U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended March 31, 2005
Commission File Number: 0-25505
[LOGO](SM)
NCRIC Group, Inc.
Delaware 52-2134774
- ------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
202-969-1866
------------
(Issuer's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such filing
requirements for the past 90 days. |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).
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 6, 2005, there
were 6,909,782 shares of NCRIC Group, Inc. common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- --------------------------------------------------------------------------------
March 31, 2005 December 31, 2004
ASSETS (unaudited)
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes (Amortized cost $190,920 and $178,432) $ 188,388 $ 178,999
Equity securities (Cost $24,091 and $20,679) 26,372 23,308
--------- ---------
Total securities available for sale 214,760 202,307
OTHER ASSETS:
Cash and cash equivalents 7,326 13,658
Reinsurance recoverable 45,122 44,846
Goodwill, net 7,296 7,296
Premiums and accounts receivable, net 5,672 7,526
Deferred income taxes, net 9,276 8,404
Other assets 12,513 8,862
--------- ---------
TOTAL ASSETS $ 301,965 $ 292,899
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 110,072 $ 107,746
Loss adjustment expenses 45,875 45,496
--------- ---------
Total losses and loss adjustment expenses 155,947 153,242
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 261 351
Unearned premiums 53,663 40,790
Advance premiums 366 5,520
Reinsurance premiums payable 430 766
Trust Preferred Securities 15,000 15,000
Other liabilities 5,696 5,215
--------- ---------
TOTAL LIABILITIES 231,363 220,884
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 12,000,000 shares authorized; 6,909,782
and 6,892,517 shares issued and outstanding, respectively (net
of 56,134 treasury shares) 70 70
Preferred stock $0.01 par value - 1,000,000 shares authorized, 0 shares issued -- --
Additional paid in capital 49,286 49,161
Unallocated common stock held by the ESOP (2,444) (2,478)
Common stock held by the stock award plan (1,151) (1,218)
Accumulated other comprehensive income (166) 2,109
Retained earnings 25,562 24,926
Treasury stock, at cost (555) (555)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 70,602 72,015
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 301,965 $ 292,899
========= =========
See notes to condensed consolidated financial statements.
2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
2005 2004
REVENUES:
Net premiums earned $ 17,843 $ 16,150
Net investment income 1,915 1,670
Net realized investment gains 302 333
Practice management and related income 1,176 1,224
Other income 178 237
-------- --------
Total revenues 21,414 19,614
-------- --------
EXPENSES:
Losses and loss adjustment expenses 14,446 13,075
Underwriting expenses 3,201 3,533
Practice management and related expenses 1,345 1,234
Interest expense on Trust Preferred Securities 254 202
Other expenses 1,134 952
-------- --------
Total expenses 20,380 18,996
-------- --------
INCOME BEFORE INCOME TAXES 1,034 618
-------- --------
INCOME TAX PROVISION 398 96
-------- --------
NET INCOME $ 636 $ 522
======== ========
OTHER COMPREHENSIVE (LOSS) INCOME (2,275) 1,636
-------- --------
COMPREHENSIVE (LOSS) INCOME $ (1,639) $ 2,158
======== ========
Net income per common share:
Basic:
Average shares outstanding 6,401 6,337
-------- --------
Earnings Per Share $ 0.10 $ 0.08
======== ========
Diluted:
Average shares outstanding - basic 6,401 6,337
Dilutive effect of stock options 215 277
-------- --------
Average shares outstanding - diluted 6,616 6,614
-------- --------
Earnings Per Share $ 0.10 $ 0.08
======== ========
See notes to condensed consolidated financial statements.
3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------------
Three Months
Ended March 31,
2005 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 636 $ 522
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (302) (333)
Amortization and depreciation 564 498
Provision for uncollectible receivables (2) 87
Deferred income taxes 300 (367)
Stock released for coverage of benefit plans 226 165
Changes in assets and liabilities:
Reinsurance recoverable (276) (4,652)
Premiums and accounts receivable 1,856 3,069
Other assets (3,680) 237
Losses and loss adjustment expenses 2,705 4,243
Retrospective premiums accrued under
reinsurance treaties (90) 67
Unearned premiums 12,873 14,407
Advance premiums (5,154) (2,862)
Reinsurance premiums payable (336) (1,062)
Other liabilities 481 1,520
-------- --------
Net cash flows provided by operating activities 9,801 15,539
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (27,796) (46,039)
Sales, maturities and redemptions of investments 11,813 29,545
Purchases of property and equipment (150) (241)
-------- --------
Net cash flows used in investing activities (16,133) (16,735)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt -- (180)
-------- --------
Net cash flows used in financing activities -- (180)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (6,332) (1,376)
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 13,658 9,978
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 7,326 $ 8,602
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ -- $ --
======== ========
Interest paid $ 249 $ 204
======== ========
See notes to condensed consolidated financial statements.
4
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
for the three-month period ended March 31, 2005 - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements
were prepared in accordance with instructions to Form 10-Q and therefore
do not include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three-month period ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2005. These condensed consolidated financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited consolidated financial
statements of NCRIC Group, Inc. (NCRIC Group) for the year ended December
31, 2004, which were filed with the Securities and Exchange Commission on
Form 10-K.
2. Reportable Segment Information
NCRIC Group has one reportable segment: Insurance. The insurance segment
provides medical professional liability and other insurance. The
reportable segment is a strategic business unit that offers products and
services and is therefore managed separately. NCRIC Group evaluates
performance based on profit or loss before income taxes. Selected
financial data is presented for the business segment at or for the
three-month period ended March 31, 2005 and 2004 (in thousands):
At or For the Three Months
Ended March 31,
--------------------------
2005 2004
-------- --------
Insurance Segment
Revenues from external customers $ 18,021 $ 16,369
Net investment income 1,843 1,571
Net realized investment gains 302 332
Losses and loss adjustment expenses 14,446 13,075
Depreciation and amortization 525 447
Segment profit before taxes 2,168 1,317
Segment assets 285,219 263,824
Segment liabilities 214,226 184,614
Expenditures for segment assets 76 149
The following are reconciliations of reportable revenues, net investment
income, net realized investment gains, losses and loss adjustment
expenses, profit before taxes, assets and liabilities to NCRIC Group's
consolidated totals (in thousands):
At or For the Three Months
Ended March 31,
--------------------------
2005 2004
--------- ---------
Revenues from external customers:
Total revenues for reportable segment $ 18,021 $ 16,369
Other revenues 1,176 1,242
--------- ---------
Consolidated total $ 19,197 $ 17,611
========= =========
5
At or For the Three Months
Ended March 31,
--------------------------
2005 2004
--------- ---------
Net investment income:
Total investment income for
reportable segment $ 1,843 $ 1,571
Other investment income 72 99
--------- ---------
Consolidated total $ 1,915 $ 1,670
========= =========
Net realized investment gains:
Total realized investment gains for
reportable segment $ 302 $ 332
Other realized investment gains -- 1
--------- ---------
Consolidated total $ 302 $ 333
========= =========
Losses and loss adjustment expenses:
Total losses and loss adjustment expenses for
reportable segment $ 14,446 $ 13,075
Other losses and loss adjustment expenses -- --
--------- ---------
Consolidated total $ 14,446 $ 13,075
========= =========
Profit before taxes:
Total profit for reportable segment $ 2,168 $ 1,317
Other losses (1,134) (699)
--------- ---------
Consolidated total $ 1,034 $ 618
========= =========
Assets:
Total assets for reportable segment $ 285,219 $ 263,824
Other assets 16,746 17,178
--------- ---------
Consolidated total $ 301,965 $ 281,002
========= =========
Liabilities:
Total liabilities for reportable segment $ 214,226 $ 184,614
Other liabilities 17,137 16,086
--------- ---------
Consolidated total $ 231,363 $ 200,700
========= =========
3. Earnings per Share
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding. The following table sets forth the
computation of basic and diluted earnings per share (in thousands except
per share data):
For the Three Months
Ended March 31,
--------------------
2005 2004
------ ------
Net income $ 636 $ 522
====== ======
Weighted average common
shares outstanding - basic 6,401 6,337
Dilutive effect of stock options
and awards 215 277
------ ------
Weighted average common
shares outstanding - diluted 6,616 6,614
====== ======
Net income per common share:
Basic $ 0.10 $ 0.08
====== ======
Diluted $ 0.10 $ 0.08
====== ======
6
4. Merger
On February 28, 2005, the Company announced that the Board of
Directors had approved an agreement to merge NCRIC Group, Inc. into
ProAssurance Corporation in a stock-for-stock transaction. 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, 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, the exchange ratio would 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.
5. Litigation
On February 13, 2004, a District of Columbia Superior Court jury
returned a verdict in favor of Columbia Hospital for Women Medical Center,
Inc. (CHW) in the premium collection litigation between NCRIC, Inc. and
CHW. The verdict came in a civil action stemming from NCRIC, Inc.'s
efforts to collect payment for nearly $3 million in premiums that NCRIC
alleges it is owed by CHW under a contract with CHW that expired in 2000.
The jury ruled against the claim by NCRIC, Inc. and returned a verdict of
$18.2 million in favor of CHW counterclaims.
The verdict was entered as a judgment on February 20, 2004. On March
5, 2004, NCRIC filed post-trial motions for judgment as a matter of law
and, in the alternative, for a new trial. As a result of these post-trial
motions, the judgment is not final, and jurisdiction with respect to the
verdict remains with the trial judge. No decision has yet been rendered on
the post-trial motions. In connection with the filing of post-trial
motions, NCRIC secured a $19.5 million appellate bond and associated
letter of credit. The amount of the bond represents the verdict plus a
projection of post-trial interest. No amounts have been drawn upon the
letter of credit as of May 6, 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.
Expenses incurred for the trial portion of the litigation, reported
as a component of underwriting expenses, in the first quarter of 2005 and
2004 were $50,000 and $503,000, respectively. Expenses incurred for
post-trial costs, reported as a component of other expenses, in the first
quarter of 2005 and 2004 were $68,000 and $370,000, respectively. NCRIC
Group, Inc. has indemnified NCRIC, Inc., through an indemnification
agreement, for post-trial costs expected to be incurred and for any
potential final judgment up to $5.5 million, on an after-tax basis.
6. Other Comprehensive Income
Other comprehensive loss for the three-month period ended March 31, 2005
includes unrealized loss for available for sale investments, net of tax,
of $2,275,000. Other comprehensive income for the three-month period ended
March 31, 2004 includes unrealized gain for available for sale
investments, net of tax, of $1,636,000.
7. 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 03-1, 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.
7
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. In April 2005, the Securities and Exchange Commission deferred
the effective date of SFAS 123R from the first interim or annual period
beginning after June 15, 2005 to the next fiscal year beginning 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 first quarter of
2006.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
condensed consolidated financial statements and related notes included in this
Form 10-Q. References to "NCRIC" mean NCRIC Group and its subsidiaries.
General
The financial statements and data presented in the Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the
United States of America, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
There have been no material changes to our accounting policies during the
quarter ended March 31, 2005. Following is a condensed summary of key financial
concepts and of those accounting policies which we believe to be the most
critical. That is, these are most important to the portrayal of our financial
condition and results of operations and they require management's most complex
judgments, including the need to make estimates about the effect of insurance
losses and other matters that are inherently uncertain.
Premium income. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Net premiums
written are adjusted by any amount which has been billed but not yet earned
during the period in arriving at earned premiums. Extended reporting
endorsements premium is earned in the same period it is written.
For several large groups of policyholders, we have had insurance programs
where the premiums are retrospectively determined based on losses during the
period. Under all of the current programs, the full premium level was 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 through the period when all open program claims are resolved. At
policy renewal dates, these programs have been discontinued.
Reserves for losses and loss adjustment expenses. We write one line of
business, medical professional liability. Losses and LAE reserves are estimates
of future payments for reported claims and related expenses of adjudicating
claims with respect to insured events that have occurred in the past. The change
in these reserves from period to period is reflected as an increase or decrease
to our losses and LAE expense incurred.
Medical professional liability losses and LAE reserves are established
based on an estimate of these future payments as reflected in our past
experience with similar cases and historical trends involving claim payment
patterns. Reserving for medical professional liability claims is a complex and
uncertain process, requiring the use of informed estimates and judgments.
Although we intend to estimate conservatively our future payments relating to
losses incurred, there can be no assurance that currently established reserves
will prove adequate in light of subsequent actual experience. Losses and LAE
expenses as stated in the statement of operations are reported net of
reinsurance recoveries.
Reinsurance. We manage our exposure to individual claim losses, annual
aggregate losses, and LAE through our reinsurance program. Reinsurance allows us
to obtain indemnification against a specified portion of losses associated with
insurance policies we have underwritten by entering into a reinsurance agreement
with other insurance enterprises or reinsurers. We pay or cede part of our
policyholder premium to reinsurers. The reinsurers in return agree to reimburse
us for a specified portion of any claims covered under the reinsurance contract.
While reinsurance arrangements are designed to limit losses from large exposures
and to permit recovery of a portion of direct losses, reinsurance does not
relieve us of liability to our 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.
8
Investment portfolio. Our investment portfolio is composed principally of
fixed maturity securities classified as available-for-sale. All securities with
gross unrealized losses at the balance sheet date are evaluated for evidence of
other-than-temporary impairment on a quarterly basis. We write down to fair
value any security with an impairment that is deemed to be other-than-temporary
in the period the determination is made. The assessment of whether such
impairment has occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. The evaluation for
other-than-temporary impairments is a quantitative and qualitative process
involving judgments which is subject to risks and uncertainties. The risks and
uncertainties include changes in general economic conditions, the issuer's
financial condition and the effects of changes in interest rates.
Goodwill. 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 March 31, 2005, resulted from the
1999 acquisition of three businesses which now operate as divisions of
ConsiCare, Inc. (formerly NCRIC MSO, Inc.), a subsidiary of NCRIC Group. 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 March 31, 2005.
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 NCRIC 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 NCRIC 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 NCRIC 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. In April 2005, the Securities and Exchange
Commission deferred the effective date of SFAS 123R from the first interim or
annual period beginning after June 15, 2005 to the next fiscal year beginning
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 first
quarter of 2006.
Overview
First quarter 2005 results reflect 1) the continued implementation of our
business plan and 2) expenses incurred for the proposed merger with ProAssurance
Corporation. Book value per share as of March 31, 2005 stood at $10.22 compared
to $10.45 at December 31, 2004, decreasing due to the decline in fair value of
the fixed-maturity component of the investment portfolio.
9
As measured by premium, 40% of our policies have renewal dates in the
first quarter of the year. In the first quarter the overall retention rate was
84%, a level slightly lower than experienced in recent years. We continue to see
economic pressures drive physicians to look for less costly coverage
alternatives, such as moving to a lower cost provider and alternative risk
financing. Primarily as a result of business lost to price competition, the
overall number of insurance policies in force went down during the quarter. The
policy count as of March 31, 2005 stands at 3,847 compared to 3,942 as of
December 31, 2004. The net policy count reduction is mainly attributable to two
groups of physicians that moved their coverage to competitors due to pricing.
Nevertheless, earned premiums grew due to the rate level increases and new
business written over the past 12 months.
Claims frequency, as measured by the number of claims reported, rose
slightly in the first quarter of 2005 compared to the first quarter of 2004.
Development of losses reported in prior years is neutral in 2005.
On March 4, 2005, A.M. Best downgraded the rating of NCRIC, Inc. from "A-"
to "B++" (Very Good) under review with negative implications. The "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. 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.
The announcement of the downgrade occurred after the anniversary dates of
nearly all first quarter renewals. For this reason, premium written and earned
was basically unaffected by the rating change. In April, however, we saw two
groups of physicians terminate their coverage either solely because of the
rating or due to a combination of the downgrade and our relatively high premium
rates.
Three months ended March 31, 2005 compared to three months ended March 31, 2004
Consolidated net income
Net income was $636,000 for the three months ended March 31, 2005 compared
to $522,000 for the three months ended March 31, 2004. Total revenue for the
quarter of $21.4 million was up 9% compared to the same quarter in 2004. The
higher revenue was partially offset by increases in loss and loss adjustment
expenses. Expenses related to the CHW litigation were lower by $755,000 in the
first quarter of 2005 compared to the first quarter of 2004. Additionally,
expenses of $649,000 related to the proposed merger transaction were incurred in
the first quarter of 2005.
First quarter pre-tax income in our insurance segment increased to $2.2
million from $1.3 million for 2004. Insurance segment earnings improved
primarily due to $272,000 of higher investment income and $453,000 decrease in
expenses related to the trial portion of the litigation in the first quarter of
2005 compared to the first quarter of 2004.
Net premiums earned
Net premiums earned increased by $1.6 million, or 10%, to $17.8 million
from $16.2 million for the three months ended March 31, 2005 and 2004,
respectively. The increase results primarily from the premium rates increases,
which average 18%, partially offset by $668,000 less premium for extended
reporting endorsements. Extended reporting endorsements premium is earned in the
same period it is written. Additionally, net premiums earned for the first
quarter of 2005 increased by $247,000 from the March 31, 2004 level due to
unfavorable loss development in the hospital-sponsored retrospectively rated
programs in the first quarter of 2005. Under these programs, additional premiums
are either earned or returned based on a group's loss experience.
Gross premiums written of $34.4 million for the three months ended March
31, 2005 compared to $34.3 million for the three months ended March 31, 2004
increased due to the rise in premium rates, plus new business written, partially
offset by the reduction in extended reporting endorsement premium and a
reduction in policies in force.
The overall level of new business produced in the first quarter of 2005 is
lower than for the corresponding period
10
in 2004, as expected. Since our product is priced at the high end of the market,
growth in business is constrained. We believe our price level is required by the
loss characteristics of the markets in which we compete. We continue to maintain
that pricing integrity is critical to long-term viability. Following is a table
displaying the new business produced in the first quarter of 2005 and 2004.
Three Months Ended March 31,
----------------------------
2005 2004
--------- ---------
Direct $ 331,000 $ 395,000
Agent 497,000 637,000
The following chart illustrates the components of gross premium written by
state for the first quarter of 2005 compared to the same period in 2004 (amounts
in thousands):
Three Months Ended March 31,
-------------------------------------------
2005 2004
-------------------- -------------------
District of Columbia $16,914 49% $16,290 48%
Virginia 7,208 21% 7,820 23%
Maryland 6,733 20% 6,342 18%
Delaware 1,916 5% 1,466 4%
West Virginia 1,583 5% 2,335 7%
------- ------- ------- -------
$34,354 100% $34,253 100%
======= ======= ======= =======
Premium collection litigation. During 2000, it was determined that one of our
hospital-sponsored retrospective programs would not be renewed. In accordance
with the terms of the contract, we billed the hospital sponsor, CHW, based on
the actual accumulated loss experience of the terminated program. Because the
original 2000 bill was not paid when due, we initiated legal proceedings to
collect. As of March 31, 2005 the amount due to NCRIC for this program was $2.9
million. No amount of net receivable was accrued 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 CHW in the premium collection litigation between NCRIC,
Inc. and CHW. The verdict came in a civil action stemming from NCRIC, Inc.'s
efforts to collect payment for nearly $3 million in premiums that NCRIC alleges
it is owed by CHW under a contract with CHW that expired in 2000. The jury ruled
against the claim by NCRIC, Inc. and returned a verdict of $18.2 million in
favor of CHW counterclaims.
The verdict was entered as a judgment on February 20, 2004. On March 5,
2004, NCRIC filed post-trial motions for judgment as a matter of law and, in the
alternative, for a new trial. As a result of these post-trial motions, the
judgment is not final, and jurisdiction with respect to the verdict remains with
the trial judge. No decision has yet been rendered on the post-trial motions. In
connection with the filing of post-trial motions, NCRIC secured a $19.5 million
appellate bond and associated letter of credit. The amount of the bond
represents the verdict plus a projection of post-trial interest. No amounts have
been drawn upon the letter of credit as of May 6, 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. Expenses incurred for this litigation in the first quarters of 2005 and
2004 were $62,000 and $761,000, respectively. The expenses associated with the
$19.5 million appellate bond and the associated letter of credit, in the first
quarters of 2005 and 2004 were $56,000 and $112,000, respectively.
Net investment income
Net investment income increased by $245,000 for the three months ended
March 31, 2005 compared to the first quarter of 2004 due to an increase in
average invested funds. The average effective yield was approximately 3.56% for
the three months ended March 31, 2005 and 3.55% for the three months ended March
31, 2004. The tax equivalent yield was approximately 3.97% for the first quarter
of 2005 and 3.94% for the first quarter of 2004.
11
Net realized investment gains
Net realized investment gains of $302,000 and $333,000 in the first
quarters of 2005 and 2004, respectively, resulted from both fixed maturity and
equity security trades made in the course of routine portfolio management. In
the first quarter of 2005, there was no other-than-temporary impairment charge
recognized on any security. An equity security in which an other-than-temporary
impairment charge of $15,000 was recognized during the year ended December 31,
2004 was sold in 2005.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services for the following categories of services: practice management,
accounting, tax and personal financial planning, retirement plan accounting and
administration, and other services. First quarter revenue of $1.2 million is
essentially flat on a quarter-to-quarter comparison.
Losses and loss adjustment expenses and combined ratio results
The increase in current year losses to $14.4 million for the first quarter
of 2005 reflects the rise in the cost of resolving claims combined with a slight
increase in the frequency of claims reported in the first quarter of 2005
compared to the number reported in the first quarter of 2004. The severity of
current losses incurred is greater in recognition of the increased loss trends
reported in the year-end reserve valuation. Development of losses reported in
prior years is neutral in 2005 reflecting favorable experience on claims closed
during the quarter offset by the continuing upward pressure of severity of
losses.
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Three Months Ended
March 31,
------------------
2005 2004
------ ------
Loss and LAE ratio ............... 81.0% 81.0%
Underwriting expense ratio ....... 17.9% 21.8%
------ ------
Combined ratio ................... 98.9% 102.8%
The combined ratio of 98.9% for the three months ended March 31, 2005
reflects the higher level of earned premiums in relation to the increase in loss
and loss adjustment expenses and the stable level of core underwriting expenses.
Reduced litigation expenses contributed 2.5 points of decrease in the
underwriting expense ratio.
Expenses
Underwriting expenses of $3.2 million for the three months ended March 31,
2005 decreased from $3.5 million for the three months ended March 31, 2004,
primarily due to the $453,000 reduction in litigation expense offset by higher
commissions and other expenses associated with the increased level of premium.
Practice management and related expenses totaled $1.3 million for the
three months ended March 31, 2005 which represents a 9% increase over the
expense level for the first quarter of 2004. The increase stems largely from the
ConsiCare branding and related promotional expenses which are part of the
business development plan.
Interest expense is on the Trust Preferred Securities. The rate is 400
basis points over the 3-month LIBOR.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. First
quarter 2005 expenses include costs associated with the proposed merger with
ProAssurance. Additionally, post-trial litigation expenses were $302,000 lower
in the first quarter of 2005 compared to the same quarter of 2004.
Federal income taxes
The effective tax rate for NCRIC, at 38% for the three months ended March
31, 2005 is higher than the statutory rate principally due to the tax treatment
of the merger expenses incurred, partially offset by nontaxable
12
investment income. The effective tax rate of 15% for the three months ended
March 31, 2004, is lower than the federal statutory rate principally due to
nontaxable investment income.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the three months ended March 31, 2005, we had cash flows from
operations of $9.8 million compared to $15.5 million for the corresponding
period of 2004. The $5.7 million of decreased cash flow results primarily from
higher payments for claims and LAE partially offset by increased net premium
receipts. Because of the long-term nature of both the payments of claims and the
settlement of swing-rated reinsurance premiums due to the reinsurers, cash from
operations for a medical professional liability insurer like NCRIC can vary
substantially from period to period.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in corporate
and tax-exempt securities. As of March 31, 2005, the carrying value of the
securities portfolio was $214.8 million. The portfolio was invested as follows:
At March 31, At December 31,
2005 2004
------------ ---------------
U. S. Government and agencies ................. 17% 18%
Asset and mortgage-backed securities .......... 26 24
Tax-exempt securities ......................... 22 21
Corporate bonds ............................... 23 25
High-yield bond fund .......................... 3 3
Equity securities ............................. 9 9
At March 31, 2005, over 71% of the bond portfolio was invested in U.S.
Government and agency securities or had a rating of AAA or AA. For regulatory
purposes, 89% of the bond portfolio was rated "Class 1", which is the highest
quality rated group as classified by the NAIC. The accumulated other
comprehensive loss totaled $166,000 at March 31, 2005, compared to other
comprehensive income of $2.1 million at December 31, 2004. At March 31, 2005,
the gross unrealized investment gains totaled $3.6 million and the gross
unrealized investment losses totaled $3.9 million, with no concentration of
unrealized loss in any security or industry.
During 2001, ConsiCare, Inc. borrowed $1,971,000 from SunTrust Bank to
finance the contingent purchase payments from the 1999 acquisition of three
companies. The term of the loan was three years at a floating rate of LIBOR plus
one and one-half percent. This debt was fully repaid in May, 2004.
In December, 2002, NCRIC Group issued trust preferred securities in the
amount of $15 million in a pooled transaction to unrelated investors. This debt
has a maturity of 30 years, and bears interest at an annual rate equal to
three-month LIBOR plus 4.0%, payable quarterly. Interest is adjusted on a
quarterly basis provided that prior to December 4, 2007, this interest rate
shall not exceed 12.50%. The debt is callable by NCRIC Group at par beginning
December 4, 2007. The interest rate as of March 31, 2005 was 6.94%.
Effects of inflation
The primary effect of inflation is in estimating reserves for unpaid
losses and LAE for medical professional liability claims in which there is a
long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on our results cannot be conclusively
known until claims are ultimately settled. Based on actual results to date, we
believe that losses and LAE reserve levels and our ratemaking process adequately
incorporate the effects of inflation.
13
Forward-Looking Information
Certain statements made in this document are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1033 and Section 21E
of the Securities Exchange Act of 1934. Such forward-looking statements may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of those terms. These forward-looking statements are
subject to significant risks, assumptions and uncertainties, including, among
other things, the following important factors that could affect the actual
outcome of future events:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o inflation and changes in the interest rate environment and performance of
financial markets;
o adverse changes in the securities markets;
o changes in laws or government regulations affecting medical professional
liability insurance and practice management and financial services;
o NCRIC, Inc.'s concentration in a single line of business;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o changes to our ratings assigned by A.M. Best;
o the cost and availability of reinsurance;
o our ability to successfully integrate acquired entities;
o changes in accounting policies and practices, as may be adopted by our
regulatory agencies and the Financial Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and wish to
advise readers that the factors listed above could affect our financial
performance and could cause actual results for future period to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At March 31, 2005, fixed maturity securities comprise
88% of total investments at market value. U.S. Government and tax-exempt bonds
represent 44% of the fixed maturity securities. Equity securities, consisting
primarily of common stock, account for the remainder of the investment
portfolio. The investment in a mutual fund containing high-yield securities is
also classified with equity securities. We have classified our investments as
available for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure we have on our investment portfolio. In
general, the market value of our fixed maturity portfolio increases or decreases
in an inverse relationship with fluctuation in interest rates. During periods of
rising interest rates, the fair value of our investment portfolio will generally
decline resulting in decreases in our stockholders' equity. Conversely, during
periods of falling interest rates, the fair value of our investment portfolio
will generally increase resulting in increases in our stockholders' equity. In
addition, our net investment income increases or decreases in a direct
relationship with interest rate changes on monies reinvested from maturing
securities and investments of positive cash flow from operating activities.
The value of our investment portfolio as compared to cost or amortized
cost is as follows (in thousands):
Unrealized (loss) gain Unrealized gain
at March 31, 2005 at December 31, 2004
---------------------- --------------------
Fixed maturity securities $(2,532) $ 567
Equity securities 2,281 2,629
------- -------
Net $ (251) $ 3,196
======= =======
14
Generally, the longer the duration of the security, the more sensitive the
asset is to market interest rate fluctuations. To control the adverse effects of
the changes in interest rates, our investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
Our investment policy also provides that all security purchases be limited to
rated securities or unrated securities approved by management on the
recommendation of our investment advisor. Approximately 64% of the portfolio is
Treasury or Agency related or rated AAA, the highest rating for a security.
Management of NCRIC, along with NCRIC's external investment managers, seeks to
maximize after-tax yields while minimizing portfolio credit risk.
One common measure of the interest sensitivity of fixed maturity
securities is effective duration. Effective duration utilizes maturities,
yields, and call terms to calculate an average age of expected cash flows. The
following table shows the estimated fair value of NCRIC's fixed maturity
portfolio based on fluctuations in the market interest rates.
Projected Market Value
Yield Change (bp) Market Yield (in thousands)
----------------- ------------ --------------
-300 0.56% $213,142
-200 1.56% 204,891
-100 2.56% 196,639
Current Yield** 3.56% 188,388
100 4.56% 180,137
200 5.56% 171,885
300 6.56% 163,634
**Current yield is as of March 31, 2005.
Item 4. 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 Rules 13a-14(e) or 15d-14(e) under the Exchange Act)
as of March 31, 2005, the Evaluation Date. Based upon that evaluation, the Chief
Executive Office 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 Securities and Exchange
Commission's rules and forms. There have been no significant changes in our
internal control over financial reporting that occurred during our most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See Note 5 to the Condensed Consolidated Financial Statements included in
Part I, Item 1 of this Form 10-Q for information on pending litigation.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Filings on Form 8-K during the quarter ending March 31, 2005:
1) On January 6, 2005 the Company filed a Form 8-K pursuant to Item 5
disclosing an advisory agreement with Stephen S. Fargis, who resigned as
the Company's senior vice president and chief operating officer, as of
December 31, 2004. The advisory agreement commenced on January 1, 2005 and
shall expire June 30, 2006.
15
2) On March 4, 2005 the Company filed a Form 8-K pursuant to Item 5 which
included a press release dated February 28, 2005 announcing that
ProAssurance Corporation (PRA) and NCRIC Group entered into an Agreement
and Plan of Merger, which provides for the merger of NCRIC Group into NCP
Merger Corporation, a newly formed wholly owned subsidiary of PRA. The
transaction is subject to customary conditions, including the receipt of
required regulatory approvals and approval by NCRIC stockholders.
3) On March 30, 2005 the Company filed a form 8-K pursuant to Item 5 which
addressed a Schedule 13D filed by certain shareholders who had expressed
concerns about the proposed merger transaction with ProAssurance
Corporation and their intention to propose to the Company's Board of
Directors that it release potential acquirers from certain confidentiality
agreements. By letter dated March 29, 2005, NCRIC responded to this filing
and stated that it does not believe the confidentiality agreements entered
into with third parties precludes their ability to make additional
proposals to the Board.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
May 9, 2005 /s/ R. Ray Pate, Jr.
--------------------------------------
R. Ray Pate, Jr., President & Chief
Executive Officer
(Duly Authorized Officer)
May 9, 2005 /s/ Rebecca B. Crunk
--------------------------------------
Rebecca B. Crunk, Sr. Vice President &
Chief Financial Officer
(Principal Financial Officer)
16