - GAAP BASIS $ 72,015 $ 77,979 $ 47,817
======== ======== ========
NET LOSS - STATUTORY BASIS $ (8,984) $ (4,900) $ (1,510)
Deferred taxes 2,850 810 2,508
GAAP consolidation and other (986) (128) (256)
-------- -------- --------
NET (LOSS) INCOME - GAAP BASIS $ (7,120) $ (4,218) $ 742
======== ======== ========
As of December 31, 2004, 2003, and 2002, statutory capital and surplus for
NCRIC was sufficient to satisfy regulatory requirements. Each insurance
company is restricted under the applicable Insurance Code as to the amount
of dividends it may pay without regulatory consent.
12. 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
years, 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 no longer reports 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
data below has been reclassified to reflect this change in reportable
segments. Selected financial data is presented below for each business
segment for the year ended December 31 (in thousands):
2004 2003 2002
--------- --------- ---------
Insurance
Revenues from external customers $ 67,229 $ 48,343 $ 31,023
Net investment income 6,844 5,749 5,877
Net realized investment gains (losses) 477 1,901 (131)
Loss and loss adjustment expenses 70,310 50,473 26,829
Depreciation and amortization 1,890 1,378 524
Segment (loss) profit before taxes (9,738) (4,844) 1,323
Segment assets 274,353 245,137 190,522
Segment liabilities 202,712 168,465 138,297
Expenditures for segment assets 1,056 410 637
79
The following are reconciliations of reportable segment revenues, net
investment income, assets, liabilities, and profit to the Company's
consolidated totals (in thousands):
2004 2003 2002
--------- --------- ---------
Revenues:
Total revenues from external customers for reportable segment $ 67,229 $ 48,343 $ 31,023
Other revenues 4,448 4,982 5,888
--------- --------- ---------
Consolidated total $ 71,677 $ 53,325 $ 36,911
========= ========= =========
2004 2003 2002
--------- --------- ---------
Net investment income:
Total investment income for reportable segment $ 6,844 $ 5,749 $ 5,877
Other investment income 412 259 38
--------- --------- ---------
Consolidated total $ 7,256 $ 6,008 $ 5,915
========= ========= =========
Net realized investment gains (losses):
Total realized investment gains (losses) for reportable segment $ 477 $ 1,901 $ (131)
Other realized investment gains (losses) (2) 29 --
--------- --------- ---------
Consolidated total $ 475 $ 1,930 $ (131)
========= ========= =========
Loss and loss adjustment expenses:
Total loss and loss adjustment expenses for reportable segment $ 70,310 $ 50,473 $ 26,829
Other loss and loss adjustment expenses -- -- --
--------- --------- ---------
Consolidated total $ 70,310 $ 50,473 $ 26,829
========= ========= =========
(Loss) profit before taxes:
Total (loss) profit for reportable segment $ (9,738) $ (4,844) $ 1,323
Other losses, net (2,186) (2,068) (903)
--------- --------- ---------
Consolidated total $ (11,924) $ (6,912) $ 420
========= ========= =========
Assets:
Total assets for reportable segment $ 274,353 $ 245,137 $ 190,522
Other unallocated amounts 18,546 17,409 12,165
--------- --------- ---------
Consolidated total $ 292,899 $ 262,546 $ 202,687
========= ========= =========
Liabilities:
Total liabilities for reportable segment $ 202,712 $ 168,465 $ 138,297
Other liabilities 18,172 16,102 16,573
--------- --------- ---------
Consolidated total $ 220,884 $ 184,567 $ 154,870
========= ========= =========
80
13. TRANSACTIONS WITH AFFILIATES
NCRIC MSO rented an office building for one of its divisions from a
partnership whose partners are HealthCare Consulting senior executives.
The lease terminated October 31, 2002. For this property, NCRIC MSO paid
approximately $57,000 in rent for the year ended December 31, 2002.
During 2004, 2003, and 2002, members of the Company's Board of Directors
paid NCRIC MSO approximately $199,000, $176,000 and $163,000,
respectively, for practice management related services.
14. 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 the Company alleges
it is owed by CHW under a contract with the hospital that expired in 2000.
The jury rejected the claim by NCRIC, Inc. and returned a verdict in favor
of CHW counterclaims. The jury awarded $18.2 million in damages to CHW.
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. In connection with the filing of
post-trial motions, NCRIC secured a $19.5 million appellate bond and
associated letter of credit. No amounts have been drawn upon the letter of
credit as of March 17, 2005. 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 incurred for this litigation for
the years ended December 31, 2004, 2003, and 2002 were $734,000, $399,000,
and $365,000. Expenses associated with securing the $19.5 million
appellate bond and associated letter of credit were $261,000 in 2004.
15. SUBSEQUENT EVENT
On February 28, 2005, the Company announced its Board had approved an
agreement to merge NCRIC Group, Inc. into ProAssurance Corporation in a
stock-for-stock transaction that values the Company at $10.10 per share,
based on the closing price of ProAssurance common stock on Friday,
February 25, 2005. Under the terms of the agreement each holder of common
stock of the Company will have the right to receive 0.25 of a share of
ProAssurance common stock for each share of NCRIC Group. This exchange
ratio is subject to adjustment in the event that the market price of the
ProAssurance stock prior to the closing of the transaction either exceeds
$44.00 or is less than $36.00 such that the exchange ratio would then be
adjusted such that the value per NCRIC Group share would neither exceed
$11.00 nor be less than $9.00, respectively. The transaction is subject to
required regulatory approvals and a vote of NCRIC Group stockholders and
is expected to close early in the third
81
quarter of 2005.
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 2004, 2003 and 2002. For the earnings per share calculations, the
share amounts for periods prior to the conversion and stock offering have
been revised to reflect the share exchange ratio applied in the
conversion:
Year Ended December 31, 2004
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Premiums earned and other
revenues $ 17,611 $ 16,860 $ 18,131 $ 19,075
Net investment income 1,670 1,908 1,800 1,878
Realized investment gains (loss) 333 83 (72) 131
Net income (loss) 522 (437) 1,097 (8,302)
Basic earnings (losses) per share of
common stock $ 0.08 $ (0.07) $ 0.17 $ (1.30)
Diluted earnings (losses) per share
of common stock $ 0.08 $ (0.07) $ 0.17 $ (1.30)
Year Ended December 31, 2003
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Premiums earned and other
revenues $ 13,177 $ 12,599 $ 13,954 $ 13,595
Net investment income 1,322 1,389 1,657 1,640
Realized investment gains 199 1,155 498 78
Net income (loss) 514 542 370 (5,644)
Basic earnings (losses) per share of
common stock $ 0.08 $ 0.08 $ 0.06 $ (0.89)
Diluted earnings (losses) per share
of common stock $ 0.08 $ 0.08 $ 0.06 $ (0.89)
82
Year Ended December 31, 2002
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
Premiums earned and other revenues $ 8,339 $ 8,702 $ 9,478 $ 10,392
Net investment income 1,550 1,524 1,444 1,397
Realized investment (losses) gains (36) (574) 6 473
Net income (loss) 534 198 (791) 801
Basic earnings (losses) per share of
common stock $ 0.08 $ 0.03 $ (0.12) $ 0.12
Diluted earnings (losses) per share
of common stock $ 0.08 $ 0.03 $ (0.12) $ 0.12
83
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2004 (IN THOUSANDS)
- --------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN IN
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
-------- -------- -------------
Fixed Maturities:
United States Government and government
agencies and authorities $ 37,355 $ 37,313 $ 37,313
States, municipalities, and political subdivisions 42,571 43,529 43,529
All other corporate bonds 48,184 48,380 48,380
Asset and mortgage-backed securities 50,322 49,777 49,777
Redeemable preferred stocks -- -- --
-------- -------- --------
Total fixed maturities 178,432 178,999 178,999
Equity securities:
Industrial, miscellaneous, and all other 20,679 23,308 23,308
-------- -------- --------
Total equity securities 20,679 23,308 23,308
Total investments $199,111 $202,307 $202,307
======== ======== ========
(1) Original cost of equity securities, and, as to fixed maturities, original
costs reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
84
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 2003
------- -------
ASSETS
INVESTMENTS:
Investments in subsidiaries* $77,524 $82,920
Bonds 6,636 7,403
------- -------
Total investments 84,160 90,323
OTHER ASSETS:
Cash and cash equivalents 701 296
Receivables 76 76
Property and equipment, net -- 895
Due from subsidiaries* 1,799 1,397
Other assets 1,348 741
------- -------
TOTAL ASSETS $88,084 $93,728
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Junior Subordinated Deferrable Interest Debentures $15,464 $15,464
Other liabilities 605 285
------- -------
TOTAL LIABILITIES 16,069 15,749
------- -------
STOCKHOLDERS' EQUITY:
Common stock 70 70
Other stockholders' equity, including unrealized gains
or losses on securities of subsidiaries 71,945 77,909
------- -------
TOTAL STOCKHOLDERS' EQUITY 72,015 77,979
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $88,084 $93,728
======= =======
* Eliminated in consolidation.
See notes to condensed financial statements.
85
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 2003 2002
------- ------- -------
REVENUES:
Net investment income $ 437 $ 272 $ 16
Dividends from subsidiaries* -- 1,000 1,750
Other income (2) 15 7
------- ------- -------
Total revenues 435 1,287 1,773
------- ------- -------
EXPENSES:
Interest expense -- 826 62
Other operating expenses 1,549 663 608
------- ------- -------
Total expenses 1,549 1,489 670
------- ------- -------
(LOSS) INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES (1,114) (202) 1,103
Equity in undistributed earnings of subsidiaries (6,006) (4,016) (361)
------- ------- -------
NET (LOSS) INCOME $(7,120) $(4,218) $ 742
======= ======= =======
* Eliminated in consolidation.
See notes to condensed financial statements.
86
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (7,120) $ (4,218) $ 742
Adjustments to reconcile net (loss) income
to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries 6,006 4,016 361
Net realized investment losses (gains) 2 (8) --
Amortization and depreciation 44 199 106
Stock released for coverage of benefit plans 683 546 319
Other changes in assets and liabilities: 186 (1,276) 639
-------- -------- --------
Net cash flows (used in) provided by operating activities (199) (741) 2,167
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (246) (9,059) (3,392)
Sales, maturities and redemptions of securities 1,025 4,982 --
Conversion of holding company -- (254) --
Investment in subsidiaries -- (30,075) (13,960)
Purchases of property and equipment -- (89) (175)
-------- -------- --------
Net cash flows provided by (used in) investing activities 779 (34,495) (17,527)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 30 -- --
Net proceeds from Junior Subordinated Deferrable Interest Debentures -- -- 15,464
Net proceeds from public stock offering -- 35,783 --
Payments to acquire treasury stock (205) (350) (30)
-------- -------- --------
Net cash flows (used in) provided by financing activities (175) 35,433 15,434
NET CHANGE IN CASH AND CASH EQUIVALENTS 405 197 74
-------- -------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 296 99 25
-------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 701 $ 296 $ 99
======== ======== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ -- $ 830 $ --
======== ======== ========
See notes to condensed financial statements.
87
NOTES TO CONDENSED FINANCIAL STATEMENTS
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes of NCRIC Group, Inc. and
Subsidiaries.
I. REORGANIZATION
On June 24, 2003, a plan of conversion and reorganization was approved by the
members of NCRIC, A Mutual Holding Company and by the shareholders of NCRIC
Group, Inc. In the conversion and related stock offering, the NCRIC, A Mutual
Holding Company offered for sale its 60% ownership interest in NCRIC Group, Inc.
As a result of the conversion and stock offering, NCRIC, A Mutual Holding
Company ceased to exist, and NCRIC Group, Inc. became a fully publicly-owned
company. See Note 2 of the Notes to the Financial Statements.
On December 31, 1998, National Capital Reciprocal Insurance Company consummated
its plan of reorganization from a reciprocal insurer to a stock insurance
company and became a wholly owned subsidiary of NCRIC Group, Inc. (Group) and
converted into NCRIC, Inc. Group was organized in December 1998, as part of the
plan to reorganize the corporate structure.
II. BASIS OF PRESENTATION
In Group's financial statements, investment in subsidiaries is stated at cost
plus equity in undistributed earnings of subsidiaries since date of
reorganization plus unrealized gains and losses of subisidiaries' investments.
III. INVESTMENTS
See Investments in the Consolidated Financial Statements and in Note 3 of the
Notes to the Consolidated Financial Statements.
IV. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
See Note 5 of the Notes to the Consolidated Financial Statements.
V. COMPREHENSIVE INCOME
See Comprehensive Income in the Consolidated Financial Statements.
VI. INCOME TAXES
Group and its eligible subsidiaries file a consolidated U.S. Federal Income tax
return. Income tax liabilities or benefits are recorded by each subsidiary based
upon separate return calculations.
For further information on income taxes, see Income Taxes in Note 7 of the Notes
to the Consolidated Financial Statements.
VII. ACCOUNTING CHANGES
For information concerning new accounting standards adopted in 2004, 2003 and
2002, see Note 1 of the Notes to the Consolidated Financial Statements.
VIII. SUBSEQUENT EVENT
For information on the subsequent event, see Note 15 of the Notes to the
Consolidated Financial Statements.
88
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2004, 2003, AND 2002 (IN THOUSANDS)
- --------------------------------------------------------------------------------
DEFERRED FUTURE POLICY OTHER POLICY
POLICY BENEFITS, LOSSES, CLAIMS AND
ACQUISITION CLAIMS, AND UNEARNED BENEFITS PREMIUM
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE
- ------- ----- ------------- -------- ------- -------
Insurance:
2004 $ 2,717 $153,242 $ 40,790 $ 66,462
2003 $ 2,358 $125,991 $ 34,553 $ -- $ 47,264
2002 $ 1,480 $104,022 $ 24,211 $ -- $ 30,098
AMORTIZATION
BENEFITS, OF DEFERRED
NET LOSSES AND POLICY OTHER
INVESTMENT LOSS ACQUISITION OPERATING PREMIUMS
SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN
- ------- ------ -------- ----- -------- -------
Insurance:
2004 $ 7,256 $ 70,310 $ 5,840 $ 6,662 $ 87,229
2003 $ 6,008 $ 50,473 $ 4,360 $ 6,003 $ 71,365
2002 $ 5,915 $ 26,829 $ 2,890 $ 5,728 $ 51,799
89
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(IN THOUSANDS)
- --------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
PROPERTY AND GROSS TO OTHER FROM OTHER NET OF ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------- -------- -------- -------- -------- --------
2004 $ 80,992 $(14,530) $ 66,462 0%
2003 $ 61,023 $(13,759) $ -- $ 47,264 0%
2002 $ 44,113 $(14,023) $ -- $ 30,090 0%
90
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2004 AND 2003 (IN THOUSANDS)
- --------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
----------- ------- -------- ---------- -------
2004
Allowance for Doubtful
Accounts $1,882 $ 108 $ (136) $1,854
2003
Allowance for Doubtful
Accounts $1,924 $ 486 $ (528) $1,882
91
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE COMPANIES
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002
(IN THOUSANDS)
- --------------------------------------------------------------------------------
DEFERRED RESERVE FOR
POLICY UNPAID CLAIMS NET NET
ACQUISITION AND CLAIM UNEARNED PREMIUMS INVESTMENT
COSTS ADJUSTMENT EXPENSES PREMIUMS EARNED INCOME
----- ------------------- -------- ------ ------
2004 $ 2,717 $153,242 $ 40,790 $ 66,462 $ 7,256
2003 $ 2,358 $125,991 $ 34,553 $ 47,264 $ 6,008
2002 $ 1,480 $104,022 $ 24,211 $ 30,098 $ 5,915
AMORTIZATION
LOSS AND LOSS OF DEFERRED PAID LOSS
ADJUSTMENT EXPENSES POLICY AND LOSS
RELATED TO:(1) ACQUISITION ADJUSTMENT PREMIUMS
CURRENT YEAR PRIOR YEAR COSTS EXPENSES(1) WRITTEN
------------ ---------- ----- ----------- -------
2004 $ 53,158 $ 17,152 $ 5,840 $ 37,977 $ 87,229
2003 $ 44,588 $ 5,885 $ 4,360 $ 30,765 $ 71,365
2002 $ 24,063 $ 2,766 $ 2,890 $ 20,155 $ 51,799
(1) Loss and loss adjustment expenses shown net of reinsurance
92
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 9A. Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-14(e) under the Exchange Act) as
of December 31, 2004, the Evaluation Date. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed in the reports that NCRIC Group, Inc.
files or submits under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
No change in the Company's internal control over financial reporting
occurred during the fourth quarter of 2004 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Item 9B. Other Information
None
PART III
Item 10. Directors and Executive Officers of the Registrant
Information included in NCRIC Group, Inc.'s Proxy Statement for its 2005
Annual Meeting of Shareholders is incorporated herein by reference.
Item 11. Executive Compensation
Information included in NCRIC Group, Inc.'s Proxy Statement for its 2005
Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Information included in NCRIC Group, Inc.'s Proxy Statement for its 2005
Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accountant Fees and Services
Information included in NCRIC Group, Inc.'s Proxy Statement for its 2005
Annual Meeting of Shareholders is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K:
(a)(1) Financial Statements. The following consolidated financial statements of
NCRIC Group, Inc. and subsidiaries are included herein in accordance with Item 8
of Part II of this report.
Report of Independent Registered Public Accounting Firm
93
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Operations for the Years Ended December 31, 2004,
2003 and 2002
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004,
2003 and 2002
Notes to Consolidated Financial Statements for the Years Ended December 31,
2004, 2003 and 2002
(a)(2) Financial Statement Schedules. The following consolidated financial
statement schedules of NCRIC Group, Inc. and subsidiaries are included herein in
accordance with Item 8 of Part II of this report.
I. Summary of Investments - Other Than Investments in Related Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
VI. Supplemental Information Concerning Property-Casualty Insurance
Companies
(b) Reports on Form 8-K.
--------------------
On November 12, 2004 the Registrant filed a Current Report on Form 8-K,
pursuant to Item 12, to report the issuance of a press release announcing
earnings for the quarter ended September 30, 2004. The press release was
included as an exhibit to the Current Report.
On December 17, 2004 the Registrant filed a Current Report on Form 8-K,
pursuant to Item 7.01, to provide clarification on the Registrant's
targeted ratio of net premiums to statutory surplus.
(c) Exhibits.
---------
The following exhibits are filed as part of this report or are
incorporated by reference to other filings.
3.1 Certificate of Incorporation of NCRIC Group, Inc. (1)
3.2 Bylaws of NCRIC Group, Inc.(2)
10.1 Stock Option Plan (3)
10.2 Stock Award Plan (3)
10.3 NCRIC Group, Inc. 2003 Stock Option Plan (4)
10.4 NCRIC Group, Inc. 2003 Stock Award Plan (4)
10.5 Employment Agreement between NCRIC Group, Inc., NCRIC Inc., and R.
Ray Pate, Jr. (5)
10.6 Employment Agreement between NCRIC Group, Inc, NCRIC, Inc. and
Rebecca B. Crunk (5)
10.7 Consulting Agreement between NCRIC Group, Inc. and Stephen S. Fargis
(6)
10.8 Employment Agreement with William E. Burgess (2)
10.9 Lease (3)
10.10 Amendment to Lease (3)
10.11 Administrative Services Agreement (7)
10.12 Tax Sharing Agreement (7)
10.13 Agreement and Plan of Merger between NCRIC Group, Inc. and
ProAssurance Corporation (8)
21 Subsidiaries
23.2 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- ----------
(1) Incorporated by reference to the Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-1 filed with the Commission on
May 12, 2003.
(2) Incorporated by reference to the Registration Statement on Form S-1
filed with the Commission on March 25, 2003.
94
(3) Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 (File No. 333- 69537) filed with the Commission on
December 23, 1998 and subsequently amended on April 15, 1999, March
12, 1999 and May 7, 1999.
(4) Incorporated by reference to the Registrant's Proxy Statement for
the 2003 Annual Meeting of Shareholders filed with the Commission on
May 19, 2003.
(5) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-25505), originally filed with the Commission on
March 27, 2002.
(6) Incorporated by reference to the Registrant's Current Report on Form
8-K (File No. 0-25505), originally filed with the Commission on
January 6, 2005.
(7) Incorporated by reference to the Registrant's Annual Report on Form
10-K (File No. 0-25505), originally filed with the Commission on
March 26, 2004.
(8) Incorporated by reference to Exhibit 2.1 of the Registrant's Current
Report on Form 8-K (File No. 0-25505), originally filed with the
Commission on March 4, 2005, which incorporates the Agreement and
Plan of Merger dated as of February 28, 2005 by reference to Exhibit
2.1 of the Current Report on Form 8-K of ProAssurance Corporation
(File No. 001-16533), originally filed with the Commission on March
3, 2005.
(d) Not applicable.
95
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NCRIC Group, Inc.
Date: March 21, 2005 By: /s/ R. Ray Pate, Jr.
------------------------------------
R. Ray Pate, Jr.
Vice Chairman, President and Chief
Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Nelson P. Trujillo Chairman of the Board of March 21, 2005
- --------------------------- Directors
Nelson P. Trujillo, M.D.
/s/ R. Ray Pate, Jr. Vice Chairman of the Board of March 21, 2005
- --------------------------- Directors, President and Chief
R. Ray Pate, Jr. Executive Officer (Principal
Executive Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 21, 2005
- --------------------------- Financial Officer (Principal
Rebecca B. Crunk Financial and Accounting
Officer)
/s/ Vincent C. Burke Director March 21, 2005
- ---------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman Director March 21, 2005
- ---------------------------
Pamela W. Coleman, M.D.
/s/ Leonard M. Glassman Director March 21, 2005
- ---------------------------
Leonard M. Glassman, M.D.
/s/ Luther W. Gray, Jr. Director March 21, 2005
- ---------------------------
Luther W. Gray, Jr., M.D.
/s/ Prudence P. Kline Director March 21, 2005
- ---------------------------
Prudence P. Kline, M.D.
96
/s/ Stuart A. McFarland Director March 21, 2005
- ---------------------------
Stuart A. McFarland
/s/ J. Paul McNamara Director March 21, 2005
- ---------------------------
J. Paul McNamara
/s/ Leonard M. Parver Director March 21, 2005
- ---------------------------
Leonard M. Parver, M.D.
/s/ Frank K. Ross Director March 21, 2005
- ---------------------------
Frank K. Ross
/s/ David M. Seitzman Director March 21, 2005
- ---------------------------
David M. Seitzman, M.D.
97