Press Release
August 10, 2004
For Immediate Release
For Information Contact:
Eric R. Anderson, Vice President, Investor Relations - 202.969.1866
NCRIC Group, Inc. Reports 2004 Six Month and Second Quarter Results
Six Month Summary
o Revenue of $38.5 million, up 29%
o Direct premiums written of $46.2 million, up 20%
o Modest decline of claims frequency
o Continued increase in claims severity
o Renewed 88% of eligible policies
o Combined ratio of 107.6%
o Net income of $85,000 or $.01 per diluted common share
o Expense of $679,000 (after tax) related to the CHW litigation
o Book value per share of $10.98 at June 30, 2004
Second Quarter Summary
o Revenue of $18.9 million, up 25%
o Adverse development of $1.0 million (after tax) on 2000 and 2001
claims
o Additional expense of $393,000 (after tax) related to the fraudulent
act of a former sales agent
o Net loss of $437,000 or $.07 per diluted common share
WASHINGTON, D.C. -- NCRIC Group, Inc. (NCRIC) (Nasdaq National Market: NCRI),
today announced a net loss of $437,000, or $0.07 per diluted share for the
second quarter of 2004. Year-to-date through June 30, 2004, the Company reported
net income of $85,000, or $0.01 per diluted share. The loss in the quarter was
the result of a $1.0 million (after tax) increase to professional liability
reserves for losses related to 2001 report year claims
in Virginia and 2000 report year claims in the District of Columbia and $393,000
(after tax) in expenses related to the fraudulent act of a former sales agent.
Expenses incurred during the first six months of 2004 for the CHW litigation
were $679,000 (after tax). Higher premium income and a continued moderation of
the number of claims reported in 2004 partially offset the negative factors.
President and CEO R. Ray Pate, Jr., commented on the results, "Despite the
challenges of the quarter, the continued execution of our business plan
generated a number of positive returns for the Company. We saw a large growth in
premium income and we continued to add new policyholders in the states we have
targeted for expansion. Market data from 2003 reveals that we are the top writer
in Delaware with a 25% market share and among the top writers in Virginia. In
addition, through the first six months of the year, we have renewed 88% of our
policies that are eligible for renewal."
He added, "The continued moderation of the number of new claims is also a
positive indicator. Claims frequency, as measured by the number of claims
reported, declined in the first six months of 2004 compared to the same period
in 2003 and to the 2003 quarterly average. We are pleased with this outcome
given that lower claims frequency has a direct impact on our financial results.
We continue to caution, however, that our business is most accurately measured
over time in contrast to drawing conclusions based on results that occur on a
quarter to quarter basis."
Pate stated that the Company has taken appropriate steps to address the issues
that depressed second quarter financial results. "The financial results for the
second quarter were disappointing. Because we are concerned about the claims
patterns that have emerged, we have engaged an actuarial claims specialist to
analyze the loss development and claims severity patterns. Our goal in
conducting this study is to achieve a further understanding of claims trends to
ensure that we have the best information possible as a foundation for making our
business decisions."
Pate further pointed out that additional exposure relating to the act of the
former sales agent has been eliminated. "The expense that impacted our quarterly
results was related to the last of two claims that arose from the agent's
actions. No further costs will be incurred as a result of this incident. After
this event was initially reported in 2002, we implemented significant
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safeguards, including more stringent agent compliance requirements, to help
ensure that a similar act does not occur in the future."
"While many factors affect the profitability of our insurance segment, we
anticipate a strengthening of results as previous rate increases work their way
into our financials and as we take advantage of expansion opportunities that
arise in our core markets," said Pate. "By remaining true to the principles of
aggressive claims management, sound reserving, disciplined pricing and
underwriting, and unparalleled client service, we can continue to make progress
toward the achievement of our financial and operational objectives."
Insurance segment
The primary company in our insurance segment, NCRIC, Inc., provides professional
liability insurance for physicians, surgeons and other ancillary providers
involved in the delivery of healthcare.
Selected Segment Data:
- ----------------------
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
--------------------- --------------------
2004 2003 2004 2003
---- ---- ---- ----
Net premiums earned $ 15,580 $ 10,962 $ 31,730 $ 22,411
Net investment income 1,805 1,379 3,376 2,666
Realized investment gains 87 1,136 417 1,340
Other income 170 286 389 566
-------- -------- -------- --------
Total segment revenue 17,642 13,763 35,912 26,983
Losses & LAE 14,136 10,355 27,211 19,938
Underwriting expenses 3,406 2,234 6,939 4,705
Other expenses 140 69 283 179
Interest 207 -- 409 --
-------- -------- -------- --------
Total segment expenses 17,889 12,658 34,842 24,822
Pre-tax segment results $ (247) $ 1,105 $ 1,070 $ 2,161
======== ======== ======== ========
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Net Premiums Earned
The increase in net premiums earned primarily reflects growth in business in
force from the sale of new policies over the past 12 months, the increases in
premium rates effective with 2004 and 2003 renewals, which average 27%, and
higher premiums for extended reporting endorsements. Premium for extended
reporting endorsements is earned in the same period it is written and totaled
$3.3 million in the first six months of 2004 compared to $2.1 million for the
same period in 2003.
Direct Premiums Written By State
(in thousands)
Six Months Ended June 30,
-------------------------
2004 2003
---- ---- -
District of Columbia $18,044 39% $17,432 45%
Virginia 12,735 28% 8,862 23%
Maryland 8,461 18% 6,242 16%
Delaware 4,496 10% 2,963 8%
West Virginia 2,487 5% 3,131 8%
------- ------- ------- -------
Total $46,223 100% $38,630 100%
New Premiums Written
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Direct $ 58 $ 161 $ 453 $ 327
Agent 342 2,729 979 3,988
------ ------ ------ ------
Total $ 400 $2,890 $1,432 $4,315
====== ====== ====== ======
The overall level of new business produced in the first six months of 2004 is
lower than for the first six months of 2003, as planned. As a result of 2003
expansion we are now the leading carrier in Delaware as measured by market
share. We continue to write new business in Virginia; however, our product is
priced at the high end of the market which has constricted growth. "We believe
our price level in Virginia is required by the loss characteristics of the
market," Pate said. "During the second quarter of 2004 we saw the A.M. Best
rating reduced for our lowest priced Virginia competitor. We continue to
maintain that pricing integrity is critical to long-term viability."
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Losses and Loss Adjustment Expenses
(in thousands)
Three Months Ended June 30, Six Months Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Incurred losses and LAE related to:
Current year - losses $ 12,618 $ 10,507 $ 25,693 $ 20,240
Prior years - development 1,518 (152) 1,518 (302)
-------- -------- -------- --------
Total incurred for the period $ 14,136 $ 10,355 $ 27,211 $ 19,938
======== ======== ======== ========
The increase in current year losses in the second quarter of 2004 reflects the
increase in the level of exposure as a result of expanding business combined
with a rise in the cost of resolving claims and reserves on extended reporting
endorsements. The loss ratio targeted by 2004 premium rates combined with lower
claims frequency partially offsets the continuing increase in severity. Adverse
development of losses originally reported in prior years is recognized for the
2000 and 2001 report years and reflects experience on claims closed during the
quarter in addition to the continuing upward pressure of severity of losses.
Chief Financial Officer Rebecca B. Crunk commented on the losses, "Increases in
claims severity continue to impact both claims reported in the current calendar
year and claims originally reported in prior years. This loss trend was
identified in our 2003 year-end reserve valuation. The development of losses on
claims reported in prior years represents an increase in the severity of losses
in the Virginia 2001 report year and the District of Columbia 2000 report year.
This development differs from historical patterns of loss development. We have
engaged an actuarial claims specialist to perform an in-depth study to analyze
the factors driving claims trends."
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Combined Ratio
Six Months Ended June 30,
2004 2003
------ ------
GAAP Underwriting Ratios:
Loss and LAE ratio 85.8% 89.0%
Underwriting expense ratio 21.8% 21.0%
Combined ratio 107.6% 110.0%
The combined ratio for the three months ended June 30, 2004 reflects the higher
level of earned premiums in relation to the increase in loss and loss adjustment
expenses, the increase in loss severity, and the stable level of core
underwriting expenses. Underwriting expenses in the second quarter of 2004
include $595,000, or 1.9 points of the underwriting expense ratio, for expenses
related to the fraudulent act of a former sales agent and $525,000, or 1.7
points of the underwriting expense ratio, for fees associated with the trial
portion of the CHW premium collection litigation.
Unaudited Consolidated Financial Summary
(in thousands, except share data)
Three months ended June 30, Six months ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Net premiums earned $ 15,580 $ 10,962 $ 31,730 $ 22,411
Net investment income 1,908 1,389 3,578 2,711
Net realized investment gains 83 1,155 416 1,354
Practice management and related income 1,092 1,277 2,316 2,652
Other income 188 360 425 713
-------- -------- -------- --------
Total revenues 18,851 15,143 38,465 29,841
Expenses:
Losses and loss adjustment expenses 14,136 10,355 27,211 19,938
Underwriting expenses 3,406 2,234 6,939 4,705
Practice management expenses 1,245 1,289 2,479 2,692
Interest expense on Trust Preferred Securities 205 204 407 405
Other expenses 729 395 1,681 837
-------- -------- -------- --------
Total expenses 19,721 14,477 38,717 28,577
Income before income taxes (870) 666 (252) 1,264
Income tax provision (benefit) (433) 124 (337) 208
-------- -------- -------- --------
Net income (loss) $ (437) $ 542 $ 85 $ 1,056
======== ======== ======== ========
Net income (loss) per common share:
Basic $ (0.07) $ 0.08 $ 0.01 $ 0.16
Diluted $ (0.07) $ 0.08 $ 0.01 $ 0.15
Weighted average shares outstanding:
Basic 6,342 6,660 6,340 6,669
Diluted 6,614 6,817 6,614 6,815
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Balance Sheet Summary
(in thousands, except per share data)
June 30, 2004 December 31, 2003
------------- -----------------
(unaudited)
Total investments, at market value $ 187,786 $ 174,357
Reinsurance recoverable 53,093 48,100
Total assets 274,155 262,546
Liability for losses and loss adjustment expenses 134,569 125,991
Total liabilities 198,403 184,567
Accumulated other comprehensive income (loss) (1,181) 1,461
Total stockholders' equity 75,752 77,979
Book value per share $ 10.98 $ 11.30
Outlook
CHW Litigation
On February 13, 2004, a District of Columbia Superior Court jury ruled against
NCRIC's claim for premiums due and returned a verdict in favor of Columbia
Hospital for Women Medical Center, Inc. (CHW) in counterclaims to the premium
collection litigation initiated by NCRIC. NCRIC filed post-trial motions on
March 5, 2004. CHW filed a reply to NCRIC's motions on March 26, 2004, and NCRIC
filed renewed post-trial motions on April 5, 2004. There have been no further
developments with regard to a judgment on the post-trial motions.
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West Virginia
In September 2003, NCRIC filed for a 35.2% rate increase in West Virginia to be
effective January 1, 2004. On December 4, 2003, the West Virginia Department of
Insurance Regulation approved a 9.8% rate increase. Because we were unable to
secure a rate that was adequate for our West Virginia risk exposure, we informed
the West Virginia Commissioner of Insurance on January 8, 2004 of our intention
to non-renew West Virginia policyholders. In late July, we contacted the
Department and suggested that they reconsider our original filing. Based on the
Department's response, in August 2004 we will file for a rate increase to be
effective immediately. If that rate increase is approved, we will be able to
offer renewals to West Virginia policyholders in the latter part of the year.
Our previous decision to non-renew West Virginia policyholders was based solely
on the inability to achieve an adequate rate level for West Virginia risk
exposure. We are hopeful that this rate filing will be approved thereby enabling
us to respond to the medical professional liability insurance needs of
healthcare providers in the state.
Competition
We continue to see changes in the competitive landscape in several of our market
territories. In Virginia, the financial rating of The Doctors' Company - the
second largest carrier in the state as identified by 2003 market share data -
was downgraded from A- to B++ with a negative outlook. We believe that this
development may result in additional expansion opportunities. In addition, the
largest medical professional liability insurance carrier in the state of
Maryland - the Medical Mutual Liability Insurance Society of Maryland - recently
filed for a 41% rate increase to be effective with the January 1, 2005 renewal
period. The carrier also announced the elimination of the provision of a
policyholder dividend. As a result of these changes, Maryland physicians insured
by this competitor will experience rate increases ranging from a low of 64% to a
high of 170%. We believe that this rate action could create significant
expansion opportunities in the Maryland market.
2005 Rates
We have begun actuarial evaluations for 2005 rates and anticipate the completion
of a comprehensive review of our insurance policy pricing in all jurisdictions
in September 2004. Our rates are designed to cover the cost of insurance and
provide a return on capital. The rate level determined by the rate review will
be applied to all policies beginning with those with effective dates in 2005.
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Combined Ratio Guidance
Excluding the impact of adverse development on prior years losses, our
previously established combined ratio target of 104.5 for 2004 remains
unchanged.
Practice Management Operations
A performance incentive plan is being developed for the management team of the
practice management operations that could transfer up to 20% of the ownership of
the business to these individuals over a period of time if certain performance
targets are achieved. This program will provide added incentive to improve
profitability and could also facilitate an employee purchase of the practice
management operations in the future.
Investor Conference Call
An investor conference call to discuss NCRIC's 2004 six month and second quarter
results will be held at 9:00 a.m., ET, on Wednesday, August 11, 2004. Investors
and analysts may access the conference call by dialing 1.800.810.0924. All
participants are requested to call in at least ten minutes prior to the start of
the conference to register. The listen-only audience will be provided an
opportunity to submit appropriate questions following management's remarks and
these questions will be responded to as time permits. The conference call will
also be webcast in a listen-only format through the Investor Relations section
of NCRIC's corporate website at www.ncric.com. The webcast will be archived and
will be available until September 8, 2004 at ncric.com.
Safe Harbor Information
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 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 include: statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating
strategies; and estimates of our risks and future costs and benefits. 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:
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o general economic conditions, either nationally or in our market area,
that are worse than expected;
o price competition;
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 our ability to successfully integrate acquired entities;
o changes to our ratings assigned by A.M. Best;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o the cost and availability of reinsurance;
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.
About NCRIC Group, Inc.
NCRIC Group, Inc. (NCRIC) 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 benefits plan design and pension
administration. In addition to its headquarters in
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Washington, D.C., NCRIC has offices in Wilmington, Delaware; Greensboro, North
Carolina; Richmond and Lynchburg, Virginia; and Charleston, West Virginia. NCRIC
provides services to more than 5,000 physician clients.
For further information, contact Eric R. Anderson, Vice President, Investor
Relations; 1115 30th Street, NW, Washington, D.C. 20007; 202.969.1866, ext.
3102; anderson@ncric.com; or consult NCRIC's website, www.ncric.com.
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August 10, 2004