Press Release
February 21, 2003
For Immediate Release
- ---------------------
For Information Contact:
R. Ray Pate, Jr., President and CEO - 202.969.1866
NCRIC Group, Inc. Announces Fourth Quarter, Year-end Results
Washington, D.C. -- NCRIC Group, Inc. (Nasdaq: NCRI), a leading provider of
medical professional liability insurance and physician practice management
services in the Mid-Atlantic region, today reported operating results for its
fourth quarter and twelve months ended December 31, 2002.
Fourth quarter net income was $801,000, or $0.22 per diluted share, compared to
a net loss of $312,000 for the same quarter in 2001. Net realized investment
gains were $313,000 for the quarter, compared to net realized investment losses
of $312,000 for the same period in 2001. Operating income for the fourth quarter
was $488,000, compared to operating income of zero in 2001. Operating income is
defined as net income excluding net realized investment gains or losses, all on
an after-tax basis.
For the twelve months ended December 31, 2002, net income totaled $742,000, or
$0.20 per diluted share, compared to net income of $1.6 million, or $0.44 per
diluted share, for the twelve months ended December 31, 2001. Year-to-date
results were negatively impacted by an allowance for uncollectible premiums
receivable and unfavorable development of losses on claims reported in prior
years. Additionally, net realized investment losses totaled $86,000 for 2002
compared to $183,000 for 2001.
Operating income for the twelve months ended December 31, 2002 was $828,000, or
$0.23 per diluted share, compared to $1.8 million, or $0.49 per diluted share,
for the same period in 2001. Excluding the charge for the premiums receivable
allowance, operating income for the year was $1.6 million. While premium revenue
increased 46% for the twelve months ended December 31, 2002 compared to December
31, 2001, the higher revenue was largely offset by an increase in loss and loss
adjustment expenses, principally in the development of losses on claims reported
in prior years, and in underwriting expenses.
Stockholders' equity increased by $3.4 million to $47.8 million at December 31,
2002, up 7% as a result of net income plus an increase in accumulated other
comprehensive gain from increased unrealized gains in the investment portfolio.
As of December 31, 2002, there were 3.7 million shares of NCRIC Group, Inc.
common stock outstanding. Book value per share as of December 31, 2002 stood at
$12.89 compared to $11.98 as of December 31, 2001 and $11.13 as of December 31,
2000.
"Over the past twelve months, our insurance segment experienced considerable
expansion outside of the District of Columbia due to the contraction of medical
professional liability carriers in our other market territories," said R. Ray
Pate, Jr., President and CEO, NCRIC Group, Inc. "The distribution of our premium
written throughout a wider geographic area assists in diversifying the risk that
comes with acquiring additional market share. These favorable conditions,
coupled with rate increases and the continued high level of production from our
agent network, enabled us to attain a record year in new business sales and
achieve significant growth in premium written in 2002."
"Despite this notable expansion, we are disappointed with the net operating
results for 2002 and attribute these results to several factors," Pate
continued. "As reported throughout the year, we experienced increased severity
in the development of losses on claims reported in prior years. Furthermore, the
increase in the allowance for uncollectible premiums receivable for the
hospital-sponsored program had a direct impact on 2002 earnings."
Segment Results - Insurance Segment
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ -------------
2002 2001 2002 2001
---- ---- ---- ----
Net premiums earned $ 8,731 $ 5,882 $ 30,098 $ 20,603
Net investment income 1,378 1,510 5,877 6,087
Other income 262 134 925 515
-------- -------- -------- --------
Total segment revenue 10,371 7,526 36,900 27,205
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Losses & LAE 7,757 5,953 26,829 18,858
Underwriting expenses 1,909 1,255 8,175 4,885
Other expenses 28 91 442 350
-------- -------- -------- --------
Total segment expenses 9,694 7,299 35,446 24,093
-------- -------- -------- --------
Pre-tax operating results 677 228 1,454 3,112
Realized inv. gains (losses) 473 (472) (131) (278)
-------- -------- -------- --------
Pre-tax segment results $ 1,150 $ (245) $ 1,323 $ 2,834
======== ======== ======== ========
For the twelve months ended December 31, 2002, new business written (excluding
the 100% ceded HCA program) was $12.7 million, up $500,000 or 4%, from $12.2
million for the same twelve month period in 2001. New business written, coupled
with the increased premium rates, resulted in a 46% 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. The cost for claims reported in 2002
increased due to the rise in exposure. The development of losses for claims
originally reported in prior years reduced earnings in 2002.
New Premium Written
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ -------------
2002 2001 2002 2001
---- ---- ---- ----
Direct $ 573 $ 283 $ 2,309 $ 1,206
Agent 1,875 3,858 9,988 10,964
HCA 59 - 793 -
Princeton 21 - 403 -
------- ------- ------- -------
Total $ 2,528 $ 4,141 $13,493 $12,170
======= ======= ======= =======
Net Premiums Earned
Net premiums earned for the three months ended December 31, 2002 increased by
$2.8 million, or 47%, to $8.7 million from $5.9 million for the three months
ended December 31, 2001. This increase primarily reflects growth in policies in
force as a result of net new business written combined with the increases in
base premium rates.
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Net premiums earned increased by $9.5 million, or 46%, to $30.1 million for the
year ended December 31, 2002 from $20.6 million for 2001. This increase
primarily reflects growth in policies in force as a result of net new business
written combined with the rise in base premiums. Due to the 2001 decision not to
provide a renewal premium credit for 2002 renewals, net premiums earned were
higher by $300,000 in 2002 compared to 2001. Additionally, net premiums earned
through December 31, 2002, includes a decrease of $197,000 from the December 31,
2001 level due to favorable loss development in the hospital-sponsored
retrospectively rated programs. Under these programs, additional premiums are
either earned or returned based on a group's adverse or favorable loss
experience. Reinsurance ceded premiums were higher in 2002 compared to 2001 by
$1.3 million due to less favorable development under the swing-rated reinsurance
treaty.
During 2000, it was determined that one of NCRIC's hospital-sponsored
retrospective programs would not be renewed. In accordance with the terms of the
contract, in 2000 NCRIC billed the hospital sponsor $1.3 million, and an
additional $700,000 was billed during 2002 based on the actual accumulated loss
experience of the terminated program. As a result of the amount billed in 2002,
written premium for the twelve months ended December 31, 2002 increased by a net
amount of $372,000 over 2001, while net earned premium was unaffected by the
billing.
NCRIC initiated legal proceedings to collect the unpaid receivable because the
original 2000 bill was not paid when due. NCRIC has filed a motion for summary
judgment, which has not yet been decided. The hospital sponsor stopped admitting
patients in May 2002 and sold its principal assets during the third quarter of
2002.
Although NCRIC continues to pursue the claim, based on information received
during the third quarter of 2002 and consultation with legal counsel, it appears
the hospital assets may not be sufficient to cover its liabilities, including
NCRIC's claim. Accordingly, in the third quarter of 2002 NCRIC increased its
allowance for uncollectibility by $1.2 million to cover 100% of the amount
receivable. The charge for the allowance is included in underwriting expense.
Since the amount due is significant, NCRIC will continue to pursue collection of
the amount it is due. Legal fees incurred through the twelve-month period ended
December 31, 2002 for this action were approximately $180,000 higher than in
2001.
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Gross Premiums Written
Gross premiums written of $8.6 million increased by $3.0 million for the three
months ended December 31, 2002 from $5.6 million for the three months ended
December 31, 2001. For the twelve months ended December 31, 2002, gross premiums
written of $51.8 million increased $17.3 million, or 50%, from $34.5 million for
the twelve months ended December 31, 2001. This increase was due to net new
business combined with the premium rate increase effective January 1, 2002. Net
new business written consists of new premium offset by policy terminations.
The distribution of premium written shows notable growth in NCRIC's market areas
outside of the District of Columbia. NCRIC continues to maintain strict
underwriting standards as it expands its business.
Gross Premium Written By State
(in thousands)
Twelve Months Ended December 31,
--------------------------------
2002 2001
---- ----
District of Columbia $ 21,796 42% $ 17,486 51%
Virginia 14,863 29% 7,853 23%
Maryland 5,663 11% 5,236 15%
West Virginia 6,492 13% 2,886 8%
WV - HCA 793 1% - -
WV - Princeton 403 1% - -
Delaware 1,789 3% 998 3%
-------- ---- -------- ----
Total $ 51,799 100% $ 34,459 100%
Loss and Loss Adjustment Expenses
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Incurred losses and LAE related to:
Current year - losses $ 6,759 $ 6,358 $ 24,063 $ 23,056
Prior years - development 998 (405) 2,766 (4,198)
-------- -------- -------- --------
Total incurred for the period $ 7,757 $ 5,953 $ 26,829 $ 18,858
======== ======== ========= ========
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Total incurred loss and LAE of $7.8 million for the three months ended December
31, 2002 increased by $1.8 million from the $6.0 million incurred for the three
months ended December 31, 2001. For the year ended December 31, 2002, total
incurred loss and LAE of $26.8 million increased by $7.9 million from the $18.9
million incurred for the year ended December 31, 2001. The increase in current
year losses to $24.1 million for the twelve months ended December 31, 2002 and
to $6.8 million for the fourth quarter reflects the rise in the level of
liability exposure as a result of expanding business. The adverse development of
losses reported in prior years in both the fourth quarter and twelve-month
period reflects the upward pressure of severity of losses as reported previously
and a rise in the cost of settling claims. Prior year development results from
the re-estimation and settlement of individual losses not covered by
reinsurance, which are generally losses under $500,000.
Combined Ratio Results
Twelve Months Ended
December 31,
-------------------
2002 2001
---- ----
Loss and LAE ratio:
Current year losses 79.9% 111.9%
Prior years losses 9.2 (20.4)
------ ------
Total Loss and LAE ratio 89.1 91.5
Underwriting expense ratio 27.2 23.7
------ ------
Combined ratio 116.3% 115.2%
====== ======
The combined ratio of 116.3% for the twelve months ended December 31, 2002
reflects the higher level of earned premiums combined with the increase in
underwriting costs offset by a lower incurred loss ratio. The lower current year
loss ratio reflects the benefit of the increased premium rate levels and a
moderation of claims frequency. The higher underwriting expense component
includes the impact (4.1%) of the increase in the allowance for uncollectible
premiums receivable from a hospital-sponsored program as noted previously.
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Segment Results - Practice Management Services Segment
(in thousands)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------ ------------
2002 2001 2002 2001
---- ---- ---- ----
Client revenue $ 1,393 $ 1,534 $ 5,886 $ 6,239
Investment income 5 10 27 55
-------- -------- -------- --------
Total segment revenue 1,398 1,544 5,913 6,294
Expenses 1,361 1,703 5,830 6,089
-------- -------- -------- --------
Pre-tax segment results $ 37 $ (159) $ 83 $ 205
======== ======== ======== ========
Pre-tax income from NCRIC's practice management segment decreased for the year
2002 compared to 2001 primarily as a result of a decrease in client revenue.
Fourth quarter 2002 results show an improvement over the 2001 fourth quarter due
to lower expenses.
Client revenue in the Practice Management Services Segment was $1.4 million for
the three months ended December 31, 2002, a decrease of $141,000 compared to the
three months ended December 31, 2001. For the year 2002, practice management and
related revenue totaled $5.9 million, $353,000 less than in 2001. The decreased
revenue in both the fourth quarter and twelve months ended December 31, 2002 was
a result of a reduced level of non-recurring consulting assignments compared to
2001.
"We experienced a reduction in client revenue in 2002 as a result of the
growing pressure on medical practice income due to reductions in the payer
system," said Steve Fargis, President, NCRIC MSO, Inc. "Physicians simply have
less discretionary funds available for large, long-term consulting engagements.
In light of these conditions, we have adjusted our staffing level through
attrition and implemented additional expense management initiatives.
Furthermore, we have implemented a number of strategies, including continued
promotion of our Compliance Division and increased cross-marketing to our
non-physician client base, in an attempt to enhance profitability."
Practice management and related expenses for the fourth quarter and twelve
months of 2002 were $300,000 lower than for the corresponding periods of 2001.
Expenses decreased due to the cessation of goodwill amortization with the
implementation of SFAS 142 beginning January 1, 2002; goodwill amortization
totaled $388,000 in 2001. This decrease was partially offset by expense
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increases in the first nine months of 2002 for integration costs and transition
of client service for two of the former owners as they moved toward the
expiration of their employment contracts at the end of 2002.
NCRIC Group, Inc.
Three months ended Dec. 31, Twelve months ended Dec. 31,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands) (in thousands)
Revenues:
Net premiums earned $ 8,731 $ 5,882 $ 30,098 $ 20,603
Net investment income 1,397 1,519 5,915 6,136
Net realized investment gains (losses) 473 (472) (131) (278)
Practice management and related income 1,370 1,513 5,800 6,156
Other income 291 166 1,013 602
-------- -------- -------- --------
Total revenues 12,262 8,608 42,695 33,219
Expenses:
Losses and loss adjustment expenses 7,757 5,953 26,829 18,858
Underwriting expenses 1,906 1,247 8,168 4,877
Practice management expenses 1,356 1,698 5,811 6,063
Other expenses 288 282 1,467 1,245
-------- -------- -------- --------
Total expenses 11,307 9,180 42,275 31,043
Income (loss) before income taxes 955 (572) 420 2,176
Income tax provision (benefit) 154 (260) ( 322) 597
-------- -------- -------- --------
Net income (loss) $ 801 $ (312) $ 742 $ 1,579
======== ======== ======== ========
Net income per common share:
Basic $ 0.22 $ (0.09) $ 0.21 $ 0.45
Diluted $ 0.22 $ (0.09) $ 0.20 $ 0.44
Operating income per common share:
Basic $ 0.14 $ 0.00 $ 0.23 $ 0.50
Diluted $ 0.13 $ 0.00 $ 0.23 $ 0.49
Weighted average shares outstanding:
Basic 3,575 3,543 3,557 3,529
Diluted 3,634 3,622 3,632 3,615
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December 31, 2002 December 31, 2001
----------------- -----------------
(in thousands)
Total investments, at market value $ 120,120 $ 103,125
Reinsurance recoverable 43,231 30,077
Total assets 202,687 161,002
Liability for losses and loss adjustment expenses 104,022 84,560
Total liabilities 154,870 116,548
Accumulated other comprehensive gain 2,806 474
Total stockholders' equity 47,817 44,454
Outlook
Second Step Conversion
On January 28, 2002, NCRIC, A Mutual Holding Company (NCRIC MHC) and NCRIC
Group, Inc. (NCRIC Group) announced that their respective boards of directors
approved a plan of conversion and reorganization for NCRIC MHC which will
complete the transition of NCRIC Group to full stock ownership. As part of the
conversion, NCRIC MHC, a mutual insurance holding company, will terminate its
existence, and the ownership interest of NCRIC MHC in NCRIC Group will be
offered for sale to members and others on a priority basis in a subscription
offering. NCRIC MHC currently owns approximately 60% of the outstanding shares
of NCRIC Group. To complete the conversion, approval is needed from the members
of NCRIC MHC, the Commissioner of the District of Columbia Department of
Insurance and Securities Regulation, and shareholders of NCRIC Group. It is
expected that members of NCRIC MHC and shareholders of NCRIC Group will be asked
to approve the proposed conversion and reorganization plan in June 2003.
The additional capital raised as a result of a successful second step conversion
will assist NCRIC in pursuing the following strategic objectives: (1) Mitigate
escalating reinsurance costs. NCRIC has restructured its reinsurance program as
a result of rising costs in the foreign and domestic reinsurance markets. The
increased level of risk retention in the current program would be further
supported by the capital raised as a result of a second step conversion. (2)
Increased capital. NCRIC's financial condition is evaluated on an annual basis
by A.M. Best Company. In addition, NCRIC is subject to periodic financial
examinations by the insurance commissioner of its jurisdiction of domicile. The
growth in capital from the second step conversion will increase NCRIC's
financial strength, thereby enabling the company to maintain its A.M. Best
rating and continue to meet regulatory requirements. (3) Capitalize on available
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market opportunities. Current market conditions in the medical professional
liability insurance sector have resulted in a further contraction of medical
professional liability insurance carriers and continued upward pressure on
pricing. The additional capital raised through a second step conversion would
provide the flexibility for NCRIC to respond to growth opportunities available
in its core market territories at what it believes to be increasingly profitable
prices.
This statement is neither an offer to sell nor a solicitation of an offer to buy
common stock. The offer will be made only by the prospectus.
Earnings
NCRIC estimates operating earnings for 2003 of up to $0.65 per share (diluted),
excluding any effects of the proposed second step conversion. A number of
factors could cause actual results to materially differ from NCRIC's
projections. These include the following: (1) Rising claims severity. While we
believe that the 2002 increase in reserves is sufficient to cover the increased
severity of claims reported in prior years, there is no guarantee that reserve
levels and pricing will be adequate or that loss development will not
significantly deviate from previously identified trends. NCRIC believes that the
trend of rising claims severity creates a continuing level of unpredictability
with regard to earnings. (2) Expanding market opportunities. Continued
contraction in the medical professional liability insurance industry may provide
additional opportunities for NCRIC to increase its market share. However, an
increased level of new premium produced in the insurance segment heightens the
strain on earnings caused by rapid growth in new business. (3) Premium rate
increases. Higher insurance premium rates may result in a decrease in the
renewal of existing policies and in the addition of new policies. (4) Investment
yield. Economic conditions, including interest rate changes and the performance
of financial markets and their impact on the value of securities, may have an
impact on projected earnings. (5) Reinsurance program. The implementation of
NCRIC's new reinsurance program and increased level of risk retention may result
in a higher level of losses and greater volatility of losses.
Reinsurance Program
NCRIC has negotiated a new reinsurance program for 2003. The restructured
program was effective January 1, 2003. All claims reported prior to January 1,
2003 are subject to the terms of NCRIC's previous reinsurance program.
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NCRIC has increased its level of retention for each loss from $500,000 to $1
million thereby reducing its reliance on reinsurers. The cost to purchase
reinsurance coverage for 2003 at the previous retention level would have been
significantly higher than the cost in the prior program.
NCRIC's new primary reinsurance program is a three year, fixed-rate treaty
covering each loss up to $1 million in excess of the $1 million retention.
Approximately 95% of the program is placed with the European reinsurance market.
The remainder of the program is placed in the domestic reinsurance market.
Safe Harbor Information
This news release contains historical information, as well as forward-looking
statements, that are based on NCRIC's estimates and expectations of future
events. Associated with this are certain risks and uncertainties that could
cause actual results to materially differ from those reflected in the
forward-looking statements. NCRIC's financial position and results of operations
are subject to fluctuations due to a variety of factors. These risks and
uncertainties include:
o general economic conditions including changes in interest rates and
the performance of financial markets and their related impact on the
value of securities;
o NCRIC, Inc.'s concentration in a single line of business principally
in the mid-Atlantic region (previously this risk factor solely
identified NCRIC, Inc.'s concentration in a single line of business
principally in the District of Columbia);
o the impact of decreasing revenues to healthcare providers;
o the impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o price competition;
o uncertainties inherent in the valuation of goodwill from the practice
management segment or other acquired businesses;
o uncertainties associated with expanding business, including
uncertainties associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best Company;
o the availability of bank financing and reinsurance;
o the mutual holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
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This news release also contains certain forward-looking statements regarding the
plan of conversion and reorganization of NCRIC MHC. Forward-looking statements
include statements regarding the anticipated closing date of the transactions,
the market for the stock, and anticipated future results and can be identified
by the fact that they do not relate strictly to historical or current facts.
Associated with this are certain risks and uncertainties that could cause actual
results to materially differ from those reflected in the forward-looking
statements. These risks and uncertainties include:
o delays in completing the plan of conversion and reorganization;
o difficulties in selling the conversion stock or in selling the
conversion stock within the expected time frame;
o increased competitive pressures;
o changes in the interest rate environment;
o general economic conditions or the securities market;
o legislative and regulatory changes that could adversely affect the
businesses in which NCRIC Group is engaged; and
o uncertainties associated with expanding business.
Other factors not currently anticipated by management may also materially and
adversely affect the plan of conversion and reorganization as well as NCRIC
Group's results of operations.
About NCRIC Group
NCRIC Group, Inc. is a healthcare financial services organization that
assists individual physicians and groups of physicians in managing their
practices by providing medical professional liability insurance, practice
management and financial services and employee benefit plan design and pension
administration. In addition to its headquarters in Washington, D.C., NCRIC
Group, Inc. has offices in Richmond, Fredericksburg and Lynchburg, Virginia as
well as Greensboro, North Carolina and provides services to more than 4,500
clients. Its primary insurance subsidiary, NCRIC, Inc., is rated A- (Excellent)
by A.M. Best Company.
For further information, contact R. Ray Pate, Jr., President and CEO, 1115
30th Street, NW, Washington, D.C. 20007, or consult NCRIC's web site,
www.ncric.com.
###
February 21, 2003
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