As filed with the Securities and Exchange Commission on March 25, 2003
Registration No. 333-________
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
NCRIC GROUP, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 6331 To be applied for
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
1115 30th Street, N.W.
Washington, D.C. 20007
(202) 969-1866
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
R. Ray Pate, Jr.
1115 30th Street, N.W.
Washington, D.C. 20007
(202) 969-1866
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
John J. Gorman, Esq.
Luse Gorman Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
If this Form is filed to register additional shares for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [_]
If the delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [_]
CALCULATION OF REGISTRATION FEE
=============================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered per share offering price registration fee
- -----------------------------------------------------------------------------------------------------------------------------
Common stock, $0.01 par value per share 6,627,510 shares (1) $10.00 $ 66,275,100 (2) $5,362
- -----------------------------------------------------------------------------------------------------------------------------
Participation Interests 423,510 interests -- -- (3)
=============================================================================================================================
(1) Includes the maximum number of shares of common stock that may be issued in
connection with this offering and exchanged for shares of common stock in
connection with this offering.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The securities of NCRIC Group, Inc. to be purchased by the NCRIC Group,
Inc. Profit Sharing Plan and Trust as adopted by NCRIC Group, Inc. are
included in the amount shown for common stock. However, pursuant to Rule
457(h) of the Securities Act of 1933, as amended, no separate fee is
required for the participation interests. Pursuant to such rule, the amount
being registered has been calculated on the basis of the number of shares
of Common Stock that may be purchased with the current assets of such Plan.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933 or until the registration statement shall become effective on such
date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
PROSPECTUS
NCRIC GROUP, INC.
Up to 3,967,500 Shares of Common Stock
================================================================================
NCRIC Group, Inc. is offering shares of common stock for sale in connection
with the conversion of NCRIC, A Mutual Holding Company from the mutual to the
stock form of organization. The shares of common stock we are offering represent
the ownership interest in NCRIC Group now owned by NCRIC, A Mutual Holding
Company, through its wholly owned subsidiary NCRIC Holdings, Inc. The existing
publicly held shares of NCRIC Group common stock will be exchanged for new
shares of common stock of NCRIC Group, Inc. All shares of common stock offered
for sale are offered at a price of $10.00 per share. Our shares of common stock
are currently traded on the Nasdaq SmallCap Market under the symbol "NCRI." Upon
consummation of the conversion and offering, we expect that our common stock
will be listed on the Nasdaq National Market under the same trading symbol.
================================================================================
OFFERING SUMMARY
Price: $10.00 per share
Adjusted
Minimum Maximum Maximum
------------ ------------ ------------
Number of shares: 2,550,000 3,450,000 3,967,500
Gross offering proceeds: $ 25,500,000 $ 34,500,000 $ 39,675,000
Estimated offering expenses: 1,314,000 1,478,000 1,572,000
Estimated net proceeds: $ 24,186,000 $ 33,022,000 $ 38,103,000
Estimated net proceeds per share: $ 9.48 $ 9.57 $ 9.60
----------
If you are an eligible member of NCRIC, A Mutual Holding Company:
. You may have priority rights to purchase shares of common stock.
If you are a participant in the NCRIC Group 401(k) Plan:
. You may direct that all or part of your current account balances in this
plan be invested in shares of NCRIC Group common stock.
. A supplement to this prospectus describes your rights under the plan.
If you are currently a stockholder of NCRIC Group, Inc.:
. Each of your shares of common stock will be exchanged for between 1.1486
and 1.7872 new shares of NCRIC Group common stock.
. Your percentage ownership will remain essentially equivalent to your
current percentage ownership interest in NCRIC Group.
. You may also have the opportunity to purchase additional shares in the
community offering after priority orders are filled.
If you do not fit any of the categories above, but you are interested in
purchasing shares of our common stock:
. You may purchase shares of common stock after orders in the preceding
categories are filled.
We are offering up to 3,450,000 shares of common stock, which may be
increased to up to 3,967,500 shares, on a best efforts basis. We must sell a
minimum of 2,550,000 shares, including shares purchased by our directors,
officers and benefit plans, in order to complete the offering and the exchange
of existing shares. The minimum purchase in the offering is 100 shares of common
stock. The offering is expected to expire on June __, 2003. We may extend this
expiration date without notice to you until ______, 2003. Once submitted, orders
are irrevocable unless the offering is terminated or extended beyond ________,
2003. If the offering is extended beyond ________, 2003, subscribers will have
the right to modify or rescind their purchase orders. We will place all funds
submitted for purchasing shares of common stock in the offering in an escrow
account at _______ Bank until we sell at least the minimum shares, or return the
funds to subscribers.
Sandler O'Neill & Partners, L.P. will assist us in our selling efforts.
Sandler O'Neill & Partners, L.P. is not obligated to purchase any shares in the
offering. Purchasers will not pay a commission to purchase shares of common
stock in the offering.
This investment involves a degree of risk, including the possible
loss of principal.
Please read "Risk Factors" beginning on page 13.
Neither the Securities and Exchange Commission, the Commissioner of
Insurance and Securities for the District of Columbia, nor any state securities
regulator has approved or disapproved of these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
SANDLER O'NEILL & PARTNERS, L.P.
The date of this prospectus is May ___, 2003
[INSERT MAP SHOWING NCRIC'S MARKET AREA]
TABLE OF CONTENTS
Page
----
SUMMARY .................................................................. 1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA ........................... 12
RISK FACTORS ............................................................. 13
FORWARD-LOOKING STATEMENTS ............................................... 20
USE OF PROCEEDS FROM THE OFFERING ........................................ 21
OUR DIVIDEND POLICY ...................................................... 22
MARKET FOR THE COMMON STOCK .............................................. 22
CAPITALIZATION ........................................................... 24
PRO FORMA DATA ........................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................. 28
BUSINESS OF NCRIC GROUP .................................................. 54
MANAGEMENT OF NCRIC GROUP ................................................ 76
BENEFICIAL OWNERSHIP OF COMMON STOCK ..................................... 84
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS ........................ 84
THE CONVERSION ........................................................... 85
COMPARISON OF STOCKHOLDERS' RIGHTS ....................................... 102
RESTRICTIONS ON ACQUISITION OF NCRIC GROUP ............................... 105
DESCRIPTION OF CAPITAL STOCK OF NCRIC GROUP FOLLOWING THE
CONVERSION ............................................................ 108
TRANSFER AGENT ........................................................... 109
EXPERTS .................................................................. 109
LEGAL MATTERS ............................................................ 109
ADDITIONAL INFORMATION ................................................... 109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................... F-1
You should rely only on the information contained in this document or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered by
this prospectus to any person in any jurisdiction in which such offer or
solicitation would be unlawful. The affairs of NCRIC Group, Inc. may change
after the date of this prospectus. Delivery of this document and the sales of
shares made hereunder does not mean otherwise.
SUMMARY
The following summary highlights the significant aspects of our business,
the conversion, the offering and the exchange of existing shares of NCRIC Group
common stock for new shares of NCRIC Group common stock. Because this is a
summary, it may not contain all the information that is important to you. For
additional information, you should read this entire prospectus carefully,
including the consolidated financial statements and the notes to the
consolidated financial statements.
Overview
We are a healthcare financial services organization that provides
individual physicians, groups of physicians and other healthcare providers with
economical, high-quality medical professional liability insurance and the
practice management and financial services necessary for them to operate in the
current healthcare environment. We own NCRIC, Inc., a medical professional
liability insurance company, and NCRIC MSO, Inc., a physician practice
management and financial services company. The principal operations of our
companies are conducted in the District of Columbia, Delaware, Maryland,
Virginia and West Virginia. For the year ended December 31, 2002, we generated
$51.8 million of gross premiums written, $30.1 million of net premiums earned
and $42.7 million of total revenues. At December 31, 2002, we had consolidated
assets of $202.7 million, liabilities of $154.9 million, and stockholders'
equity of $47.8 million. Our insurance subsidiaries are rated "A-" (Excellent)
by A.M. Best Company.
Our Business Strategy
Our business strategy is designed to enhance our profitability and
strengthen our position as a leading provider of medical professional liability
insurance, alternative risk financing services, and financial and practice
management services in the Mid-Atlantic region. The major elements of our
business strategy are the following:
Strengthen and expand our medical professional liability insurance business
by:
. Adhering to strict underwriting criteria and disciplined pricing
practices;
. Aggressively managing policyholder claims;
. Maintaining our financial strength;
. Expanding our distribution channels and pursuing strategic acquisition
opportunities;
. Maintaining close relationships with area medical communities; and
. Enhancing our product offerings.
Utilize our expertise in medical professional liability insurance to offer
alternative risk transfer products to healthcare providers. As a result of
significant premium rate increases, healthcare providers are seeking alternative
methods to secure medical professional liability coverage. We established
American Captive Corporation in 2001 to form independent protected cells to
accommodate affinity groups seeking to manage their own risk through an
alternative risk transfer structure.
Provide practice management services to assist physicians in the practice
of medicine. We offer practice management and financial services to physicians
in the District of Columbia, North
Carolina and Virginia. These services are heavily concentrated in North Carolina
and Virginia and are utilized by more than 1,000 physicians.
Growth Opportunities
Financial pressure on medical professional liability companies and market
contraction in the industry has occurred as companies that expanded nationally
or outside of their traditional market areas have sought to reduce or in some
cases eliminate their medical professional liability insurance business on a
going forward basis in order to regain financial stability. For several years in
the 1990s, many of these carriers engaged in soft-market pricing tactics that
generally resulted in lower premiums rates. Reduced profitability, reductions in
surplus and capacity constraints have led many medical professional liability
carriers to withdraw from, or limit new business in, one or more markets.
We have maintained strict underwriting criteria and a disciplined approach
with respect to pricing our product and establishing reserves. We have remained
focused on growth in our existing markets as pricing conditions have improved.
Further industry contraction and a hard insurance market characterized by
increasing premium rates, lesser competition and a shortage of capital may
create additional opportunities for growth within our market area. We are
raising additional capital through this offering to better position ourselves to
pursue further growth and market opportunities that arise.
Our Organizational Structure
NCRIC Group was established in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into the mutual
holding company structure. NCRIC, A Mutual Holding Company owns all of the
outstanding shares of NCRIC Holdings, Inc. Prior to July 29, 1999, all of the
issued and outstanding shares of NCRIC Group were held by NCRIC Holdings. On
July 29, 1999, NCRIC Group completed its initial public offering and issued
2,220,000 shares of common stock to NCRIC Holdings, Inc., the wholly-owned
subsidiary of NCRIC, A Mutual Holding Company, and sold 1,480,000 shares of the
common stock to the public in a subscription and community offering at a
purchase price of $7.00 per share.
Pursuant to the terms of the plan of conversion and reorganization, we will
convert from the mutual holding company structure to a fully public corporation.
As part of the conversion, we are offering for sale in a subscription offering
and a community offering the majority ownership interest of NCRIC Group that is
currently owned by NCRIC, A Mutual Holding Company, through its wholly-owned
subsidiary NCRIC Holdings, Inc. Upon the completion of the conversion and
offering, NCRIC, A Mutual Holding Company and NCRIC Holdings, Inc. will cease to
exist, and we will complete the transition from partial to full public stock
ownership. Existing public stockholders of NCRIC Group will receive new shares
of common stock in NCRIC Group, Inc. (our newly-formed Delaware corporation and
the successor to NCRIC Group) in exchange for their existing shares of NCRIC
Group at the conclusion of the conversion. Additional shares of common stock
will be issued to purchasers in the offering.
Our Companies
NCRIC, A Mutual Holding Company is the mutual holding company for NCRIC
Group, Inc. NCRIC, A Mutual Holding Company's principal business activity is the
ownership of all of the outstanding shares of NCRIC Holdings, Inc., which owns
2,220,000 shares of NCRIC Group, or 59.9% of the issued and outstanding shares
of NCRIC Group common stock. At the conclusion of the conversion, NCRIC, A
Mutual Holding Company and NCRIC Holdings, Inc. will cease to exist.
2
NCRIC, A Mutual Holding Company's executive office is located at 1115
30th Street, N.W., Washington, D.C. 20007. Our telephone number at this
address is (202) 969-1866.
NCRIC Group, Inc. is an insurance holding company that owns all of the
issued and outstanding common stock of NCRIC, Inc., a medical professional
liability insurance company, and NCRIC MSO, Inc., a physician practice
management and financial services company. Through these subsidiaries, we
provide insurance and practice management services to more than 5,000 healthcare
providers in the Mid-Atlantic region. At December 31, 2002, NCRIC Group had
consolidated assets of $202.7 million, liabilities of $154.9 million and
stockholders' equity of $47.8 million.
Following the conversion of NCRIC, A Mutual Holding Company, NCRIC Group
will be succeeded by a new Delaware corporation with the same name. There are
certain differences in stockholder rights arising from the existing articles of
incorporation and bylaws and NCRIC Group's Delaware certificate of incorporation
and bylaws. In addition, there are certain distinctions between applicable
Delaware and District of Columbia law. See "Comparison of Stockholder's Rights."
As of December 31, 2002, NCRIC Group had 3,708,399 shares of common stock issued
and outstanding. NCRIC, A Mutual Holding Company, through NCRIC Holdings, Inc.,
owned 2,220,000 shares of common stock of NCRIC Group, representing 59.9% of the
issued and outstanding shares of common stock. The remaining 1,488,399 shares
are held by the public.
NCRIC Group's executive office is located at 1115 30th Street, N.W.,
Washington, D.C. 20007. Our telephone number at this address is (202) 969-1866.
NCRIC, Inc. is a medical professional liability insurance company servicing
healthcare providers in the District of Columbia. NCRIC, Inc.'s wholly owned
subsidiary, Commonwealth Medical Liability Insurance Company (CML), is a medical
professional liability insurance company servicing healthcare providers in
Delaware, Maryland, Virginia and West Virginia. Medical professional liability
insurance insures a physician against liabilities arising from the rendering of,
or failure to render, professional medical services. CML's policies closely
resemble NCRIC Inc.'s policies except that policyholders of CML are not members
of NCRIC, A Mutual Holding Company. Together, NCRIC, Inc. and CML provide
insurance coverage to more than 4,000 healthcare providers in the Mid-Atlantic
region.
NCRIC MSO, Inc. was established in 1997 to provide practice management and
financial services to physicians. On January 4, 1999, NCRIC Group acquired
HealthCare Consulting, Inc., a physician practice management and financial
services company, its affiliate, HCI Ventures, LLC, a provider of capital and
financial services to management services organizations, and Employee Benefits
Services, Inc., a provider of employee benefits services. We provide practice
management and financial services to more than 1,000 physicians throughout the
Mid-Atlantic region. Since the acquisition, NCRIC MSO, Inc. has been doing
business as HealthCare Consulting and Employee Benefits Services.
NCRIC, Inc.'s and NCRIC MSO, Inc.'s executive office is located at 1115
30th Street, N.W., Washington, D.C. 20007. The telephone number at this
address is (202) 969-1866.
3
The following chart shows our current ownership structure, which is
commonly referred to as a mutual holding company structure:
----------------------------------
NCRIC, A Mutual Holding
Company
----------------------------------
100% of Shares
----------------------------------
NCRIC Holdings, Inc.
----------------------------------
59.9% of Shares
---------------------------------- ------------
40.1% of
NCRIC Group, Inc. Shares Public
Stockholders
---------------------------------- ------------
100% of Shares 100% of Shares
----------------------- ----------------------------
NCRIC, Inc. NCRIC MSO, Inc. d/b/a
HealthCare Consulting
----------------------- ----------------------------
----------------------- ----------------------------
Subsidiaries Subsidiaries
----------------------- ----------------------------
After the conversion and offering are completed, our ownership structure
will be as follows:
Public Stockholders
100% of
shares
---------------------------------------------
NCRIC Group, Inc.
---------------------------------------------
100% of 100% of
shares shares
----------------------- -------------------------------
NCRIC, Inc. NCRIC MSO, Inc. d/b/a
HealthCare Consulting
----------------------- -------------------------------
----------------------- -------------------------------
Subsidiaries Subsidiaries
----------------------- -------------------------------
4
Reasons for the Conversion
The primary reasons for the conversion are (i) to enhance our strategic and
financial flexibility by immediately increasing capital and furthering our
future access to capital markets; (ii) to serve physicians needs by maintaining
NCRIC, Inc. as an effective and competitive insurer in the future; (iii) to
support the increased level of risk retention in our reinsurance programs; (iv)
to support the growth in premiums written and further opportunities for such
growth; and (v) to enhance stockholder returns through higher earnings and
enhanced capital management strategies.
As a fully converted stock holding company, we also will have greater
flexibility in structuring mergers and acquisitions, including the form of
consideration paid in a transaction. Our current mutual holding company
structure, by its nature, limits our ability to offer shares of our common stock
as consideration in a merger or acquisition. We currently have no arrangements
or understandings regarding any specific acquisition.
Terms of the Conversion and Offering
Pursuant to the plan of conversion and reorganization, our organization
will convert from a partially public to a fully public corporation. In
connection with the conversion, we are selling the ownership interest in NCRIC
Group currently held by NCRIC, A Mutual Holding Company, through NCRIC Holdings,
Inc. We are offering between 2,550,000 and 3,450,000 shares of common stock to
members of NCRIC, A Mutual Holding Company, our employee benefit plans, our
directors, officers and employees, and the general public, to the extent shares
remain available. The number of shares to be sold may be increased up to
3,967,500 as a result of demand for the shares and changes in the conditions.
Unless the number of shares to be sold is increased to more than 3,967,500 or
decreased to less than 2,550,000, you will not have the opportunity to change or
cancel your stock order. The offering price is $10.00 per share. All investors
will pay the same purchase price per share. Sandler O'Neill & Partners, L.P.,
our marketing advisor in the offering, will use its best efforts to assist us in
selling our common stock. Sandler O'Neill & Partners, L.P. is not obligated to
purchase any shares of common stock in the offering.
Persons Who May Order Stock in the Offering
We are offering the shares of common stock of NCRIC Group in a
"subscription offering" in the following descending order of priority:
(1) Members of NCRIC, A Mutual Holding Company (i.e., policyholders of
NCRIC, Inc.) on May 6, 2003;
(2) NCRIC Group's employee benefit plans, including our employee stock
ownership plan and stock award plan; and
(3) Directors, officers and employees of NCRIC Group, who are not members
entitled to purchase shares of common stock in category (1).
Shares of common stock not issued in the subscription offering will be
offered in a "community offering," with a preference given first to (i) persons
who are policyholders of NCRIC, Inc., who are not members entitled to purchase
shares of common stock in category (1) above; (ii) policyholders of CML; and
(iii) existing stockholders of NCRIC Group. The community offering may begin
concurrently with, during or promptly after the subscription offering. We also
may offer shares of common stock not purchased in the subscription offering or
community offering through a "syndicated community offering" managed by Sandler
O'Neill & Partners, L.P. We have the right to accept or reject, in our sole
discretion, orders received in the community offering or syndicated community
offering.
5
How We Determined the Offering Range and the $10.00 Per Share Stock Price
The amount of common stock we are offering is based on an independent
appraisal of the estimated market value of NCRIC Group, assuming the conversion
and offering are completed. RP Financial, LC., our independent appraiser, has
estimated that, as of March 11, 2003, the market value ranged from $42,596,475
to $57,630,525, with a midpoint of $50,113,500. Based on this valuation, the
ownership interest of NCRIC, A Mutual Holding Company, being sold in the
offering and the $10.00 per share price, the number of shares of common stock
being offered for sale by NCRIC Group will range from 2,550,000 shares to
3,450,000 shares. The $10.00 per share price was selected primarily because it
is the price most commonly used in a mutual to stock conversion transaction. The
appraisal was based in part on NCRIC Group's financial condition and results of
operations, the effect of the additional capital raised by the sale of shares of
common stock in the offering, and an analysis of a peer group of four publicly
traded medical professional liability insurance companies and three publicly
traded workers compensation insurance companies that RP Financial, LC.
considered comparable to NCRIC Group.
The following table presents a summary of selected pricing ratios for the
seven peer group companies employed by RP Financial, LC., in the preparation of
its appraisal and the pricing ratios for NCRIC Group. Compared to the average
pricing of the peer group, NCRIC Group's pro forma pricing ratios at the
midpoint of the offering range indicated a 154% premium on a price-to-earnings
basis and a 10% discount on a price-to-tangible book basis. In considering each
of the valuation approaches, RP Financial, LC., took into account the fact that
four of the seven peer group companies reported losses for the most recent four
quarters for which financial data is publicly available and two other peer group
companies reported modest profitability such that their price-to-earnings
multiples were in excess of 30 times, which RP Financial, LC. considered less
meaningful for valuation purposes. The estimated appraised value took into
account the foregoing premiums and discounts as well as the potential financial
impact of the conversion on NCRIC Group.
The following pro forma price/earnings multiples and pro forma price/book
ratios for NCRIC Group are based on earnings and book value for the 12-month
period ending on December 31, 2002 and assume that net proceeds had been
invested at an interest rate of 4.5% (pre-tax).
Pro forma
Pro forma price-to-tangible book
price-to-earnings multiple value ratio
-------------------------- ----------------------
NCRIC Group
Maximum ......................... 41.42x 81.81%
Minimum ......................... 35.05 68.25
Valuation of peer group
companies as of March 11, 2003
Averages ........................ 15.15x (1) 83.73%
Medians ......................... 15.15 (1) 80.93
- --------------------------
(1) Represents the price-to-earnings multiple for only one of seven of the peer
group companies which RP Financial, LC. considered to be highly meaningful
for valuation purposes.
The independent appraisal does not indicate market value. Do not assume or
expect that the valuation of NCRIC Group as indicated above means that the
common stock will trade at or above the $10.00 purchase price after the
conversion.
6
The independent appraisal will be updated prior to the completion of the
conversion. If the appraised value changes to either below $42,596,475 or above
$66,275,104, we will resolicit persons who had submitted stock orders, providing
them an opportunity to modify or cancel their orders.
The Exchange of Existing Shares of NCRIC Group Common Stock
If you are currently a stockholder of NCRIC Group, your existing shares
will be cancelled and exchanged for shares of common stock of NCRIC Group, Inc.
(our newly formed Delaware corporation and successor to NCRIC Group) at the
conclusion of the conversion. The number of shares of common stock you receive
will be based on an exchange ratio determined as of the closing of the
conversion, which will depend upon the final appraised value of NCRIC Group. In
addition, if options to purchase shares of NCRIC Group are exercised before
consummation of the conversion, then there will be an increase in the percentage
of shares of NCRIC Group held by public stockholders, an increase in the number
of shares issued to public stockholders in the share exchange and a decrease in
the exchange ratio and the offering range. The following table shows how the
exchange ratio will adjust, based on the number of shares of common stock issued
in our offering. The table also shows how many shares a hypothetical owner of
NCRIC Group common stock would receive in the exchange, depending on the number
of shares of common stock issued in the offering.
New Shares to be Exchanged
New Shares to be Issued for Existing Shares of NCRIC Total Shares of
in This Offering Group Common Stock to New Shares to
----------------------- ---------------------------- be Issued in the be Received for
Conversion and Exchange 100 Existing
Amount Percent Amount Percent Offering Ratio Shares
----------- --------- ---------- ----------- ---------------- -------- ---------------
Minimum ........ 2,550,000 59.9% 1,709,648 40.1% 4,259,648 1.1486 114
Midpoint ....... 3,000,000 59.9 2,011,350 40.1 5,011,350 1.3514 135
Maximum ........ 3,450,000 59.9 2,313,053 40.1 5,763,053 1.5541 155
15% above
Maximum ..... 3,967,500 59.9 2,660,010 40.1 6,627,510 1.7872 178
If you hold shares of NCRIC Group common stock in a brokerage account in
"street name," you do not need to take any action to exchange the shares. If you
hold NCRIC Group stock certificates after the conversion and offering are
completed, you will receive a transmittal form with instructions to surrender
stock certificates. New certificates of NCRIC Group common stock will be mailed
within five business days after the exchange agent receives properly executed
transmittal forms and certificates.
No fractional shares of NCRIC Group common stock will be issued to any
public stockholder of NCRIC Group upon consummation of the conversion. For each
fractional share that would otherwise be issued, we will pay in cash an amount
equal to the product obtained by multiplying the fractional share interest to
which the holder would otherwise be entitled by the $10.00 per share
subscription price.
Limits on How Much Common Stock You May Purchase
The minimum number of shares of common stock that may be purchased is 100
shares.
If you are not now a NCRIC Group stockholder
No individual may purchase more than 100,000 shares of common stock. If any
of the following persons purchase shares of common stock, their purchases when
combined with your purchases cannot exceed 100,000 shares:
. your spouse or relatives of you or your spouse living in your house;
7
. companies, trusts, partnerships or other entities in which you have a
financial interest or hold a position; or
. other persons who may be acting in concert with you.
If you are now a NCRIC Group stockholder
In addition to the above purchase limitations, there is an ownership
limitation. Shares of common stock that you purchase in the offering
individually and together with persons acting in concert with you as described
above, plus new shares you and they receive in the exchange for existing NCRIC
Group common stock, may not exceed 5% of the total shares issued and outstanding
upon completion of the conversion. We may increase or decrease the purchase and
ownership limitations at any time.
How You May Purchase Common Stock
In the subscription offering and community offering, you may pay for your
shares only by a personal check, bank check or money order.
You can subscribe for shares of common stock in the offering by delivering
a signed and completed original stock order form, together with full payment,
provided that we receive the stock order form before the end of the offering.
The funds received for payment of NCRIC Group common stock will be placed in
escrow with a commercial bank pursuant to an escrow agreement. If for any reason
the conversion is not completed, all payments made by subscribers in the
subscription and community offering will be refunded with any interest earned
pursuant to the escrow agreement. After we receive an order, the order cannot be
withdrawn or changed, except with our consent.
Delivery of Stock Certificates
Certificates representing shares of common stock issued in the offering
will be mailed to the persons entitled thereto at the certificate registration
address noted on the stock order form, as soon as practicable following
consummation of the offering and receipt of all necessary regulatory approvals.
It is possible that, until certificates for the common stock are available and
delivered to purchasers, purchasers might not be able to sell the shares of
common stock which they ordered, even though the common stock will have begun
trading.
How We Intend to Use the Proceeds From the Offering
We estimate net proceeds will be between $24.1 million and $33.0 million,
or $38.1 million if the offering range is increased by 15%. NCRIC Group intends
to retain approximately 25% of the net proceeds (between $6.0 million and $8.25
million, or $9.5 million if the offering range is increased by 15%).
Approximately $18.1 million to $24.8 million (or $28.6 million if the offering
range is increased by 15%), representing 75% of the net proceeds, will be
invested in NCRIC, Inc.
The net proceeds retained by NCRIC Group will be used for the loan to the
employee stock ownership plan and the stock award plan to fund purchases of
shares of common stock (between $2.3 million and $3.1 million, or $3.6 million
if the offering is increased by 15%) and for general corporate purposes. Funds
invested in NCRIC, Inc. will increase its statutory capital and support further
growth in premiums written. NCRIC, Inc. will invest such proceeds in its
investment portfolio. The net proceeds retained by NCRIC Group and its
subsidiaries also may be used for future business expansion through
acquisitions. Initially, the net proceeds may be invested in short-term
investments.
8
You May Not Sell or Transfer Your Subscription Rights
If you order shares of common stock in the subscription offering, you will
be required to state that you are purchasing the common stock for yourself and
that you have no agreement or understanding to sell or transfer your
subscription rights. We intend to take legal action, including reporting persons
to federal or state regulatory agencies, against anyone who we believe sells or
gives away their subscription rights. We will not accept your order if we have
reason to believe that you sold or transferred your subscription rights.
Deadlines for Orders of Common Stock
If you wish to purchase shares of common stock of NCRIC Group, a properly
completed original stock order form, together with payment for the shares of
common stock, must be received by NCRIC Group no later than ______, Washington,
D.C. Time, on June __, 2003, unless we extend this deadline. You may submit your
order form by mail using the return envelope provided or by overnight courier to
the Stock Information Center at the indicated address. Stock order forms may not
be delivered to our offices. Once submitted, your order is irrevocable unless
the offering is terminated or extended beyond __________, 2003.
Termination of the Offering
The subscription offering will expire at ___ p.m., Washington D.C. Time, on
June __, 2003. We expect that the community offering will terminate at the same
time. We may extend this expiration date without notice to you, until ______,
2003. If the subscription offering and/or community offering extend beyond
________, 2003, we will be required to resolicit subscriptions before proceeding
with the offering.
Steps We May Take if We do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 2,550,000 shares of common stock,
we may take several steps in order to issue the minimum number of shares of
common stock in the offering range. Specifically, we may increase the purchase
limitations and extend the offering beyond the ________, 2003 expiration date,
provided that any such extension will require us to resolicit subscriptions
received in the offering.
Purchases by Officers and Directors
We expect our directors and executive officers, together with their
associates, to subscribe for 51,500 shares of common stock. The purchase price
paid by them will be the same $10.00 per share price paid by all other persons
who purchase shares of common stock in the offering. Following the conversion,
our directors and executive officers, together with their associates, are
expected to own 465,008 shares of common stock, or 9.1% of our shares at the
midpoint of the offering range.
Benefits to Management and Potential Dilution to Stockholders Resulting from the
Conversion
Our employee benefit plans expect to purchase up to 9% of the shares of
common stock we sell in the offering, or 310,500 shares of common stock,
assuming we sell the maximum of the shares proposed to be sold. If we receive
orders for more shares of common stock than the maximum of the offering range,
the employee benefit plans will have first priority to purchase shares of common
stock over this maximum, up to the total of 15% of shares sold. We reserve the
right to purchase shares of common stock in the open market following the
offering in order to fund our employee benefit plans. Our
9
employee stock ownership plan is a tax-qualified retirement plan for the benefit
of all employees. Assuming the plan purchases 5% of the shares in the offering,
or up to 172,500 shares of common stock at the maximum of the offering range, we
will recognize an additional annual compensation expense of $86,250 over a
20-year period, assuming the shares of common stock have a fair market value of
$10.00 per share for the full 20-year period. The stock award plan is a
restricted stock plan that intends to purchase 4% of the shares sold in the
offering, or up to 138,000 shares of common stock at the maximum of the offering
range, for grants to key employees and directors, at no cost to the recipients.
As a result and if, in the future, the shares of common stock held by our
employee stock ownership plan and stock award plan have a fair market value
greater or less than $10.00, the compensation expense will increase or decrease
accordingly.
We also intend to implement a stock option plan in connection with the
conversion transaction. This stock option plan would reserve a number of shares
equal to 10% of the shares of common stock sold in the conversion and offering,
for key employees and directors upon their exercise of options. As a result,
stockholders could experience dilution of approximately 5.65% in their ownership
interest in NCRIC Group. Stock option grants under this stock option plan will
be subject to vesting over a period of years.
We also will convert options previously awarded under our current stock
option plan into options to purchase NCRIC Group common stock, with the number
and exercise price to be adjusted, based on the exchange ratio. The term and
vesting period of the previously awarded options will remain unchanged.
Market for the Common Stock
Existing publicly held shares of our common stock trade on the Nasdaq
SmallCap Market under the symbol "NCRI." Upon completion of the conversion, we
anticipate that the new shares of common stock of NCRIC Group will replace
existing shares and will be traded on the Nasdaq National Market. For a period
of 20 trading days following completion of our offering, our trading symbol will
be "NCRID." Thereafter it will be "NCRI." Sandler O'Neill & Partners, L.P.
currently intends to remain a market maker in the common stock and will assist
us in obtaining additional market makers.
Our Dividend Policy
We do not pay dividends on our common stock and we do not intend to pay any
dividends in the foreseeable future. We intend to retain earnings to support the
future growth of our business.
Tax Consequences
As a general matter, the conversion will not be a taxable transaction, for
purposes of federal or state income taxes, to NCRIC, A Mutual Holding Company,
NCRIC Holdings, Inc., NCRIC Group and its subsidiaries, persons eligible to
subscribe in the subscription offering, or existing stockholders of NCRIC Group.
Existing stockholders of NCRIC Group who receive cash in lieu of fractional
share interests in new shares of NCRIC Group will recognize a gain or loss equal
to the difference between the cash received and the tax basis of the fractional
share.
Conditions to Completion of the Conversion
We cannot complete the conversion and related offering unless:
10
. The plan of conversion and reorganization is approved by at least a
majority of votes cast by voting members of NCRIC, A Mutual Holding
Company (policyholders of NCRIC, Inc.);
. The plan of conversion and reorganization is approved by at least
two-thirds of the outstanding common stock of NCRIC Group;
. The plan of conversion and reorganization is approved by at least a
majority of the votes cast by stockholders of NCRIC Group common
stock, excluding those shares held by NCRIC, A Mutual Holding Company;
. We issue at least the minimum number of shares of common stock
offered; and
. We receive the final approval of the Commissioner of Insurance and
Securities of the District of Columbia to complete the conversion and
offering.
NCRIC, A Mutual Holding Company intends to vote its ownership interest in
favor of the conversion. At December 31, 2002, NCRIC, A Mutual Holding Company,
through NCRIC Holdings, Inc., owned 59.9% of the outstanding common stock of
NCRIC Group. The directors and executive officers of NCRIC Group and their
associates owned approximately 305,927 shares of NCRIC Group, or 8.2% of the
issued and outstanding shares of common stock. They intend to vote those shares
in favor of the plan of conversion and reorganization.
Additional Information
Our employees may not, by law, assist with investment-related questions
about the offering. If you have any questions regarding the conversion or
offering, please call our Stock Information Center, toll free, at ________,
Monday through Friday between 10:00 a.m. to 4:00 p.m., Washington, D.C. Time.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO
THE EXPIRATION DATE OF JUNE __, 2003 AND IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO JUNE ___, 2003 OR
HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO JUNE ___, 2003.
11
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of NCRIC Group for the years and at the dates indicated. The
information at December 31, 2002 and 2001, and for the years ended December 31,
2002, 2001 and 2000 is derived in part from and should be read together with the
audited consolidated financial statements and notes thereto of NCRIC Group
beginning at page F-2 of this prospectus. The information at December 31, 2000,
1999, and 1998 and for the years ended December 31, 1999 and 1998 is derived in
part from audited consolidated financial statements which are not included in
this prospectus. The selected consolidated financial data below should be read
in conjunction with the consolidated financial statements and their accompanying
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
At or for the Year Ended December 31,
--------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Statement Of Operations Data:
Gross premiums written ........................ $ 51,799 $ 34,459 $ 22,727 $ 21,353 $ 19,214
========== ========== ========== ========== ==========
Net premiums written after renewal credits .... $ 33,804 $ 23,624 $ 15,610 $ 16,188 $ 21,014
========== ========== ========== ========== ==========
Net premiums earned ........................... $ 30,098 $ 20,603 $ 14,611 $ 14,666 $ 18,459
Net investment income ......................... 5,915 6,136 6,407 6,089 5,996
Net realized investment (losses) gains ........ (131) (278) (5) (71) 159
Practice management and related income ........ 5,800 6,156 5,317 4,576 78
Other income .................................. 1,013 602 470 373 357
---------- ---------- ---------- ---------- ----------
Total revenues ............................. 42,695 33,219 26,800 25,633 25,049
Losses and loss adjustment expenses ........... 26,829 18,858 11,946 12,867 15,677
Underwriting expenses ......................... 8,168 4,877 3,591 3,010 3,858
Practice management and related expenses ...... 5,811 6,063 4,970 4,845 378
Other expenses ................................ 1,467 1,245 1,237 1,439 1,510
---------- ---------- ---------- ---------- ----------
Total expenses ............................. 42,275 31,043 21,744 22,161 21,423
Income before income taxes .................... 420 2,176 5,056 3,472 3,626
Income tax provision (benefit) ................ (322) 597 1,561 967 1,079
---------- ---------- ---------- ---------- ----------
Net income .................................... $ 742 $ 1,579 $ 3,495 $ 2,505 $ 2,547
========== ========== ========== ========== ==========
Balance Sheet Data:
Invested assets ............................... $ 120,120 $ 103,125 $ 98,045 $ 95,092 $ 96,348
Total assets .................................. 202,687 161,002 145,864 140,947 134,326
Reserves for losses and loss adjustment ....... 104,022 84,560 81,134 84,282 84,595
expenses
Unearned premiums ............................. 24,211 17,237 11,472 8,898 6,423
Total liabilities ............................. 154,870/(1)/ 116,548 104,415 105,152 103,315
Total stockholders' equity .................... 47,817 44,454 41,449 35,795 31,011
Selected GAAP Underwriting Ratios/(2)/:
Losses and loss adjustment expenses ratio ..... 89.1% 91.5% 81.7% 87.7% 84.9%
Underwriting expense ratio .................... 27.2% 23.7% 24.6% 20.5% 20.9%
Combined ratio after renewal credits .......... 116.3% 115.2% 106.3% 108.2% 105.8%
Selected Statutory Data:
Losses and loss adjustment expenses ratio ..... 89.2% 90.0% 75.3% 80.8% 82.5%
Underwriting expense ratio .................... 22.6% 21.8% 19.7% 15.7% 15.1%
Combined ratio ................................ 111.8% 111.8% 95.0% 96.5% 97.6%
Operating ratio/(3)/........................... 92.4% 84.3% 63.6% 66.7% 82.5%
Ratio of net premiums written to
policyholders' surplus ...................... 0.83x 0.77x 0.60x 0.63x 1.24x
Policyholders' surplus ........................ $ 44,269 $ 32,759 $ 29,764 $ 29,212 $ 24,116
- --------------------------
(1) Includes $15.0 million of junior subordinated debentures issued in
connection with the issuance of Trust Preferred Securities.
(2) In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to
calculate the GAAP loss and underwriting expense ratios. For statutory
purposes, renewal credits are not considered a reduction in premium income,
and written premiums are used to calculate the statutory underwriting
expense ratio. Due to these differences in treatment, GAAP combined ratios
can differ significantly from statutory combined ratios. See Note 11 to the
consolidated financial statements for a discussion of the differences
between statutory and GAAP reporting.
(3) The operating ratio is the statutory combined ratio offset by the benefit
of investment income expressed as a percentage of premiums earned.
12
RISK FACTORS
- --------------------------------------------------------------------------------
You should consider carefully the following risk factors in evaluating an
investment in the common stock. You should also refer to the other information
in this prospectus, including our financial statements and accompanying notes
appearing elsewhere in this prospectus.
- --------------------------------------------------------------------------------
Our results may be affected if actual insured losses differ from our loss
reserves
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to us and our payment of that loss. To
recognize liabilities for unpaid losses, we establish reserves as balance sheet
liabilities representing estimates of amounts needed to pay reported losses and
the related loss adjustment expenses. The process of estimating loss reserves is
a difficult and complex exercise involving many variables and subjective
judgments. We regularly review our reserving techniques and our overall level of
reserves. As part of the reserving process, we review historical data and
consider the impact of various factors such as:
. Trends in claim frequency and severity;
. Changes in operations;
. Emerging economic and social trends;
. Inflation; and
. Changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate, but not
necessarily accurate, basis for predicting future events. There is no precise
method for evaluating the impact of any specific factor on the adequacy of
reserves, and actual results are likely to differ from original estimates. To
the extent loss reserves prove to be inadequate in the future, we would need to
increase our loss reserves and incur a charge to earnings in the period the
reserves are increased, which could have a material adverse impact on our
financial condition and results of operations. Although we intend to estimate
conservatively our future payments relating to losses incurred, there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience. Our ultimate liability will be known only after
all claims are closed, which is likely to be several years into the future.
The loss reserves of our insurance subsidiaries also may be affected by
court decisions that expand liability on our policies after they have been
priced and issued. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserved amounts. Our policy to litigate aggressively claims
against our insureds that we consider unwarranted or claims where settlement
resolution cannot be achieved may increase the risk that we may be required to
make such payments.
The change in our reinsurance program effective January 1, 2003 exposes us to
larger losses
We increased our retention of loss from $500,000 to $1,000,000 for each and
every loss. As a result, we expect a higher level of losses and are subject to a
higher level of loss volatility since it is more difficult to predict the number
and timing of losses in excess of $500,000.
We purchase limited reinsurance for protection against more than one
insured being involved in a single incident so that we are exposed to no more
than one retention of loss in a single medical incident.
13
The limited protection may not be adequate if there are several
policyholders involved in a single medical incident and a jury returns an
extraordinarily high verdict against all defendants.
Our earnings may not increase as a result of growth in new business in states in
which we have limited operating experience
In recent years we have expanded our business in Delaware, Virginia, and
West Virginia. We utilize publicly available information on loss experience of
our competitors when we price our products in states when we can not rely on our
own experience. The use of competitor data does not provide the same level of
confidence as when we can use our own historical data from territories we have
been operating in for many years, i.e., the District of Columbia and Maryland.
The increase in uncertainty is a result of us not knowing the effectiveness of
our underwriting and claims adjudication process in the new territory.
Our revenues and income may fluctuate with interest rates and investment results
We generally rely on the positive performance of our investment portfolio
to offset insurance losses and to contribute to our profitability. As our
investment portfolio is primarily comprised of interest-earning assets,
prevailing economic conditions, particularly changes in market interest rates,
may significantly affect our operating results. Changes in interest rates also
can affect the value of our interest-earning assets, which are principally
comprised of fixed rate investment securities. Generally, the value of fixed
rate investment securities fluctuates inversely with changes in interest rates.
Interest rate fluctuation could adversely affect our GAAP stockholders' equity,
total comprehensive income and/or cash flows. As of December 31, 2002, $119
million of our $120 million investment portfolio was invested in fixed
maturities. Unrealized pre-tax net investment gains on investments in fixed
maturities were $4.2 million and $700,000 as of December 31, 2002, and 2001,
respectively.
In accordance with our investment policies, the duration of our investment
portfolio is intended to be similar to our expectation for the duration of our
loss reserves. Changes in the actual duration of our loss reserves from our
expectations may affect our results. Our investment portfolio, however, is
subject to prepayment risk primarily due to our investments in mortgage-backed
and other asset-backed securities. An investment has prepayment risk when there
is a risk that the timing of cash flows that result from the repayment of
principal might occur earlier than anticipated because of declining interest
rates or later than anticipated because of rising interest rates. We are subject
to reinvestment risk to the extent that we are not able to reinvest prepayments
at rates comparable to the rates on the maturing investments.
Regulatory changes could have a material impact on our operations
Our insurance businesses are subject to extensive regulation by state
insurance authorities in each state in which we operate. Regulation is intended
for the benefit of policyholders rather than stockholders. In addition to the
amount of dividends and other payments that can be made by our insurance
subsidiaries, these regulatory authorities have broad administrative and
supervisory power relating to:
. rates charged to insurance customers;
. licensing requirements;
. trade practices;
. capital and surplus requirements; and
14
. investment practices.
These regulations may impede or impose burdensome conditions on rate
increases or other actions that we may want to take to enhance our operating
results, and could affect our ability to pay dividends on our common stock. In
addition, we may incur significant costs in the course of complying with
regulatory requirements. Most states also regulate insurance holding companies
like us in a variety of matters such as acquisitions, changes of control, and
the terms of affiliated transactions. Future legislative or regulatory changes
may adversely affect our business operations.
The unpredictability of court decisions could have a material impact on our
financial results
The financial position of our insurance subsidiaries may also be affected
by court decisions that expand insurance coverage beyond the intention of the
insurer at the time it originally issued an insurance policy or by a judiciary's
decision to accelerate the resolution of claims through an expedited court
calendar, thereby reducing the amount of investment income we would have earned
on related reserves. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserve amount.
Our revenues and operating performance may fluctuate with insurance business
cycles
Growth in premiums written in the medical professional liability industry
have fluctuated significantly over the past 10 years as a result of, among other
factors, changing premium rates. The cyclical pattern of such fluctuation has
been generally consistent with similar patterns for the broader property and
casualty insurance industry, due in part to the participation in the medical
professional liability industry of insurers and reinsurers which also
participate in many other lines of property and casualty insurance and
reinsurance. Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions, a soft insurance market, followed by period of capital
shortage, lesser competition and increasing premium rates, a hard insurance
market.
For several years in the 1990s, the medical professional liability industry
faced a soft insurance market that generally resulted in lower premium rates.
The medical professional liability industry is currently in a hard insurance
market cycle. We cannot predict whether, or the extent to which, the recent
increase in premium rates will continue.
Our geographic concentration ties our performance to the economic, regulatory
and demographic conditions of the Mid-Atlantic Region
Our revenues and profitability are subject to prevailing economic,
regulatory, demographic and other conditions in the region in which we write
insurance. We write our medical professional liability insurance in the District
of Columbia, Delaware, Maryland, Virginia and West Virginia. Because our
business is concentrated in a limited number of states, we may be exposed to
adverse developments that may have a greater affect on us than the risks of
doing business in a broader market area.
Our business could be adversely affected if we are not able to attract and
retain independent agents
We depend in part on the services of independent agents in marketing our
insurance products. We face competition from other insurance companies for the
services and allegiance of our independent agents. While we believe that the
commissions and services we provide to our agents are competitive with other
insurers, changes in commissions, services or products offered by our
competitors could make it more difficult for us to attract and retain
independent agents to sell our insurance products.
15
If we are unable to maintain a favorable A.M. Best Company rating, it may be
more difficult for us to write new business or renew our existing business
A.M. Best assesses and rates the financial strength and claims-paying
ability of insurers based upon its criteria. The financial strength ratings
assigned by A.M. Best to insurance companies represent independent opinions of
financial strength and ability to meet policyholder obligations, and are not
directed toward the protection of investors. A.M. Best ratings are not ratings
of securities or recommendations to buy, hold or sell any security and are not
applicable to the securities being offered by this prospectus.
Our insurance subsidiaries hold a financial strength rating of "A-"
(Excellent) by A.M. Best. An "A-" rating is A.M. Best's fourth highest rating
out of its 15 possible rating classifications. Financial strength ratings are
used by agents and customers as an important means of assessing the financial
strength and quality of insurers. If our financial position deteriorates, we may
not maintain our favorable rating. A downgrade or withdrawal of any such rating
could severely limit or prevent us from writing desirable business or renewing
our existing business.
If market conditions cause reinsurance to be more costly or unavailable, we may
be required to bear increased risks or reduce the level of our underwriting
commitments
As part of our overall risk and capacity management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our insurance
company subsidiaries. Market conditions beyond our control determine the
availability and cost of the reinsurance we purchase, which may affect the level
of our business and profitability. We may be unable to maintain our current
reinsurance coverage or to obtain other reinsurance coverage in adequate amounts
and at favorable rates. If we are unable to renew our expiring reinsurance
coverage or to obtain new reinsurance coverage, either our net exposure risk
would increase or, if we are unwilling to bear an increase in net risk
exposures, we would have to reduce the amount of risk we underwrite.
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all,
and, as a result, we could experience losses
We transfer some of the risk we have assumed to reinsurance companies in
exchange for part of the premium we receive in connection with the risk.
Although reinsurance coverage makes the reinsurer liable to us to the extent the
risk is transferred, it does not relieve us of our liability to our
policyholders. If our reinsurers fail to pay us or fail to pay us on a timely
basis, our financial results would be adversely affected.
The guaranty fund assessments that we are required to pay to state guaranty
associations may increase and our results of operations and financial conditions
could be adversely affected
Each jurisdiction in which we operate has separate insurance guaranty fund
laws requiring property and casualty insurance companies doing business within
their respective jurisdictions to be members of their guaranty associations.
These associations are organized to pay covered claims (as defined and limited
by the various guaranty association statutes) under insurance policies issued by
insolvent insurance companies. Most guaranty association laws enable the
associations to make assessments against member insurers to obtain funds to pay
covered claims after a member insurer becomes insolvent. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the covered lines of business in that state. Maximum assessments
permitted by law in any one year generally vary between 1% and 2% of annual
premiums written by a member in that state.
16
Property and casualty guaranty fund assessments incurred by us totaled
$355,000 and $243,000 for 2002 and 2001, respectively. Our policy is to accrue
the guaranty fund assessments when notified and in accordance with GAAP. We
cannot reasonably estimate liabilities for insolvency because of the lack of
adequate financial data on insolvent companies.
Our business could be adversely affected by the loss of one or more employees
We are heavily dependent upon our senior management and the loss of
services of our senior executives could adversely affect our business. Our
success has been, and will continue to be, dependent on our ability to retain
the services or our existing key employees and to attract and retain additional
qualified personnel in the future. The loss of services of any of our senior
management or any other key employee, or the inability to identify, hire and
retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of our business operations. While we have
employment agreements with our senior executives, we currently do not maintain
key employee insurance with respect to any of our employees.
We are a holding company and are dependent on dividends and other payments from
our operating subsidiaries, which are subject to dividend restrictions
We are a holding company whose principal source of funds is cash dividends
and other permitted payments from our operating subsidiaries, principally NCRIC,
Inc. If our subsidiaries are unable to make payments to us, or are able to pay
only limited amounts, we may be unable to pay dividends or make payments on our
indebtedness. The payment of dividends by these operating subsidiaries is
subject to restrictions set forth in the insurance laws and regulations of the
District of Columbia. See "Insurance Regulatory Matters - Regulation of
Dividends and Other Payments From Our Operating Subsidiaries."
Our profitability could be adversely affected by market driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to efficiently
conduct a traditional medical practice. As a result, many physicians have joined
or affiliated with managed care organizations, healthcare delivery systems or
practice management organizations. The impact of managed care and tightened
Medicare/Medicaid reimbursement may impact a physician's decision to continue
purchasing consulting and practice management services, shifting a purchase
decision from quality and value to price only. Larger healthcare systems
generally retain more risk by accepting higher deductibles and self-insured
retentions or form their own captive insurance companies. This consolidation has
reduced the role of the individual physician and the small medical group, which
represents a significant portion of our policyholders, in the medical
professional liability insurance purchasing decision.
Rising interest rates would increase interest costs associated with the trust
preferred securities issued by us
In December 2002 we issued $15,000,000 of trust preferred securities. The
trust preferred securities bear interest at a rate of 400 basis points over the
three-month London Interbank Offered Rate (LIBOR) and adjust quarterly subject
to a maximum interest rate of 12.5%. Our interest expense will increase if the
three-month LIBOR increases.
State insurance regulators may not be willing to approve our captive insurance
operations
While higher pricing and reduced availability of traditional insurance
sources have created favorable market conditions for this risk financing
vehicle, state insurance regulatory may not be willing to approve our captive
insurance operations or market conditions may change.
17
A decline in revenue and profitability in NCRIC MSO could result in a FAS 142
impairment charge
NCRIC MSO's revenue is subject to clients facing declining reimbursement
for their services. Therefore, in an effort to pare their own expenses to
improve their net profitability, our clients may not order new services, or may
diminish and possibly cease using our existing services. This could result in a
reduction of revenue to us, thereby reducing net income and resulting in an
impairment charge relative to the goodwill ascribed to NCRIC MSO.
Our stock benefit plans will increase our costs, which will reduce our income
and stockholders' equity
We anticipate that our employee stock ownership plan will purchase 5% of
the common stock sold in the offering with funds borrowed from NCRIC Group. The
cost of acquiring the employee stock ownership plan shares will be between $1.3
million at the minimum of the offering range and $2.0 million at the adjusted
maximum of the offering range. We will record annual employee stock ownership
plan expenses in an amount equal to the fair value of shares committed to be
released to employees . If shares of common stock appreciate in value over time,
the compensation expense relating to the employee stock ownership plan will
increase.
In addition, we anticipate that our stock award plan will purchase 4% of
the common stock sold in the offering with funds borrowed from NCRIC Group. The
cost of acquiring the stock award plan shares will be between $1.0 million, at
the minimum of the offering range and $1.6 million at the adjusted maximum of
the offering range. Under this plan, our officers, directors and key employees
could be awarded, at no cost to them, shares of common stock in an aggregate
amount equal to 4% of the shares sold in the offering. If shares of our common
stock appreciate in value over time, the net after-tax expense relating to the
stock award plan will increase. In order to purchase shares of common stock in
the offering, the stock award plan must be approved by the stockholders of NCRIC
Group.
The implementation of our stock option plan may dilute your ownership interest
In connection with the conversion, we intend to adopt a new stock option
plan which will reserve an amount equal to 10% of the shares of common stock
sold in the offering for issuance upon exercise of options that may be granted
to officers and directors. The stock option plan may be funded from the issuance
of authorized but unissued shares. If authorized but unissued share are
utilized, stockholders will experience a reduction in ownership interest in the
event newly issued shares are used to fund stock options grants made under this
plan.
Provisions in our certificate of incorporation and bylaws, Delaware Law and
state insurance law may impede attempts to replace or remove our management or
impede a takeover, which could adversely affect the value of our common stock
Our certificate of incorporation, bylaws and the laws of Delaware contain
provisions that may have the effect of inhibiting a non-negotiated merger or
other business combination. Additionally, the board of directors may issue
preferred stock, which could be used as an anti-takeover device, without a
further vote of our stockholders. No shares of preferred stock are currently
outstanding, and we have no present intention to issue any shares of preferred
stock. However, because the rights and preferences of any series of preferred
stock may be set by our board of directors in its sole discretion, the rights
and preferences of any such preferred stock may be superior to those of our
common stock and thus may adversely affect the rights of the holders of our
common stock.
18
The voting structure of our common stock and other provisions of the
certificate of incorporation are intended to encourage a person interested in
acquiring us to negotiate with, and to obtain the approval of, our board of
directors in connection with a transaction. However, certain of these provisions
may discourage our future acquisition, including an acquisition in which
stockholders might otherwise receive a premium for their shares. As a result,
stockholders who might desire to participate in such a transaction may not have
the opportunity to do so.
In addition, state insurance laws provide that no person or entity may
directly or indirectly acquire control of an insurance company or its holding
company unless that person or entity has received approval from the insurance
regulator. An acquisition of control of our insurance operating subsidiaries
generally would be presumed if any person or entity acquires 10% or more of our
outstanding common stock, unless the applicable insurance regulator determines
otherwise. These provisions apply even if the offer may be considered beneficial
by some of our stockholders. If a change in management or a change of control is
delayed or prevented, the market price of our common stock could decline.
Potential voting control by management and employees could make a takeover
attempt more difficult to achieve
The shares of common stock that our directors and officers intend to
purchase in the conversion, when combined with the shares that are already owned
by such persons and which may be awarded to participants under our employee
stock ownership plan, stock award plan, and stock option plan, could result in
management and employees controlling a significant percentage of our common
stock. Following completion of the conversion and offering, it is expected that
the executive officers and directors as a group will own 465,008 shares of
common stock representing 9.1% of the shares to be issued and outstanding,
assuming the conversion is completed at the midpoint of the offering range. When
combined with our employee stock ownership plan and our other stock benefit
plans, assuming they are implemented as proposed, our directors, officers and
employees could control up to 22.6% of the outstanding shares of our common
stock on a fully diluted basis. If these individuals were to act together, they
could have significant influence over the outcome of any stockholder vote. This
voting power may discourage takeover attempts that other stockholders may
desire.
We believe that subscription rights have no value for tax purposes, but the
internal revenue service may disagree
Our Federal tax counsel, Luse Gorman Pomerenk & Schick, P.C., believes that
it is more likely than not that the nontransferable subscription rights to
purchase common stock have no value. However, this opinion is not binding on the
Internal Revenue Service. If the Internal Revenue Service determines that your
subscription rights have ascertainable value, you could be taxed for an amount
equal to the value of those rights. Additionally, we could recognize a gain for
tax purposes
19
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. 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:
. general economic conditions, either nationally or in our market area,
that are worse than expected;
. price competition;
. inflation and changes in the interest rate environment and performance
of financial markets;
. adverse changes in the securities markets;
. changes in laws or government regulations affecting medical
professional liability insurance and practice management and financial
services;
. NCRIC, Inc.'s concentration in a single line of business;
. our ability to successfully integrate acquired entities;
. changes to our ratings assigned by A.M. Best;
. impact of managed healthcare;
. uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
. the cost and availability of reinsurance;
. changes in accounting policies and practices, as may be adopted by our
regulatory agencies and the Financial Accounting Standards Board; and
. changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We discuss some of these uncertainties and others in "Risk Factors"
beginning on page 13.
20
USE OF PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale
of the shares of common stock in the offering will be until the offering is
completed, we anticipate that the net proceeds will be between $24.1 million and
$33.0 million, or $38.1 million if the offering range is increased by 15%. We
estimate that we will invest in NCRIC, Inc. between $18.1 million and $24.8
million, or $28.6 million if the offering range is increased by 15%.
A summary of the anticipated net proceeds at the minimum, midpoint,
maximum and adjusted maximum of the offering range and anticipated distribution
of the net proceeds is as follows:
Adjusted
Minimum Midpoint Maximum Maximum
-------------- --------------- -------------- -------------
Offering proceeds ...................... $ 25,500,000 $ 30,000,000 $ 34,500,000 $ 39,675,000
Less offering expenses ................. (1,314,000) (1,396,000) (1,478,000) (1,572,000)
------------- ------------- ------------- -------------
Net offering proceeds ................ $ 24,186,000 $ 28,604,000 $ 33,022,000 $ 38,103,000
============= ============= ============= =============
Distribution of net proceeds:
To NCRIC, Inc. ................... $ 18,139,500 $ 21,453,000 $ 24,766,500 $ 28,577,250
Retained by NCRIC Group .......... $ 6,046,500 $ 7,151,000 $ 8,255,500 $ 9,525,750
We intend to use the net proceeds of the offering as follows:
. 75% of the net proceeds will be invested in NCRIC, Inc., which
will increase its statutory capital and support further growth in
premiums written. NCRIC, Inc. will invest such proceeds in its
investment portfolio;
. to provide a loan to the employee stock ownership plan to fund its
purchase of shares of common stock in the offering (between $1.3
million and $2.0 million);
. to provide a loan to the stock award plan to fund its purchase of
shares of common stock in the offering (between $1.0 million and
$1.6 million);
. to finance mergers and acquisitions with other companies, although
we do not currently have any agreements or understandings
regarding any specific acquisition transaction; and
. for other general corporate purposes.
Initially, a substantial portion of the net proceeds will be invested in
short-term investments, U.S. Government securities, federal agency securities
and other interest bearing securities.
The net proceeds may vary because total expenses relating to the offering
may be more or less than our estimates. For example, our expenses would increase
if a syndicated community offering were used to sell shares of our common stock
not purchased in the subscription offering and community offering.
21
OUR DIVIDEND POLICY
We do not currently pay cash dividends on our common stock and we do not
intend to pay any cash dividends in the foreseeable future. We intend to retain
earnings to support the future growth of our business.
As a holding company with no direct operations, we will rely on cash
dividends and other permitted payments from our insurance subsidiaries to pay
any future dividends to our stockholders. State insurance laws and restrictions
under our credit agreement limit the amounts that may be paid to us by our
insurance subsidiaries See "Business of NCRIC Group - Insurance company
regulation."
MARKET FOR THE COMMON STOCK
Our common stock is currently traded on the Nasdaq SmallCap Market under
the symbol "NCRI" and there is an established market for such common stock. At
May __, 2003, we had five market makers, including Sandler O'Neill & Partners,
L.P. Upon completion of the conversion, we anticipate that the new shares of
common stock of NCRIC Group will replace existing shares and be traded on the
Nasdaq National Market under the same trading symbol. Sandler O'Neill &
Partners, L.P. intends to remain a market maker in the common stock following
the conversion and also will assist us in obtaining other market makers after
the conversion. We cannot assure you that other market makers will be obtained
or that an active and liquid trading market for the shares of common stock will
develop or, if developed, will be maintained. For a period of 20 trading days
following completion of our offering, our symbol will be "NCRID," after which it
will revert to "NCRI."
The development and maintenance of a public market having the desirable
characteristics of depth, liquidity and orderliness depends on the existence of
willing buyers and sellers, the presence of which is not within our control or
that of any market maker. The number of active buyers and sellers of our shares
of common stock at any particular time may be limited, which may have an adverse
effect on the price at which our common stock can be sold. There can be no
assurance that persons purchasing the common stock will be able to sell their
shares of common stock at or above the $10.00 price per share in the offering.
Purchasers of our common stock should have a long-term investment intent and
should recognize that there may be a limited trading market in the common stock.
The following table sets forth the high and low closing prices for shares
of our common stock for the periods indicated. As of December 31, 2002, there
were 1,488,399 publicly held shares of our common stock issued and outstanding.
In connection with the conversion, each existing share of common stock of NCRIC
Group will be converted into a number of new shares of common stock, based upon
the exchange ratio that is described in other parts of this prospectus.
22
Year Ended December 31, 2002 High Low
-------------------------------- -------------- ---------------
Fourth quarter $11.000 $ 9.870
Third quarter 11.200 9.940
Second quarter 11.625 10.350
First quarter 12.980 10.430
Year Ended December 31, 2001 High Low
-------------------------------- -------------- ---------------
Fourth quarter $12.000 $ 9.750
Third quarter 12.120 9.900
Second quarter 14.000 8.000
First quarter 9.750 8.250
On January 27, 2003, the business day immediately preceding the public
announcement of the conversion, and on ______, 2003, the closing prices of NCRIC
Group common stock as reported on the Nasdaq SmallCap Market were $11.25 per
share and $_____ per share, respectively. At ______, 2003, NCRIC Group had
approximately ______ stockholders of record. On the effective date of the
conversion, all publicly held shares of NCRIC Group common stock, including
shares of common stock held by our officers and directors, will be converted
automatically into and become the right to receive a number of shares of NCRIC
Group, Inc. common stock (our newly-formed Delaware corporation and successor to
NCRIC Group) determined pursuant to the exchange ratio. See "The Conversion --
Share Exchange Ratio." Options to purchase shares of NCRIC Group common stock
will be converted into options to purchase a number of shares of NCRIC Group
common stock determined pursuant to the exchange ratio, for the same aggregate
exercise price. See "Beneficial Ownership of Common Stock."
23
CAPITALIZATION
The following table presents the historical consolidated capitalization
of NCRIC Group at December 31, 2002 and the pro forma consolidated
capitalization of NCRIC Group after giving effect to the conversion, based upon
the assumptions set forth in the "Pro Forma Data" section.
6,627,510
4,259,648 5,011,350 5,763,053 Shares
Shares Shares Shares Outstanding,
NCRIC Group Outstanding, Outstanding, Outstanding, 3,967,500
Historical at 2,550,000 3,000,000 3,450,000 Shares Sold at
December 31, Shares Sold Shares Sold at Shares Sold Adjusted
2002 at Minimum Midpoint at Maximum Maximum (1)
-------------- -------------- -------------- -------------- --------------
(Dollars in thousands)
Borrowed funds .............................. $ 995 $ 995 $ 995 $ 995 $ 995
Trust preferred securities .................. 15,000 15,000 15,000 15,000 15,000
-------------- -------------- -------------- -------------- --------------
Total .................................... $ 15,995 $ 15,995 $ 15,995 $ 15,995 $ 15,995
============== ============== ============== ============== ==============
Stockholders' equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized
(post-conversion) (2) .................... -- -- -- -- --
Common stock $0.01 par value
12,000,000 shares authorized
(post-conversion); shares to be
issued as reflected (2) (3) .............. 37 43 50 58 66
Additional paid-in capital (2) ............ 9,630 33,526 37,944 42,341 47,414
Retained earnings ......................... 36,518 35,628 35,621 35,635 35,634
Accumulated other comprehensive income .... 2,806 2,806 2,806 2,806 2,806
Less:
Treasury stock(4) ......................... (290) -- -- -- --
Common stock to be acquired by
employee stock ownership plan (5) ........ (682) (1,275) (1,500) (1,725) (1,984)
Common stock to be acquired by stock
award plan (6) ........................... (202) (1,020) (1,200) (1,380) (1,587)
-------------- -------------- -------------- -------------- --------------
Total stockholders' equity ................ $ 47,817 $ 69,708 $ 73,721 $ 77,735 $ 82,349
============== ============== ============== ============== ==============
- --------------
(1) As adjusted to give effect to an increase in the number of shares of common
stock which could occur due to a 15% increase in the offering range to
reflect demand for shares, changes in market or general financial
conditions following the commencement of the subscription and community
offerings, or regulatory considerations.
(2) NCRIC Group will have 1,000,000 authorized shares of preferred stock and
12,000,000 authorized shares of common stock, par value $0.01 per share,
following the conversion. Pro forma NCRIC Group common stock and additional
paid-in capital have been increased to reflect the number of shares of
NCRIC Group common stock to be outstanding.
(3) No effect has been given to the issuance of additional shares of NCRIC
Group common stock pursuant to an additional stock option plan. If this
plan is implemented, an amount up to 10% of the shares of NCRIC Group
common stock sold in the offering will be reserved for issuance upon the
exercise of options under the stock option plan. No effect has been given
to the exercise of options currently outstanding. See "Management of NCRIC
Group--Stock Benefit Plans."
(4) Pro forma data assumes the cancellation of treasury stock as a result of
the conversion and exchange of shares.
(5) Assumes that 5% of the shares sold in the offering will be acquired by the
employee stock ownership plan financed by a loan from NCRIC Group. The loan
will be repaid principally from NCRIC Group and its subsidiaries
contributions to the employee stock ownership plan. Since NCRIC Group will
finance the employee benefit plan debt, this debt will be eliminated
through consolidation and no liability will be reflected on NCRIC Group's
consolidated financial statements. Accordingly, the amount of shares of
common stock acquired by the employee stock ownership plan is shown in this
table as a reduction of total stockholders' equity.
(6) Assumes a number of shares of common stock equal to 4% of the common stock
to be sold in the offering will be purchased by the stock award plan
financed by a loan from NCRIC Group. The dollar amount of common stock to
be purchased is based on the $10.00 per share subscription price in the
offering and represents unearned compensation. As NCRIC Group accrues
compensation expense to reflect the vesting of shares pursuant to the stock
award plan, the credit to capital will be offset by a charge to operations.
Implementation of the stock award plan is subject to stockholder approval.
24
PRO FORMA DATA
The following table summarizes historical data of NCRIC Group and pro
forma data of NCRIC Group at or for the year ended December 31, 2002 and the
year ended December 31, 2001, based on assumptions set forth below and in the
table, and should not be used as a basis for projections of market value of the
shares of common stock following the conversion and offering. No effect has been
given in the table to the possible issuance of additional shares of common stock
pursuant to the current outstanding stock option plan or for the possible
issuance of additional shares of common stock pursuant to the stock option plan
that may be adopted by our stockholders in connection with the conversion.
The net proceeds in the tables are based upon the following assumptions:
(1) all shares of common stock will be sold in the subscription and
community offerings;
(2) 51,500 shares of common stock will be purchased by our executive
officers and directors, and their associates;
(3) our employee stock ownership plan will purchase 5% of the shares of
common stock sold in the offering with a loan from NCRIC Group. The
loan will be repaid in substantially equal principal payments over a
period of 20 years;
(4) our stock award plan will purchase 4% of the shares of common stock
sold in the offering with a loan from NCRIC Group;
(5) Sandler O'Neill & Partners, L.P. will receive a fee equal to 2% of
the aggregate dollar amount of common stock sold in the offerings. No
fee will be paid with respect to shares of common stock purchased by
our qualified and non-qualified employee benefit plans and by our
officers, directors and employees, and their immediate families; and
(6) total expenses of the offering, including the marketing fees to be
paid to Sandler O'Neill & Partners, L.P., will be between $1.3
million at the minimum of the offering range and $1.6 million at the
maximum of the offering range, as adjusted.
No effect has been given in the pro forma data for the assumed earnings
on the net proceeds. It is assumed that NCRIC Group will retain 25% of the
estimated net offering proceeds. The actual net proceeds from the sale of common
stock will not be determined until the conversion and offering are completed.
However, we currently estimate the net proceeds to be between $24,186,000 and
$33,022,000, or $38,103,000 if the offering range is increased by 15%. It is
assumed that all shares of common stock will be sold in the subscription
offering and community offering.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur, and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amounts of assets and liabilities of NCRIC
Group. The pro forma stockholders' equity is not intended to represent the fair
market value of the common stock.
25
At or For the Year Ended December 31, 2002
Based upon the Sale Price of $10.00 Per Share of
------------------------------------------------------------------
3,967,500
2,550,000 3,000,000 3,450,000 Shares (1)
Shares Shares Shares 15% Above
Minimum of Midpoint of Maximum of Maximum of
Offering Range Offering Range Offering Range Offering Range
--------------- --------------- -------------- --------------
(Dollars in thousands, except per share amounts)
Gross proceeds .............................................. $ 25,500 $ 30,000 $ 34,500 $ 39,675
Less expenses ............................................... 1,314 1,396 1,478 1,572
-------------- -------------- -------------- --------------
Estimated net proceeds ................................... 24,186 28,604 33,022 38,103
Common stock acquired by employee stock ownership
plan (7) .................................................. (1,275) (1,500) (1,725) (1,984)
Common stock acquired by stock award plan (2) ............... (1,020) (1,200) (1,380) (1,587)
-------------- -------------- -------------- --------------
Estimated net proceeds, as adjusted ...................... $ 21,891 $ 25,904 $ 29,917 $ 34,532
============== ============== ============== ==============
Year ended December 31, 2002
- ----------------------------
Consolidated net income:
Historical ............................................... $ 742 $ 742 $ 742 $ 742
Pro forma adjustments:
Employee stock ownership plan (7) ........................ (42) (50) (57) (65)
Stock award plan (2) ..................................... (135) (158) (182) (209)
-------------- -------------- -------------- --------------
Pro forma net income (3) ............................... $ 565 $ 534 $ 503 $ 468
============== ============== ============== ==============
Per share net income (4):
Historical ............................................... $ 0.18 $ 0.15 $ 0.13 $ 0.12
Pro forma adjustments:
Income on adjusted net proceeds .......................... -- -- -- (0.01)
Employee stock ownership plan (7) ........................ (0.01) (0.01) (0.01) (0.01)
Stock award plan (2) ..................................... (0.03) (0.03) (0.03) (0.03)
--------------- -------------- --------------- --------------
Pro forma net income per share (3)(4) (5) .............. $ 0.14 $ 0.11 $ 0.09 $ 0.07
=============== ============== =============== ==============
Offering price to pro forma net earnings per share (3) ...... 71.43x 90.91x 111.11x 142.86x
Number of shares used in earnings per share
calculations ................................................ 4,138,522 4,868,850 5,599,177 6,439,054
At December 31, 2002
- --------------------
Stockholders' equity:
Historical ............................................... $ 47,817 $ 47,817 $ 47,817 $ 47,817
Estimated net proceeds ................................... 24,186 28,604 33,022 38,103
Common stock acquired by employee stock
ownership plan (7) ...................................... (1,275) (1,500) (1,725) (1,984)
Common stock acquired by stock award plan (2) ............ (1,020) (1,200) (1,380) (1,587)
-------------- -------------- -------------- --------------
Pro forma stockholders' equity ....................... 69,708 73,721 77,734 82,349
Intangible assets .................................... 7,291 7,291 7,291 7,291
-------------- -------------- -------------- --------------
Pro forma tangible stockholders' equity .............. $ 62,417 $ 66,430 $ 70,443 $ 75,058
============== ============== ============== ==============
Stockholders' equity per share (6):
Historical ............................................... $ 11.23 $ 9.54 $ 8.30 $ 7.21
Estimated net proceeds ................................... 5.67 5.71 5.73 5.76
Common stock acquired by employee stock
ownership plan (7) ...................................... (0.30) (0.30) (0.30) (0.30)
Common stock acquired by stock award plan (2) ............ (0.24) (0.24) (0.24) (0.24)
--------------- -------------- -------------- --------------
Pro forma stockholders' equity per share
(6) .................................................. $ 16.36 $ 14.71 $ 13.49 $ 12.43
=============== ============== ============== ==============
Pro forma tangible stockholders' equity
per share ............................................ $ 14.65 $ 13.26 $ 12.22 $ 11.33
=============== ============== ============== ==============
Number of shares used in book value per share calculations 4,259,647 5,011,350 5,763,052 6,627,510
Offering price as percentage of pro forma
stockholders' equity per share ........................... 61.12% 67.98% 74.13% 80.45%
Offering price as percentage of pro forma
tangible stockholders' equity per share .................. 68.26% 75.41% 81.83% 88.26%
(footnotes on following page)
______________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to a 15% increase in the offering range to reflect demand
for the shares or changes in market and financial conditions following the
commencement of the offering.
(2) If approved by NCRIC Group's stockholders, the stock award plan will
purchase an aggregate number of shares of common stock equal to 4% of the
shares to be sold in the offering. The funds used to acquire these shares
will be borrowed from NCRIC Group. The table assumes that (i) 20% of the
amount contributed to the stock award plan is amortized as an expense
during the year ended December 31, 2002 and (ii) the stock award plan
expense reflects an effective combined federal and state tax rate of 34%.
(3) No effect has been given in the pro forma net income to earnings on the net
proceeds. If we were to assume that the net proceeds had been invested at a
rate of 4.5%, which is consistent with the current return available as of
March 2003 based on the near term use of proceeds, pro forma net income per
share would be $0.29, $0.27, $0.25 and $0.23, and offering price to pro
forma net income per share would be 34.48x, 37.04x, 40.00x and 43.48x, at
the minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively.
(4) Per share figures include publicly held shares of NCRIC Group common stock
that will be exchanged for new shares of NCRIC Group common stock in the
conversion. See "The Conversion -- Share Exchange Ratio." Net income per
share computations are determined by taking the number of shares assumed to
be sold in the offering and the number of new shares assumed to be issued
in exchange for publicly held shares and, in accordance with Statement of
Position 93-6, subtracting the stock award plan shares and the employee
stock ownership plan shares which have not been committed for release
during the respective periods. See note 7. The number of shares of common
stock actually sold and the corresponding number of exchange shares may be
more or less than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which has been adopted by NCRIC
Group and is being presented to stockholders for approval in connection
with the conversion. If the stock option plan is approved by stockholders,
a number of shares up to 10% of the shares sold in the offering will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of authorized but previously
unissued shares of common stock pursuant to the exercise of options under
such plan would dilute existing stockholders' ownership interest by
approximately 5.65%.
(6) Per share figures include publicly held shares of NCRIC Group common stock
that will be exchanged for new shares of NCRIC Group common stock in the
conversion. Stockholders' equity per share calculations are based upon the
sum of (i) the number of subscription shares of common stock assumed to be
sold in the offering and (ii) new shares of common stock to be issued in
exchange for publicly held shares at the minimum, midpoint, maximum and
adjusted maximum of the offering range, respectively. The exchange shares
reflect an exchange ratio of 1.1486, 1.3514, 1.5541 and 1.7872,
respectively, at the minimum, midpoint, maximum and adjusted maximum of the
offering range, respectively. The number of subscription shares actually
sold and the corresponding number of exchange shares may be more or less
than the assumed amounts.
(7) Assumes that 5% of shares of common stock sold in the offering will be
purchased by the employee stock ownership plan. For purposes of this table,
the funds used to acquire these shares are assumed to have been borrowed by
the employee stock ownership plan from NCRIC Group. NCRIC Group intends to
make annual contributions to the employee stock ownership plan in an amount
at least equal to the principal of the debt. NCRIC Group's total annual
payments on the employee benefit plans debt are based upon 20 equal annual
installments of principal and interest. Statement of Position 93-6 requires
that an employer record compensation expense in an amount equal to the fair
value of the shares committed to be released to employees. The pro forma
adjustments assume that the employee stock ownership plan shares are
allocated in equal annual installments based on the number of loan
repayment installments assumed to be paid by NCRIC Group, the fair value of
the common stock remains the subscription price and the employee benefit
plans expense reflects an effective combined federal and state tax rate of
34%. The unallocated employee benefit plans shares are reflected as a
reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the employee stock ownership plan. The pro forma net
income further assumes (i) that 6,375, 7,500, 8,625 and 9,919 shares were
committed to be released during the period at the minimum, mid-point,
maximum, and adjusted maximum of the offering range, respectively, and (ii)
in accordance with Statement of Position 93-6, only the employee benefit
plans shares committed to be released during the period were considered
outstanding for purposes of net income per share calculations.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
selected consolidated financial and operating data and consolidated financial
statements and related notes included elsewhere in this prospectus and the
information under the caption "Risk Factors." This discussion contains
forward-looking information that involves risks and uncertainties. Actual
results could differ significantly from these forward-looking statements. See
"Forward-Looking Statements."
GENERAL
The financial statements and data presented herein have been prepared
in accordance with generally accepted accounting principles (GAAP) unless
otherwise noted. GAAP differs from statutory accounting practices used by
regulatory authorities in their oversight responsibilities of insurance
companies. See Note 11 to the consolidated financial statements for a
reconciliation of our net income and equity between GAAP and statutory
accounting bases.
CRITICAL ACCOUNTING POLICIES
Following is a discussion of key financial concepts and of those
accounting policies which we believe to be the most critical. That is, these are
most important to the portrayal of our financial condition and results of
operations and they require management's most complex judgments, including the
need to make estimates about the effect of insurance losses and other matters
that are inherently uncertain.
Premium income. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Premiums
ceded to reinsurers represent the cost to us of reducing our exposure to medical
professional liability losses by transferring agreed upon insurance risks to
reinsurers through a reinsurance contract or treaty. Renewal credits are
reductions in premium billings to renewing policyholders. Net premiums written
are adjusted by any amount which has been billed but not yet earned during the
period in arriving at earned premiums. For several large groups of
policyholders, we have insurance programs where the premiums are retrospectively
determined based on losses during the period. Under all of the current programs,
the full premium level is determined and billed at the inception of the policy
term. The premium level could potentially be reduced and a premium refund made
if the program loss experience is favorable. Premiums billed under retrospective
programs are recorded as premiums written, while premium refunds accrued under
retrospective programs are recorded as unearned premiums. Under retrospective
programs, premiums earned are premiums written reduced by premium refunds
accrued. Premium refunds are accrued to reflect the risk-sharing program results
on a basis consistent with the underlying loss experience. The program loss
experience is that which is included in the determination of our losses and loss
adjustment expenses (LAE). As described more fully below, one component of the
expense for losses and LAE is the estimate of future payments for claims and
related expenses of adjudicating claims.
Unearned premiums represent premiums billed but not yet fully earned at
the end of the reporting period. Premiums receivable represent annual billed and
unbilled premiums which have not yet been collected.
Reserves for losses and loss adjustment expenses. We write one line of
business, medical professional liability. Losses and LAE reserves are estimates
of future payments for reported claims and
28
related expenses of adjudicating claims with respect to insured events that have
occurred in the past. The change in these reserves from year to year is
reflected as an increase or decrease to our losses and LAE.
Medical professional liability losses and LAE reserves are established
based on an estimate of these future payments as reflected in our past
experience with similar cases and historical trends involving claim payment
patterns. Other factors that modify past experience are also considered in
setting reserves, including court decisions; economic conditions; current trends
in losses; and inflation. Reserving for medical professional liability claims is
a complex and uncertain process, requiring the use of informed estimates and
judgments. Although we intend to estimate conservatively our future payments
relating to losses incurred, there can be no assurance that currently
established reserves will prove adequate in light of subsequent actual
experience.
The estimation process is an extensive effort. It begins in our claims
department with the initial report of a claim. For each claim reported, a case
reserve is established by the claims department based on analysis of the facts
of the particular case and the judgment of claims management. This estimation
process is not by formula but is driven by the investigation of facts combined
with the experience and insight of claims management applied to each individual
case. The timing of establishing case reserves follows established protocols
based on the underlying facts and circumstances on a case by case basis.
Specific factors considered include: the claimants assertion of loss; the amount
of documented damages asserted; an expert medical assessment; the jurisdiction
where the incident occurred; our experience with any similar cases in the past;
as well as any other factors pertinent to the specific case.
Each quarter, the aggregate of case reserves by report year is compiled
and subjected to extensive analysis. Semiannually, our independent actuary
performs an actuarial valuation of reserves based on the data comprising our
detailed claims experience since inception.
The actuarial valuation entails application of various statistically
based actuarial formulae, an analysis of trends, and a series of judgments to
produce an aggregate estimate of our liability at the balance sheet date.
Specific factors included in the estimation process include: the level of case
reserves by jurisdiction by report year; the change in case reserves between
each evaluation date; historical trends in the development of our initial case
reserves to final conclusion; expected losses and LAE levels based on past
experience relative to the level of premium earned; reinsurance treaty terms;
and any other pertinent factors that may arise.
In consultation with our independent actuary, we utilize several
methods in order to estimate losses and LAE reserves by projecting ultimate
losses. By utilizing and comparing the results of these methods, we are better
able to analyze loss data and establish an appropriate reserve. Our independent
actuary provides a point estimate for loss reserves rather than a range. The
actuarial valuation of reserves is a critical component of the financial
reporting process and provides the foundation for the determination of reserve
levels. In addition to reporting under GAAP, we file financial statements with
state regulatory authorities based on statutory accounting requirements. These
requirements include a certification of reserves by an appointed actuary. The
reserves in our statutory filings have been certified by an independent medical
professional liability insurance actuary.
Our ultimate liability will be known after all claims are closed, which
is likely to be several years into the future. For example, as of December 31,
2002, the oldest report date of an open claim is 1993. Incurred losses for each
report year will develop with a change in estimate in each subsequent calendar
year until all claims are closed for that report year. Loss development could
potentially have a significant impact on our results of operations. Developments
changing the ultimate liability as little as 1% could have a material impact on
our reported operating results.
29
The inherent uncertainty in establishing reserves is relatively greater
for companies writing long-tail medical professional liability business. Each
claim reported has the potential to be significant in amount. For the three-year
period ended December 31, 2002, the average indemnity payment per paid claim was
$360,000 with total indemnity payments of $12.9 million, $14.0 million and $14.8
million for the years ended December 31, 2002, 2001 and 2000, respectively. The
cost of individual indemnity payments over this three-year period ranged from
$1,000 to $3 million. Due to the extended nature of the claim resolution process
and the wide range of potential outcomes of professional liability claims,
established reserve estimates may be adversely impacted by: judicial expansion
of liability standards; unfavorable legislative actions; expansive
interpretations of contracts; inflation associated with medical claims; lack of
a legislated cap on non-economic damages; and the propensity of individuals to
file claims. These risk factors are amplified given the increase in new business
written in new markets because there is limited historical data available which
can be used to estimate current loss levels. We refine reserve estimates as
experience develops and additional claims are reported or existing claims are
closed; adjustments to losses reserved in prior periods are reflected in the
results of the periods in which the adjustments are made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as stated on the
income statement 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 is a
customary practice in the industry. It allows us to obtain indemnification
against a specified portion of losses associated with insurance policies we have
underwritten by entering into a reinsurance agreement with other insurance
enterprises or reinsurers. We pay or cede part of our policyholder premium to
reinsurers. The reinsurers in return agree to reimburse us for a specified
portion of any claims covered under the reinsurance contract. While reinsurance
arrangements are designed to limit losses from large exposures and to permit
recovery of a portion of direct losses, reinsurance does not relieve us of
liability to our insureds.
Under our current primary reinsurance contract, the premium ceded to
the reinsurers is based on a fixed rate applied to policy premium for that
coverage layer. During the year, estimated payments are made to the reinsurers,
and a final adjustment is made at the end of year to reflect actual premium
earned in accordance with the treaty. For the years through 2002, we retained
risk exposure up to $500,000 for each and every claim. Beginning January 1,
2003, the retention level has been increased to $1,000,000 for each and every
claim.
For 1999 and prior years, in accordance with one of our primary
reinsurance contracts, the portion of the policyholder premium ceded to the
reinsurers was swing-rated or experience-rated on a retrospective basis. This
swing-rated cession program is subject to a minimum and maximum premium range to
be paid to the reinsurers in the future, depending upon the extent of losses
actually paid by the reinsurers. A deposit premium is paid by us during the
initial policy year. An additional liability, "retrospective premiums accrued
under reinsurance treaties" is recorded by us to represent an estimate of net
additional payments to be made to the reinsurers under the program, based on the
level of loss and LAE reserves recorded. Like loss and LAE reserves, adjustments
to prior year ceded premiums payable to the reinsurers are reflected in the
results of the periods in which the adjustments are made. The swing-rated
reinsurance premiums are estimated in a manner consistent with the estimation of
our loss reserves, and therefore contain uncertainties like those inherent in
the loss reserve estimate.
Our practice for accounting for the liability for retrospective
premiums accrued under reinsurance treaties was to record the current year
swing-rated reinsurance premium at management's best estimate of the ultimate
liability, which was generally the maximum rate payable under terms of the
treaty. Due to
30
the long tail nature of the medical professional liability insurance business,
it takes several years for the losses for any given report year to fully
develop. Since the ultimate liability for reinsurance premiums depends on the
ultimate losses, among other things, it is several years after the initial
reinsurance premium accrual before the amount becomes known. During the
intervening periods, reevaluations are made and adjustments to the accrued
retrospective premiums are made as considered appropriate by management.
Exposure to individual losses in excess of $1 million is known as excess
layer coverage. Excess layer premiums are recorded as current year reinsurance
ceded costs. Under the excess layer treaties, prior to 2000 we ceded to our
reinsurers over 90% of our exposure. Effective since January 1, 2000, we cede
100% of our risks and premiums related to these coverage layers.
Investment portfolio. Our investment portfolio is composed principally of
fixed maturity securities classified as available-for-sale. All securities with
gross unrealized losses at the balance sheet date are evaluated for evidence of
other-than-temporary impairment, on a quarterly basis. We write down to fair
value any security with an impairment that is deemed to be other-than-temporary
in the period the determination is made. The assessment of whether such
impairment has occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. Management considers a wide
range of factors and uses its best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in assessing the
prospects for near-term recovery. Factors considered in the evaluation include
but are not limited to: (1) interest rates; (2) market-related factors other
than interest rates; and (3) financial conditions, business prospects and other
fundamental factors specific to the securities issuer. Declines attributable to
issuer fundamentals are reviewed in further detail. We have a security
monitoring process which includes quarterly review by an investment committee
comprised of members of our Board of Directors and representatives of
policyholders. Our CEO and CFO also participate in the committee meetings in
which our professional investment advisors review with the committee and
management the analysis prepared by our investment manager of each security that
has certain characteristics including, but not limited to: deterioration of the
financial condition of the issuer; the magnitude and duration of unrealized
losses; and the credit rating and industry of the issuer. The primary factors
considered in evaluating whether a decline in value is other-than-temporary
include: the length of time and the extent to which the fair value has been less
than cost; the financial condition and near-term prospects of the issuer;
whether the issuer is current on contractually obligated interest and principal
payments; and our intent and ability to retain the investment for a period of
time sufficient to allow for any anticipated recovery.
The evaluation for other-than-temporary impairments is a quantitative and
qualitative process involving judgments which is subject to risks and
uncertainties. The risks and uncertainties include changes in general economic
conditions, the issuer's financial condition and the effects of changes in
interest rates.
Goodwill. In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). SFAS 142 changes the accounting for goodwill from
an amortization method to an impairment-only approach. Amortization of goodwill
ceased upon adoption of SFAS 142 on January 1, 2002.
Our goodwill asset, $7.3 million as of December 31, 2002, resulted from the
1999 acquisition of three businesses which now operate as divisions of the
Practice Management Services Segment. We completed our initial goodwill
impairment testing under SFAS 142 and concluded that the goodwill asset was not
impaired as of the date of implementation of SFAS 142, nor was it impaired as of
December 31, 2002.
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.
RECENT INDUSTRY PERFORMANCE
Our results of operations have historically been influenced by factors
affecting the medical professional liability industry in general. The operating
results of the U.S. medical professional liability industry have been subject to
significant variations over time due to competition, general economic
conditions, judicial trends and fluctuations in interest rates. We actively
monitor industry trends and consider them in relation to our circumstances when
setting rates or establishing reserves.
31
According to the January 2003 Best's Review, published by A.M. Best
Company, Inc. (A.M. Best), in 2002, physicians across the country were faced
with higher medical professional liability insurance premiums and fewer
companies offering the coverage. The escalation in premium rates in recent years
is a reflection of rising frequency and severity of claims at a time when
premium rates were depressed thereby exacerbating insurers' poor operating
performance. The medical professional liability insurance marketplace is
adjusting to the departure of The St. Paul Companies, the largest medical
professional liability insurer at that time, from the sector, while other
companies have scaled back their market share or left some states entirely. Of
the 12 states identified by A.M. Best as having a crisis in medical care
stemming from the lack of availability of medical professional liability
insurance, only one - West Virginia - falls into our market territory. Two of
our other market jurisdictions, Virginia and Delaware, have been significantly
impacted by the changes in market profile described by Best's Review. In the
January 2001 issue of Best's Review, A.M. Best predicted trends to include
sustained price increases and worsening claims severity. The realization of this
prediction throughout 2001 and 2002 ultimately resulted in the change in the
entire medical professional liability insurance market as a number of the
insurance providers experienced adverse financial results and subsequently
withdrew from the market.
Medical professional liability lawsuits have been identified as a key
factor in the rising cost of the U.S. tort system according to an article in the
February 17, 2003, issue of BestWeek, a publication of A.M. Best. The article
further states that since 1975, medical professional liability tort costs rose
an average of 11.6% a year, outpacing the average overall growth in tort costs
of 9.4% over the same period. The February, 2003 issue of Best's Review reports
that between 1999 and 2000, median professional liability jury awards increased
43%, causing a rise in medical professional liability insurance rates. Several
of the jurisdictions in which we operate have not adopted tort reform, most
notably the District of Columbia which had the highest cumulative mean medical
professional liability indemnity payment level for the ten year period ending
December 31, 2001, according to the latest data available from the National
Practitioner Data Bank.
CONSOLIDATED NET INCOME Years ended December 31, 2002, 2001 and 2000
Year ended December 31, 2002 compared to year ended December 31, 2001
Net income totaled $742,000 for the year ended December 31, 2002 compared
to $1.6 million for the year ended December 31, 2001. Year-to-date 2002 results
were negatively impacted by the increase in allowance for uncollectible premium
receivable and unfavorable development of losses on claims reported in prior
years. Net realized investment losses, after tax, for the year ended December
31, 2002 totaled $86,000 compared to net realized investment losses of $183,000
for the year ended December 31, 2001.
The operating results of our insurance segment for the year ended December
31, 2002 were primarily driven by the following factors. We continued to
experience a significant increase in new business written in 2002. For the year,
new business written (excluding the 100% ceded HCA program) was $12.7 million,
up $0.5 million or 4%, from $12.2 million for 2001. The rise in 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. While the cost for claims
reported in 2002 increased due to the rise in exposure, the development of
losses for claims originally reported in 2000 and 2001 reduced pre-tax earnings
for 2002.
Our practice management segment earnings in 2002 decreased compared to 2001
primarily as a result of a decrease in client revenue combined with an increase
in expenses. Client revenue decreases stem from a reduction in non-recurring
consulting assignments; as medical practice income comes under increasing
pressure due to reductions in the payer system, physicians have less
discretionary funds available for consultant engagements. Expense decreases are
due to the cessation of goodwill amortization due to the implementation of SFAS
142 beginning January 1, 2002, offset by expenses associated with the transition
of client service for two of the former owners as they moved towards the
expiration of their employment contracts at the end of 2002 and other
transitional costs associated with the continued integration of the purchased
companies.
Three months ended December 31, 2002 compared to three months ended December 31,
2001
Net income for the fourth quarter of 2002 was $801,000 compared to a net
loss of $312,000 in the fourth quarter of 2001. The 2002 fourth quarter result
includes realized investment gains, net of tax, of
32
$312,000 compared to realized investment losses, net of tax, of $312,000 in the
fourth quarter of 2001. The pre-tax operating result for the insurance segment
was income of $677,000 in 2002 compared to $228,000 in 2001, respectively. For
the practice management services segment, the fourth quarter result for 2002 was
pre-tax income of $37,000 compared to a pre-tax loss of $159,000 for the fourth
quarter of 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Net income totaled $1.6 million for the year ended December 31, 2001
compared to $3.5 million for the year ended December 31, 2000. Excluding net
realized investment losses, operating earnings for the year 2001 were $1.8
million compared to $3.5 million for the year 2000. Total revenue in 2001
increased 24% over the 2000 level. The higher revenue was offset by an increase
in loss and loss adjustment expenses, in underwriting expenses, and in practice
management expenses.
Our insurance segment experienced a substantial increase in new business
written in the year ended December 31, 2001, which resulted in a rise in net
premiums earned. The profitability of a medical professional liability insurance
policy is designed to emerge over a period of years rather than in the year the
policy is written; profits are designed to accrue through investment income on
the invested premiums and through successful resolution of claims. Therefore,
the large increase in new business written in the current period causes a strain
on current period earnings. In addition, earnings were impacted by reduced net
investment income because of lower market yields and by increased incurred
losses reflecting increased frequency and severity trends.
Our practice management segment produced a significant increase in revenue
primarily as a result of its focused efforts on new business development. Higher
revenue was offset by expenses related to the ongoing servicing of new business,
the allocation of additional resources to new business development and
additional expenses associated with the execution of the contingent purchase
payouts. Similar to the insurance segment, in the start-up of new client
relationships, we incur costs not covered by initial client revenue; the design
of the revenue stream is to recover the initial costs through the on-going
client relationship.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Results for the fourth quarter of 2001 were a net loss of $312,000 compared
to net income of $924,000 in the fourth quarter of 2000. The 2001 fourth quarter
result includes net realized investment losses, net of tax, of $312,000. The
insurance segment experienced a significant increase in new business written,
with the associated impact on net earnings as described above, producing pre-tax
earnings of $228,000 before realized investment losses, compared to 2000 fourth
quarter pre-tax earnings of $1.6 million. Practice management segment revenues
increased 25% in the fourth quarter of 2001 over 2000; the segment produced
quarterly pre-tax results of a loss of $159,000 compared to pre-tax earnings of
$41,000 in the fourth quarter of 2000.
33
NET PREMIUMS EARNED
The following table is a summary of our net premiums earned:
Year ended December 31,
------------------------------------------
2002 2001 2000
----------- ------------ -----------
(in thousands)
Gross premiums written ........................... $ 51,799 $ 34,459 $ 22,727
Change in unearned premiums ...................... (7,686) (6,267) (2,762)
----------- ----------- -----------
Gross premiums earned before renewal credits ..... 44,113 28,192 19,965
Reinsurance premiums ceded related to:
Current year .................................. (14,429) (8,992) (5,982)
Prior years ................................... 406 1,696 1,872
----------- ----------- -----------
Total reinsurance premiums ceded ............ (14,023) (7,296) (4,110)
----------- ----------- -----------
Net premiums earned before renewal credits ....... 30,090 20,896 15,855
Renewal credits .................................. 8 (293) (1,244)
----------- ----------- -----------
Net premiums earned .............................. $ 30,098 $ 20,603 $ 14,611
=========== =========== ===========
Year ended December 31, 2002 compared to year ended December 31, 2001
Gross premiums written increased by $17.3 million, or 50%, to $51.8 million
for the year ended December 31, 2002 from $34.5 million for the year ended
December 31, 2001 due to net new business written combined with the premium rate
increases, which averaged 14%. The gross premiums written include premiums for
retrospectively rated programs of $2.2 million for the year ended December 31,
2002 and $1.4 million for the year ended December 31, 2001. Written premium in
2002 included $0.4 million for the billing of previously accrued premium for one
of the retrospectively rated risk sharing programs discussed in the "Premium
Collection Litigation" section below. Gross premiums written on excess layer
coverage increased $2.1 million to $6.6 million for the year ended December 31,
2002 from $4.5 million for the year ended December 31, 2001.
The change in unearned premiums for the period increased by $1.4 million to
$7.7 million for the year ended December 31, 2002 from $6.3 million for the year
ended December 31, 2001. This increase resulted from net new business written
throughout the year combined with premium rate increases.
Gross premiums earned before renewal credits increased $15.9 million, or
56%, to $44.1 million for the year ended December 31, 2002 from $28.2 million
for the year ended December 31, 2001. The increase was primarily due to $13.2
million of additional premiums earned under basic medical professional liability
insurance and $2.0 million of additional gross premiums earned for excess limits
coverage.
Reinsurance premiums ceded increased by $6.7 million to $14.0 million for
the year ended December 31, 2002 from $7.3 million for the year ended December
31, 2001. The increase was primarily the result of the increase in gross
premiums earned. Reinsurance premiums are affected by current year premiums
payable to the reinsurers, as well as the retrospective adjustments to accruals
for prior year premiums.
Current year reinsurance premiums ceded increased by $5.4 million, or 60%,
to $14.4 million for the year ended December 31, 2002 from $9.0 million for the
year ended December 31, 2001. This increase was due to the increased gross
premium reinsured, including an increase of $2.0 for excess limit coverage which
was 100% ceded to unaffiliated reinsurers. The reinsurance premium rates in 2002
were unchanged from the 2001 level.
34
Reinsurance premiums related to prior years under the swing-rated treaty
were reduced by $0.4 million in 2002 and $1.7 million in 2001 due to favorable
loss development of reinsured losses compared to our prior estimates. Generally,
losses covered by the swing-rated treaty are in the range excess of $500,000 to
$1 million. Loss development results from the re-estimation and settlement of
individual losses. The 2002 change is primarily reflective of the favorable loss
development in the 1995, 1997 and 1998 coverage years. The 2001 change is
primarily reflective of the favorable loss development in the 1992 and 1996
coverage years. As claims are brought to conclusion, each year there are fewer
outstanding claims in the years covered by this reinsurance treaty. The
potential for loss development impacting this reinsurance coverage is reduced
each year as the inventory of open claims is reduced. While loss development on
an aggregate basis has been favorable, there is no guarantee that development
for the remainder of the unresolved claims will follow the same pattern. The
liability "retrospective premiums accrued under reinsurance treaties" decreased
to $0.6 million at December 31, 2002 from $2.4 million at December 31, 2001.
Renewal credits for the year ended December 31, 2002, reflect our decision
to not provide a renewal premium credit for 2003 renewals.
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 the year ended December
31, 2001. The increase reflects the $15.9 million growth in gross earned
premiums and the lower renewal credits partially offset by the $6.7 million
higher reinsurance premiums in 2002 compared to 2001.
In 2002 we initiated a program to provide insurance coverage to physicians
at four HCA hospitals in West Virginia. Under this arrangement, we cede 100% of
the insurance exposure to a captive insurance company affiliated with the
sponsoring hospitals. We receive a ceding commission for providing complete
policy underwriting, claims and administrative services for these policies.
While accounting standards require the premium written to be included as a part
of our direct written premium, we have no net written nor net earned premium
from this program.
American Captive Corporation (ACC), our subsidiary, developed its first
protected-cell captive, the Princeton Community Hospital Cell (West Virginia),
in 2002. In anticipation of the initiation of the Princeton Cell within ACC,
some insurance was underwritten by us during the first nine months of 2002 for
policies that will be 100% reinsured by the Princeton Cell when it becomes
active. The premium amounts for these policies are separately identified in the
following table to aid comparisons.
The mix of business produced directly by us versus by agents has changed
between years as shown on the following chart of new gross written premium:
Year Ended December 31,
-------------------------
2002 2001
---------- ----------
(in thousands)
Direct ............... $ 2,309 $ 1,206
Agent ................ 9,988 10,964
HCA .................. 793 --
Princeton Cell ....... 403 --
---------- ---------
$ 13,493 $ 12,170
========== =========
The distribution of premium written shows notable growth in our market
areas outside of the District of Columbia. We continue to maintain strict
underwriting standards as we expand our business.
35
The following chart illustrates the components of gross premium written by
state as follows:
Year Ended December 31,
------------------------------------------------
2002 2001
--------------------- ---------------------
(dollars in thousands)
Amount % Amount %
----------- ------- ---------- -------
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 ................... 6,292 13 2,886 8
West Virginia, HCA .............. 993 1 -- --
West Virginia, Princeton Cell ... 403 1 -- --
Delaware ........................ 1,789 3 998 3
----------- ------- ---------- -------
Total ...................... $ 51,799 100% $ 34,459 100%
=========== ======= ========== =======
Premium collection litigation. During 2000, it was determined that one of
our hospital-sponsored retrospective programs would not be renewed. This is the
only retrospective program in which the full policy premium was not billed at
the beginning of the policy period. Rather, and in accordance with the terms of
the contract, in 2000 we 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 year 2002 increased by a net amount of $372,000 over the
same period in 2001 while net earned premium was unaffected by the billing.
Because the original 2000 bill was not paid when due, we initiated legal
proceedings to collect. We have 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 we continue to pursue the claim, based on information received
during the third quarter of 2002 and consultation with legal counsel, it appears
that the hospital assets may not be sufficient to cover its liabilities,
including our claim. Accordingly, we increased our 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 to us is significant, we will continue to pursue collection of the amount
due. Legal fees incurred through the year ended December 31, 2002 for this
action were approximately $180,000 higher than in 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Gross premiums written increased by $11.8 million, or 52%, to $34.5 million
for the year ended December 31, 2001 from $22.7 million for the year ended
December 31, 2000 due to net new business written combined with the premium rate
increases, which averaged 7.5%. The gross premiums written include premiums for
retrospectively rated programs of $1.4 million for the year ended December 31,
2001 and $2.5 million for the year ended December 31, 2000. Written premium in
2000 included $1.3 million for the billing of previously accrued premium for one
of the retrospectively rated risk sharing programs further discussed below.
Gross premiums written on excess layer coverage increased $1.8 million to $4.5
million for the year ended December 31, 2001 from $2.7 million for the year
ended December 31, 2000.
During 2000, it was determined that one of our retrospective programs would
not be renewed at the September 1, 2000 renewal date. Under this type of risk
sharing program, physicians are underwritten directly by us and pay lower
individual premiums than if not part of the risk-sharing program. At the end of
the policy year covered by the premium, a review of the actual loss experience
of the physician group
36
is completed. Should the group's loss experience be unfavorable, we will require
additional premium payments from the sponsoring hospital to offset the
unfavorable losses.
Under terms of the contract based on the actual accumulated loss experience
of the terminated program, we billed the hospital sponsor $1.3 million in 2000
and an additional $800,000 in January 2002. Based on the continuing development
of loss experience, during the year ended December 31, 2001, $500,000 of gross
premium earned has been accrued related to additional amounts due to us from the
hospital sponsor.
Because the September 2000 bill was not paid when due, we initiated legal
proceedings to collect. We will use all means legally available to collect the
amount due. Although we believe that we will prevail, since the premium amount
is disputed, an allowance for uncollectibility has been established and is
included in underwriting expenses. Pursuit of this litigation requires an
expense for legal fees, which is reported as an underwriting expense, and
reduces our net earnings.
The change in unearned premiums for the period increased by $3.5 million to
$6.3 million for the year ended December 31, 2001 from $2.8 million for the year
ended December 31, 2000. This increase resulted from net new business written
throughout the year.
Gross premiums earned before renewal credits increased $8.2 million, or
41%, to $28.2 million for the year ended December 31, 2001 from $20.0 million
for the year ended December 31, 2000. The increase was primarily due to $6.8
million of additional premiums earned under basic medical professional liability
insurance and $1.6 million of additional gross premiums earned for excess limits
coverage.
Reinsurance premiums ceded increased by $3.2 million to $7.3 million for
the year ended December 31, 2001 from $4.1 million for the year ended December
31, 2000. The increase was primarily the result of the increase in gross
premiums earned. Reinsurance premiums are affected by current year premiums
payable to the reinsurers, as well as the retrospective adjustments to accruals
for prior year premiums.
Current year reinsurance premiums ceded increased by $3.0 million, or 50%,
to $9.0 million for the year ended December 31, 2001 from $6.0 million for the
year ended December 31, 2000. This increase is due to the increased gross
premium reinsured. The reinsurance premium rates in 2001 were unchanged from the
2000 level.
Reinsurance premiums related to prior years under the swing-rated treaty
were reduced by $1.7 million in 2001 and $1.9 million in 2000 due to favorable
loss development of reinsured losses compared to prior estimates by us.
Generally, losses covered by the swing-rated treaty are in the range excess of
$500,000 to $1 million. The 2001 change is primarily reflective of the favorable
loss development in the 1992 and 1996 coverage years. The 2000 change is
primarily reflective of the favorable loss development in the 1993 through 1996
years. The liability "retrospective premiums accrued under reinsurance treaties"
decreased to $2.4 million at December 31, 2001 from $5.5 million at December 31,
2000.
Renewal credits decreased to $293,000 for the year ended December 31, 2001
from $1.2 million for the year ended December 31, 2000, reflecting our decision
to not provide a renewal premium credit for 2002 renewals. In general, renewal
credits apply to policies written in the District of Columbia. A growing
proportion of our business is written in other jurisdictions where renewal
credits are not issued.
Net premiums earned before renewal credits increased $5.0 million, or 31%,
to $20.9 million for the year ended December 31, 2001 from $15.9 million for the
year ended December 31, 2000. Net premiums earned after renewal credits
increased by $6.0 million, or 41%, to $20.6 million for the year
37
ended December 31, 2001 from $14.6 million for the year ended December 31, 2000.
The increase reflects the $8.2 million growth in gross earned premiums and the
lower renewal credits, partially offset by the $3.2 million higher reinsurance
premiums in 2001 compared to 2000.
The mix of business produced directly by us versus by agents has changed
between years as shown on the following chart of new gross written premium. The
proportion of business produced by our independent agency force has increased to
90% of total new business written in 2001 from 59% during in 2000.
Year ended December 31,
------------------------
2001 2000
------- --------
(in millions)
Direct ......... $ 1.2 $ 1.8
Agent .......... 11.0 2.6
While insurance in force continues to follow the historic pattern of
insuring risks concentrated in the District of Columbia, there has been notable
growth in premium written in our other market areas. Of the increase in written
premium in 2001 over 2000, 26% comes from business written in Maryland, 39% from
Virginia, 24% from West Virginia, and 8% from Delaware.
In 2001, premium written to clients of the Practice Management Services
Segment totaled $854,000 compared to $540,000 in 2000.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Gross premiums written increased to $5.6 million for the quarter ended
December 31, 2001 from $943,000 for the quarter ended December 31, 2000. In
addition to the premium rate increase effective for 2001 renewal dates, new
business written in the fourth quarter of 2001 significantly exceeded the prior
fourth quarter, as shown in the following chart:
Three months ended December 31,
-------------------------------
2001 2000
-------- --------
(in millions)
Direct ......... $ 0.2 $ 0.5
Agent .......... 3.9 0.3
Gross premiums earned increased $3.3 million to $8.1 million for the three
months ended December 31, 2001 compared to $4.8 million for the 2000 fourth
quarter. Reinsurance premiums ceded increased by $1.3 million to $2.2 million
for the fourth quarter of 2001. Current year reinsurance ceded premiums
increased by $1.0 million to $2.5 million for the fourth quarter of 2001
compared to the fourth quarter of 2000 corresponding to the increase in gross
premiums earned. Reinsurance premiums related to prior years under the
swing-rated treaty decreased by $279,000 to $301,000 for the fourth quarter of
2001 compared to $580,000 for the fourth quarter of 2000. Favorable development
of losses under the swing-rated treaty results in the reduction of premiums due
related to prior report years. The 2001 fourth quarter development was less
favorable than the 2000 fourth quarter development.
Net premiums earned for the three months ended December 31, 2001 increased
$2.3 million to $5.9 million from $3.6 million for the three months ended
December 31, 2000, reflecting the increase in
38
gross earned premiums partially offset by the lower favorable development of
prior years under the swing-rated reinsurance treaty.
NET INVESTMENT INCOME
Year ended December 31, 2002 compared to year ended December 31, 2001
Net investment income decreased by $221,000, or 4%, for the year ended
December 31, 2002 compared to the prior year reflecting a decrease in yields
partially offset by a higher base of average invested assets. Net investment
income for the year ended December 31, 2002 was $5.9 million compared to $6.1
million for the year ended December 31, 2001. Average invested assets, which
include cash equivalents, increased by $5.7 million, or 4%, to $111.4 million
for the year ended December 31, 2002. New investments were primarily directed to
corporate bonds, and tax-exempt securities with the strategy of maximizing
after-tax returns with investment grade securities. The average effective yield
was approximately 5.33% for the year ended December 31, 2002 and 5.80% for the
year ended December 31, 2001. The tax equivalent yield was approximately 5.94%
at December 31, 2002 and 6.30% at December 31, 2001. The change in investment
yields is reflective of the market change in interest rates in 2002 compared to
2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Net investment income decreased by $271,000, or 4%, for the year ended
December 31, 2001 compared to the prior year reflecting a decrease in yields
partially offset by a higher base of average invested assets. Net investment
income for the year ended December 31, 2001 was $6.1 million compared to $6.4
million for the year ended December 31, 2000. Average invested assets, which
include cash equivalents, increased by $4.1 million, or 4%, to $105.7 million at
December 31, 2001. New investments were primarily directed to corporate bonds
and tax-exempt securities with the strategy of maximizing after-tax returns with
investment grade securities. The average effective yield was approximately 5.80%
for the year ended December 31, 2001 and 6.31% for the year ended December 31,
2000. The tax equivalent yield was approximately 6.30% at December 31, 2001 and
6.72% at December 31, 2000. The change in investment yields is reflective of the
market change in interest rates in 2001 compared to 2000.
NET REALIZED INVESTMENT LOSSES
Year ended December 31, 2002 compared to year ended December 31, 2001
Net realized investment losses were $131,000 for the year ended
December 31, 2002 compared to $278,000 for the year ended December 31, 2001.
During the fourth quarter of 2002, we repositioned our portfolio to replace weak
credits with stronger rated bonds, realizing a net gain of $473,000. This
partially offset the losses realized in prior quarters of 2002. In 2002, we
determined that one fixed maturity security, issued by WorldCom, had experienced
an other-than-temporary impairment, and recorded a pre-tax investment loss of
$557,000, reducing the carrying value to fair value during the second quarter
when the determination was made. Additionally, in 2001, we determined that an
equity security consisting of common stock experienced an other-than-temporary
impairment. Accordingly, we recorded a pre-tax impairment loss of $300,000 in
2001 relating to that investment.
For securities sold during 2002 at a loss, the following is a summary of
facts and circumstances related to the securities: Five securities, all
corporate fixed maturities, were sold for consideration totaling $2.5 million
resulting in realized pre-tax losses totaling $1.0 million. In 2002, prior to
the sale, these securities experienced a decline in fair value of $1.1 million
from December 31, 2001. Three additional securities, all corporate fixed
maturities, were sold for consideration totaling $1 million, resulting in
pre-tax realized losses of approximately $430,000. The fair value of these
securities had not changed significantly in 2002 compared to December 31, 2001.
All of these securities were sold upon the recommendation of the outside
investment manager, based upon the desire to maintain the overall credit quality
of the portfolio or in response to the underlying business fundamentals relating
to the securities. Finally, upon exercise of an issuer call option, one
preferred stock produced consideration of $1.1 million and a pre-tax realized
loss of $113,000.
Year ended December 31, 2001 compared to year ended December 31, 2000
Net realized investment losses were $278,000 for the year ended December
31, 2001 compared to $5,000 for the year ended December 31, 2000. Through
September 30, 2001, the net realized investment
39
gains were comprised of gains on sales of equity securities and corporate and
agency bonds. The net realized losses in the fourth quarter of 2001 were
comprised of:
Osprey bond $ (738,000)
E-Health Solutions Group (300,000)
Treasury securities 536,000
Miscellaneous gains 30,000
-------------
Total $ (472,000)
=============
The loss realized on the Osprey bond (an Enron partnership) represents our
entire exposure to Enron securities. In addition, we realized a loss from a
start-up equity investment in E-Health Solutions Group, a medical information
technology company that is developing software products to be used by healthcare
companies. While the investment in E-Health Solutions Group may produce value in
future periods, an evaluation conducted during the fourth quarter concluded that
under GAAP, we needed to write off the carrying value of the investment.
The realized investment losses in 2000 were from the sale of U.S.
government and agencies securities partially offset by realized gains from the
sale of asset and mortgage-backed securities.
PRACTICE MANAGEMENT AND RELATED INCOME
Revenue for practice management and related services is comprised of fees
for the following categories of services provided in 2002: practice management
(38%); accounting (31%); tax and personal financial planning (12%); retirement
plan accounting and administration (13%); and all other services (6%).
Year ended December 31, 2002 compared to year ended December 31, 2001
Practice management and related revenues decreased by $356,000, or 6%, to
$5.8 million for the year ended December 31, 2002, from $6.2 million for the
year ended December 31, 2001. This revenue consists of fees generated by NCRIC
MSO through its HealthCare Consulting and Employee Benefits Services divisions.
The decreased revenue was a result of a reduced level of non-recurring
consulting assignments in the HealthCare Consulting division compared to 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Practice management and related revenues increased by $839,000, or 16%, to
$6.2 million for the year ended December 31, 2001, from $5.3 million for the
year ended December 31, 2000. This revenue consists of fees generated by NCRIC
MSO through HealthCare Consulting and Employee Benefits Services. The increased
revenue is a result of the focused efforts on new business development through
the addition of new clients in both recurring business and one-time consulting
assignments and the 2001 increase in consulting rates.
OTHER INCOME
Other income includes revenues from insurance brokerage, insurance agency
and physician services, as well as service charge income from installment
payments for our insurance premium billings.
40
Year ended December 31, 2002 compared to year ended December 31, 2001
Other income increased $411,000, or 68%, to $1,013,000 for the year ended
December 31, 2002 from $602,000 for the year ended December 31, 2001. The
increased revenue resulted primarily from increased brokerage reinsurance treaty
commission income generated by the increased current year reinsurance ceded
premiums and from services fees generated by premium installment payments. In
late 2001 we began offering an installment payment option to our insureds. As a
result, the revenue generated by service fees on installment payments grew
throughout 2002 compared to 2001.
Year ended December 31, 2001 compared to year ended December 31, 2000
Other income increased $132,000, or 28%, to $602,000 for the year ended
December 31, 2001 from $470,000 for the year ended December 31, 2000. The
increased revenue resulted primarily from increased brokerage reinsurance treaty
commission income generated by the increased current year reinsurance ceded
premiums.
LOSSES AND LOSS ADJUSTMENT EXPENSES INCURRED AND COMBINED RATIO RESULTS
The expense for incurred losses and LAE for each year is summarized as
follows. All loss expense amounts incurred are reported net of reinsurance
amounts recoverable.
Year Ended December 31,
----------------------------------
2002 2001 2000
--------- ---------- ---------
(in thousands)
Incurred losses and LAE related to:
Current year losses .................. $ 24,063 $ 23,056 $ 17,829
Prior years loss development ......... 2,766 (4,198) (5,883)
--------- --------- ---------
Total incurred for the year ......... $ 26,829 $ 18,858 $ 11,946
========= ========= =========
Traditionally, property and casualty insurer results are judged using
ratios of losses and underwriting expenses compared to net premiums earned.
Following is a summary of these ratios for each period.
Year Ended December 31,
----------------------------------
2002 2001 2000
--------- --------- ---------
Losses and LAE ratio:
Current year losses .................. 79.9% 111.9% 122.0%
Prior years loss development ......... 9.2 (20.4) (40.3)
--------- --------- ---------
Total losses and LAE ratio ............ 89.1 91.5 81.7
Underwriting expense ratio ............ 27.2 23.7 24.6
--------- --------- ---------
Combined ratio ........................ 116.3% 115.2% 106.3%
========= ========= =========
The combined ratio and its component loss and underwriting expense ratios
are profitability measures used throughout the insurance industry as a relative
measure of underwriting performance. Insurance premium rates are designed to
cover the costs of providing insurance coverage. These costs include loss
expenses arising from indemnity claims, costs required to adjudicate claims, and
costs to issue and service insurance policies. The calculations show the cost of
each expense component as a percentage of earned premium income. A general guide
for interpreting the combined ratio is a lower ratio indicates greater
profitability than does a higher ratio.
41
The resolution of many of the claims reported to us is determined through a
trial. Following is a summary of the trial results for each period.
Year Ended December 31,
----------------------------
2002 2001 2000
------- ------- ------
Plaintiff verdicts ................ 5 5 5
Defense verdicts .................. 13 13 7
Mistrials or hung juries .......... 4 2 2
---- ---- ----
Total trials ...................... 22 20 14
==== ==== ====
Of the five plaintiff verdicts in 2002, three verdicts were awarded in
excess of our $500,000 retention. Of the five plaintiff verdicts in 2001, one
verdict was awarded in excess of our $500,000 retention. No verdicts exceeded
our $500,000 retention in 2000.
Year ended December 31, 2002 compared to year ended December 31, 2001
Total incurred losses and LAE expense of $26.8 million for year ended
December 31, 2002 represented an increase of $8.0 million, or 42%, compared to
$18.9 million incurred for the year ended December 31, 2001.
The total incurred losses are broken into two components - incurred losses
related to the current coverage year and development on prior coverage year
losses. Current year incurred losses increased by $1.0 million, or 4%, to $24.1
million for the year ended December 31, 2002 from $23.1 million for the year
ended December 31, 2001, reflecting the rise in the level of liability exposure
as a result of expanding business, combined with a moderation of claims
frequency.
Prior year development results from the re-estimation and resolution of
individual losses not covered by reinsurance, which are generally losses under
$500,000. In 2002 we experienced unfavorable development of $2.8 million on
estimated losses for prior years' claims. The re-estimation of loss cost takes
into consideration a variety of factors including recent claims settlement
experience, new information on open claims, and changes in the judicial
environment. The primary factors driving our 2002 development, which is
comprised of favorable development in the 1999 report year offset by adverse
development in the 1998, 2000 and 2001 report years, include additional
information on claims originally reported in prior years and interpretation of
emerging settlement trends in our expansion market areas.
An increase in severity was first noted in 1996 and continued through 2002
for claims reported in the District of Columbia. The increase in severity
reflects the growing size of plaintiff verdicts and settlements. Our escalation
in this adverse claims trend is similar to the conditions faced by many medical
professional liability insurance carriers across the nation. While an increase
in severity would tend to cause loss ratios to deteriorate, our reinsurance
program for losses in excess of $500,000 provides a layer of protection against
the increase in severity of losses.
In the market territories outside of the District of Columbia, or our
expansion market areas, our experience covers a time-period insufficient to make
a determination on severity trends. In these new market areas, we carefully
evaluate developing data to identify and recognize emerging trends as soon as
possible.
The total losses and LAE ratio was increased by 9 points for the year ended
December 31, 2002 and was decreased by 20 points for the year ended December 31,
2001 as a result of prior years loss development. The 2002 change is primarily
reflective of favorable loss development for the 1996 and
42
1999 loss years, more than offset by adverse development in the 1998, 2000 and
2001 loss years; whereas, the 2001 change is primarily reflective of the
favorable loss development for the 1992, 1996, 1997 and 1998 loss years,
partially offset by adverse development in the 1995 loss year.
The underwriting expense ratio increased to 27.2% for the year ended
December 31, 2002 from 23.7% for the year ended December 31, 2001. This increase
is reflective of the reserve against the hospital-sponsored program receivable
of $1.2 million, as previously discussed. Underwriting expenses increased $3.3
million to $8.2 million for the year ended December 31, 2002 from $4.9 million
for the year ended December 31, 2001. Of the 67% increase in underwriting
expenses, 25% was attributed to the receivable allowance; this translates into
an addition of 4.1% to the underwriting expense ratio. See "Underwriting
Expenses."
The combined ratio increased to 116.3% for the year ended December 31, 2002
from 115.2% for the year ended December 31, 2001. The primary factor driving the
increased combined ratio was the increase in underwriting expenses offset by a
lower incurred loss ratio.
The statutory combined ratio was 111.8% for the year ended December 31,
2002, and the same for the year ended December 31, 2001. This includes a slight
decrease in the loss ratio offset by a slight increase in the expense ratio,
reflecting the same premium, loss and expense factors noted previously.
Year ended December 31, 2001 compared to year ended December 31, 2000
Total incurred loss and LAE expense of $18.9 million for year ended
December 31, 2001 represented an increase of $7.0 million, or 59%, compared to
$11.9 million incurred for the year ended December 31, 2000.
The total incurred losses are broken into two components; incurred losses
related to the current coverage year and development on prior coverage year
losses. Current year incurred losses increased by $5.3 million, or 30%, to $23.1
million for the year ended December 31, 2001 from $17.8 million for the year
ended December 31, 2000 reflecting the rise in the level of liability exposure
as a result of expanding business, an increase in the frequency of reported
claims, and a rise in the cost of adjudicating and settling claims. An increase
in severity was first noted in 1996 and continued through 2001. The increase in
severity reflects the growing size of plaintiff verdicts and settlements. Our
escalation in this adverse claims trend is similar to the conditions faced by
many medical professional liability insurance carriers across the nation. While
an increase in severity would tend to cause loss ratios to deteriorate, our
reinsurance program for losses in excess of $500,000 provides protection against
the increase in severity of losses.
We experienced favorable development on estimated losses for prior year's
claims for both years. Prior year development results from the re-estimation and
settlement of individual losses not covered by reinsurance, which are generally
losses under $500,000. The favorable loss development related to prior years'
claims was $4.2 million for the year ended December 31, 2001, and $5.9 million
for the year ended December 31, 2000. The total loss and LAE ratio was reduced
by 20 points for the year ended December 31, 2001 and 40 points for the year
ended December 31, 2000, as a result of this favorable development. The 2001
change is primarily reflective of the favorable loss development for the 1992,
1996, 1997 and 1998 loss years, partially offset by adverse development in the
1995 loss year; whereas, the 2000 change is primarily reflective of the
favorable loss development for the 1994, 1996, 1998 and 1999 loss years,
partially offset by adverse development in the 1995 loss year. The reduced level
of favorable development in 2001 compared to 2000 reflects claims closed as well
as the continuing upward pressure of severity of losses noted above.
43
The underwriting expense ratio decreased to 23.7% for the year ended
December 31, 2001 from 24.6% for the year ended December 31, 2000. This decrease
is reflective of the 31% increase in net earned premiums partially offset by the
36% increase in underwriting expenses. Underwriting expenses increased $1.3
million to $4.9 million for the year ended December 31, 2001 from $3.6 million
for the year ended December 31, 2000. Of the 36% increase in underwriting
expenses, 19% was attributed to a guaranty fund assessment of $243,000; this
translates into an addition of 1.2% to the underwriting expense ratio. See
"Underwriting Expenses."
The combined ratio increased to 115.2% for the year ended December 31, 2001
from 106.3% for the year ended December 31, 2000. The primary factor driving the
increased combined ratio was the increase in incurred losses stemming from the
lower favorable prior year loss development.
The statutory combined ratio was 111.8% for the year ended December 31,
2001 compared to 95.0% for the year ended December 31, 2000. This increase
reflects the same premium and loss level factors noted previously.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
The fourth quarter expense for incurred losses and LAE net of reinsurance
is summarized as follows:
Year Ended December 31,
-----------------------
2001 2000
------- --------
(in thousands)
Incurred losses and LAE related to:
Current year-losses ............................... $ 6,358 $ 4,541
Prior years-development ........................... (405) (1,520)
------- -------
Total incurred for the quarter ..................... $ 5,953 $ 3,021
======= =======
Total incurred loss and LAE expense of $6.0 million for the fourth quarter
of 2001 increased by $3.0 million over the fourth quarter of 2000. The increase
in current year losses to $6.4 million for the fourth quarter of 2001 reflects
the increase in the level of liability exposure as a result of our expanding
business and a rise in the cost of settling claims. The lower level of favorable
development of losses reported in prior years reflects the experience on the
claims closed during the quarter as well as the continuing upward pressure of
severity of losses as reported previously.
LOSSES AND LOSS ADJUSTMENT EXPENSES LIABILITY
The loss and LAE reserve liabilities for unpaid claims as of each period
are as follows:
At December 31,
------------------------
2002 2001
-------- --------
(in thousands)
Liability for:
Loss .............................................. $ 70,314 $ 56,802
Loss adjustment expense ........................... 33,708 27,758
-------- --------
Total liability .................................... $104,022 $ 84,560
======== ========
Reinsurance recoverable on losses .................. $ 43,231 $ 30,077
======== ========
Number of cases pending ............................ 517 430
44
Each case represents claims against one or more policyholders relating to a
single incident. Losses in the medical professional liability industry can take
up to eight to ten years, or occasionally more, to fully resolve. Amounts are
not due from the reinsurers until we pay a claim. We believe that all of our
reinsurance recoverables are collectible. "See Business - Reinsurance" for a
discussion on the reinsurance program.
UNDERWRITING EXPENSES
For 2002, salaries and benefits accounted for approximately 24% of other
underwriting expenses, bad debt expense 16%, with professional fees, including
legal, auditing and director's fees, accounting for approximately another 14% of
the underwriting expenditures. The amortization of premium taxes and commissions
related to the change in unearned premiums reflects the balance. Guaranty fund
assessments are based on industry loss experience in the jurisdictions where we
do business, which loss experience is not entirely predictable.
Year ended December 31, 2002 compared to year ended December 31, 2001
Underwriting expenses increased $3.3 million, or 67%, to $8.2 million for
the year ended December 31, 2002 from $4.9 million for the year ended December
31, 2001. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in
commissions, travel, and other underwriting costs. These expenses were partially
offset by an increase in ceding allowances as a result of the increase in
premiums earned. Underwriting expenses also increased due to legal fees incurred
for the collection litigation initiated by us and for the $1.2 million addition
to the allowance for uncollectible premiums, as more fully discussed in the
section "Net Premiums Earned." In addition, we received guaranty fund
assessments totaling $355,000 stemming from the insolvency of PHICO Insurance
Company. There is the possibility we could be assessed additional amounts in the
future. However, since the amount of any potential future assessment is not
reasonably estimable at this time, no additional expense accrual has been
recorded.
Year ended December 31, 2001 compared to year ended December 31, 2000
Underwriting expenses increased $1.3 million, or 36%, to $4.9 million for
the year ended December 31, 2001 from $3.6 million for the year ended December
31, 2000. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in
commissions, travel, and other underwriting costs. These expenses were partially
offset by an increase in ceding allowances as a result of the increase in
premiums earned. Underwriting expenses also increased due to legal fees incurred
for the collection litigation initiated by us, as discussed in "Net Premiums
Earned", and for the allowance for potential uncollectible premiums. In
addition, we received a guaranty fund assessment from the D.C. Guaranty Fund of
$243,000 stemming from the insolvency of Reliance Insurance Company. There is
the possibility we could be assessed additional amounts in the future. However,
since the amount of any potential future assessment is not reasonably estimable
at this time, no additional expense accrual has been recorded. No similar
assessment was received in 2000.
PRACTICE MANAGEMENT AND RELATED EXPENSES
Practice management and related expenses consist primarily of expenses,
such as salaries, general office expenses and interest on debt, related to NCRIC
MSO operations of the businesses acquired January 4, 1999. The management
services organization was established in 1997 to provide physicians with a
variety of administrative support and other services but did not have
substantive operations until 1998.
45
Year ended December 31, 2002 compared to year ended December 31, 2001
Practice management and related expenses decreased $252,000 million, or 4%,
to $5.8 million for the year ended December 31, 2002 compared to $6.1 million
for the year ended December 31, 2001. Expense decreased due to the cessation of
goodwill amortization with the implementation of SFAS 142 effective January 1,
2002 partially offset by additional expenses associated with the transition of
client service for two of the former owners as they moved towards the expiration
of their employment contracts at the end of 2002 and other transitional costs
associated with the continued integration of the purchased companies.
Year ended December 31, 2001 compared to year ended December 31, 2000
Practice management and related expenses increased $1.1 million, or 22%, to
$6.1 million for the year ended December 31, 2001 compared to $5.0 million for
the year ended December 31, 2000. Expenses increased as a result of the growth
in new business and business development efforts during 2001. In addition,
goodwill amortization increased by $131,000, interest expense increased $75,000,
and compensation expense increased by $70,000 as a result of the contingent
purchase payments made in 2001 to the prior owners of HealthCare Consulting,
Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc.
Three months ended December 31, 2001 compared to three months ended December 31,
2000
Practice management and related expenses of $1.7 million in the fourth
quarter of 2001 increased over the $1.2 million incurred in the fourth quarter
of 2000 due to the same factors influencing the growth of expenses throughout
the year 2001, that is, expenses associated with the growth of new business and
with the contingent purchase payments made in 2001. Additional fourth quarter
expense included increases for bad debts and employee compensation.
OTHER EXPENSES
Other expenses include expenditures for holding company and subsidiary
operations which are not directly related to the issuance of medical
professional liability insurance or practice management and related operations,
including insurance brokerage, insurance agency, and captive development.
In April 2001, we announced the formation of ACC, a wholly owned subsidiary
and the first captive insurance company to be licensed in the District of
Columbia under the Captive Insurance Act of 2000. As a captive insurance
company, ACC was established to provide an alternative risk-financing vehicle
for affinity groups. The captive program is marketed to organizations and groups
wishing to finance and manage their own risk. During 2002, ACC incurred $247,000
in expenses. While one sponsored-cell contract has been signed, the captive cell
has not yet begun operations due to delays in regulatory approval in West
Virginia.
Year ended December 31, 2002 compared to year ended December 31, 2001
Other expenses of $1.5 million for the year ended December 31, 2002
increased $222,000, or 18% compared to the year ended December 31, 2001. Expense
increases are for captive business development costs and holding company
operations.
46
Year ended December 31, 2001 compared to year ended December 31, 2000
Other expenses of $1.2 million for the year ended December 31, 2001 are
unchanged from the expense level for the year ended December 31, 2000. Other
expenses include amounts incurred to meet the various requirements associated
with having common stock traded in the public market; the expense of the stock
grants made in September, 2000 under the Stock Award Plan; and, in 2001,
$184,000 of start-up expenses for the new captive insurance company subsidiary.
INCOME TAXES
Our effective tax rate is lower than the federal statutory rate principally
due to nontaxable investment income.
Year Ended December 31,
----------------------------
2002 2001 2000
------ ------ ------
Federal income tax at statutory rates .......... 34% 34% 34%
Tax exempt income .............................. (89) (12) (4)
Dividends received ............................. (21) (4) (1)
Goodwill amortization .......................... 0 5 1
Other, net ..................................... 1 4 1
--- --- ---
Income tax at effective rates .................. (77)% 27% 31%
=== === ===
Our net deferred tax assets are created by temporary differences that will
result in tax benefits in future years due to the differing treatment of items
for tax and financial statement purposes. The primary difference is the
requirement to discount or reduce loss reserves for tax purposes because of
their long-term nature.
At December 31,
---------------------------------
2002 2001
------------ -------------
Deferred income tax asset .... $ 3,789,000 $ 2,482,000
Year ended December 31, 2002 compared to year ended December 31, 2001
The tax benefit for the year ended December 31, 2002 was $322,000 compared
to tax expense of $597,000 for the year ended December 31, 2001. The Federal
corporate income tax rate of 34% was adjusted to an effective tax rate of (77%)
for the year ended December 31, 2002 due to tax-exempt income and nontaxable
dividends.
The increase in the deferred income tax asset to a balance of $3.8 million
as of December 31, 2002 resulted primarily from the growth of the insurance
business, particularly in unearned premiums and loss reserves where the timing
of recognition for financial statement and tax return reporting differ, in
addition to completion of the amortization of the deferred tax liability that
had arisen from a change in tax accounting method four years ago. The increase
in the deferred income tax asset was partially reduced by the deferred tax
liability on unrealized investment gains.
Year ended December 31, 2001 compared to year ended December 31, 2000
Tax expense for the year ended December 31, 2001 was $597,000 compared to
$1.6 million for the year ended December 31, 2000. The Federal corporate income
tax rate of 34% was reduced to an effective tax rate of 27% for the year ended
December 31, 2001 due to tax-exempt income and nontaxable
47
dividends received, partially offset by non-deductible goodwill amortization and
other, principally state income taxes. The effective rate of 31% for the year
ended December 31, 2000 was higher than the 2001 effective rate primarily due to
a lower level of tax-exempt income in 2000. The decrease in the provision for
income tax is reflective of the decreased income before tax combined with the
decrease in the effective tax rate.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
NCRIC Group, parent company
Financial condition and capital resources. We are a stock holding company
whose operations and assets primarily consist of its ownership of NCRIC, Inc.
and NCRIC MSO, Inc. We assist our subsidiaries in their efforts to compete
effectively and create long-term growth. As a part of this strategy, we may seek
to take advantage of acquisition opportunities and alternative financing.
In December 2002, we completed the private placement sale of $15 million of
30-year floating rate trust preferred securities. The securities are callable at
par five years from the date of issuance. The interest rate on the securities is
floating at the 3-month London Interbank Offered Rate (LIBOR) plus 400 basis
points. The initial rate is 5.42%. We contributed $13.5 million of the funds
raised to the statutory surplus of its insurance subsidiaries.
Liquidity. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. Our cash flow from
operations consists of dividends from our subsidiaries, if declared and paid,
and other permissible payments from our subsidiaries, offset by holding company
expenses, which consist of costs for corporate management and interest on the
trust preferred securities. The amount of the future cash flow available to us
may be influenced by a variety of factors, including NCRIC, Inc.'s financial
results and regulation by the District of Columbia Department of Insurance and
Securities Regulation.
The payment of dividends to us by NCRIC, Inc. is subject to limitations
imposed by the District of Columbia Holding Company System Act of 1993. Under
the DC Holding Company Act, NCRIC, Inc. must seek prior approval from the
Commissioner to pay any dividend which, combined with other dividends made
within the preceding 12 months, exceeds the lesser of (A) 10% of the surplus at
the end of the prior year or (B) the prior year's net income excluding realized
capital gains. Net income, excluding realized capital gains, for the 2 years
preceding the current year is carried forward for purposes of the calculation to
the extent not paid in dividends. The law also requires that an insurer's
statutory surplus following a dividend or other distribution be reasonable in
relation to the insurer's outstanding liabilities and adequate to meet its
financial needs. The District of Columbia permits the payment of dividends only
out of unassigned statutory surplus. Using these criteria, as of December 31,
2002, NCRIC, Inc. had approximately $1.2 million of unassigned statutory surplus
available for dividends.
NCRIC Group and Subsidiaries, consolidated
Liquidity. The primary sources of our liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay losses and LAE, operating expenses, reinsurance premiums, taxes,
and to purchase investments.
48
We had cash flows provided by (used in) operations for the years ended
December 31, as follows:
2002........... $ 3.4 million
2001 .......... $ 8.3 million
2000 .......... $ (0.8) million
The $4.9 million of decreased cash flow provided by operations in 2002
compared to 2001 results primarily from an increase in net claims and claims
settlement cost payments and a change in the timing of the receipt of premiums.
Prior to 2002, a majority of insureds financed their annual premium through an
outside financing company, which then remitted the full annual premium to us at
the beginning of the policy year. For policies with 2002 effective dates, we
provide the option to policyholders to pay their premiums in installments
throughout the policy year. This has the impact of spreading the cash receipts
from premiums over the policy year. Because of the long-term nature of both the
payments of claims and the settlement of swing-rated reinsurance premiums due to
reinsurers, cash from operations for a medical professional liability insurer
like us can vary substantially from year to year.
Comprehensive income was a gain of $3.1 million for the year ended December
31, 2002 compared to $2.8 million for the year ended December 31, 2001. The
increase in comprehensive income results from the $1.1 million increase in net
unrealized investment gains, combined with the $0.8 million lower net income.
Financial condition and capital resources. We invest our positive cash flow
from operations primarily in investment grade, fixed maturity securities. As of
December 31, 2002, the carrying value of the securities portfolio was $120.1
million, compared to a carrying value of $103.1 million at December 31, 2001.
The portfolios were invested as follows:
At December 31,
-----------------------
2002 2001
------- -------
U.S. Government and agencies .................. 23% 4%
Asset and mortgage-backed securities .......... 28 29
Tax exempt securities ......................... 27 19
Corporate bonds ............................... 17 42
Equity securities ............................. 5 6
------- -------
100% 100%
======= =======
Over 64% of the bond portfolio at December 31, 2002 was invested in U.S.
Government and agency securities or has a rating of AAA or AA. Over 99% of the
bond portfolio as of December 31, 2002 was held in investment grade (BBB or
better) securities as rated by Standard & Poor's. For regulatory purposes, as of
December 31, 2002, 94% of the portfolio is rated Class 1, which is the highest
quality rated group as classified by the NAIC.
The accumulated other comprehensive income totaled $2.8 million at December
31, 2002 compared to $474,000 at December 31, 2001. This improvement in asset
values resulted primarily from the reduction in market interest rates.
At December 31, 2002, our portfolio included total gross unrealized gains
of $5.2 million, or 4.3% of the $120.1 million carrying value of the portfolio,
and total unrealized losses of $950,000, or less than 1% of the carrying value
of the portfolio. The total unrealized losses are comprised of seventeen
different securities, including eight Treasury Note issues, six corporate debt
fixed maturity securities (five of which are investment grade), with lengths of
time to maturity ranging from nine to twenty-eight years, two preferred stock
issues, and one equity issue. All of the fixed maturity securities are meeting
and are expected to continue to meet all contractual obligations for interest
payments.
At December 31, 2002, the aggregate fair value of the securities with
unrealized losses was $12.6 million, or 93% of the aggregate carrying value of
those securities of $13.6 million. The largest single security with an
unrealized loss at December 31, 2002 relates to a bond issued by Xerox Capital
Trust, which matures in 2027 and carries a coupon rate of 8%. The unrealized
pre-tax loss relating to this security is approximately $247,000 based on the
fair value of $280,000 at December 31, 2002. We will continue to actively
monitor the financial position and outlook for this investment and take any
action determined to be appropriate. Unrealized losses related to other
securities are not individually significant, nor is there any concentration of
unrealized losses with respect to the type of security or industry.
49
The following table displays characteristics of the securities with an
unrealized loss in value as of December 31, 2002. No concentrations of
industries exist in these securities.
Below investment grade
Total securities and equity securities
------------------------------------- ------------------------------------------
Length of time in Amortized Unrealized Amortized Unrealized
unrealized loss position Cost Fair Value Loss Cost Fair Value Loss
- ------------------------ ---------- ---------- ----------- ------------ ---------- -----------
(in thousands)
Less than 1 year ....... $ 4,060 $ 3,957 $ 103 $ 135 $ 90 $ 46
Over 1 year ............ 9,539 8,692 847 3,947 3,464 483
---------- ---------- ----------- ------------ ---------- -----------
Total at December 31,
2002 ................ $ 13,599 $ 12,649 $ 950 $ 4,082 $ 3,554 $ 529
========== ========== =========== ============ ========== ===========
The following table displays the maturity distribution of those fixed
maturity securities with an unrealized loss in value as of December 31, 2002:
Fixed maturity securities
---------------------------------
Amortized Unrealized
Cost Fair Value Loss
--------- ---------- ----------
(in thousands)
During one year or less .................. $ 153 $ 152 $ 1
Due after one year through five years .... 1,347 1,345 2
Due after five years through ten years ... 1,000 967 33
Due after twenty years ................... 7,538 6,911 627
--------- --------- --------
Total ........................... $ 10,038 9,375 $ 663
========= ========= ========
We believe that all of our fixed maturity securities are readily
marketable. Investment duration is closely monitored to provide adequate cash
flow to meet operational and maturing liability needs. Asset and liability
modeling, including sensitivity analyses and cash flow testing, are performed on
a regular basis.
We are required to pay aggregate annual salaries in the amount of $945,000
to four persons under employment agreements.
Under terms of the purchase agreement between the previous owners of
HealthCare Consulting, Inc., HCI Ventures, LLC, Employee Benefits Services, Inc.
and us, contingency payments totaling $3.1 million could be paid in cash if the
acquired companies achieved earnings targets in 2000, 2001, and 2002. During
2000, the earnings target was met and we paid the prior owners $1.55 million on
March 31, 2001. After analyzing the acquired companies' operations since the
acquisition, terms were negotiated and agreed upon for an early payment of the
second contingent payment originally scheduled to be paid in 2002. As a result,
on June 23, 2001, we paid $1.46 million, the present value of the remaining
payments to the prior owners. During June 2001, NCRIC MSO, Inc. borrowed
$1,971,000 from SunTrust Bank to finance these payments. The term of the loan is
3 years at a floating rate of LIBOR plus one and one-half percent. The interest
rate was 2.93% and 4.83% at December 31, 2002 and December 31, 2001,
respectively. Principal and interest payments are due on a monthly basis.
Our stockholders' equity totaled $47.8 million at December 31, 2002 and
$44.5 million at December 31, 2001. The $3.3 million increase for the year ended
December 31, 2002 was due primarily to $742,000 of net income plus $2.3 million
of net unrealized investment gains. The $3.0 million increase for the year ended
December 31, 2001 was primarily due to $1.6 million of net income plus $1.2
million of net unrealized investment gains.
Effects of inflation and interest rate changes
The primary effect of inflation on us is in estimating reserves for unpaid
losses and LAE for medical professional liability claims in which there is a
long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
50
inflation. The actual effect of inflation on our results cannot be conclusively
known until claims are ultimately settled. Based on actual results to date, we
believe that loss and LAE reserve levels and our ratemaking process adequately
incorporate the effects of inflation.
Interest rate changes expose us to market risk on our investment
portfolio. This market risk is the potential for financial losses due to the
decrease in the value or price of an asset resulting from broad movements in
prices, such as interest rates. In general, the market value of our fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, our net investment income increases
or decreases in a direct relationship with interest rate changes on monies
re-invested from maturing securities and investments of positive cash flow from
operating activities.
Federal income tax matters
For tax years prior to the stock offering, we filed a consolidated
United States Federal income tax return with our parent and subsidiaries. For
tax years after the stock offering, we do not file as part of a consolidated
United States Federal income tax return with NCRIC, A Mutual Holding Company or
NCRIC Holdings because NCRIC, A Mutual Holding Company and NCRIC Holdings own
directly and indirectly less than 80% of the outstanding shares of NCRIC Group.
Tax years 1999, 2000 and 2001 are open but not currently under audit. In 2000
the Internal Revenue Service approved a change in accounting method for us
relative to the timing of revenue recognition for tax purposes.
Regulatory matters
NAIC statutory accounting codification. The National Association of
Insurance Commissioners (NAIC) is an association of the insurance regulators of
all 50 states and the District of Columbia. The NAIC has codified the statutory
accounting practices, which are the accounting rules and guidelines prescribed
by the state insurance regulators. The project was intended to re-examine
current statutory accounting practices and to ensure uniform accounting
treatment from a regulatory standpoint. Many of the changes to statutory
accounting are based on generally accepted accounting principles with
modifications that emphasize the concept of conservatism and solvency inherent
in statutory accounting. The accounting mandated by the codification applied
commencing January 1, 2001. Statutory accounting changes resulting from this
codification do not have an effect on the financial statements prepared in
accordance with GAAP, which have been included in this document and filed with
the Securities and Exchange Commission. The effect on our statutory surplus on
January 1, 2001 was an increase of $1.6 million. This increase is mainly due to
the effect of accounting changes related to the implementation of deferred taxes
and the removal of the excess of statutory reserves over statement reserves
penalty, offset by charges to surplus for overdue receivables.
NAIC IRIS ratios. The NAIC Insurance Regulatory Information System
(IRIS) is an early warning system that is primarily intended to be utilized by
state and District of Columbia insurance department regulators to assist in
their review and oversight of the financial condition and results of operations
of insurance companies operating in their respective jurisdictions. IRIS is a
ratio analysis system that is administered by the NAIC. The NAIC provides state
and District of Columbia insurance department regulators with ratio reports for
each insurer within their jurisdiction based on standardized annual financial
statements submitted by the insurers. IRIS identifies 12 ratios to be analyzed
for a property-casualty insurer, and specifies a range of values for each of
these ratios. The ratios address various aspects of each insurer's financial
condition and stability including profitability, liquidity, reserve adequacy and
overall analytical ratios. Departure from the usual range of a ratio may require
the submission of an explanation to the state or District of Columbia insurance
regulator. Departure from the usual range on four or more ratios may lead to
increased regulatory oversight.
51
For 2002 and 2001, our subsidiary CML was outside the usual range on
three ratios. The ratio results were impacted by two primary factors: the rapid
increase in new premium written in CML and the increase in severity of losses,
particularly the adverse development in losses of one prior year. In the opinion
of management, because of the reasons for the ratio results for the current
year, the ratio results are not indicative of operational problems in this
subsidiary. For 2002 and 2001, another subsidiary, NCRIC, Inc., was outside the
usual range for two ratios as the result of the rapid increase in premiums and
the increase in severity of losses, particularly the adverse development of
prior year losses.
NAIC Risk-Based Capital. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital (RBC) formula is
designed to allow state and District of Columbia insurance regulators to
identify potentially under-capitalized companies. For property-casualty
insurers, the formula takes into account risks related to the insurer's assets
including risks related to its investment portfolio, and the insurer's
liabilities, including risks related to the adverse development of coverages
underwritten. The RBC rules provide for different levels of regulatory attention
depending on the ratio of the insurer's total adjusted capital to the authorized
control level of RBC. The first level of regulatory action, a review by the
domiciliary insurance commissioner of a company prepared RBC plan, is instituted
at the point a company's total adjusted capital is at a level equal to or less
than two times greater than the authorized control level risk-based capital. For
all periods presented, the total adjusted capital levels for NCRIC, Inc. and CML
were significantly in excess of the authorized control level of RBC. As a
result, the RBC requirements are not expected to have an impact on our
operations. Following is a presentation of the total adjusted capital for NCRIC,
Inc. and CML compared to the authorized control level of RBC:
Authorized control
level
Risk-based capital Total adjusted capital
------------------ ----------------------
NCRIC, NCRIC,
Inc. CML Inc. CML
-------- --------- ----------- ---------
(in millions)
December 31, 2002 ..... $ 6.7 $0.49 $ 44.3 $ 4.7
December 31, 2001 ..... $ 4.7 $0.17 $ 32.8 $ 4.3
December 31, 2000 ..... $ 3.7 $0.19 $ 29.8 $ 4.5
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 December 31, 2002, fixed maturity securities
comprised 95% of total investments at fair value. U.S. government and tax-exempt
bonds represent 50% of the fixed maturity securities. Equity securities,
consisting primarily preferred stock, account for the remainder of the
investment portfolio. We have classified our investments as available for sale.
Because of the high percentage of fixed maturity securities, interest
rate risk represents the greatest exposure we have on our investment portfolio.
In general, the market value of our fixed maturity portfolio increases or
decreases in an inverse relationship with fluctuation in interest rates. During
periods of rising interest rates, the fair value of our investment portfolio
will generally decline resulting in decreases in our stockholders' equity.
Conversely, during periods of falling interest rates, the fair value of our
investment portfolio will generally increase resulting in increases in our
stockholders' equity. In addition, our net investment income increases or
decreases in a direct relationship with interest rate changes on monies
reinvested from maturing securities and investments of positive cash flow from
operating activities.
52
Generally, the longer the duration of the security, the more sensitive
the asset is to market interest rate fluctuations. To control the adverse
effects of the changes in interest rates, our investment portfolio of fixed
maturity securities consists primarily of intermediate-term, investment-grade
securities. Our fixed income portfolio at December 31, 2002 reflected an average
effective maturity of 4.4 years and an average modified duration of 4.7 years.
Our investment policy also provides that all security purchases be limited to
rated securities or unrated securities approved by management on the
recommendation of our investment advisor. Over 99% of our bond portfolio as of
December 31, 2002 was held in investment grade securities.
During the early part of 2002, there was a change in the allocation of
our portfolio which increased the proportion of tax-exempt securities in the
portfolio for the purpose of maximizing after-tax yields while minimizing
portfolio credit risk. In December 2002, the funds provided through issuance of
the Trust Preferred Securities were invested in U.S. Treasury securities,
decreasing the percentage of tax-exempt and corporate bonds to 58% of the total
fixed maturity securities compared to 65% at December 31, 2001.
One common measure of the interest sensitivity of fixed maturity
securities is effective duration. Effective duration utilizes maturities,
yields, and call terms to calculate an average age of expected cash flows. The
following table shows the estimated fair value of our fixed maturity portfolio
based on fluctuations in the market interest rates.
Projected Market
Yield Change Value
(bp) Market Yield (in millions)
------------ -------------- -----------------
-300 0.86% $136.0
-200 1.86 130.7
-100 2.86 125.4
Current Yield** 3.86 120.1
100 4.86 114.8
200 5.86 109.5
300 6.86 104.2
---------------
**Current yield is as of December 31, 2002.
The actual impact of the market interest rate changes on the securities
may differ from those shown in the sensitivity analysis above.
53
BUSINESS OF NCRIC GROUP
Overview
We are a healthcare financial services organization that provides
individual physicians and groups of physicians and other healthcare providers
with economical, high-quality medical professional liability insurance and the
practice management and financial services necessary for them to succeed in the
current healthcare environment. We own NCRIC, Inc., a medical professional
liability insurance company and NCRIC MSO, Inc., a physician practice management
and financial services company.
We offer medical professional liability insurance and practice
management services to physicians and other health care providers in Delaware,
the District of Columbia, Maryland, Virginia, and West Virginia. We currently
provide our insurance products and practice management services to approximately
5,000 physicians throughout this market area as of December 31, 2002. This
compares to approximately 4,000 physicians in 2001 and 3,000 physicians in 2000.
This increase is primarily driven by growth in our insurance segment. The number
of our practice management clients has remained stable at approximately 1,000
over this same period. The following table shows our insurance segment policy
count and gross premiums written over the last ten years.
Gross
Premiums
Policy Written (in
Count thousands)
--------- --------------
1992 1,229 $ 23,541
1993 1,215 22,801
1994 1,226 21,509
1995 1,223 19,506
1996 1,231 19,017
1997 1,250 17,869
1998 1,328 19,214
1999 1,532 21,353
2000 2,010 22,727
2001 2,953 34,459
2002 3,785 51,799
As reflected in the table above, we have experienced significant growth
since 1999, and not during the soft-market pricing environment of the
mid-to-late 1990s. We have maintained a disciplined approach towards
underwriting, product pricing and loss reserves, and we have remained focused on
selective expansion in our core markets as pricing conditions have improved.
According to data provided by A.M. Best, in 2001, we had 53.3% of the
District of Columbia medical professional liability market share. We believe
that we have one of the highest retention rates of policyholders in the industry
at more than 95%, for 2002, and our market presence has expanded significantly
as competing medical professional liability insurers have been forced to either
restrict their premium writings or exit the market completely due to financial
difficulties.
We have a strong management team with many years of industry experience
with us. R. Ray Pate, President and Chief Executive Officer, has 7 years with us
and 16 years of experience in the medical professional liability insurance
business. William E. Burgess, Senior Vice President, has been with us for 22
years and has been responsible for our risk management and claims processing
functions. Stephen S.
54
Fargis, Senior Vice President and Chief Operating Officer, joined us in 1995 and
has 19 years of experience in the healthcare industry. Mr. Fargis has been
responsible for implementing our growth strategy in our existing and new
geographic markets. Rebecca B. Crunk, Senior Vice President and Chief Financial
Officer, has been with us since 1998 and is responsible for our financial
reporting functions. Ms. Crunk is a certified public accountant with 25 years'
experience in insurance industry accounting.
Given the long-tail nature of our professional liability insurance
business, we focus on our operating ratio, which combines the ratio of
underwriting income or loss to net premiums earned, referred to as the combined
ratio, offset by the benefit of investment income generated from our cash and
invested assets, also expressed as a percentage of premiums earned. Our average
statutory operating ratio for the five year period ended December 31, 2001 was
77.0%. This compares favorably to an average statutory operating ratio of 94.4%
for the property and casualty industry over the same period, according to data
published by A.M. Best. The long-tail nature also results in a higher level of
invested assets and investment income as compared to other property and casualty
lines of business. At December 31, 2001 our ratio of cash and invested assets,
which totaled $122.5 million, to statutory surplus was 3.3x as compared to 2.7x
for the property and casualty industry according to information reported by A.M.
Best. For the five years ended December 31, 2001, our net investment income
averaged 34.4% of net premiums earned compared to 14.0% for the property and
casualty industry over the same period according to information reported by A.M.
Best, in each case determined on a statutory basis.
For the year ended December 31, 2002, we generated $51.8 million of
gross premiums written, $30.1 million of net premiums earned and $42.3 million
of total revenues. At December 31, 2002, we had consolidated assets of $202.7
million, liabilities of $154.9 million, and stockholders' equity of $47.8
million. Our insurance subsidiaries are rated "A-" (Excellent) by A.M Best.
Business Strategy
Our business strategy is designed to enhance our profitability and
strengthen our position as a leading provider of medical professional liability
insurance, alternative risk financing services, and financial and practice
management services in the Mid-Atlantic region. The major elements of our
business strategy are:
Strengthen and expand our medical professional liability insurance business by:
Adhering to strict underwriting criteria and disciplined pricing
practices. We consistently have followed strict underwriting procedures with
respect to the issuance of all of our insurance policies and do not manage our
business to achieve a certain level of premium growth or market share. In
addition, we solicit the input of physicians from a cross section of medical
specialties to assess accurately the underwriting risks in each of our market
territories. We seek to achieve our principal objective of attracting and
retaining high quality business by focusing on independent physicians who
practice individually or in small groups who we believe are more receptive to
our service-intensive approach and more likely to remain with us in times of
price based competition. We continually monitor market conditions to identify
potentially negative trends that may require corrective actions in our prices
and underwriting criteria.
Aggressively managing policyholder claims. In addition to prudent risk
selection, we seek to control our underwriting results through effective claims
management. Our claims department focuses on the early evaluation and aggressive
management of medical professional liability claims. We investigate each claim
and vigorously litigate claims that we consider unwarranted or claims where
settlement resolution cannot be achieved. We have established an understanding
of the legal climates in our core
55
market area and we retain locally based attorneys who specialize in medical
professional liability defense. We believe this approach contributes to lower
overall costs, and results in greater customer loyalty.
Maintaining our financial strength. We are rated "A-" (Excellent) by
A.M. Best. An "A-" rating is assigned to companies that have, on balance,
excellent balance sheet strength, operating performance and business profile.
These companies, in A.M. Best's opinion, have a strong ability to meet their
ongoing obligations to policyholders. We have sustained our financial strength
and stability during difficult market conditions through adhering to strict
underwriting, pricing and loss reserving practices. We are committed to abiding
to these practices. We recognize the importance of our A.M. Best rating to our
customers and agents and intend to manage our business to protect our financial
security.
Expanding our distribution channels and pursuing strategic
acquisitions. In addition to our leading position in the District of Columbia,
we are a significant insurer in Delaware, Maryland, Virginia, and West Virginia.
Historically, direct sales in the District of Columbia were the primary source
of written premiums. In recent years, growth in states outside of the District
of Columbia has largely come through our independent agents. In 2002, 17% of all
new business was written through direct distribution and 83% through independent
agents. We believe we can further increase new business through the continued
use of independent agents. We also believe that consolidation will continue in
the medical professional liability insurance industry. This may give rise to
opportunities for us to make strategic acquisitions to expand our business.
Maintaining close relationships with area medical communities. National
Capital Reciprocal Insurance Company was founded in 1980 with the strong support
of the Medical Society of the District of Columbia (MSDC) and the District of
Columbia's physicians. We maintain the exclusive endorsement of the MSDC, as
well as that of the Virginia-based Arlington County Medical Society. We also
maintain strong working relationships with the Medical Society of Virginia and
the Delaware Medical Society.
Enhancing our product offerings. We have developed other insurance
products in addition to our core medical professional liability insurance
offerings. These products include comprehensive premises liability coverage for
medical offices and PracticeGard Plus. PracticeGard Plus is designed to protect
physicians from costly civil fees and penalties related to the government's
regulations regarding billing coding and compliance.
Utilize our expertise in medical professional liability insurance to offer
alternative risk transfer products to healthcare providers.
As a result of significant premium rate increases, healthcare providers
are seeking alternatives methods to secure medical professional liability
coverage. We established ACC under District of Columbia law in 2001 to form
independent protected captive cells to accommodate affinity groups seeking to
manage their own risk through an alternative risk transfer structure.
Alternative risk transfer is broadly defined as the use of alternative insurance
mechanisms as a substitute for traditional risk-transfer products offered by
insurers. ACC is well positioned to meet current professional liability
insurance market needs due to our ability to manage risk and provide access to
increasingly unavailable reinsurance markets. We believe this venture is
strategically placed to capitalize on the emerging opportunities as demand for
these specialized services increases. Our first protected-cell captive is
expected to commence operations upon final regulatory approval, which is
anticipated in 2003. We are competing with established national brokerage and
specialty companies to provide both the risk transfer vehicle and services to
support and manage captives. We also compete on a regulatory level with other
jurisdictions and varying regulatory requirements in such domiciles as Hawaii,
Bermuda, the Caribbean and Europe.
56
Provide practice management services to assist physicians in the practice of
medicine.
We offer practice management and financial services to physicians in
the District of Columbia, North Carolina and Virginia. These services are
heavily concerted in North Carolina and Virginia and are utilized by more than
1,000 physicians. Most of our clients are small and solo practitioners. We
compete most often with single source providers of individual services who
target small business. In our accounting, tax and financial services we also
compete with local and regional certified public accounting firms. In our
retirement plan administration we compete with large brokerage firms; while with
respect to our payroll services we compete with national companies.
Growth Opportunities
Financial pressure on medical professional liability companies and
market contraction in the industry has occurred as companies that expanded
nationally or outside of their traditional market areas have sought to reduce or
in some cases eliminate their medical professional liability insurance business
on a going forward basis in order to regain financial stability. For several
years in the 1990s, many of these carriers engaged in soft-market pricing
tactics that generally resulted in lower premiums rates. Reduced profitability,
reductions in surplus and capacity constraints have led many medical
professional liability carriers to withdraw from, or limit new business in, one
or more markets.
We have maintained strict underwriting criteria and a disciplined
approach with respect to pricing our product and establishing reserves. We have
remained focused on growth in our existing markets as pricing conditions have
improved. Further industry contraction and a hard insurance market characterized
by increasing premium rates, lesser competition and a shortage of capital may
create additional opportunities for growth within our market area. We are
raising additional capital through this offering to better position ourselves to
pursue further growth and market opportunities that arise.
In our market areas, The St. Paul Companies, a national writer and the
country's largest medical professional liability insurance carrier in 2001,
exited the market leaving behind an approximately 9% industry-wide market share.
This had a significant impact on our Delaware and Virginia markets as The St.
Paul Companies had 2001 market shares of 22% and 15%, respectively. In addition,
Fireman's Fund, another leading carrier also withdrew from the market. Princeton
Insurance Company and MIIX Group, Inc. also have restricted writing premium
policies to their domiciled states leaving former policyholders seeking coverage
in our key markets of Delaware, Maryland and Virginia. Furthermore, financial
difficulties have led to the insolvency of Doctors' Insurance Reciprocal (a
subsidiary of The Reciprocal Group of America), leaving more than 1,000
physicians needing coverage in Virginia.
Further industry contraction and a continued hard insurance market may
create additional opportunities for expansion within our market area. The
additional capital raised in this offering will better position us to pursue
continued growth and market opportunities that arise.
Competition
The competitive environment in the medical professional liability
industry has changed significantly over the past several years. We do not expect
competition from the national companies, such as The St. Paul Companies and CNA
Insurance Companies, which have historically been our largest competitors. The
largest writers of medical professional liability insurance have recently
decided to retrench or exit the marketplace. As a result, the market now is
composed of smaller companies that offer only medical professional liability
insurance.
57
We expect to face competition from those companies that are focused on
narrow geographic markets. In addition, our competitors may have existing
relationships with insurance brokers or other distribution channels, which we
may be unable to supplant.
The following is a brief summary of our primary competitors in the
jurisdictions in which we operate.
District of Columbia. We are one of a few remaining carriers currently
writing insurance policies in Washington, D.C. According to A.M. Best 2001 data,
the most recent available, we have 53% of the District of Columbia medical
professional liability market share. The Doctors Company Insurance Group holds a
9% market share in the District of Columbia. Professionals Advocate, a member of
The Medical Mutual Group, holds an 8% market share in the District of Columbia.
Delaware. As a result of the withdrawal of The St. Paul Companies and
Fireman's Fund from the Delaware market and the downgrade of Princeton Insurance
Company, we are expanding our market share among Delaware physicians. Companies
licensed to do business in the state include MLMIC Group and SCPIE Holdings,
Inc. which hold market shares of 13% and 7%, respectively.
Maryland. We also have been writing insurance policies in Maryland
since 1980. The departure of Princeton Insurance Company and MIIX Group, Inc.
from Maryland and the insolvency of PHICO Insurance Company has created
opportunities for growth in the state. Our primary competitor in Maryland is
Medical Mutual of Maryland, a physician-governed carrier that has approximately
49% of the market share.
Virginia. Our primary competitors in the Virginia marketplace include
State Volunteer Mutual Insurance Company, Medical Mutual of North Carolina, The
Doctors Company Insurance Group, MAG Mutual Insurance Company, Professionals
Advocate, and ProAssurance Corporation. We have experienced significant growth
in the Virginia market in the last two years. In 2002, The St. Paul Companies,
Princeton Insurance Company and MIIX Group, Inc. exited this market creating
additional growth opportunities. In addition, in January 2003 the largest
underwriter of medical professional liability insurance in Virginia, Doctors
Insurance Reciprocal, entered into receivership, which we believe will present
additional growth opportunities. It is estimated that as a result of these
developments, approximately 30% of the physicians in Virginia will be seeking
alternative coverage.
West Virginia. We currently do not expect to expand our business and we
intend to maintain a limited exposure in West Virginia. Although few carriers
are currently writing new business in West Virginia, ProAssurance Corporation
has emerged as one of the state's primary markets for physicians.
Insurance Activities
General. We provide medical professional liability insurance for
independent physicians who practice individually or in small groups. We
generally sell an insurance product with $1 million of coverage for any one
incident with a $3 million limit for incidents reported within the policy year.
Our policies are written on a claims made basis and include coverage for the
entire defense cost of the claim. These policies provide coverage for claims
arising from incidents that both occur and are reported to us while the policy
is in force. A claims-made policy is in force from the starting date of the
initial policy period and continues in force from that date through each
subsequent renewal. Policyholders can purchase up to $10 million dollars of
excess coverage that provides coverage for losses up to $11 million with an
annual limit of $13 million.
58
Underwriting. Our policyholder services department is responsible for
the evaluation of applicants for medical professional liability coverage, the
issuance of policies and the establishment and implementation of underwriting
standards. In addition, this department provides information to the D.C.
Underwriting Committee and Virginia, West Virginia and Delaware Physician
Advisory Boards. These boards are comprised of physicians who represent a cross
discipline of medical specialties and provide valued input on local standards of
care as they relate to understanding medical risk and underwriting in each area.
We believe this combination of medical and insurance industry professionals
provides a competitive advantage in underwriting services when compared to our
competitors.
We adhere to consistent and strict underwriting procedures with respect
to the issuance of all physician medical professional liability policies. Each
applicant or member of an applicant medical group is required to complete and
sign a detailed application that provides a personal and professional history,
the type and nature of the applicant's professional practice, information
relating to specific practice procedures, hospital and professional affiliations
and a complete history of any prior claims and incidents.
We also perform a continuous process of underwriting policyholders at
renewal. Information concerning physicians with large losses, a high frequency
of claims or changing or unusual practice characteristics is developed through
renewal applications, claims history and risk management reports.
Claims. Our claims department is responsible for claims investigation,
establishment of appropriate case reserves for losses and LAE, defense planning
and coordination, monitoring of attorneys engaged by us to defend an insured
against a claim and negotiation of the settlement or other disposition of a
claim.
We emphasize early evaluation and aggressive management of claims. When
a claim is reported, our claims professionals complete a preliminary evaluation
and set the initial reserve. After a full evaluation of the claim has been
completed, which generally occurs within seven months, the initial reserve may
be adjusted.
As of December 31, 2002, we had approximately 517 open cases with an
average of 65 cases being handled by each claims representative. Our claims
department consists of nine claims professionals and the level of education
ranges from certified paralegal to juris doctor. The current professional claims
staff has an average of 12 years of experience handling medical professional
liability cases. We limit the number of claims handled by each representative to
fewer than 90 cases. We believe this number is lower than other companies in the
medical professional liability insurance industry.
Our focus is to maintain a local presence in the jurisdictions where we
write coverage. We have obtained an understanding of the local medical and legal
climates where we write policies through on-site visits, interviews with local
law firms, discussions with policyholders and ongoing communications with local
law firms. We retain locally-based attorneys who specialize in medical
professional liability defense and share our philosophy to represent our
policyholders. We also retain the services of medical experts who are leaders in
their specialties and who bring credibility and expertise to the litigation
process.
Our D.C. claims committee is composed of 9 physicians from various
specialties and meets monthly to provide evaluation and guidance on claims. The
multi-specialty approach of these physicians adds a unique perspective to the
claims handling process as it provides an opportunity to obtain the opinions of
several different specialists meeting to share their knowledge in the area of
liability evaluation and general peer review.
59
Our objective of local physician claims guidance is carried out in
Delaware, Virginia, and West Virginia through advisory boards which serve as our
preliminary risk screening mechanism. These boards meet to review medical
incidents, assess claims and practice characteristics of current and prospective
policyholders, and bring to our attention all matters of special interest to
healthcare providers in their state.
Risk management. The goal of our risk management staff is to assist our
policyholders in identifying potential areas of exposure to loss and to develop
strategies to reduce or eliminate such risk. Our risk management committee, a
group of nine physicians comprising various specialties, lend their individual
expertise in the development of risk management services tailored to the needs
of the individual policyholders to aid in this endeavor.
Our risk management staff presents educational seminars throughout the
year in locations convenient to our policyholders. Programs designed to address
the needs and interests of physicians are held throughout the District of
Columbia, Delaware, Maryland, Virginia and West Virginia, and cover a wide
variety of topics. Our staff is also available to present customized programs,
on an as requested basis, to individual physician groups and/or office staff.
Physicians unable to attend a live seminar are given the opportunity to
access our risk management services in other ways. Currently, three home study
courses are available and accessible either on-line or in booklet format. Those
physicians wanting a more involved approach to dealing with their risk
management concerns may participate in an office assessment conducted by one of
our risk management staff members.
CME accreditation through the MSDC, allows us to award Category 1 CME
credit to those physicians who attend a live seminar, successfully complete a
home study course, or undergo an office assessment. Participation in one of
these activities also entitles policyholders to a 5% policy premium discount.
Marketing. Within the District of Columbia, we market directly to
individual physicians and other prospective policyholders through our sponsored
relationship with the MSDC, referrals by existing policyholders, advertisements
in medical journals, and direct solicitation to licensed physicians. We attract
new physicians by targeting medical residents and physicians just entering
medical practice. In addition, we participate as a sponsor and participant in
various medical group and hospital administrators' programs, medical association
and specialty society conventions and similar events. We believe that our
comprehensive approach, market knowledge and insurance expertise all play key
roles in the successful direct marketing of our medical professional liability
insurance in this jurisdiction.
Our primary marketing channel in Delaware, Maryland, Virginia, and West
Virginia is our independent agent network. In 2002, our agent network totaled 32
agencies. These agents produced 83% of new premiums and 50% of renewing premiums
in 2002. Healthcare providers frequently utilize agents when they purchase
medical professional liability insurance. Therefore, we believe that developing
our broker relationships in these states is important to grow our market share.
We select agents who have demonstrated experience and stability in the medical
professional liability insurance industry. Brokers and agents receive market
rate commissions and other incentives averaging 9% based on the business they
produce and maintain. We strive to foster relationships with those brokers and
agents who are committed to promoting our products and are successful in
producing business for us. In 2002, we created the President's Gold Circle to
recognize agencies that contribute growth in excess of $1 million in premium.
Account information is communicated to all policyholders and agents
through our Policyholder Services Department. This department strives to
maintain a close relationship with the medical groups
60
and individual practitioners insured by us as well as the agents who make up our
agency network. To best serve clients and agents, we deploy client service
representatives who can answer most inquiries and, in other instances, provide
immediate access to an appropriate individual who has the expertise to provide a
response. For hospital-based programs and large and mid-size medical groups, we
have an account manager assigned to each group who leads a team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. Over the
years, we believe this approach has resulted in our high customer retention and
satisfaction rate.
Risk Sharing Arrangements. We have entered into agreements for risk
sharing programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. The type of risk sharing arrangement offered
involves the initial funding of a portion of a premium being held to pay losses.
In this type of arrangement, we receive full gross premium, less applicable
credits otherwise granted. After quota share losses are determined, if loss
development is favorable, any premium in excess of the losses is returned.
Risk sharing arrangements help lower our risk associated with medical
care provided by the hospital's attending physicians. The arrangements also
establish a cost-effective source of professional liability coverage for
physicians participating in the program.
We reduced the level of risk share discount offered in our risk sharing
programs in 2003, and established an administrative management program for
intensive risk management services specific to these programs. This new
administrative program is provided on a fee basis and generates additional
non-risk bearing revenue.
Rates. We establish rates and rating classifications for physician and
medical group policyholders in the District of Columbia based on the losses and
LAE experience we have developed over the past 21 years. For our other market
areas, we rely on losses and LAE experience data from the medical professional
liability industry. We have various rating classifications based on practice
location, medical specialty and other factors. We utilize premium discounts,
including discounts for part-time practice, physicians just entering medical
practice, claim-free physicians and risk management participation. Generally,
total discounts granted to a policyholder do not exceed 25% of the base premium.
In addition, surcharges generally do not exceed 25% of the base premium.
Effective rates equal our base rate, less any discounts, plus any surcharges to
the policyholder.
Our rates are established based on previous loss experience, loss
expense adjustments, anticipated policyholder discounts or surcharges, and fixed
and variable operating expenses. In recognition of the increase in the severity
of losses, the weighted average rate increase for our base premiums was 29.2%
effective January 1, 2003, and 15.8% effective January 1, 2002.
Reserves for Losses and LAE. The determination of loss and LAE reserves
involves projection of ultimate losses through an actuarial analysis of our
claims history and other medical professional liability insurers, subject to
adjustments deemed appropriate by us due to changing circumstances. Included in
our claims history are losses and LAE paid by us in prior periods, and case
reserves for losses and LAE developed by our claims department as claims are
reported and investigated. Actuaries rely primarily on historical loss
experience in determining reserve levels on the assumption that historical loss
experience provides a good indication of future loss experience despite the
uncertainties in loss trends and the delays in reporting and settling claims. As
additional information becomes available, the estimates reflected in earlier
loss reserves might be revised. Any increase or decrease in the amount of
reserves, including reserves for insured events of prior years, would have a
corresponding adverse or beneficial effect on our results of operations for the
period in which the adjustments are made.
61
Our estimates of the ultimate cost of settling the claims are based on
numerous factors including, but not limited to:
. information then known;
. predictions of future events;
. estimates of future trends in claims frequency and severity;
. predictions of future inflation rates;
. judicial theories of liability;
. judicial interpretations of insurance contracts; and
. legislative activity.
The inherent uncertainty of establishing reserves is greater for
medical professional liability insurance because lengthy periods may elapse
before notice of a claim or a determination of liability. Medical professional
liability insurance policies are long tail policies, which means that claims and
expenses may be paid over a period of 10 or more years. This is longer than most
property and casualty claims. As a result of these long payment periods, trends
in medical professional liability policies may be slow to emerge, and we may not
promptly modify our underwriting practices and change our premium rates to
reflect underlying loss trends. Finally, changes in the practice of medicine and
healthcare delivery, like the emergence of new, larger medical groups that do
not have an established claims history, and additional claims resulting from
restrictions on treatment by managed care organizations, may not be fully
reflected in our underwriting and reserving practices.
Our independent actuary reviews our reserves for losses and LAE
periodically and prepare semi-annual reports that include a recommended level of
reserves. We consider this recommendation as well as other factors, like loss
retention levels and anticipated or estimated changes in frequency and severity
of claims, in establishing the amount of its reserves for losses and LAE. We
continually refine reserve estimates as experience develops and claims are
settled. Medical professional liability insurance is a line of business for
which the initial losses and LAE estimates may change significantly as a result
of events occurring long after the reporting of the claim. For example, losses
and LAE estimates may prove to be inadequate because of sudden severe inflation
or adverse judicial or legislative decisions.
62
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
----------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Balance, beginning of year .................... $ 84,560 $ 81,134 $ 84,282
Less reinsurance recoverable on unpaid
claims ...................................... 29,624 27,312 25,815
--------- --------- ---------
Net balance ................................... 54,936 53,822 58,467
--------- --------- ---------
Incurred related to:
Current year ................................ 24,063 23,056 17,829
Prior years ................................. 2,766 (4,198) (5,883)
--------- --------- ---------
Total incurred ........................... 26,829 18,858 11,946
--------- --------- ---------
Paid related to:
Current year ................................ 1,491 1,599 917
Prior years ................................. 18,664 16,145 15,674
--------- --------- ---------
Total paid ............................... 20,155 17,744 16,591
--------- --------- ---------
Net balance ................................... 61,610 54,936 53,822
Plus reinsurance recoverable on unpaid
claims ...................................... 42,412 29,624 27,312
--------- --------- ---------
Balance, end of year .......................... $ 104,022 $ 84,560 $ 81,134
========= ========= =========
The amounts shown above and the reserve for unpaid losses and LAE on
the chart located on the next page are presented in conformity with GAAP.
The following table reflects the development of reserves for unpaid
losses and LAE for the years indicated, at the end of that year and each
subsequent year. The first line shows the reserves, as originally reported at
the end of the stated year. Each calendar year-end reserve includes the
estimated unpaid liabilities for that coverage year and for all prior coverage
years. The section under the caption "Cumulative Liability Paid Through End of
Year" shows the cumulative amounts paid through each subsequent year on those
claims for which reserves were carried as of each specific year-end. The section
under the caption "Re-estimated Liability" shows the original recorded reserve
as adjusted as of the end of each subsequent year to reflect the cumulative
amounts paid and any other facts and circumstances discovered during each year.
The line "Redundancy (deficiency)" sets forth the difference between the latest
re-estimated liability and the liability as originally established.
63
The table reflects the effects of all changes in amounts of prior
periods. For example, if a loss determined in 1996 to be $100,000 was first
reserved in 1992 at $150,000, the $50,000 favorable loss development, being the
original estimate minus the actual loss, would be included in the cumulative
redundancy in each of the years 1992 through 1996 shown below. This table
presents development data by calendar year and does not relate the data to the
year in which the claim was reported or the incident actually occurred.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future.
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Reserve for Unpaid
Losses and LAE ............ $ 86,727 $ 88,891 $ 77,647 $ 68,928 $ 68,101 $ 72,031 $ 84,595 $ 84,282 $ 81,134 $ 84,560
Cumulative Liability
Paid Through End of
Year:
One year later .......... 18,103 19,786 21,667 16,084 14,916 9,667 13,865 20,813 20,828 21,995
Two years later ......... 35,861 39,293 34,829 27,634 22,237 21,810 32,778 38,078 34,253
Three years later ....... 51,163 47,348 43,237 32,409 29,135 36,310 42,381 44,696
Four years later ........ 56,648 51,845 45,219 34,657 39,938 42,553 44,352
Five years later ........ 59,473 52,984 45,682 41,578 44,297 43,581
Six years later ......... 60,335 53,208 51,450 43,753 44,724
Seven years later ....... 60,440 58,246 52,551 43,962
Eight years later ....... 63,395 59,086 52,737
Nine years later ........ 64,113 59,108
Ten years later ......... 64,115
Re-estimated Liability:
One year later .......... $ 79,174 $ 70,640 $ 68,891 $ 62,028 $ 61,121 $ 71,419 $ 72,575 $ 77,373 $ 73,582 $ 86,534
Two years later ......... 65,174 63,248 66,439 53,429 62,097 64,980 66,733 71,489 73,654
Three years later ....... 62,521 65,422 60,858 55,883 58,169 61,336 60,752 68,439
Four years later ........ 65,225 64,460 62,625 53,400 54,324 54,996 59,069
Five years later ........ 67,681 66,275 61,077 50,744 50,977 53,952
Six years later ......... 69,765 64,877 58,220 47,946 50,666
Seven years later ....... 68,415 63,514 55,739 47,099
Eight years later ....... 67,740 61,262 55,156
Nine years later ........ 65,671 60,160
Ten years later ......... 64,213
Redundancy
(deficiency) ............... $ 22,514 $ 28,731 $ 22,491 $ 21,829 $ 17,435 $ 18,079 $ 25,526 $ 15,843 $ 7,480 $ (1,974)
General office premises liability incurred losses have been less than
1% of medical professional liability incurred losses in the last five years. We
do not have reserves for pollution claims as our policies exclude liability for
pollution. We have never been presented with a pollution claim brought against
us or our insureds.
Reinsurance. We follow customary industry practice by reinsuring a
portion of our risks and paying a reinsurance premium based upon the premiums
received on all policies subject to reinsurance. By reducing our potential
liability on individual risks, reinsurance protects us against large losses. We
have full underwriting authority for medical professional liability policies
including premises liability policies issued to physicians, surgeons, dentists
and professional corporations and partnerships. The 2003 reinsurance program
cedes to the reinsurers up to the maximum reinsurance policy limit those risks
insured by us in excess of our $1 million retention.
Although reinsurance does not discharge us from our primary liability
for the full amount of our insurance policies, it contractually obligates the
reinsurer to pay successful claims against us to the extent
64
of risk ceded. Our current reinsurance program is designed to provide coverage
through separate reinsurance treaties for two layers of risk.
Losses in excess of $1,000,000 per claim up to $2,000,000. Effective
January 1, 2003 to January 1, 2006, the treaty, which reinsures us for losses in
excess of $1,000,000 per claim up to $2,000,000, is a fixed rate treaty. The
reinsurance premium is agreed upon as a fixed percentage of gross net earned
premium income. Gross net earned premium income is our gross premium earned net
of discounts for coverage limits up to $2,000,000.
Effective January 1, 2000 to January 1, 2003 our primary treaty
reinsures losses in excess of $500,000 per claim up to $1,000,000 and is a fixed
rate treaty. Our first excess cession treaty covers losses up to $1,000,000 in
excess of $1,000,000 per claim. For risks related to claims submitted January 1,
2000 to January 1, 2003, under this first excess cession treaty, we cede 100% of
our risks and premium.
For claims submitted for 1999 and prior years, we have a swing-rated
treaty which reinsures us for losses in excess of $500,000 per claim up to
$1,000,000, subject to an inner aggregate deductible of 5% of gross net earned
premium income . The ultimate reinsurance premium is subject to incurred losses
and ranges between a minimum premium of 4% of gross net earned premium income
and a maximum premium of 22.5% of gross net earned premium income. The inner
aggregate deductible means that we must pay losses within the reinsurance layer
until the inner aggregate deductible is satisfied. We paid a deposit premium
equal to 14% of gross net earned premium income that is ultimately increased or
decreased based on actual losses, subject to the minimum and maximum premium.
Following are the reinsurance premium terms for the swing-rated treaty for
calendar years 1999, 1998, 1997 and 1996.
Percentage of Gross Net Earned
Premium Income
-------------------------------
1999 1998 1997 1996
------ ------ ------ ------
Deposit premium ............. 14.0% 14.0% 14.0% 14.0%
Maximum premium ............. 22.5 22.5 22.5 30.0
Minimum premium ............. 4.0 4.0 4.0 4.0
Inner aggregate deductible .. 5.0 5.0 5.0 10.0
We have recorded, based on actuarial analysis, management's best
estimate of premium expense under the terms of the swing-rated treaty. In the
initial year of development for each coverage year, the premium was capped at
the maximum rate. We then adjusts the liability and expense as losses develop in
subsequent years.
For claims related to 1999 and prior years, we cede 91% of its risks
and premium to the $1,000,000 excess layer treaty program and retain 9% of the
risks and premium. We receive a ceding commission from the reinsurers to cover
the costs associated with issuing this coverage.
Losses up to $9,000,000 in excess of $2,000,000 per claim. An excess
cession layer treaty covers losses up to $9,000,000 in excess of $2,000,000 per
claim. We cede 100% of our risks to the $2,000,000 excess layer treaty program
and retain none of the risks. The premium for the $2,000,000 excess layer treaty
is 100% of the premium collected from insureds for this coverage. We receive a
ceding commission from the reinsurers to cover the costs associated with issuing
this coverage.
Ceding commissions, which are 15% of gross ceded reinsurance premiums
in the excess layer and other treaties are deducted from other underwriting
expenses. Ceding commissions were $1.1 million, $644,000 and $357,000 in 2002,
2001 and 2000, respectively.
65
Additionally, our reinsurance program protects us from paying multiple
retentions for claims arising out of one event. We will only pay one $1,000,000
retention regardless of the number of original policies or claimants involved.
We also have protection against losses in excess of its existing reinsurance. We
may provide higher policy limits reinsured through facultative reinsurance
programs. Facultative reinsurance programs are reinsurance programs which are
specifically designed for a particular risk not covered by our existing
reinsurance arrangements. We currently have facultative reinsurance in
connection with groups of physicians who desire policy limits greater than
$11,000,000.
We determine the amount and scope of reinsurance coverage to purchase
each year based upon evaluation of the risks accepted, consultations with
reinsurance consultants and a review of market conditions, including the
availability and pricing of reinsurance. Our primary reinsurance treaty is
placed with non-affiliated reinsurers for a three-year term with annual
renegotiations. Our current three-year treaty expires January 1, 2006.
The reinsurance program is placed with a number of individual
reinsurance companies and Lloyds' syndicates to mitigate the concentrations of
reinsurance credit risk. Most of the reinsurers are European companies or
Lloyds' syndicates; there is a small percentage placed with a domestic
reinsurer. As of December 31, 2002, the amounts recoverable from reinsurers
attributable to Lloyds of London represents a total of 42 syndicates. We rely on
our wholly owned brokerage firm, National Capital Insurance Brokerage, Ltd.,
Willis Re, Inc. and a London-based intermediary to assist in the analysis of the
credit quality of reinsurers. We also require reinsurers that are not authorized
to do business in the District of Columbia to post a letter of credit to secure
reinsurance recoverable on paid losses.
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 2002 by reinsurer:
Reinsurance A.M. Best
Reinsurer Recoverable Rating
----------- --------------- ----------
(in thousands)
Lloyd's of London syndicates .............. $ 25,846 A-
Hanover Rueckversicherungs - AG ........... 4,091 A+
CNA Reinsurance LTD ....................... 3,102 NR3
Unionamerica Insurance .................... 1,948 C++
Transatlantic Reinsurance Company ......... 3,491 A++
AXA Reassurance ........................... 2,622 A
Terra Nova Insurance Company LTD .......... 1,208 B++
Other reinsurers .......................... 923 A/A-
----------
Total .................................. $ 43,231
==========
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2002, 2001, and 2000 is as follows:
Year Ended December 31,
------------------------------------------------------------------
2002 2001 2000
--------------------- ---------------------- ---------------------
Written Earned Written Earned Written Earned
--------- ---------- --------- ---------- ---------- ----------
(in thousands)
Direct ... $ 51,799 $ 44,113 $ 34,459 $ 28,192 $ 22,727 $ 19,965
Ceded .... (18,003) (14,023) (10,542) (7,296) (5,874) (4,110)
--------- --------- --------- --------- --------- ---------
Net ...... $ 33,796 $ 30,090 $ 23,917 $ 20,896 $ 16,853 $ 15,855
========= ========= ========= ========= ========= =========
66
In late 1999, we introduced PracticeGard Plus, which provides errors
and omissions coverage on Medicare/Medicaid billing to health care providers.
This coverage provides up to $1 million in indemnity and expense protection and
only pays indemnity on civil fines and penalties. We reinsure 100% of this risk
and receive a ceding commission. We intend to evaluate our level of risk
acceptance based on how losses develop in the future. Since this coverage
protects a new risk based on recently passed national legislation, current loss
development is uncertain.
Investment Portfolio. Investment income is an important component in
support of our operating results. We utilize external investment managers who
adhere to policies established and supervised by our investment committee. Our
current investment policy has placed primary emphasis on investment grade, fixed
income securities and seeks to maximize after-tax yields while minimizing
portfolio credit risk. Toward achieving this goal, our investment guidelines,
which set the parameters for our investment policy, permit investments in
tax-advantaged securities such as municipal bonds and preferred stock. Our
investment guidelines document is reviewed and updated as needed but at least
annually.
Deutsche Asset Management (DeAM) previously Zurich Scudder Insurance
Asset Management was the external investment manager for our fixed income
securities including tax advantaged preferred stocks for the three years ended
December 31, 2002. Effective January 1, 2003, Standish Mellon Asset Management
became the external investment manager for our portfolio.
Each year we, along with our investment manager, have conducted
extensive financial analyses of the investment portfolio using stochastic models
to develop a risk appropriate investment portfolio given the business
environment and risks relevant to us. DeAM supplemented stochastic modeling with
the output from their independent investment research and strategy group to
develop a tailored investment approach for us. Analysis of our capital structure
and risk-bearing ability, valuation, peer comparisons, as well as proprietary
and third party modeling, determine the optimal level of tax advantaged
investments and provide strategy input.
DeAM used Dynamic Financial Analysis (DFA) a total company tool to test
our capital structure and business plan under numerous potential future economic
scenarios. The results of DFA, in the form of probability distributions on key
financial statistics, allow us to make risk informed decisions on the structure
of our investment portfolio as it relates to our business profile. DFA output
has been especially useful in setting portfolio policy regarding average
duration and optimizing potential equity exposure.
We have classified our investments as available for sale and report
them at fair value, with unrealized gains and losses excluded from net income
and reported, net of deferred taxes, as a component of stockholders' equity.
During periods of rising interest rates, as experienced during 1999, the fair
value of our investment portfolio will generally decline resulting in decreases
in our stockholders' equity. Conversely, during periods of falling interest
rates, as experienced during 2002, the fair value of our investment portfolio
will generally increase resulting in increases in our stockholders' equity.
67
The following table sets forth the fair value and the amortized cost of
our investment portfolio at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
------------ ----------- ----------- ------------
(in thousands)
At December 31, 2002
U.S. Government and agencies ................ $ 27,664 $ 292 $ (4) $ 27,952
Corporate ................................... 32,680 1,567 (488) 33,759
Tax-exempt obligations ...................... 30,416 2,309 (21) 32,704
Asset and mortgage-backed securities ........ 19,549 882 (150) 20,281
------------ ----------- ---------- ------------
110,309 5,050 (663) 114,696
Equity securities ........................... 5,561 150 (287) 5,424
------------ ----------- ---------- ------------
Total ..................................... $ 115,870 $ 5,200 $ (950) $ 120,120
============ =========== ========== ============
At December 31, 2001
U.S. Government and agencies ................ $ 4,600 $ 161 $ -- $ 4,761
Corporate ................................... 43,739 977 (1,311) 43,405
Tax-exempt obligations ...................... 19,304 634 (134) 19,804
Asset and mortgage-backed securities ........ 28,073 695 (15) 28,753
------------ ----------- ---------- ------------
95,716 2,467 (1,460) 96,723
Equity securities ........................... 6,691 118 (407) 6,402
------------ ----------- ---------- ------------
Total ..................................... $ 102,407 $ 2,585 $ (1,867) $ 103,125
============ =========== ========== ============
At December 31, 2000
U.S. Government and agencies ................ $ 13,037 $ 490 $ (14) $ 13,513
Corporate ................................... 32,301 181 (1,763) 30,719
Tax-exempt obligations ...................... 15,379 631 -- 16,010
Asset and mortgage-backed securities ........ 31,335 208 (303) 31,240
------------ ----------- ---------- ------------
92,052 1,510 (2,080) 91,482
Equity securities ........................... 7,121 45 (603) 6,563
------------ ----------- ---------- ------------
Total ..................................... $ 99,173 $ 1,555 $ (2,683) $ 98,045
============ =========== ========== ============
Our investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. Our investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of our
investment advisor. At December 31, 2002, we held 58 asset and mortgage-related
securities, most of which had a quality of Agency/AAA. Collectively, our
mortgage-related securities had an average yield to maturity of approximately
3.42%. Approximately 53.4% of the mortgage-related securities are pass-through
securities. We do not have any interest only or principal only pass-through
securities.
The following table contains the investment quality distribution of our
fixed maturity investments at December 31, 2002.
Type/Ratings of Investment Percentage
------------------------------------ ----------
Treasury/Agency ................... 34.4%
AAA ............................... 29.8
AA ................................ 9.8
A ................................. 19.7
BBB ............................... 6.1
B ................................. 0.2
------
100.0%
======
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc.
The following table sets forth information concerning the maturities of
fixed maturity securities in our investment portfolio as of December 31, 2002,
by contractual maturity. Actual maturities will
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differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
At December 31, 2002
----------------------------------------
Percentage
Amortized of Fair
Cost Fair Value value
------------ -------------- -----------
(in thousands)
Due in one year or less .................... $ 742 $ 750 1%
Due after one year through five years ...... 40,685 42,283 35
Due after five years through ten years ..... 36,707 38,825 32
Due after ten years ........................ 12,626 12,557 10
---------- ---------- --------
90,760 94,415 78%
Equity securities .......................... 5,561 5,424 5
Asset and mortgage-backed securities ....... 19,549 20,281 17
---------- ---------- --------
Total ................................... $ 115,870 $ 120,120 100%
========== ========== ========
Proceeds from bond maturities, sales and redemptions of available for
sale investments during the years 2002, 2001, and 2000 were $39.0 million, $22.0
million and $10.5 million, respectively. Gross gains of $1,437,000, $787,000 and
$16,000 and gross losses of $1,568,000, $1,065,000 and $21,000 were realized on
available for sale investment redemptions during 2002, 2001, and 2000,
respectively.
The average effective maturity and the average modified duration of the
securities in our fixed maturity portfolio as of December 31, 2002 and 2001, was
4.4 years and 4.7 years, respectively.
A.M. Best Company Ratings
A.M. Best, which rates insurance companies based on factors of concern
to policyholders, rated NCRIC, Inc. and CML "A-"(Excellent). This is the fourth
highest rating of the 15 ratings that A.M. Best assigns. NCRIC, Inc. received
its initial rating of "B" in 1988, was upgraded to "B+" in 1989, to "B++" in
1996 and was upgraded to "A-" in 1997. A.M. Best reaffirmed the "A-" ratings of
NCRIC, Inc. and CML in 2002. A.M. Best reviews its ratings periodically.
A.M. Best's "A-" rating is assigned to those companies that in A.M.
Best's opinion have a strong ability to meet their obligations to policyholders
over a long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews:
. the company's profitability, leverage and liquidity;
. its book of business;
. the adequacy and soundness of its reinsurance;
. the quality and estimated market value of its assets;
. the adequacy of its reserves and surplus;
. its capital structure;
. the experience and competence of its management; and
. its market presence.
Insurance company regulation
General. NCRIC, Inc. is subject to supervision and regulation by the
District of Columbia Department of Insurance and Securities Regulation and
insurance authorities in Maryland. CML is
69
subject to supervision and regulation by the District of Columbia Department of
Insurance and Securities Regulation and insurance authorities in Delaware,
Maryland, Virginia and West Virginia. This regulation is concerned primarily
with the protection of policyholders' interests rather than stockholders'
interests. Accordingly, decisions of insurance authorities made with a view to
protecting the interests of policyholders may reduce our profitability. The
extent of regulation varies by jurisdiction, but this regulation usually
includes:
. regulating premium rates and policy forms;
. setting minimum capital and surplus requirements;
. regulating guaranty fund assessments;
. licensing of insurers and agents;
. approving accounting methods and methods of setting statutory loss
and expense reserves;
. underwriting limitations;
. the terms upon which a full demutualization transaction can occur;
. restrictions on transactions with affiliates;
. setting requirements for and limiting the types and amounts of
investments;
. establishing requirements for the filing of annual statements and
other financial reports;
. conducting periodic statutory examinations of the affairs of
insurance companies;
. approving proposed changes of control; and
. limiting the amounts of dividends that may be paid without prior
regulatory approval.
Without the approval of the District of Columbia Commissioner of
Insurance and Securities, neither NCRIC, Inc. nor CML may diversify out of the
healthcare and insurance fields through an acquisition or otherwise.
NAIC Codification. The Codification of Statutory Accounting Principles
was developed by the NAIC as a comprehensive guide to statutory accounting
intended to provide analysts and other users with more comparable financial
statements. Much of statutory accounting is based on GAAP with modifications
that emphasize the concepts of conservatism and solvency inherent in statutory
accounting. The Codification was mandated by the NAIC to be effective as of
January 1, 2001. Statutory accounting changes resulting from this guidance do
not have an effect on the financial statements prepared in accordance with GAAP,
which have been included with this document and filed with the Securities and
Exchange Commission.
Guaranty fund laws. Each of the jurisdictions in which we do business
has guaranty fund laws under which insurers doing business in those
jurisdictions can be assessed on the basis of premiums written by the insurer in
that jurisdiction in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. In the
District of Columbia, insurance companies are assessed in three categories: (i)
automobile; (ii) workers' compensation; and (iii) all other. An insurance
company licensed to do
70
business in the District of Columbia is only liable to pay an assessment if
another insurance company within its category becomes insolvent. We are in the
"all other" category.
Significant assessments could have a material adverse effect on our
financial condition or results of operations. While we will not necessarily be
liable to pay assessments each year, the insolvency of another insurance company
within our category of insurance could result in the maximum assessment being
imposed on us over several years. We cannot predict the amount of future
assessments. During 2001 we received an assessment due to the insolvency of
Reliance Insurance Company. Recently PHICO Insurance Company went into
receivership; this resulted in guaranty fund assessments to us of $355,000 in
2002. In each of the jurisdictions in which we conduct business, the amount of
the assessment cannot exceed 2% of our direct premiums written per year in that
jurisdiction.
Examination of insurance companies. Every insurance company is subject to a
periodic financial examination under the authority of the insurance commissioner
of its jurisdiction of domicile. Any other jurisdiction interested in
participating in a periodic examination may do so. The last completed periodic
financial examination of NCRIC, Inc., based on December 31, 1999 financial
statements, was completed and a final report was issued on February 20, 2001.
The final report positively assessed our financial stability and operating
procedures. The last periodic financial examination report of CML, based on
December 31, 2001 financial statements, was issued on August 30, 2002. The
periodic financial examination positively assessed CML's financial stability and
operating procedures.
Approval of rates and policies. The District of Columbia, Virginia and
Delaware require us to submit rates to regulators on a file and use basis. Under
a file and use system, an insurer is permitted to bring new rates and policies
into effect on filing them with the appropriate regulator, subject to the right
of the regulator to object within a fixed period of days. In each of the
District of Columbia, Maryland and Virginia, rating plans, policies and
endorsements must be submitted to the regulators 30 days prior to their
effectiveness. In Maryland, rates must be submitted to regulators 30 days prior
to their effectiveness. Maryland and West Virginia are prior approval
jurisdictions. The possibility exists that we may be unable to implement desired
rates, policies, endorsements, forms or manuals if these items are not approved
by an insurance commissioner.
Medical professional liability reports. We principally write medical
professional liability insurance, as such, requirements are placed upon us to
report detailed information with regard to settlements or judgments against our
insureds. In addition, we are required to report to the D.C. Department of
Insurance and Securities Regulation or state regulatory agencies or the National
Practitioners Data Bank payments, claims closed without payments and actions
like terminations or premiums surcharges with respect to our insureds. Penalties
may attach if we fail to report to either the Department of Insurance and
Securities Regulation or an applicable state insurance regulator or the National
Practitioners Data Bank.
Changes in government regulation of the healthcare system. Federal and
state governments recently have considered reforming the healthcare system.
While some of the proposals could be beneficial to our business the adoption of
others could adversely affect us. Public discussion of a broad range of
healthcare reform measures will likely continue in the future. These measures
that would affect our medical professional liability insurance business and our
practice management products and services include, but are not limited to:
. spending limits;
. price controls;
. limits on increases in insurance premiums;
71
. limits on the liability of doctors and hospitals for tort claims; and
. changes in the healthcare insurance system.
Insurance Holding Company Regulation. The Commissioner of Insurance and
Securities of the District of Columbia has jurisdiction over NCRIC Group as an
insurance holding company. We are required to file information periodically with
the Department of Insurance and Securities Regulation, including information
relating to its capital structure, ownership, financial condition and general
business operations. In the District of Columbia, transactions by an insurance
company with affiliates involving loans, sales, purchases, exchanges, extensions
of credit, investments, guarantees or other contingent obligations, which within
any 12-month period aggregate at least 3% of the insurance company's admitted
assets or 25% of its surplus, whichever is greater, require prior approval.
Prior approval is also required for all management agreements, service contracts
and cost-sharing arrangements between an insurance company and its affiliates.
Some reinsurance agreements or modifications also require prior approval.
District of Columbia insurance laws also provide that the acquisition or
change of control of a domestic insurance company or of any person or entity
that controls an insurance company cannot be consummated without prior
regulatory approval. A change in control is generally defined as the acquisition
of 10% or more of the issued and outstanding shares of an insurance holding
company.
Regulation of dividends from insurance subsidiaries. The District of
Columbia insurance laws limit the ability of NCRIC, Inc. to pay dividends.
Without prior notice to and approval of the Commissioner of Insurance and
Securities, NCRIC, Inc. may not declare or pay an extraordinary dividend, which
is defined as any dividend or distribution of cash or other property whose fair
market value, together with other dividends or distributions made, within the
preceding 12 months exceeds the lesser of (1) 10% of NCRIC, Inc.'s statutory
surplus as of the preceding December 31, or (2) NCRIC, Inc.'s statutory net
income excluding realized capital gains, for the 12-month period ending the
preceding December 31, but does not include pro rata distributions of any class
of our own securities. In calculating net income under the test, NCRIC, Inc. may
carry forward net income, excluding realized capital gains, from the previous
two calendar years that has not been paid out as dividends. District of Columbia
law gives the Commissioner of Insurance and Securities broad discretion to
disapprove dividends even if the dividends are within the above-described
limits. The District of Columbia permits the payment of dividends only out of
unassigned statutory surplus. Using these criteria, as of December 31, 2002,
because of the statutory loss from operations in 2002, NCRIC, Inc. would be able
to pay approximately $1.2 million in dividends without regulatory approval.
CML's dividend restrictions are identical to NCRIC, Inc.'s. Based on its 2002
operating results, CML would be able to pay approximately $500,000 in dividends
without prior approval of the Commissioner of Insurance and Securities.
Federal Securities Laws
General. We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 for the registration of
shares of common stock to be issued in connection with the conversion and the
offering. Upon completion of the conversion and the offering, NCRIC Group common
stock will continue to be registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. We will continue to be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares of common stock
to be issued in the offering does not cover the resale of those shares. Shares
of common stock purchased by persons who are not affiliates of NCRIC Group may
be resold without registration. Shares purchased by an affiliate of
72
NCRIC Group will be subject to the resale restrictions of Rule 144 under the
Securities Act of 1933. If NCRIC Group meets the current public
information requirements of Rule 144 under the Securities Act of 1933, each
affiliate of NCRIC Group that complies with the other conditions of Rule 144,
including those that require the affiliate's sale to be aggregated with those of
other persons, would be able to sell in the public market, without registration,
a number of shares not to exceed, in any three-month period, the greater of 1%
of the outstanding shares of NCRIC Group, or the average weekly volume of
trading in the shares during the preceding four calendar weeks. In the future,
NCRIC Group may permit affiliates to have their shares registered for sale under
the Securities Act of 1933.
Sarbanes-Oxley Act. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (SOA). The stated goals of the SOA are to increase
corporate responsibility, to provide for enhanced penalties for accounting and
auditing improprieties at publicly traded companies and to protect investors by
improving the accuracy and reliability of corporate disclosures pursuant to the
securities laws.
The SOA is the most far-reaching U.S. securities legislation enacted in
many years. The SOA generally applies to all companies,, that file or are
required to file periodic reports with the Securities and Exchange Commission,
under the Securities Exchange Act of 1934.
The SOA includes very specific additional disclosure requirements and new
corporate governance rules, requires the Securities and Exchange Commission and
securities exchanges to adopt extensive additional disclosure, corporate
governance and other related rules and mandates further studies of certain
issues by the Securities and Exchange Commission and the Comptroller General.
The SOA represents significant federal involvement in matters traditionally left
to state regulatory systems, such as the regulation of the accounting
profession, and to state corporate law, such as the relationship between a board
of directors and management and between a board of directors and its committees.
The SOA addresses, among other matters:
. audit committees;
. certification of financial statements by the chief executive officer
and the chief financial officer;
. the forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer's securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement;
. a prohibition on insider trading during pension plan black out
periods;
. disclosure of off-balance sheet transactions;
. a prohibition on personal loans to directors and officers;
. expedited filing requirements for Forms 4;
. disclosure of a code of ethics and filing a Form 8-K for a change or
waiver of such code;
. "real time" filing of periodic reports;
. the formation of a public accounting oversight board;
. auditor independence; and
. various increased criminal penalties for violations of securities
laws.
73
The SOA contains provisions which became effective upon enactment and
provisions which will become effective from within 30 days to one year from
enactment. The Securities and Exchange Commission has been delegated the task of
enacting rules to implement various provisions with respect to, among other
matters, disclosure in periodic filings pursuant to the Securities and Exchange
Act.
Our Companies
We were organized in December 1998 in connection with the reorganization of
National Capital Reciprocal Insurance Company into a mutual holding company
structure. NCRIC, A Mutual Holding Company owns all of the outstanding shares of
NCRIC Holdings, Inc., which prior to July 29, 1999, owned all of the outstanding
shares of NCRIC Group, Inc. Effective July 29, 1999, we completed an initial
public offering and issued 2,220,000 shares of the common stock to NCRIC
Holdings, Inc. and 1,480,000 shares of the common stock in a subscription and
community offering at a price of $7.00 per share.
NCRIC, Inc. NCRIC, Inc., a wholly owned subsidiary of NCRIC Group, Inc., is
the former National Capital Reciprocal Insurance Company incorporated in 1980
and is a licensed property and casualty insurance company domiciled in the
District of Columbia. NCRIC, Inc. provides professional liability insurance to
physicians in the District of Columbia. Policyholders of NCRIC, Inc. are also
members of NCRIC, A Mutual Holding Company.
Commonwealth Medical Liability Insurance Company. Commonwealth Medical
Liability Insurance Company, a wholly owned subsidiary of NCRIC, Inc.
incorporated in 1989, is a licensed property and casualty insurance company
domiciled in the District of Columbia. CML provides professional liability
insurance to physicians in Delaware, Maryland, Virginia, and West Virginia and
is licensed to conduct business in Tennessee.
National Capital Insurance Brokerage, Ltd. National Capital Insurance
Brokerage, Ltd., a wholly owned subsidiary of NCRIC, Inc. incorporated in 1984,
is a licensed insurance brokerage that provides reinsurance brokerage services
to NCRIC, Inc., CML, and protected cells within American Captive Corporation.
American Captive Corporation. ACC, a wholly owned subsidiary of NCRIC, Inc.
incorporated in 2001, is an organization that is authorized to form independent
protected cells to accommodate affinity groups seeking to manage their own risk
through an alternative risk transfer structure. In February 2002, NCRIC
announced formation of a joint venture with Risk Services, LLC, to form National
Capital Risk Services to offer a complete range of alternative risk transfer
services to healthcare clients throughout the nation.
NCRIC Insurance Agency, Inc. NCRIC Insurance Agency, Inc., a wholly owned
subsidiary of NCRIC, Inc. incorporated in 1989, is a licensed insurance agency
that has strategic partnerships with experienced brokers to provide life,
health, disability, and long term care coverage to our clients. These products
are not underwritten by us.
NCRIC MSO, Inc. NCRIC MSO, Inc., a wholly owned subsidiary of NCRIC Group,
Inc. incorporated in 1998, provides practice management services and employee
benefits services to physicians and dentists in the District of Columbia, North
Carolina and Virginia.
NCRIC Physicians Organization, Inc. NCRIC PO, Inc. was organized in 1994, a
wholly owned subsidiary of NCRIC MSO, Inc., to provide a network for managed
care contracting with third party payers. NCRIC PO no longer contracts as a
network and effective October 1, 2004 will reach the end of a
74
settlement agreement with a former health plan partner, American Medical
Services. In this settlement, AMS currently pays $6,000 per month to NCRIC PO.
NCRIC Statutory Trust I. NCRIC Statutory Trust I was formed in 2002 as a
special purpose entity for the purpose of issuing trust preferred securities.
Personnel
As of December 31, 2002, we employed 108 full-time persons. None of our
employees are represented by a collective bargaining unit and we consider our
relationship with our employees to be good.
Properties
Our principal business operations are conducted from our leased executive
offices, which consist of approximately 18,156 square feet located at 1115 30th
Street, N.W., Washington, D.C. 20007. The term of the lease is for 10 years,
commencing April 15, 1998 and expiring April 30, 2008. Annual rental is $421,476
with 2% annual increases for the first five years of the term. In the sixth year
of the term, the rent increases by $2.00 per rentable square foot and remains at
that level for the balance of the term. We have the option to renew the lease
for one additional term of five years. We also maintain office space in
Lynchburg and Richmond, Virginia as well as in Greensboro, North Carolina.
The following table sets forth the facilities leased by us at December 31,
2002, along with the applicable lease expiration date:
Property Location Lease Expiration Date
- ------------------------------------------------------- -----------------------
Offices:
1115 30/th/ Street, N.W., Washington, D.C. 20007 April 30, 2008
424 Graves Mill Road, Lynchburg, Virginia 24502 October 31, 2007
4701 Cox Road, Richmond, Virginia 23060 April 30, 2004
600 Green Valley Road, Greensboro, North Carolina 27408 March 31, 2008
Legal Proceedings
We are from time to time named as a defendant in various lawsuits
incidental to our insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. We vigorously defend these
actions, unless a reasonable settlement appears appropriate. We believe that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on our consolidated financial condition.
75
MANAGEMENT OF NCRIC GROUP
Directors
Our Board of Directors currently consists of 14 members. Approximately
one-third of the directors are elected annually. Directors generally are elected
to serve for three-year terms.
The table below sets forth certain information regarding the composition of
our Board of Directors as of December 31, 2002 including the terms of office of
board members.
Names Age Position Held Director Since (1) Current Term to Expire
- ----- --- ------------- ----------------- ----------------------
Vincent C. Burke, III 51 Director 1998 2005
Pamela W. Coleman 46 Director 1989 2005
Martin W. Dukes, Jr. 57 Director 1997 2004
Leonard M. Glassman 56 Director 1993 2003
Luther W. Gray, Jr. 62 Director 1984 2004
Prudence P. Kline 51 Director 1995 2005
Edward G. Koch 60 Director 1996 2004
J. Paul McNamara 53 Director 1998 2005
Leonard M. Parver 58 Director 1998 2004
R. Ray Pate, Jr. 42 Vice Chairman 1996 2003
Raymond Scalettar 73 Director 1980 2003
David M. Seitzman 73 Director 1980 2003
Robert L. Simmons 70 Director 1984 2003
Nelson P. Trujillo 64 Chairman 1980 2004
- --------------------------------
(1) With respect to years prior to 1998, reflects the initial appointment as a
governor of National Capital Reciprocal Insurance Company, or a director of
its attorney-in-fact, or its subsidiary, NCRIC, Inc. or CML.
Directors
The principal occupation during the past five years of each director and
executive officer of NCRIC Group is set forth below. All directors have held
their present positions for five years unless otherwise stated.
Nelson P. Trujillo, M.D. is Chairman of the Board of Directors of NCRIC
Group and its subsidiaries. He was a governor and Chairman of the Board of
National Capital Reciprocal Insurance Company from 1980 until its mutual holding
company reorganization on December 31, 1998. Dr. Trujillo is currently President
of Metropolitan Gastroenterology Group where he is a physician.
R. Ray Pate, Jr. is President and Chief Executive Officer of NCRIC Group
and NCRIC, Inc. and Chief Executive Officer of NCRIC MSO. He was the Treasurer
of National Capital Reciprocal Insurance Company and President, Chief Executive
Officer and Director of National Capital Underwriters, Inc., attorney-in-fact
for National Capital Reciprocal Insurance Company, from 1996 until the mutual
holding company reorganization in 1998. Since June 2000 he has served as Vice
Chairman of the Board of Directors.
Vincent C. Burke, III has been a director of NCRIC Group and subsidiaries
since the reorganization in 1998. He is a partner with the firm of Furey, Doolan
& Abell, LLP. From April 1992 to May 1998, he was counsel to the law firm of
Reed Smith Shaw & McClay. Mr. Burke's practice is in the areas of corporate,
business, real estate and closely-held businesses. He practices in the District
of Columbia and Maryland.
76
Pamela W. Coleman, M.D. was a governor of National Capital Reciprocal
Insurance Company from 1989 until the mutual holding company reorganization in
1998, and has been a Director of NCRIC Group and subsidiaries since the
reorganization. Dr. Coleman is a urologist in private practice.
Martin W. Dukes, Jr., M.D. was a Director of National Capital Underwriters,
Inc. from 1997 until the mutual holding company reorganization in 1998, a
Director of NCRIC, Inc. since the reorganization, and a Director of NCRIC Group
and subsidiaries since May 2001. Dr. Dukes is a physician in private practice in
the District of Columbia.
Luther W. Gray, Jr., M.D. was a governor of National Capital Reciprocal
Insurance Company from 1984 until the mutual holdingcompany reorganization in
1998 and has been a Director of NCRIC Group and subsidiaries since the mutual
holding company reorganization. He is currently the Chairman of the Underwriting
Committee for NCRIC, Inc. Dr. Gray is a physician and general surgeon with
Luther W. Gray, Jr., M.D., PC and is Chair of the Department of Surgery at
Sibley Memorial Hospital.
Leonard M. Glassman, M.D. was a Director of National Capital Underwriters,
Inc. from 1993 until the mutual holding company reorganization in 1998 and has
been a director of NCRIC Group and subsidiaries since the reorganization. He is
currently the Chairman of the Investment Committee of NCRIC, Inc. and served as
Chairman of the Board of NCRIC, Inc. from 1998 until 2000. Dr. Glassman is a
physician with Washington Radiology Associates, P.C. He is a past member of the
Finance Committee of the Medical Society of the District of Columbia and was
Chief of Radiology of Columbia Hospital for Women Medical Center from 1984 to
1999.
Prudence P. Kline, M.D. was a Director of National Capital Underwriters,
Inc. from 1995 until the mutual holding company reorganization in 1998 and has
been a director of NCRIC Group and subsidiaries since the reorganization. Dr.
Kline has been a physician in private practice in the District of Columbia since
1986.
Edward G. Koch, M.D. has served as a Director of Commonwealth Medical
Liability Insurance Company since 1996 and a director of NCRIC Group and
subsidiaries since the reorganization in 1998. Dr. Koch is a gynecological
physician in private practice in Arlington, Virginia and the District of
Columbia. Since 1997 he has been President of the Arlington County Medical
Society Foundation. Sponsored by the Medical Society of Virginia, he is an
alternate delegate to the AMA from Virginia.
J. Paul McNamara has been a director of NCRIC Group and subsidiaries since
the reorganization in 1998. He is President and Chief Operating Officer of
Sequoia National Bank/Sequoia Bancshares, Inc.
Leonard M. Parver, M.D. has been a Director of NCRIC Group and subsidiaries
since the reorganization in 1998. He was Chairman of the Board of Directors of
NCRIC MSO, Inc. from 1998 until 2000. He has practiced medicine in the District
of Columbia for the past 22 years.
Raymond Scalettar, M.D., D.Sc., was Vice Chairman of the Board of Directors
of National Capital Underwriters, Inc. from 1980 until the mutual holding
company reorganization in 1998 and has been a director of NCRIC Group and
subsidiaries since the reorganization. He is a founder of the Washington
Internal Medicine Group, a health policy consultant, a past trustee and Chair of
the Board of Trustees of the AMA, and a past Commissioner and Senior Consultant
to the Joint Commission on Accreditation of HealthCare Organizations. As
President of the Medical Society of the District of Columbia in 1977, he
commissioned the study that led to the formation of NCRIC in 1980.
77
David M. Seitzman, M.D. was a member of the Board of Directors of National
Capital Underwriters, Inc. from 1980 until the mutual holding company
reorganization in 1998 and has been a Director of NCRIC Group and subsidiaries
since the reorganization. Dr. Seitzman is now retired from the practice of
medicine. He served on the boards of Blue Cross and Blue Shield of the National
Capital Area and the Medical Society of the District of Columbia and served as
President and co-founder of the Center for Ambulatory Surgery, Inc. Since 1993,
Dr. Seitzman was a trustee of portfolios of The 59 Wall Street Fund, Inc., which
is advised by Brown Brothers Harriman & Co., one of NCRIC, Inc.'s investment
advisors until January 1, 2000.
Robert L. Simmons, M.D. was a member of the Board of Directors of National
Capital Underwriters, Inc. from 1984 until the mutual holding company
reorganization in 1998, a Director of NCRIC, Inc. since the reorganization, and
a Director of NCRIC Group and subsidiaries since May 2001. Dr. Simmons is Vice
President of Medical Affairs at Providence Hospital in the District of Columbia
and is a thoracic and cardiovascular surgeon.
Executive Officers Who Are Not Directors
Stephen S. Fargis was Senior Vice President - Business Development of
National Capital Underwriters, Inc. from 1995 until the mutual holding company
reorganization in 1998. Since the reorganization he has also been Senior Vice
President and Chief Operating Officer of NCRIC, Inc. and in 2001 was named
President of NCRIC MSO, Inc.
Rebecca B. Crunk was the Chief Financial Officer of National Capital
Underwriters, Inc. from April 1998 until the mutual holding company
reorganization in 1998. Since the reorganization she has also been Senior Vice
President, Chief Financial Officer and Treasurer of NCRIC, Inc. Ms. Crunk is a
certified public accountant and is a member of the American Institute of
Certified Public Accountants. From 1995 to 1998, she was Vice President,
Treasurer and Controller of ReliaStar United Services Life Insurance Company.
William E. Burgess was Senior Vice President - Claims and Risk Management
of National Capital Underwriters, Inc. from August 1997 until the mutual holding
company reorganization in 1998. From 1993 to August 1997, he was a Vice
President of National Capital Underwriters, Inc. Since the reorganization he has
also been Senior Vice President and Secretary of NCRIC, Inc.
Meetings and Committees of the Board of Directors
The business of NCRIC Group is conducted through regular and special
meetings of the Board of Directors and its committees. The Board of Directors
met 11 times during 2002. No director attended fewer than 75% of the total
meetings held by the Board of Directors and the committees on which such
director served, except Dr. Robert L. Simmons.
The Board of Directors has established an Audit Committee, a Compensation
Committee, a Governance Committee and a Nominating Committee.
The Audit Committee is comprised of Directors Burke, Coleman, McNamara and
Seitzman. The Audit Committee recommends the firm to be appointed as independent
accountants to audit the financial statements, reviews the scope and results of
the audit with the independent accountants, reviews with management and the
independent accountants NCRIC Group's year-end audit, and considers the adequacy
of NCRIC Group's internal accounting controls. The Audit Committee met five
times in 2002.
78
The Compensation Committee is comprised of Directors Burke, Kline, Seitzman
and Trujillo. The Compensation Committee reviews and makes recommendations to
the Board of Directors concerning compensation, benefit policies and stock
ownership programs, as well as the compensation of the chief executive officer.
The Compensation Committee administers the stock option plan and the stock award
plan. The Compensation Committee met five times in 2002.
The Governance Committee is comprised of Directors Pate, Burke, Glassman
and Trujillo. The Governance Committee is responsible for reviewing the
effectiveness of board meetings and board committees, and for reviewing and
establishing board governance guidelines. The Governance Committee met one time
in 2002.
The Nominating Committee is comprised of Directors Pate, Burke, Glassman
and Trujillo. The Nominating Committee was established for the purpose of
identifying, evaluating and recommending potential candidates for election to
the Board. While the Committee will consider nominees recommended by the
shareholders, it has not actively solicited recommendations from shareholders.
Nominations by shareholders must comply with certain procedural and
informational requirements set forth in NCRIC Group's Bylaws. See "Advance
Notice of Business to be Conducted at an Annual Meeting." The Nominating
Committee met one time in 2002.
Compensation of Directors
Fees. Each non-employee Director of NCRIC Group (other than the Chairman)
receives annual cash compensation of $45,000. The Chairman of the Board will
receive annual cash compensation of $150,000 (prior to the completion of the
conversion the mutual holding company paid a proportionate share of this
amount). Directors who are also our officers or our employees do not receive any
cash compensation for serving as directors. Directors serving on the audit
committee receive a $400 per meeting fee ($500 for the Chairman). Directors
serving on the nominating committee receive a $300 per meeting fee ($350 for the
Chairman). All directors are reimbursed for out-of-pocket expenses in connection
with attendance at any meeting of the Board of Directors or any committee.
Stock Benefit Plans. Our Directors are eligible to participate in and have
received awards of stock options and restricted stock. Directors will be
eligible to receive awards of restricted stock and stock options under the plans
proposed for stockholder approval in connection with conversion.
79
Executive Compensation
The following table sets forth information for the years ended December 31,
2002, 2001 and 2000 as to compensation paid to the President and Chief Executive
Officer and the other executive officers (collectively referred to as "Named
Executive Officers") who earned over $100,000 in salary and bonuses during 2002.
Annual Compensation(1) Long-Term Compensation
---------------------------------------------- --------------------------------
Awards Payouts
---------------------- ---------
Year Restricted
Name and Ended Other Annual Stock Options/ LTIP All Other
Principal Position 12/31 Salary Bonus Compensation Awards (2) SAR (#) Payouts Compensation
- -------------------------- ------- ---------- --------- -------------- ------------ -------- ------- --------------
R. Ray Pate, Jr. 2002 $ 290,000 $ 0 -- $ -- -- -- $ 26,208
President and 2001 290,000 0 -- -- -- -- 22,346
Chief Executive Officer 2000 240,000 60,000 -- 104,895 -- -- 22,528
Stephen S. Fargis 2002 $ 170,000 $ 0 -- $ -- -- -- $ 24,339
Senior Vice President and 2001 170,000 0 -- -- -- -- 22,130
Chief Operating Officer 2000 151,667 30,308 -- 69,930 -- -- 22,312
Rebecca B. Crunk 2002 $ 170,000 $ 0 -- $ -- -- -- $ 26,500
Senior Vice President and 2001 170,000 0 -- -- -- -- 22,453
Chief Financial Officer 2000 135,000 27,000 -- 69,930 -- -- 22,414
William E. Burgess 2002 $ 128,398 $ 0 -- $ -- -- -- $ 18,739
Senior Vice President and 2001 120,000 0 -- -- -- -- 20,690
Secretary 2000 120,000 24,000 -- 58,275 -- -- 20,249
- ------------
(1) For the fiscal years ended December 31.
(2) Equals the market value of the stock award on the date of the grant, which
was $7.875 per share. The total number and dollar value of unvested shares
of stock awarded to Mr. Pate, Mr. Fargis, Ms. Crunk and Mr. Burgess as of
December 31, 2002, based on the market value of the common stock on
December 31, 2002 ($11.00 per share), was 7,992, 5,328, 5,328 and 4,400
shares, and $87,912, $58,608, $58,608 and $48,400, respectively.
Employment Agreements
R. Ray Pate, Jr. serves as the President and Chief Executive Officer of
NCRIC Group under an employment agreement between NCRIC Group and Mr. Pate dated
January 1, 2001. Under the terms of his employment agreement, Mr. Pate is
entitled to basic compensation of $350,000 for 2003 and is reimbursed for all
reasonable and proper business expenses incurred by him in the performance of
his duties. The terms of the employment agreement also provide that Mr. Pate is
entitled to participate in any retirement and/or pension plans or health and
medical insurance plans offered to NCRIC Group's senior executives; receive use
of an automobile; and be covered by both term life insurance and disability
insurance.
The term of the employment agreement is five years commencing January 1,
2001. NCRIC Group may terminate the employment agreement for cause or without
cause, at any time. Any dispute as to whether NCRIC Group had cause will be
determined by arbitration. If NCRIC Group terminates Mr. Pate's employment
agreement without cause, Mr. Pate is entitled to receive, as severance pay, an
amount equal to three years' base compensation at the level in effect on the
date of the termination. Mr. Pate may voluntarily terminate his employment
provided that he gives 60 days prior notice of his voluntary termination or pays
liquidated damages equal to the amount of his base compensation for two months.
NCRIC Group entered into an employment agreement commencing December 1,
2000, with Stephen S. Fargis on substantially similar terms to Mr. Pate's except
that Mr. Fargis' employment agreement terminates November 30, 2003, and provides
for base compensation of $200,000 for 2003.
80
NCRIC Group entered into an employment agreement commencing January 1, 2001
with Rebecca B. Crunk on substantially similar terms to Mr. Pate's, except Ms.
Crunk's agreement terminates December 31, 2003, and provides for base
compensation of $220,000 for 2003.
NCRIC Group entered into an employment agreement commencing January 1, 2002
with William E. Burgess on substantially similar terms to Mr. Pate's, except Mr.
Burgess' employment agreement terminates December 31, 2004, and provides for
base compensation of $175,000 for 2003.
Employee Stock Ownership Plan
NCRIC Group has an employee stock ownership plan for eligible employees.
Pursuant to the employee stock ownership plan, employees age 21 or older who
have worked for NCRIC, Inc. for a period of one year and have been credited with
1,000 or more hours of service during the year are eligible to participate. As
part of the conversion and offering, the employee stock ownership plan intends
to borrow funds from NCRIC Group and to use those funds to purchase a number of
shares of common stock equal to 5% of the shares sold in the offerings. Shares
purchased by the ESOP will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares of common
stock released from the suspense account in an amount proportional to the
repayment of the principal of the employee stock ownership plan loan will be
allocated among employee stock ownership plan participants on the basis of
compensation in the year of allocation. For purposes of vesting and eligibility,
participants in the employee stock ownership plan receive credit for service
prior to the effective date of the employee stock ownership plan. A participant
will vest in increments of 20% per year of credited service and will be fully
vested in his or her account balance after five years of credited service. A
participant who terminates employment for reasons other than death, retirement
or disability prior to five years of credited service will forfeit the nonvested
portion of his or her benefits under the employee stock ownership plan. Benefits
will be payable in the form of common stock upon death, retirement, disability
or separation from service. Contributions by NCRIC Group to the employee stock
ownership plan are discretionary, subject to the loan terms and tax law limits,
and, therefore, benefits payable under the employee stock ownership plan cannot
be estimated.
NCRIC Group established an administrative board to administer the employee
stock ownership plan. The employee stock ownership plan trustees, Mr. Pate and
Dr. Trujillo, must vote all allocated shares held in the employee stock
ownership plan in accordance with the instructions of participating employees.
Pursuant to the employee stock ownership plan, nondirected shares, and shares of
common stock held in the suspense account, will be voted in a manner calculated
to most accurately reflect the instructions it has received from participants
regarding the allocated stock so long as the vote is in accordance with the
provisions of the Employee Retirement Income Security Act.
Stock Benefit Plans
The Board of Directors of NCRIC Group has established stock benefit plans
that provide discretionary awards of stock options and restricted stock to its
directors and officers . No options were granted to or exercised by the Named
Executive Officers during 2002.
Set forth below is certain information concerning options outstanding to
the Named Executive Officers at December 31, 2002. No options were exercised by
the named executive officers during 2002.
81
====================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
====================================================================================================================
Number of Unexercised Value of Unexercised
Options at In-The-Money Options at
Year-End Year-End (1)
- --------------------------------------------------------------------------------------------------------------------
Shares Acquired Value Exercisable/Unexercisable Exercisable/Unexercisable
Name Upon Exercise Realized (#) ($)
- --------------------------------------------------------------------------------------------------------------------
R. Ray Pate, Jr. 0 $-- 13,320/0 $53,280/0
- --------------------------------------------------------------------------------------------------------------------
Stephen S. Fargis 0 $-- 9,250/0 $37,000/0
- --------------------------------------------------------------------------------------------------------------------
William E. Burgess 0 $-- 7,400/0 $29,600/0
- --------------------------------------------------------------------------------------------------------------------
Rebecca B. Crunk 0 $-- 7,400/0 $29,600/0
====================================================================================================================
_______________
(1) Equals the difference between the aggregate exercise price of the options
and the aggregate fair market value of the shares of common stock that
would be received upon exercise, assuming such exercise occurred on
December 31, 2002, at which date the closing price of the common stock as
quoted on the Nasdaq SmallCap Market was at $11.00.
Benefits to Be Considered in Connection with the Conversion
Stock Award Plan. NCRIC Group stockholders are being asked to approve a new
stock award plan in connection with the conversion. If approved by stockholders,
the new stock award plan would purchase 4% of the shares sold in the offering or
102,000 shares, 120,000 shares, 138,000 shares or 158,700 shares at the minimum,
mid-point, maximum and adjusted maximum of the offering range, respectively. As
a result, we must recognize expense for shares awarded over their vesting period
at the fair market value of the shares on the date they are awarded. The
recipients will be awarded shares of common stock under the stock award plan at
no cost to them. No awards would be made under the stock award plan until the
plan is approved by stockholders.
If the stock award plan is approved by the stockholders of NCRIC Group,
NCRIC Group will establish a trust for the purpose of purchasing shares of
common stock in the offering. NCRIC Group will loan the trust the funds to
purchase the number of shares of common stock equal to 4% of the shares sold in
the offering. NCRIC Group anticipates that the loan to the trust will be repaid
by periodic cash contributions to be made to the trust by NCRIC Group. The trust
will award shares of common stock to participants in a manner designed to
encourage participants' continued service.
Awards granted under the stock award plan would be nontransferable and
nonassignable. Awards would be adjusted for capital changes such as stock
dividends and stock splits. Awards would be 100% vested upon termination of
employment or service due to death, disability, or following a change in
control, and also would be 100% vested upon normal retirement. If employment or
service were to terminate for other reasons, the award recipient would forfeit
any nonvested award. If employment or service were to terminate for cause (as
defined), shares not already delivered would be forfeited.
The recipient of an award will recognize income equal to the fair market
value of the stock earned, determined as of the date of vesting, unless the
recipient makes an election under Section 83(b) of the Internal Revenue Code of
1986, as amended, to be taxed earlier. The amount of income recognized by the
recipient would be a deductible expense for tax purposes for NCRIC Group.
Stock Option Plan. NCRIC Group stockholders are being asked to approve a
new stock option plan in connection with the conversion. If approved by the
stockholders, the new stock option plan would reserve a number of shares equal
to 10% of the shares sold in the offering for issuance when options granted to
recipients are exercised. Ten percent of the shares issued in the offering would
amount to
82
255,000 shares, 300,000 shares, 345,000 shares or 396,750 shares at the minimum,
mid-point, maximum and adjusted maximum of the offering range, respectively. No
options would be granted under the new stock option plan until stockholder
approval of the plan is received. Since the shares of common stock underlying
the options will come from authorized but unissued shares of common stock,
stockholders will experience dilution of approximately 5.65% in their
ownership interest in NCRIC Group at the mid-point of the offering range.
The exercise price of the options granted under the new stock option plan
will be equal to the fair market value of NCRIC Group common stock on the date
of grant of the stock options. Options granted under the stock option plan would
be adjusted for capital changes such as stock splits and stock dividends. Stock
option grants will be 100% vested upon termination of employment due to death or
disability or upon a change in control, and if the stock option plan is adopted
more than one year after the conversion, awards would be 100% vested upon normal
retirement.
The stock option plan would be administered by a committee of non-employee
members of the NCRIC Group's board of directors. Options granted under the stock
option plan to employees may be "incentive" stock options, which are designed to
result in a beneficial tax treatment to the employee but no tax deduction to
NCRIC Group. Non-qualified stock options may also be granted to employees under
the stock option plan, and may be granted to the non-employee directors who
receive stock options. In the event an option recipient terminated his or her
employment or service as an employee or director, the options would terminate
during certain specified periods.
83
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides the beneficial ownership of our common stock
held by our directors and executive officers, individually and as a group, as of
February 28, 2003. The business address of each director and executive officer
is 1115 30th Street, N.W., Washington, D.C. 20007.
Number of Shares of Common Percent of All Common
Name of Beneficial Owner Stock Beneficially Owned (1)(2) Stock Outstanding (3)
- --------------------------------- ------------------------------- ----------------------
Vincent C. Burke, III 4,370 *
Pamela W. Coleman 10,821 *
Martin W. Dukes, Jr. 2,620 *
Leonard M. Glassman 22,770 *
Luther W. Gray, Jr. 7,641 *
Prudence P. Kline 3,720 *
Edward G. Koch 3,020 *
J. Paul McNamara 20,095 *
Leonard M. Parver 14,912 *
R. Ray Pate, Jr. 60,365 1.6%
Raymond Scalettar 7,642 *
David M. Seitzman 7,645 *
Robert L. Simmons 9,220 *
Nelson P. Trujillo 46,330 1.3%
Stephen S. Fargis 34,640 *
Rebecca B. Crunk 31,943 *
William E. Burgess 18,235 *
All directors and executive officers as a group (17 persons) 305,989 8.2%
___________________
* Less than 1%.
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table of
any shares of common stock if he has sole or shared voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the date as of which beneficial
ownership is being determined. As used herein, "voting power" is the power
to vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares. Includes all shares held
directly as well as by spouses and minor children, in trust and other
indirect ownership, over which shares the named individuals effectively
exercise sole or shared voting and investment power.
(2) Includes shares that may be acquired pursuant to presently exercisable
stock options. A total of 68,450 shares owned may be acquired pursuant to
presently exercisable stock options.
(3) Calculated by dividing the number of shares outstanding plus the number of
shares, individually and for the group, that may be acquired pursuant to
presently exercisable stock options, by the total shares of common stock
outstanding plus the number of shares that may be acquired pursuant to
presently exercisable stock options, individually and for the group.
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The table below sets forth, for each of NCRIC Group's directors and
executive officers and for all of the directors and executive officers as a
group, the following information:
(1) the number of exchange shares to be held upon consummation of the
conversion, based upon their beneficial ownership of NCRIC Group
common stock as of February 28, 2003;
(2) the proposed purchases of subscription shares, assuming
sufficient shares are available to satisfy their subscriptions;
and
(3) the total amount of NCRIC Group common stock to be held upon
consummation of the conversion.
84
In each case, it is assumed that subscription shares are sold at the
midpoint of the offering range. See "The Conversion--Limitations on Common Stock
Purchases."
Proposed Purchases of Common
Stock in the Offering (1) Total Common Stock to be Held
----------------------------- -------------------------------
Number of Percentage of
Exchange Shares Number of Number of Total
Name of Beneficial Owner to be Held (2) Shares Amount Shares Outstanding (3)
- ------------------------ ----------------- ------------ ------------- ------------ ----------------
Vincent C. Burke, III 5,905 1,000 $ 10,000 6,905 *
Pamela W. Coleman 14,623 500 5,000 15,123 *
Martin W. Dukes, Jr. 3,540 -0- -0- 3,540 *
Leonard M. Glassman 30,771 10,000 100,000 40,771 *
Luther W. Gray, Jr. 10,326 1,000 10,000 11,326 *
Prudence P. Kline 5,027 1,000 10,000 6,027 *
Edward G. Koch 4,081 1,000 10,000 5,081 *
J. Paul McNamara 27,156 7,500 75,000 34,656 *
Leonard M. Parver 20,152 3,500 35,000 23,652 *
R. Ray Pate, Jr. 81,577 5,000 50,000 86,577 1.7%
Raymond Scalettar 10,327 -0- -0- 10,327 *
David M. Seitzman 10,331 2,500 25,000 12,831 *
Robert L. Simmons 12,459 -0- -0- 12,459 *
Nelson P. Trujillo 62,610 10,000 100,000 72,610 1.4%
--------------- ---------- ---------- ----------
298,885 43,000 430,000 341,885
--------------- ---------- ---------- ----------
Stephen S. Fargis 46,813 5,000 50,000 51,813 1.0%
Rebecca B. Crunk 43,167 2,500 25,000 45,667 *
William E. Burgess 24,643 1,000 10,000 25,643 *
--------------- ---------- ---------- ----------
114,623 8,500 85,000 123,123
=============== ========== ========== ==========
Total for Directors
and Executive Officers 413,508 51,500 515,000 465,008 9.1%
=============== ========== ========== ========== ======
__________________
* Less than 1%.
(1) Includes proposed subscriptions, if any, by associates.
(2) Based on information presented in "Beneficial Ownership of Common Stock."
(3) Calculated by dividing the total shares of NCRIC Group common stock to be
outstanding at the midpoint of the offering range (_______ shares) plus the
number of shares that may be acquired pursuant to presently exercisable
stock options, which in the aggregate totaled _______ shares.
THE CONVERSION
The Boards of Directors of NCRIC Group and NCRIC, A Mutual Holding Company
have approved the plan of conversion and reorganization. The plan of conversion
and reorganization must also be approved by the members of NCRIC, A Mutual
Holding Company (policyholders of NCRIC, Inc.) and the stockholders of NCRIC
Group. A special meeting of members and an annual meeting of stockholders have
been called for this purpose. The Commissioner of Insurance and Securities of
the District of Columbia also has conditionally approved the plan of conversion
and reorganization. However, such approval does not constitute a recommendation
or endorsement of the plan of conversion and reorganization by the Commissioner.
General
The respective Boards of Directors of NCRIC, A Mutual Holding Company and
NCRIC Group adopted the plan of conversion and reorganization on January 28,
2003. Pursuant to the plan of conversion and reorganization, our organization
will convert from the mutual holding company form of organization to the fully
stock form. NCRIC, A Mutual Holding Company and NCRIC Holdings, Inc. will be
merged into NCRIC Group, and NCRIC, A Mutual Holding Company and NCRIC Holdings,
Inc. will no longer exist and all membership rights will be cancelled and
members will receive subscription rights in accordance with the plan of
conversion and reorganization. Pursuant to the plan of conversion and
reorganization, NCRIC Group will be succeeded by a new Delaware corporation with
the same name.
85
As part of the conversion, the ownership interest of NCRIC, A Mutual Holding
Company in NCRIC Group, owned through NCRIC Holdings, Inc., will be offered for
sale in the stock offering. When the conversion is completed, all of the common
stock of NCRIC Group will be owned by public stockholders. A diagram of our
corporate structure before and after the conversion is set forth in the summary
of this prospectus.
Under the plan of conversion and reorganization, at the conclusion of the
conversion and offering, each share of NCRIC Group common stock owned by persons
other than NCRIC, A Mutual Holding Company will be converted automatically into
the right to receive new shares of NCRIC Group common stock determined pursuant
to an exchange ratio which is based upon an independent appraisal. The exchange
ratio will ensure that immediately after the exchange of existing shares of
NCRIC Group for new shares, the public stockholders of NCRIC Group common stock
will own the same aggregate percentage of new NCRIC Group common stock that they
owned immediately prior to the conversion, excluding any shares they purchased
in the offering.
NCRIC Group intends to retain 25% of the net proceeds of the offering and
to contribute the balance of the net proceeds to NCRIC, Inc. The conversion will
be effected only upon completion of the issuance of at least the minimum number
of shares of our common stock to be offered pursuant to the plan of conversion
and reorganization.
The plan of conversion and reorganization provides that we will offer
shares of common stock for sale in the subscription offering to eligible members
of NCRIC, A Mutual Holding Company, our employee benefit plans, including the
employee stock ownership plan and stock award plan, and our directors, officers
and employees. Subject to the prior rights of these holders of subscription
rights, we will offer common stock for sale in a community offering to members
of the general public, with a preference given in the following order:
(1) persons who are policyholders of NCRIC, Inc. but not eligible members
as of NCRIC, A Mutual Holding Company;
(2) persons who are policyholders of CML; and
(3) existing stockholders of NCRIC Group as of May 6, 2003.
We have the right to accept or reject, in whole or in part, any orders to
purchase shares of the common stock received in the community offering. The
community offering may begin at the same time as the subscription offering and
must be completed within 45 days after the completion of the subscription
offering unless otherwise extended by _____________. See "--Community Offering."
We determined the number of shares of common stock to be offered in the
offering based upon an independent appraisal of the estimated pro forma market
value of NCRIC Group. All shares of common stock to be sold in the offering will
be sold at $10.00 per share. The independent valuation will be updated and the
final number of the shares to be issued in the offering will be determined at
the completion of the offering. See "--Stock Pricing and Number of Shares to be
Issued" for more information as to the determination of the estimated pro forma
market value of the common stock.
The following is a brief summary of the conversion and is qualified in its
entirety by reference to the provisions of the plan of conversion and
reorganization. A copy of the plan of conversion and reorganization is available
for inspection at our executive office and at the office of the Department of
Insurance and Securities Regulation. The plan of conversion and reorganization
is also filed as an exhibit
86
to our registration statement filed with the Securities and Exchange Commission
of which this prospectus is a part. See "Additional Information."
Reasons for the Conversion
The primary reasons for the conversion are (i) to enhance NCRIC Group's
strategic and financial flexibility by immediately increasing capital and
furthering its future access to capital markets; (ii) to serve physicians needs
by maintaining NCRIC, Inc. as an effective and competitive insurer in the
future; (iii) to support the increased level of risk retention in our
reinsurance programs; (iv) to support the growth in premiums written and further
opportunities for such growth; and (v) to enhance stockholder returns through
higher earnings and enhanced capital management strategies.
As a fully converted stock holding company, we also will have greater
flexibility in structuring mergers and acquisitions, including the form of
consideration paid in a transaction. Our current mutual holding company
structure, by its nature, limits our ability to offer shares of our common stock
as consideration in a merger or acquisition. We currently have no arrangements
or understandings regarding any specific acquisition.
Approvals Required
The affirmative vote of a majority of the total number of votes cast by the
members of NCRIC, A Mutual Holding Company at the special meeting of members is
required to approve the plan of conversion and reorganization. By their approval
of the plan of conversion and reorganization, the members of NCRIC, A Mutual
Holding Company will also be deemed to approve the merger of NCRIC, A Mutual
Holding Company and NCRIC Holdings, Inc. into NCRIC Group. The affirmative vote
of the holders of at least two-thirds of the outstanding shares of common stock
of NCRIC Group and a majority of the votes cast by the public stockholders of
NCRIC Group common stock also are required to approve the plan of conversion and
reorganization. The plan of conversion and reorganization has received the
conditional approval from the Department of Insurance and Securities Regulation.
Effects of Conversion on Members and Policyholders
Continuity. While the conversion is being accomplished, the normal business
of NCRIC Group and its subsidiaries will continue without interruption. After
the conversion, NCRIC Group will continue to offer existing services to its
customers. The directors serving NCRIC Group at the time of the conversion will
serve as directors of NCRIC Group after the conversion.
Effect on Voting Rights of Members. At present, policyholders of NCRIC,
Inc. are members of, and have voting rights in, NCRIC, A Mutual Holding Company
as to all matters requiring membership action. Upon completion of the
conversion, policyholders of NCRIC, Inc. will cease to be members of NCRIC, A
Mutual Holding Company and will no longer have voting rights. Upon completion of
the conversion, all voting rights will be vested in NCRIC Group. The
stockholders of NCRIC Group will possess exclusive voting rights with respect to
NCRIC Group common stock.
Tax Effects. NCRIC Group will receive an opinion of counsel with regard to
federal and state income taxation to the effect that the conversion will not be
taxable for federal or state income tax purposes to NCRIC, A Mutual Holding
Company, NCRIC Holdings, Inc, NCRIC Group, the public stockholders of NCRIC
Group, members of NCRIC, A Mutual Holding Company, and the directors, officer
and employees of NCRIC Group and its subsidiaries. See "--Tax Aspects."
87
Share Exchange Ratio
The plan of conversion and reorganization provides that in connection with
the conversion of the mutual holding company to fully stock form, the public
stockholders will be entitled to exchange their shares for common stock of the
converted holding company. Each publicly held share of NCRIC Group common stock
will, on the effective date of the conversion, be automatically converted into
the right to receive a number of new shares of NCRIC Group common stock. The
number of new shares of common stock will be determined pursuant to the exchange
ratio based upon an independent appraisal of NCRIC Group, which ensures that the
public stockholders of NCRIC Group common stock will own the same percentage of
new common stock in NCRIC Group after the conversion as they held in NCRIC Group
immediately prior to the conversion, exclusive of their purchase of additional
shares in the offering, and the receipt of cash in lieu of fractional shares. At
December 31, 2002, there were 3,708,399 shares of NCRIC Group common stock
outstanding (net of treasury stock), and 1,488,399 shares were publicly held.
The exchange ratio is not dependent on the market value of NCRIC Group common
stock. It is calculated based on the percentage of NCRIC Group common stock held
by the public, the independent appraisal of NCRIC Group prepared by RP
Financial, LC. and the number of shares of common stock sold in the offering.
The exchange ratio is expected to range from approximately 1.1486 exchange
shares for each publicly held share of NCRIC Group at the minimum of the
offering range to 1.7872 exchange shares for each publicly held share of NCRIC
Group at the adjusted maximum of the offering range.
If you are now a stockholder of NCRIC Group, your existing shares will be
cancelled and exchanged for new shares of NCRIC Group common stock. The number
of shares you receive will be based on the final exchange ratio determined as of
the closing of the conversion. The actual number of shares of common stock you
receive will depend upon the number of shares of common stock we issue in the
offering, which in turn will depend upon the final appraised value of NCRIC
Group. In addition, if options to purchase shares of NCRIC Group are exercised
before consummation of the conversion, then there will be an increase in the
percentage of shares of NCRIC Group common stock held by public stockholders, an
increase in the number of shares issued to public stockholders in the share
exchange and a decrease in the exchange ratio and the offering range. The
following table shows how the exchange ratio will adjust, based on the number of
shares issued in the offering. The table also shows how many shares an owner of
NCRIC Group common stock would receive in the exchange, adjusted for the number
of shares sold in the offering.
New Shares to be Exchanged Total Shares of New Shares
New Shares to be Issued for Existing Shares of NCRIC Common Stock to to be
in This Offering Group be Issued in the Received for
----------------------- ---------------------------- Conversion and Exchange 100 Existing
Amount Percent Amount Percent Offering Ratio Shares
---------- ---------- ---------- ---------- ------------ -------- --------
Minimum ............ 2,550,000 59.9% 1,709,648 40.1% 4,259,648 1.1486 114
Midpoint ........... 3,000,000 59.9 2,011,350 40.1 5,011,350 1.3514 135
Maximum ............ 3,450,000 59.9 2,313,053 40.1 5,763,053 1.5541 155
15% above Maximum .. 3,967,500 59.9 2,660,010 40.1 6,627,510 1.7872 178
Outstanding options to purchase shares of NCRIC Group common stock also
will be converted into and become options to purchase new shares of NCRIC Group
common stock. The number of shares of common stock to be received upon exercise
of these options will be determined pursuant to the exchange ratio. The
aggregate exercise price, duration and vesting schedule of these options will
not be affected. At December 31, 2002, there were 74,000 outstanding options to
purchase NCRIC Group common stock, all of which were vested.
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Stock Pricing and Number of Shares to be Issued
The plan of conversion and reorganization requires that the aggregate
purchase price of the common stock sold in the offering must be based on the
appraised pro forma market value of the common stock, as determined by an
independent valuation. NCRIC Group has engaged RP Financial, LC. to make this
independent valuation. For its services in preparing the initial valuation, RP
Financial, LC. will receive a fee of $50,000. NCRIC Group has agreed to
indemnify RP Financial, LC. and its employees and affiliates against specified
losses, including any losses in connection with claims under the federal
securities laws, arising out of its services as appraiser, except where such
liability results from its negligence or bad faith.
The appraisal considered the pro forma impact of the offering. The
appraisal applied four primary methodologies: the pro forma price-to-book value
approach applied to both reported book value and tangible book value; the pro
forma price-to-earnings approach applied to reported and core earnings; the pro
forma price-to-revenue approach and the pro forma price-to-assets approach. The
market value ratios applied in the four methodologies were based upon the
current market valuations of the peer group companies, subject to valuation
adjustments applied by RP Financial, LC. to account for differences between
NCRIC Group and the peer group. RP Financial, LC. placed the greatest emphasis
on the price-to-earnings and price-to-book approaches in estimating pro forma
market value.
The independent valuation was prepared by RP Financial, LC. in reliance
upon the information contained in this prospectus, including the consolidated
financial statements. RP Financial, LC. also considered the following factors,
among others:
. the present and projected operating results and financial condition of
NCRIC Group;
. certain historical, financial and other information relating to NCRIC
Group;
. industry trends impacting NCRIC Group;
. a comparative evaluation of the operating and financial
characteristics of NCRIC Group with those of other similarly situated
publicly traded companies;
. the aggregate size of the offering of the common stock;
. the impact of the conversion on NCRIC Group's stockholders' equity and
earnings potential;
. the proposed dividend policy of NCRIC Group; and
. the trading market for securities of comparable companies and general
conditions in the market for such securities.
Included in RP Financial, LC.'s report were certain assumptions as to the
pro forma earnings of NCRIC Group after the conversion that were utilized in
determining the appraised value. These assumptions included estimated expenses
and an assumed after-tax rate of return on the net offering proceeds. See "Pro
Forma Data" for additional information concerning these assumptions. The use of
different assumptions may yield different results.
The independent valuation states that as of March 11, 2003, the estimated
pro forma market value, or valuation range, of NCRIC Group ranged from a minimum
of $42,596,475 to a maximum of $57,630,525 with a midpoint of $50,113,500. The
Board of Directors decided to offer the shares for a price of $10.00 per share.
The aggregate offering price of the shares will be equal to the valuation range
multiplied by the percentage of NCRIC Group common stock owned by NCRIC, A
Mutual Holding
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Company, through NCRIC Holdings, Inc. The number of shares offered will be equal
to the aggregate offering price of the shares divided by the price per share.
Based on the valuation range, the percentage of NCRIC Group common stock owned
by NCRIC, A Mutual Holding Company and the $10.00 price per share, the minimum
of the offering range will be 2,550,000 shares, the midpoint of the offering
range will be 3,000,000 shares and the maximum of the offering range will be
3,450,000 shares.
The Board of Directors reviewed the independent valuation and, in
particular, considered the following:
. NCRIC Group's financial condition and results of operations;
. comparison of financial performance ratios of NCRIC Group to those of
other companies of similar size;
. stock market conditions generally and in particular for medical
professional liability insurance companies; and
. the historical trading price of the publicly held shares of NCRIC
Group common stock.
All of these factors are set forth in the independent valuation. The Board
of Directors also reviewed the methodology and the assumptions used by RP
Financial, LC. in preparing the independent valuation and the Board of Directors
believes that such assumptions were reasonable. The offering range may be
amended, if required, as a result of subsequent developments in the financial
condition of NCRIC Group or market conditions generally. In the event the
independent valuation is updated to amend the pro forma market value of NCRIC
Group to less than $42,596,475 or more than $66,275,104, the appraisal will be
filed with the Securities and Exchange Commission by post-effective amendment.
The independent valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing our common
stock. RP Financial, LC. did not independently verify our consolidated financial
statements and other information that we provided to them, nor did RP Financial,
LC. independently value our assets or liabilities. The independent valuation
considers NCRIC Group and its subsidiaries as a going concern and should not be
considered as an indication of the liquidation value of NCRIC Group and its
subsidiaries. Moreover, because the valuation is necessarily based upon
estimates and projections of a number of matters, all of which may change from
time to time, no assurance can be given that persons purchasing our common stock
in the offering will thereafter be able to sell their shares at prices at or
above the $10.00 price.
Following commencement of the subscription offering, the maximum of the
valuation range may be increased by up to 15% to up to $66,275,104, which will
result in a corresponding increase of up to 15% in the maximum of the offering
range to up to 3,967,500 shares, to reflect changes in the market and financial
conditions or demand for the shares without resoliciting subscribers. We will
not decrease the minimum of the valuation range and the minimum of the offering
range without a resolicitation of subscribers. The subscription price of $10.00
per share will remain fixed. See "--Limitations on Common Stock Purchases" as to
the method of distribution and allocation of additional shares that may be
issued in the event of an increase in the offering range to fill unfilled orders
in the offering.
If the update to the independent valuation at the conclusion of the
offering results in an increase in the maximum of the valuation range to more
than $66,275,104 and a corresponding increase in the offering range to more than
3,967,500 shares, or a decrease in the minimum of the valuation range to less
than $42,596,475 and a corresponding decrease in the offering range to fewer
than 2,550,000 shares, then, we may terminate the plan of conversion and
reorganization, and return by check all funds received
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promptly with interest as held in escrow. Alternatively, we may hold a new
offering, establish a new offering range, extend the offering period and
commence a resolicitation of subscribers or take other actions in order to
complete the conversion. In the event that a resolicitation is commenced, unless
we receive an affirmative response within a reasonable period of time, we will
return all funds received promptly to investors as described above. Any
resolicitation following the conclusion of the subscription and community
offerings would not exceed 45 days.
An increase in the number of shares to be issued in the offering would
decrease both a subscriber's ownership interest and NCRIC Group's pro forma
earnings and stockholders' equity on a per share basis while increasing pro
forma earnings and stockholders' equity on an aggregate basis. A decrease in the
number of shares to be issued in the offering would increase both a subscriber's
ownership interest and NCRIC Group's pro forma earnings and stockholders' equity
on a per share basis, while decreasing pro forma earnings and stockholders'
equity on an aggregate basis. For a presentation of the effects of these
changes, see "Pro Forma Data."
Copies of the valuation appraisal report of RP Financial, LC. and the
detailed memorandum of the appraiser setting forth the method and assumptions
for the appraisal are available for inspection at our executive office, as
specified under "Additional Information."
Exchange of Stock Certificates
The conversion of existing outstanding shares of NCRIC Group common stock
into the right to receive new shares of NCRIC Group common stock will occur
automatically on the effective date of the conversion. As soon as practicable
after the effective date of the conversion, we or a bank or trust company
designated by us in the capacity of exchange agent, will send a transmittal form
to each public stockholder of NCRIC Group who holds stock certificates. The
transmittal forms are expected to be mailed within five business days after the
effective date of the conversion and will contain instructions on how to
exchange old shares of NCRIC Group common stock for new shares of NCRIC Group
common stock. We expect that stock certificates for new shares of NCRIC Group
common stock will be distributed within five business days after we receive
properly executed transmittal forms and other required documents. Shares held by
public stockholders in street name will be exchanged automatically upon the
effective date; no transmittal forms will be mailed relating to these shares.
No fractional shares of NCRIC Group common stock will be issued to any
public stockholder of NCRIC Group when the conversion is completed. For each
fractional share that would otherwise be issued to a stockholder who holds a
certificate, we will pay by check an amount equal to the product obtained by
multiplying the fractional share interest to which the holder would otherwise be
entitled to by $10.00. Payment for fractional shares will be made as soon as
practicable after the receipt by the exchange agent of surrendered NCRIC Group
stock certificates. If your shares are held in street name, you will
automatically receive cash in lieu of fractional shares.
You should not forward your stock certificates until you have received
transmittal forms, which will include forwarding instructions.
Until your existing certificates representing NCRIC Group common stock are
surrendered for exchange after the conversion in compliance with the terms of
the transmittal form, you will not receive new shares of NCRIC Group common
stock and you will not be paid dividends, if any, on the new NCRIC Group common
stock. When you surrender your certificates, any unpaid dividends, if any, will
be paid without interest. For all other purposes, however, each certificate
which represents shares of NCRIC Group common stock outstanding at the effective
date of the conversion will be considered to evidence
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ownership of new shares of NCRIC Group common stock into which those shares have
been converted by virtue of the conversion.
If a certificate for NCRIC Group common stock has been lost, stolen or
destroyed, the exchange agent will issue a new stock certificate upon receipt of
appropriate evidence as to the loss, theft or destruction, appropriate evidence
as to the ownership of the certificate by the claimant, and appropriate and
customary indemnification, which is normally effected by the purchase of a bond
from a surety company at the stockholder's expense.
All new shares of NCRIC Group common stock that we issue to you in exchange
for existing shares of NCRIC Group common stock will be considered to have been
issued in full satisfaction of all rights pertaining to such shares, subject,
however, to our obligation to pay any dividends or make any other distributions
with a record date prior to the effective date of the conversion which may have
been declared by us on or prior to the effective date and which remain unpaid at
the effective date.
Subscription Offering and Subscription Rights
In accordance with the plan of conversion and reorganization, rights to
subscribe for the purchase of shares of common stock in the subscription
offering have been granted under the plan of conversion and reorganization in
the following descending order of priority. The filling of all subscriptions
that we receive will depend on the availability of common stock after
satisfaction of all subscriptions of all persons having prior rights in the
subscription offering and to the maximum, minimum and overall purchase
limitations set forth in the plan of conversion and reorganization and as
described below under "--Limitations on Common Stock Purchases."
Priority 1: Eligible Members. Each eligible member of NCRIC, A Mutual
Holding Company (i.e., policyholder of NCRIC, Inc.) on May 6, 2003 will receive,
without payment therefor, nontransferable subscription rights to purchase up to
100,000 shares of common stock, subject to the overall purchase limitations. See
"--Limitations on Common Stock Purchases." If there are not sufficient shares
available to satisfy all subscriptions, shares will first be allocated so as to
permit each subscribing Eligible Member to purchase 100 shares. Thereafter, any
remaining shares will be allocated among the subscribing eligible members whose
subscriptions remain unsatisfied sufficient to make his or her total allocation
equal to the lesser of 1,000 shares or a number of shares for which he or she
has subscribed. Thereafter, unallocated shares will be allocated to each
subscribing Eligible Member whose subscription remains unfilled in the
proportion that the number of shares as to which the Eligible Member's
subscription remains unsatisfied bears to the total amount of shares of all
subscribing eligible members whose subscriptions remain unfilled. If an amount
so allocated exceeds the amount subscribed for by any one or more Eligible
Member, the excess shall be reallocated among those eligible members whose
subscriptions are not fully satisfied until all available shares have been
allocated.
Priority 2: Employee Benefit Plans. Our employee benefit plans, including
our employee stock ownership plan and stock award plan, will receive, without
payment therefor, nontransferable subscription rights to purchase in the
aggregate up to 12% of the common stock sold in the offering (we anticipate our
employee stock ownership plan and stock award plan will purchase an aggregate of
9% of the common stock sold in the offering).
Priority 3: Directors, Officers and Employees. To the extent that there are
sufficient shares remaining after satisfaction of subscriptions by eligible
members and our employee benefit plans, each director, officer and employee who
is not an Eligible Member in category (1) above will receive a nontransferable
subscription right to purchase up to 100,000 shares of our common stock.
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Expiration Date for the Subscription Offering. The subscription offering
will expire at _______, Washington, D.C. Time, on June __, 2003, unless extended
by us for up to 45 days, if necessary. We may decide to extend the expiration
date of the subscription offering and/or the community offering for any reason,
whether or not subscriptions have been received for shares at the minimum,
midpoint or maximum of the offering range. Subscription rights which have not
been exercised prior to the expiration date will become void.
If at least 2,550,000 shares have not been sold within 45 days after the
expiration date, unless the period is extended, all funds delivered to us
pursuant to the offering will be returned promptly to the subscribers with any
interest that is earned in escrow. If an extension beyond the 45-day period
following the expiration date is granted, we will notify subscribers of the
extension of time and of the rights of subscribers to modify or rescind their
subscriptions.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of the eligible members, our employee benefit plans and our
directors, officers and employees, we may offer shares pursuant to the plan of
conversion and reorganization to members of the general public in a community
offering. Shares may be offered with the following preferences:
(1) persons who are policyholders of NCRIC, Inc. who are not eligible
members as set forth in priority (1);
(2) persons who are policyholders of CML; and
(3) existing stockholders of NCRIC Group as of May 6, 2003.
Subscribers in the community offering may purchase up to 100,000 shares of
common stock, subject to the overall purchase limitations. See "--Limitations on
Common Stock Purchases." The minimum purchase is 100 shares. The opportunity to
purchase shares of common stock in the community offering category is subject to
our right, in our sole discretion, to accept or reject any such orders in whole
or in part either at the time of receipt of an order or at any time prior to the
closing of the offering.
If we do not have sufficient shares available to fill the orders of public
stockholders of NCRIC Group as of May 6, 2003, we will allocate the remaining
available shares among those persons in a manner that permits each of them, to
the extent possible, to purchase 100 shares. Thereafter, we will allocate the
remaining available shares among those persons in a manner that permits each of
them, to the extent possible to purchase the lesser of 1,000 shares or the
number of shares subscribed for by such person. Thereafter, unallocated shares
will be allocated among public stockholders whose orders remain unsatisfied
based on the size of the unfilled order of each public stockholder of NCRIC
Group relative to the size of the aggregate unfilled orders of other public
stockholders. If an over subscription occurs due to the orders of persons who
are policyholders of NCRIC, Inc. and CML, the allocation procedures described
above will apply to the stock orders of such persons. If an over subscription
occurs due to the orders of members of the general public, the allocation
procedures described above will apply to the stock orders of such persons.
The community offering may begin with or during the subscription offering
and is expected to terminate at the same time as the subscription offering, and
must terminate no more than 45 days following the subscription offering. NCRIC
Group may decide to extend the community offering for any reason and is not
required to give purchasers notice of any such extension unless such period
extends
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beyond 45 days after the expiration date of the offering. If 2,550,000 shares
have not been issued within 45 days after the expiration date, all funds
delivered to us will be returned promptly to the purchasers with any interest
that is earned in escrow. If an extension beyond the 45-day period following the
expiration date is granted, we will notify purchasers of the extension of time
and of the rights of purchasers to modify or rescind their orders.
We have the right to reject any order submitted in the offering by a person
who we believe is making false representations or who we otherwise believe,
either alone or acting in concert with others, is violating, evading,
circumventing, or intends to violate, evade or circumvent the terms and
conditions of the plan of conversion and reorganization.
Syndicated Community Offering
If feasible, our Board of Directors may decide to offer for sale all shares
of common stock not subscribed for or purchased in the subscription and
community offerings in a syndicated community offering, subject to such terms,
conditions and procedures as we may determine, in a manner that will achieve the
widest distribution of the common stock. However, we retain the right to accept
or reject in whole or in part any orders in the syndicated community offering.
In the syndicated community offering, any person may purchase up to 100,000
shares of common stock, subject to the overall maximum purchase limitations.
Unless the syndicated community offering begins during the community offering,
the syndicated community offering will begin as soon as possible after the
completion of the subscription and community offerings.
If for any reason we cannot effect a syndicated community offering of
shares not distributed in the subscription and community offerings, or in the
event that there is an insignificant number of shares remaining after the
subscription and community offerings or in the syndicated community offering, we
will try to make other arrangements for the sale of unsubscribed shares, if
possible.
Limitations on Common Stock Purchases
The plan of conversion and reorganization includes the following
limitations on the number of shares of common stock that may be purchased during
the conversion:
(1) No person may purchase fewer than 100 shares or more than 100,000
shares of common stock;
(2) Our employee benefit plans, including our employee stock ownership
plan and stock award plan, may purchase in the aggregate up to 12% of
the shares of common stock issued in the offering,
(3) Except for the employee benefit plans, as described above, no person
or entity, together with associates or persons acting in concert with
such person or entity, may purchase more than 100,000 shares in all
categories of the offering combined;
(4) Current stockholders of NCRIC Group are subject to an ownership
limitation. As previously described, current stockholders of NCRIC
Group will receive new shares of NCRIC Group common stock in exchange
for their existing shares of NCRIC common stock. The number of shares
of common stock that a stockholder may purchase in the offering,
together with associates or persons acting in concert with such
stockholder, when combined with the shares that the stockholder and
his or her associates will receive in exchange for existing NCRIC
Group common stock, may not exceed 5% of the shares
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of common stock of NCRIC Group to be issued and outstanding upon
completion of the conversion and offering; and
(5) The maximum number of shares of common stock that may be purchased in
all categories of the offering by our directors, officers, employees
and their associates, in the aggregate, when combined with new shares
of common stock issued in exchange for existing shares, may not exceed
25% of the shares issued in the conversion and offering.
Our Board of Directors, without the receipt of any required regulatory,
stockholder or member approvals, may decrease or increase the purchase and
ownership limitations. If a purchase limitation is increased, subscribers in the
subscription offering who ordered the maximum amount will be, and some other
large subscribers who through their subscriptions evidence a desire to purchase
the maximum allowable number of shares, in our sole discretion, may be given the
opportunity to increase their subscriptions up to the then applicable limit. The
effect of this type of resolicitation will be an increase in the number of
shares owned by subscribers who choose to increase their subscriptions.
In the event of an increase in the total number of shares offered in the
offering, due to an increase in the offering range of up to 15%, shares will be
allocated in the following order of priority in accordance with the plan of
conversion and reorganization:
(1) to fill the employee benefit plans' subscription;
(2) to fill our directors, officers and employees subscriptions; and
(3) to fill subscriptions in accordance with the priorities set forth in
the subscription offering.
The term "associate" of a person means:
(1) any corporation or organization (other than NCRIC Group, NCRIC
Holdings, Inc., NCRIC, A Mutual Holding Company, NCRIC, Inc. or a
majority-owned subsidiary of NCRIC, Inc.) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner
of 10% or more of any class of equity securities;
(2) any trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee or in
a similar fiduciary capacity except that for the purposes of this Plan
relating to subscriptions in the offering, the term "Associate" does
not include any non-tax-qualified employee stock benefit plan or any
tax-qualified employee stock benefit plan in which a person has a
substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity, and except that, for purposes of aggregating total
shares that may be purchased or owned by officers and directors the
term "Associate" does not include any tax-qualified employee stock
benefit plan; and
(3) any relative or spouse of such person, or any relative of such spouse,
who has the same home as such person or who is a director or officer
of NCRIC Group, NCRIC, Inc. or any parent or subsidiary.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent conscious
parallel action towards a common goal whether or not pursuant to an
express agreement; or
95
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement or other arrangement, whether
written or otherwise.
A person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
employee stock benefit plan will not be deemed to be acting in concert with its
trustee or a person who serves in a similar capacity solely for the purpose of
determining whether common stock held by the trustee and common stock held by
the plan will be aggregated.
Our directors are not treated as associates of each other solely because of
their membership on our Board of Directors. We have the right to determine
whether prospective purchasers are associates or acting in concert. Common stock
purchased in the offering will be freely transferable except for shares
purchased by our directors, officers and employees and except as described
below. Any purchases made by any associate of NCRIC Group and its subsidiaries
for the explicit purpose of meeting the minimum number of shares of common stock
required to be sold in order to complete the offering shall be made for
investment purposes only and not with a view toward redistribution. In addition,
under NASD guidelines, members of the NASD and their associates are subject to
certain restrictions on transfer of securities purchased in accordance with
subscription rights and to certain reporting requirements upon purchase of these
securities. For a further discussion of limitations on purchases of our shares
of common stock at the time of conversion and thereafter, see "--Certain
Restrictions on Purchase or Transfer of Our Shares after Conversion" and
"Restrictions on Acquisition of NCRIC Group."
Plan of Distribution; Selling Agent Compensation
Offering materials have been initially distributed through mailings to
eligible members, our employee stock ownership plan, directors, officers and
employees of NCRIC Group. Offering materials also will be initially distributed
by mail in direct response to an inquiry from members and other customers of
NCRIC Group who are otherwise not eligible members. Additional copies of the
offering materials will be made available through our Stock Information Center
and Sandler O'Neill & Partners, L.P. We also will distribute offering materials
if requested following any informational meetings that may be held for customers
and persons residing in our local market areas, and following direct telephone
solicitation of natural persons or other investors whom we believe may be
interested in participating in the stock offering. All prospective purchasers
are to send payment directly to our Stock Information Center, where such funds
will be held in a segregated in an escrow account with ___________ and not
released until the offering is completed or terminated.
We have engaged Sandler O'Neill & Partners, L.P. a broker-dealer registered
with the NASD, as a financial and marketing advisor in connection with the
offering of our common stock. In its role as financial and marketing advisor,
Sandler O'Neill & Partners, L.P. will assist us in the offering as follows: (i)
consulting as to the securities marketing implications of any aspect of the plan
of conversion and reorganization or related corporate documents; (ii) reviewing
with our Board of Directors the financial and securities marketing implications
of the independent appraiser's appraisal of the common stock; (iii) reviewing
all offering documents, including the prospectus, stock order forms and related
offering materials (we are responsible for the preparation and filing of such
documents); (iv) assisting in the design and implementation of a marketing
strategy for the offering; (v) assisting us in obtaining all requisite
regulatory approvals; (vi) assisting us in preparing for meetings with potential
investors and broker-dealers; and (vii) providing such other general advice and
assistance as may be requested to promote the successful completion of the
offering, which may include training and educating our employees regarding the
mechanics and regulatory requirements of the offering, conducting informational
meetings for employees, customers and the general public and coordinating the
selling efforts. For these
96
services, Sandler O'Neill & Partners, L.P. will receive a fee of 2.0% of the
aggregate dollar amount of the common stock sold in the offering, excluding
shares of common stock sold to our employee stock ownership plan, our stock
award plan and to our directors, officers and employees, and their immediate
families.
To the extent any shares of the common stock remain available after the
subscription and community offerings, Sandler O'Neill & Partners, L.P., at our
request, may seek to form a syndicate of registered broker-dealers to assist in
the solicitation of orders of the common stock in a syndicated community
offering, subject to the terms and conditions to be set forth in a selected
dealer's agreement. Sandler O'Neill & Partners, L.P. has agreed to use its best
efforts to assist us with the solicitation of subscriptions and orders for
shares of our common stock in the syndicated community offering. Sandler O'Neill
& Partners, L.P. is not obligated to take or purchase any shares of our common
stock in the offering. Sandler O'Neill & Partners, L.P. has expressed no opinion
as to the prices at which the common stock may trade nor has Sandler O'Neill &
Partners, L.P. provided any written report or opinion to us as to the fairness
of the conversion and offering. If there is a syndicated community offering,
Sandler O'Neill & Partners, L.P. will receive a fee of 2.0% of the aggregate
dollar amount of the common stock sold in the syndicated community offering. The
total fees payable to Sandler O'Neill & Partners, L.P. and other NASD member
firms in the syndicated community offering shall not exceed 7.0% of the
aggregate dollar amount of the common stock sold in the syndicated community
offering.
In addition, we have engaged Sandler O'Neill & Partners, L.P. to act as
conversion agent in connection with the offering. In its role as conversion
agent, Sandler O'Neill & Partners, L.P. will assist us in the offering as
follows: (i) compilation of member records; (ii) preparation of proxy, order
and/or request forms; (iii) organization and supervision of the conversion
information center; (iv) proxy solicitation and special meeting services; and
(v) subscription services. For these services, Sandler O'Neill & Partners, L.P.
will receive a fee of $10,000.
We also will reimburse Sandler O'Neill & Partners, L.P. for its reasonable
out-of-pocket expenses associated with its marketing effort, up to a maximum of
$75,000 (including legal fees and expenses). We have not made any advance
payment to Sandler O'Neill & Partners, L.P. If the plan of conversion and
reorganization is terminated or if Sandler O'Neill & Partners, L.P. terminates
its agreement with us in accordance with the provisions of the agreement,
Sandler O'Neill & Partners, L.P. will only receive reimbursement of its
reasonable out-of-pocket expenses. We will indemnify Sandler O'Neill & Partners,
L.P. against liabilities and expenses (including legal fees) incurred in
connection with the conversion, including in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering material for the common stock, including liabilities under the
Securities Act of 1933.
Our directors and executive officers may participate in the solicitation of
offers to purchase shares of our common stock. Other trained employees may
participate in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or answering questions of a ministerial nature.
Other questions of prospective purchasers will be directed to executive officers
or registered representatives. We will rely on Rule 3a4-1 of the Exchange Act,
so as to permit officers, directors, and employees to participate in the sale of
the common stock. No officer, director, or employee will be compensated for his
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the common stock.
Procedure for Purchasing Shares
Expiration Date. The offering will expire at ___ p.m., Washington, D.C.
Time, on June __, 2003, unless we extend it, if required. This extension may be
approved by us, in our sole discretion, without
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further approval or additional notice to purchasers in the offering. Any
extension of the offering beyond 45 days after the expiration date of the
offering would require approval from the Commissioner of Insurance, and
purchasers would be given the right to increase, decrease or rescind their
orders for common stock. If the number of shares of common stock offered is
reduced below the minimum of the offering range, or increased above the adjusted
maximum of the offering range, purchasers will be given an opportunity to
increase, decrease or rescind their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this date. Execution of an order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. Subscription funds will be maintained in an escrow account at
_____________ and interest, if any earned thereon, will be returned to
subscribers only if the offering is extended beyond ________, 2003 or
terminated.
We reserve the right in our sole discretion to terminate the offering at
any time and for any reason, in which case we will return all funds submitted,
plus interest at the escrow account's savings rate from the date of receipt.
Use of Order Forms. In order to purchase shares of common stock in the
subscription offering and community offering, you must complete an order form
and remit payment. Incomplete order forms or order forms that are not signed are
not required to be accepted. We will not be required to accept orders submitted
on photocopied or facsimiled stock order forms. All order forms must be received
prior to ______ a.m. Washington, D.C. Time, on June __, 2003. We are not
required to accept order forms that are not received by that time, are executed
defectively or are received without full payment. We are not required to notify
subscribers of incomplete or improperly executed order forms, and we have the
right to waive or permit the correction of incomplete or improperly executed
order forms. We do not represent, however, that we will do so and we have no
affirmative duty to notify any prospective subscriber of any such defects. You
may submit your order form and payment by mail using the return envelope
provided, by mailing your order form to our Stock Information Center, or by
overnight delivery to the Stock Information Center at the indicated address on
the front of the order form. Once tendered, an order form cannot be modified or
revoked without our consent. We reserve the absolute right, in our sole
discretion, to reject orders received in the community offering, in whole or in
part, at the time of receipt or at any time prior to completion of the offering.
If you are ordering shares, you must represent that you are purchasing shares
for your own account and that you have no agreement or understanding with any
person for the sale or transfer of the shares. Our interpretation of the terms
and conditions of the plan of conversion and reorganization and of the
acceptability of the order forms will be final.
By signing the order form, you will be acknowledging that you received a
copy of this prospectus. However, signing the order form will not result in you
waiving your rights under the Securities Act of 1933 or the Securities Exchange
Act of 1934.
Payment for Shares. Payment for all shares of common stock will be required
to accompany all completed order forms for the purchase to be valid. Payment for
shares may be made by personal check, bank check or money order, made payable to
NCRIC Group, Inc.
These funds must be available in the account(s) and will be immediately
cashed and placed in a segregated escrow account at __________ and interest
earned thereon will be returned to subscribers only if the offering is extended
beyond ______, 2003, or terminated. . Once we receive your executed order form,
it may not be modified, amended or rescinded without our consent, unless the
offering is not
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completed by the expiration date, in which event purchasers may be given the
opportunity to increase, decrease or rescind their orders for a specified period
of time.
Our employee benefit plans will not be required to pay for such shares of
common stock until consummation of the offering, provided there is a loan
commitment from NCRIC Group to lend to the employee stock ownership plan and
stock award plan the necessary funds to purchase shares of common stock in the
subscription offering.
Delivery of Stock Certificates. Certificates representing shares of common
stock issued in the offering and checks representing any applicable refund
and/or interest paid on subscriptions made by check, money order or bank draft
will be mailed to the persons entitled thereto at the certificate registration
address noted on the order form, as soon as practicable following consummation
of the offering and receipt of all necessary regulatory approvals. Any
certificates returned as undeliverable will be held by the transfer agent until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the common stock are
available and delivered to purchasers, purchasers may not be able to sell the
shares of common stock which they ordered, even though the common stock will
have begun trading.
Other Restrictions. Notwithstanding any other provision of the plan of
conversion and reorganization, no person is entitled to purchase any shares of
common stock to the extent the purchase would be illegal under any federal or
state law or regulation, including state "blue sky" registrations, or would
violate regulations or policies of the National Association of Securities
Dealers, Inc., particularly those regarding free riding and withholding. We may
ask for an acceptable legal opinion from any purchaser as to the legality of his
or her purchase and we may refuse to honor any purchase order if an opinion is
not timely furnished.
Escrow Agreement
__________, our escrow agent, our transfer agent and NCRIC Group have
entered into an escrow agreement to permit the escrow agent to hold funds
received from subscribers and purchasers in escrow until the closing or
termination of the subscription, community and syndicated community offerings.
Funds will only be released from escrow if at least the minimum number of shares
are sold in the offerings. If the offerings do not close, subscribers and
purchasers will have their funds returned to them in full, with any interest
earned thereon.
Restrictions on Transfer of Subscription Rights and Shares
The plan of conversion and reorganization prohibits any person with
subscription rights, including the eligible members, and our directors, officers
and employees, from transferring or entering into any agreement or understanding
to transfer the legal or beneficial ownership of the subscription rights issued
under the plan of conversion and reorganization or the shares of common stock to
be issued upon their exercise. These rights may be exercised only by the person
to whom they are granted and only for his or her account. Each person exercising
subscription rights will be required to certify that he or she is purchasing
shares solely for his or her own account and that he or she has no agreement or
understanding regarding the sale or transfer of such shares. The regulations
also prohibit any person from offering or making an announcement of an offer or
intent to make an offer to purchase subscription rights or shares of common
stock to be issued upon their exercise prior to completion of the offering.
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We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights, and we will not honor
orders that we believe involve the transfer of subscription rights.
Stock Information Center
If you have any questions regarding the offering, please call the Stock
Information Center, toll free, at ____________, from 10:00 a.m. to 4:00 p.m.,
Washington, D.C. Time, Monday through Friday.
Tax Aspects
Consummation of the conversion is expressly conditioned upon the prior
receipt of an opinion of counsel with respect to federal and state income
taxation that indicates that the conversion will not be a taxable transaction to
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group, NCRIC, Inc.
and members of NCRIC. A Mutual Holding Company. Unlike private letter rulings,
opinions of counsel or tax advisors are not binding on the Internal Revenue
Service or any state taxing authority, and such authorities may disagree with
such opinions. In the event of such disagreement, there can be no assurance that
NCRIC Group would prevail in a judicial proceeding.
NCRIC Group and NCRIC, Inc. have received an opinion of counsel, Luse
Gorman Pomerenk & Schick, P.C., regarding all of the material federal income tax
consequences of the conversion, which includes the following:
1. The merger of NCRIC Holdings, Inc. with and into NCRIC Group, Inc.
will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(A) of the Code.
2. The merger of NCRIC Group with and into NCRIC Group (Delaware) will
qualify as a tax-free reorganization within the meaning of Section
368(a)(1)(A) of the Code.
3. Stockholders of NCRIC Group will not recognize any gain or loss upon
their constructive exchange of NCRIC Group common stock for new
shares of NCRIC Group (Delaware) common stock.
4. The members of NCRIC, a Mutual Holding Company, i.e., policy holders
of NCRIC, Inc., will be treated as transferring their membership
rights to NCRIC Group (Delaware) in exchange for the subscription
rights to buy NCRIC Group (Delaware) common stock. A member will
recognize gain or loss on the exchange to the extent that the fair
market value of the subscription rights received differs from the
basis of such members in the rights surrendered therefore. It is more
likely than not that the fair market value of the nontransferable
subscription rights to purchase NCRIC Group (Delaware) common stock
is zero.
5. There is no Federal tax incidence to NCRIC Group (Delaware) on its
granting subscription rights to members in exchange for their
membership rights in MHC. NCRIC Group will recognize no gain or loss
on the lapse of a subscription right.
6. It is more likely than not that the fair market value of the
nontransferable subscription rights to purchase common stock is zero.
Accordingly, no gain or loss will be recognized by members upon
distribution to them of nontransferable subscription rights to
purchase shares of NCRIC Group common stock, provided that the amount
to be paid for NCRIC Group common stock is equal to the fair market
value of NCRIC Group common stock.
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7. It is more likely than not that the basis of the NCRIC Group
common stock purchased in the offering will be its purchase
price. The holding period of the NCRIC Group common stock
purchased pursuant to the exercise of nontransferable
subscription rights will commence on the date on which the right
to acquire such stock was exercised.
8. Each existing stockholder's aggregate basis in new shares of
NCRIC Group common stock (including fractional share interests)
received in the exchange will be the same as the aggregate basis
of NCRIC Group common stock surrendered in exchange therefor.
9. Each stockholder's holding period in his or her NCRIC Group
(Delaware) common stock received in the exchange will include the
period during which NCRIC Group common stock surrendered was
held, provided that the NCRIC Group common stock surrendered is a
capital asset in the hands of the stockholder on the date of the
exchange.
10. Cash received by any current stockholder of NCRIC Group in lieu
of a fractional share interest in shares of NCRIC Group
(Delaware) common stock will be treated as having been received
as a distribution in full payment in exchange for a fractional
share interest of new NCRIC Group (Delaware) common stock, which
such stockholder would otherwise be entitled to receive.
Accordingly, a stockholder will recognize gain or loss equal to
the difference between the cash received and the basis of the
fractional share. If the common stock is held by the stockholder
as a capital asset, the gain or loss will be capital gain or
loss.
11. No gain or loss will be recognized by NCRIC Group on the receipt
of cash or property in exchange for NCRIC Group common stock sold
in the offering.
The tax opinions as to 6 and 7 above are based on the position that
nontransferable subscription rights to be received by eligible members and our
directors, officers and employees do not have any economic value at the time of
distribution or the time the subscription rights are exercised. In this regard,
Luse Gorman Pomerenk & Schick, P.C. noted that the subscription rights will be
granted at no cost to the recipients, will be legally non-transferable and of
short duration, and will provide the recipient with the right only to purchase
shares of common stock at the same price to be paid by the general public in any
community offering. The firm also noted that the Internal Revenue Service has
not in the past concluded that the subscription rights have value. Based on the
foregoing, Luse Gorman Pomerenk & Schick, P.C. believes that it is more likely
than not that the nontransferable subscription rights to purchase common stock
have no value. However, the issue of whether or not the subscription rights have
value is based on all the facts and circumstances. If the nontransferable
subscription rights are subsequently found to have an ascertainable value
greater than zero, income may be recognized by various recipients of the
nontransferable subscription rights (in certain cases, whether or not the rights
are exercised) and we could recognize gain on the distribution of the
nontransferable subscription rights. Eligible members and NCRIC Group's
directors, officers and employees are encouraged to consult with their own tax
advisors as to the tax consequences in the event that subscription rights are
deemed to have an ascertainable value. Unlike private rulings, an opinion of
Luse Gorman Pomerenk & Schick, P.C., is not binding on the Internal Revenue
Service and the Internal Revenue Service could disagree with the conclusions
reached therein.
The federal tax opinion has been filed with the Securities and Exchange
Commission as an exhibit to NCRIC Group's registration statement. Advice
regarding the District of Columbia income tax consequences consistent with the
federal tax opinion has been issued by Luse Gorman Pomerenk & Schick, P.C., tax
advisors to NCRIC, A Mutual Holding Company and NCRIC Group.
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Certain Restrictions on Purchase or Transfer of Our Shares after Conversion
All shares of common stock purchased in the offering by a director or an
officer of NCRIC Group generally may not be sold for a period of one year
following the closing of the conversion, except in the event of the death of the
director or officer. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be issued
to the effect that any transfer within this time period of any certificate or
record ownership of the shares other than as provided above is a violation of
the restriction. Any shares of common stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to the restricted stock will
be similarly restricted. Sales of shares of the common stock by NCRIC Group's
directors and executive officers will also be subject to certain insider trading
and other transfer restrictions under the federal securities laws. See
"Regulation-Federal Securities Laws."
Purchases of shares of our common stock by any of our directors, officers
and their associates, during the three-year period following the closing of the
conversion may be made only through a broker or dealer registered with the
Securities and Exchange Commission, except with the prior written approval of
the Commissioner of Insurance and Securities. This restriction does not apply,
however, to negotiated transactions involving more than 1% of our outstanding
common stock or to purchases of our common stock by our stock option plan or any
of our tax-qualified employee stock benefit plans or non-tax-qualified employee
stock benefit plans, including any recognition and retention plans or restricted
stock plans.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the conversion, our existing NCRIC Group
stockholders will become stockholders of NCRIC Group, a Delaware corporation and
the successor to the existing NCRIC Group. There are certain differences in
stockholder rights arising from distinctions between NCRIC Group's existing
articles of incorporation and bylaws and NCRIC Group's Delaware certificate of
incorporation and bylaws, and from distinctions between laws applicable to
Delaware and District of Columbia chartered corporations.
This discussion is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. This
discussion is qualified in its entirety by reference to the certificate of
incorporation and bylaws of NCRIC Group and the Delaware General Corporation
Law. See "Additional Information" for procedures for obtaining a copy of NCRIC
Group's certificate of incorporation and bylaws.
Authorized Capital Stock. Our authorized capital stock currently consists
of 10,000,000 shares of common stock, par value $0.01 per share, and no shares
of preferred stock. After the conversion, our authorized capital stock as a
Delaware corporation will consist of 12,000,000 shares of common stock, $0.01
par value per share, and 1,000,000 shares of preferred stock, par value $0.01
per share. We authorized the issuance of preferred stock, and we authorized more
common stock than will be issued in the conversion, in order to provide our
Board of Directors with flexibility to effect, among other transactions,
financings, acquisitions, stock dividends, stock splits and stock option grants.
However, these additional authorized shares may also be used by our Board of
Directors consistent with its fiduciary duty to deter future attempts to gain
control of NCRIC Group. Our Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates and liquidation preferences. As a result of the
ability to fix voting rights for a series of preferred stock, our Board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
preferred stock to persons friendly to management in order to attempt to block a
hostile tender offer, merger or other transaction by which a third party seeks
control, and thereby assist management to retain
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its position. We currently have no plans for the issuance of additional shares,
other than the issuance of additional shares through our stock benefit plans.
Control by the Mutual Holding Company. Pursuant to applicable laws and
regulations, NCRIC, A Mutual Holding Company is required to own not less than a
majority of the outstanding NCRIC Group common stock. There will be no such
restriction applicable to NCRIC Group following consummation of the conversion.
Board of Directors. NCRIC Group's existing articles of incorporation and
require the Board of Directors to be divided into three classes as nearly equal
in number as possible, and that the members of each class shall be elected for a
term of three years and until their successors are elected and qualified, with
one class being elected annually. NCRIC Group's Delaware certificate of
incorporation and bylaws also require the Board of Directors to be divided into
three classes, but each class does not have to be as nearly equal in number as
possible.
Under NCRIC Group's existing bylaws, any director may be removed for cause
by a vote of two-thirds of the entire Board. NCRIC Group's Delaware certificate
of incorporation provides that any director may be removed for cause by the
holders of at least 80% of the outstanding voting shares of NCRIC Group.
Special Meetings of Stockholders. NCRIC Group's existing bylaws provide
that special meetings of NCRIC Group's stockholders may be called by the
Chairman, the President, a majority of the Board of Directors or the holders of
not less than twenty percent of the outstanding capital stock of NCRIC Group
entitled to vote at the meeting. NCRIC Group's Delaware certificate of
incorporation provides that special meetings of the stockholders of NCRIC Group
may be called only by a majority vote of the total authorized directors.
Stockholder Action Without a Meeting. The existing bylaws of NCRIC Group
provide that any action to be taken or which may be taken at any annual or
special meeting of stockholders may be taken if a consent in writing, setting
forth the actions so taken, is given by the holders of all outstanding shares
entitled to vote. NCRIC Group's Delaware certificate of incorporation
specifically denies the authority of stockholders to act without a meeting.
Stockholder's Right to Examine Books and Records. Under District of
Columbia law, which is applicable to NCRIC Group, a stockholders who owns five
percent or more of the outstanding common stock may inspect and copy specified
books and records of the company after proper written notice for a proper
purpose. Delaware law provides that a stockholder, regardless of the number of
shares owned, may inspect books and records upon written demand stating the
purpose of the inspection, if such purpose is reasonably related to such
person's interest as a stockholder.
Limitations on Voting Rights of Greater-than-10% Stockholders. NCRIC
Group's Delaware certificate of incorporation provides that no record or
beneficial owner, directly or indirectly, of more than 10% of the outstanding
shares of common stock will be permitted to vote any shares in excess of such
10% limit. There is no such provision in the current articles of incorporation.
Mergers, Consolidations and Sales of Assets. District of Columbia law
requires the approval of the majority of the Board of Directors of NCRIC Group
and the holders of two-thirds of the outstanding stock of NCRIC Group entitled
to vote thereon for mergers, consolidations and sales of all or substantially
all of NCRIC Group's assets.
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NCRIC Group's Delaware certificate of incorporation requires the approval
of the holders of at least 80% of NCRIC Group's outstanding shares of voting
stock to approve certain "Business Combinations" involving an "Interested
Stockholder" except where (i) the proposed transaction has been approved by
two-thirds of the members of the Board of Directors who are unaffiliated with
the Interested Stockholder and who were directors prior to the time when the
Interested Stockholder became an Interested Stockholder; or (ii) certain "fair
price" provisions are complied with. The term "Interested Stockholder" includes
any individual, corporation, partnership or other entity, other than NCRIC Group
or its subsidiary, which owns beneficially or controls, directly or indirectly,
10% or more of the outstanding shares of voting stock of NCRIC Group or an
affiliate of such person or entity. This provision of the certificate of
incorporation applies to any "Business Combination," which is defined to
include, among other things:
(1) any merger or consolidation of NCRIC Group with or into any Interested
Stockholder;
(2) any sale, lease, exchange, mortgage, transfer, or other disposition of
25% or more of the assets of NCRIC Group and its subsidiaries to an
Interested Stockholder;
(3) the issuance or transfer of any securities of NCRIC Group or a
subsidiary of NCRIC Group to an Interested Stockholder having a value
exceeding 25% of the combined fair market value of the outstanding
securities of NCRIC Group;
(4) the adoption of any plan or proposal for the liquidation or
dissolution of NCRIC Group proposed by or on behalf of an Interested
Stockholder or any Affiliate of an Interested Stockholder; or
(5) any reclassification of securities, any recapitalization, or any
merger with a subsidiary or other transaction that has the effect of
increasing an Interested Stockholder's proportional share of any class
of securities of NCRIC Group.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of a majority of the outstanding shares of common stock of NCRIC Group
and any other affected class of stock. One exception under Delaware law to the
majority approval requirement applies to stockholders owning 15% or more of the
common stock of a corporation for a period of less than three years. Such 15%
stockholder, in order to obtain approval of a business combination, must obtain
the approval of two-thirds of the outstanding stock, excluding the stock owned
by such 15% stockholder, or satisfy other requirements under Delaware law
relating to board of director approval of his or her acquisition of the shares
of NCRIC Group. The increased stockholder vote required to approve a business
combination may have the effect of preventing mergers and other business
combinations which a majority of stockholders deem desirable and placing the
power to prevent such a merger or combination in the hands of a minority of
stockholders.
NCRIC Group's Delaware certificate of incorporation provides that the NCRIC
Group's Board of Directors may consider certain factors in addition to the
amount of consideration to be paid when evaluating certain business combinations
or a tender or exchange offer. These additional factors include the social and
economic effects of the transaction on its customers and employees and the
communities served by NCRIC Group.
Dissenters' Rights of Appraisal. District of Columbia law generally
provides that a stockholder of a District of Columbia corporation that engages
in a merger, consolidation or sale of all or substantially
104
all of its assets shall have the right to demand from such institution payment
of the fair or appraised value of his or her stock in the institution, subject
to specified procedural requirements.
Under Delaware law, except for cash merger transactions, shareholders of
NCRIC Group generally will not have dissenters' appraisal rights in connection
with a plan of merger or consolidation to which NCRIC Group is a party because
the common stock is expected to be listed on the Nasdaq National Market.
Amendment of Governing Instruments. No amendment of NCRIC Group's articles
of incorporation may be made unless it is first proposed by the Board of
Directors of NCRIC Group, and thereafter approved by the holders of two-thirds
of the total votes eligible to be cast at a legal meeting. NCRIC Group's
Delaware certificate of incorporation may be amended by the vote of the holders
of a majority of the outstanding shares of NCRIC Group common stock, except that
the provisions of the certificate of incorporation governing the calling of
meetings of stockholders and the prohibition of action by written consent of
stockholders, stockholder nominations and proposals, limitations on voting
rights of 10% stockholders, the number and staggered terms of directors,
vacancies on the Board of Directors and removal of directors, approval of
certain business combinations, indemnification of officers and directors, and
the manner of amending the certificate of incorporation and bylaws, may not be
repealed, altered, amended or rescinded except by the vote of the holders of at
least 80% of the outstanding shares of NCRIC Group.
The existing bylaws of NCRIC Group may be amended by a two-thirds vote of
the full Board of Directors of NCRIC Group or by a majority vote of the votes
cast by the stockholders of NCRIC Group at any legal meeting. NCRIC Group's
Delaware bylaws may only be amended by a majority vote of the Board of Directors
of NCRIC Group or by the holders of at least 80% of the outstanding stock of
NCRIC Group.
RESTRICTIONS ON ACQUISITION OF NCRIC GROUP
Although the Board of Directors NCRIC Group are not aware of any effort
that might be made to obtain control of NCRIC Group after the conversion, the
Board of Directors believes that it is appropriate to include certain provisions
as part of NCRIC Group's certificate of incorporation to protect the interests
of NCRIC Group and its stockholders from takeovers which the Board of Directors
of NCRIC Group might conclude are not in the best interests of NCRIC Group and
its stockholders.
The following discussion is a general summary of the material provisions of
NCRIC Group's certificate of incorporation and bylaws and certain other
regulatory provisions that may be deemed to have an "anti-takeover" effect. The
following description of certain of these provisions is necessarily general and,
with respect to provisions contained in NCRIC Group's certificate of
incorporation and bylaws, reference should be made in each case to the document
in question, each of which is part of NCRIC Group's registration statement filed
with the SEC. See "Where You Can Find Additional Information."
NCRIC Group's Certificate of Incorporation and Bylaws
NCRIC Group's certificate of incorporation and bylaws contain a number of
provisions, relating to corporate governance and rights of stockholders, that
might discourage future takeover attempts. As a result, stockholders who might
desire to participate in such transactions may not have an opportunity to do so.
In addition, these provisions will also render the removal of the Board of
Directors or management of NCRIC Group more difficult.
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The following description is a summary of the provisions of the certificate
of incorporation and bylaws. See "Where You Can Find Additional Information" as
to how to review a copy of these documents.
Directors. The Board of Directors will be divided into three classes. The
members of each class will be elected for a term of three years and only one
class of directors will be elected annually. Thus, it would take at least two
annual elections to replace a majority of NCRIC Group's board. Further, the
bylaws impose notice and information requirements in connection with the
nomination by stockholders of candidates for election to the Board of Directors
or the proposal by stockholders of business to be acted upon at an annual
meeting of stockholders.
Restrictions on Call of Special Meetings. The certificate of incorporation
and bylaws provide that special meetings of stockholders can be called only by
the Board of Directors pursuant to a resolution adopted by a majority of the
total number of authorized directorships. Stockholders are not authorized to
call a special meeting of stockholders.
Prohibition of Cumulative Voting. The certificate of incorporation
prohibits cumulative voting for the election of Directors.
Limitation of Voting Rights. The certificate of incorporation provides that
in no event will any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns
more than 10% of the then outstanding shares of common stock, be entitled or
permitted to vote any of the shares held in excess of the 10% limit.
Restrictions on Removing Directors from Office. The certificate of
incorporation provides that directors may only be removed for cause, and only by
the affirmative vote of the holders of at least 80% of the voting power of all
of our then-outstanding stock entitled to vote (after giving effect to the
limitation on voting rights discussed above in "--Limitation on Voting Rights.")
Authorized but Unissued Shares. After the conversion, NCRIC Group will have
authorized but unissued shares of common and preferred stock. See "Description
of Capital Stock." The certificate of incorporation authorizes 1,000,000 shares
of serial preferred stock. NCRIC Group is authorized to issue preferred stock
from time to time in one or more series subject to applicable provisions of law,
and the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be multiple or as a separate class).
In the event of a proposed merger, tender offer or other attempt to gain control
of NCRIC Group that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
preferred stock with rights and preferences that would impede the completion of
the transaction. An effect of the possible issuance of preferred stock,
therefore may be to deter a future attempt to gain control of NCRIC Group. The
Board of Directors has no present plan or understanding to issue any preferred
stock.
Amendments to Certificate of Incorporation and Bylaws. Amendments to the
certificate of incorporation must be approved by NCRIC Group's Board of
Directors and also by a majority of the outstanding shares of NCRIC Group's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required to amend the following
provisions:
(i) The limitation on voting rights of persons who directly or
indirectly beneficially own more than 10% of the outstanding shares
of common stock;
(ii) The inability of stockholders to act by written consent;
106
(iii) The inability of stockholders to call special meetings of
stockholders;
(iv) The division of the Board of Directors into three staggered classes;
(v) The ability of the Board of Directors to fill vacancies on the
board;
(vi) The inability to deviate from the manner prescribed in the bylaws by
which stockholders nominate directors and bring other business
before meetings of stockholders;
(vii) The requirement that at least 80% of stockholders must vote to
remove directors, and can only remove directors for cause;
(viii) The ability of the Board of Directors to amend and repeal the
bylaws; and
(ix) The ability of the Board of Directors to evaluate a variety of
factors in evaluating offers to purchase or otherwise acquire NCRIC
Group.
The bylaws may be amended by the affirmative vote of a majority of the
directors of NCRIC Group or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.
Purpose and Anti-Takeover Effects of NCRIC Group's Delaware Certificate of
Incorporation and Bylaws. Our Board of Directors believes that the provisions
described above are prudent and will reduce our vulnerability to takeover
attempts and certain other transactions that have not been negotiated with and
approved by our Board of Directors. These provisions will also assist us in the
orderly deployment of the conversion proceeds into productive assets during the
initial period after the conversion. Our Board of Directors believes these
provisions are in the best interests of NCRIC Group and its stockholders.
Accordingly, our Board of Directors believes that it is in the best interests of
NCRIC Group and its stockholders to encourage potential acquirers to negotiate
directly with the Board of Directors of NCRIC Group and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also the view of our Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of NCRIC Group and that is in the best interests of
all stockholders.
Despite our belief as to the benefits to stockholders of these provisions
of NCRIC Group's Delaware certificate of incorporation and bylaws, these
provisions may also have the effect of discouraging a future takeover attempt
that would not be approved by our Board, but pursuant to which stockholders may
receive a substantial premium for their shares over then current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have any opportunity to do so. Such provisions will also make it more
difficult to remove our Board of Directors and management. Our Board of
Directors, however, has concluded that the potential benefits outweigh the
possible disadvantages.
District of Columbia Law and the Plan of Conversion
District of Columbia law prohibits any person from making an offer and from
making an announcement of an offer for any security issued or to be issued by a
converting insurance company or its holding company prior to completion of its
conversion. The Plan of Conversion provides that for a period of five years
following completion of the conversion, no person may offer to acquire or
acquire the
107
beneficial of more than 5% of the outstanding stock of the company, without the
approval of the Commissioner of Insurance and Securities of the District of
Columbia.
Under the insurance laws of the District of Columbia, no person may acquire
control of NCRIC Group, a holding company for a District of Columbia insurance
company, without the prior approval of the Commissioner of Insurance and
Securities. Control is defined to mean the power to direct or cause the
direction of the management and policies of the company, and is presumed to
exist if a person directly or indirectly owns, controls, holds with power to
vote, or holds proxies representing more than 10% of any class of voting stock
of a company.
DESCRIPTION OF CAPITAL STOCK OF NCRIC GROUP
FOLLOWING THE CONVERSION
General
At the effective date, NCRIC Group will be authorized to issue 12,000,000
shares of common stock, par value of $0.01 per share, and 1,000,000 shares of
preferred stock, par value $0.01 per share. NCRIC Group currently expects to
issue in the offering up to _______ shares of common stock, subject to
adjustment, and up to ________ shares, subject to adjustment, in exchange for
the publicly held shares of NCRIC Group. NCRIC Group will not issue shares of
preferred stock in the conversion. Each share of NCRIC Group common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. Upon payment of the subscription price for the
common stock, in accordance with the plan of conversion and reorganization, all
of the shares of common stock will be duly authorized, fully paid and
nonassessable.
Common Stock
Dividends. NCRIC Group may pay dividends out of statutory surplus under
Delaware law or from net earnings if, and when declared by its Board of
Directors. The payment of dividends by NCRIC Group is subject to limitations
that are imposed by law and applicable regulation. The holders of common stock
of NCRIC Group will be entitled to receive and share equally in dividends as may
be declared by the Board of Directors of NCRIC Group out of funds legally
available therefor. If NCRIC Group issues shares of preferred stock, the holders
thereof may have a priority over the holders of the common stock with respect to
dividends.
Voting Rights. Upon consummation of the conversion, the holders of common
stock of NCRIC Group will have exclusive voting rights in NCRIC Group. They will
elect NCRIC Group's Board of Directors and act on other matters as are required
to be presented to them under Delaware law or as are otherwise presented to them
by the Board of Directors. Generally, each holder of common stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. If NCRIC Group issues shares of preferred stock,
holders of the preferred stock may also possess voting rights. Certain matters
require an 80% stockholder vote.
Liquidation. In the event of liquidation, dissolution or winding up of
NCRIC Group, the holders of its common stock would be entitled to receive, after
payment or provision for payment of all its debts and liabilities, all of the
assets of NCRIC Group available for distribution. If preferred stock is issued,
the holders thereof may have a priority over the holders of the common stock in
the event of liquidation or dissolution.
108
Preemptive Rights. Holders of the common stock of NCRIC Group will not be
entitled to preemptive rights with respect to any shares that may be issued. The
common stock is not subject to redemption.
Preferred Stock
None of the shares of NCRIC Group's authorized preferred stock will be
issued in the conversion. Preferred stock may be issued with preferences and
designations as our Board of Directors may from time to time determine. Our
Board of Directors may, without stockholder approval, issue shares of preferred
stock with voting, dividend, liquidation and conversion rights that could dilute
the voting strength of the holders of the common stock and may assist management
in impeding an unfriendly takeover or attempted change in control.
TRANSFER AGENT
The transfer agent and registrar for NCRIC Group common stock is Registrar
and Transfer Company, Cranford, New Jersey.
EXPERTS
The consolidated financial statements and additional schedules of NCRIC
Group as of December 31, 2002 and 2001, and for each of the three years in the
period ended December 31, 2002, included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their reports
appearing herein (which reports express an unqualified opinion and include an
explanatory paragraph referring to Note 1 in the consolidated financial
statements regarding the adoption of Statement of Financial Acounting Standards
No. 142 "Goodwill and Other Intangible Assets"), and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
RP Financial, LC. has consented to the publication herein of the summary of
its report to NCRIC Group setting forth its opinion as to the estimated pro
forma market value of the common stock upon completion of the conversion and
offering and its letter with respect to subscription rights.
LEGAL MATTERS
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to NCRIC
Group, Inc, will issue its opinion to us regarding the legality of the issuance
of the common stock and the federal income tax consequences of the conversion.
Certain legal matters will be passed upon for Sandler O'Neill & Partners, L.P.
by Patton Boggs LLP, Washington, D.C.
ADDITIONAL INFORMATION
NCRIC Group has filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933 with respect to the
shares of common stock offered hereby. As permitted by the rules and regulations
of the Securities and Exchange Commission, this prospectus does not contain all
the information set forth in the registration statement. Such information,
including the appraisal report which is an exhibit to the registration
statement, can be examined without charge at the public reference facilities of
the Securities and Exchange Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and copies of such material can be obtained from the SEC
at prescribed rates. The Securities and Exchange Commission telephone number is
1-800-SEC-0330. In addition, the SEC maintains a web site (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC, including NCRIC
Group. The statements contained in this prospectus as to the contents of any
contract or other document filed as an exhibit to the
109
Registration Statement are, of necessity, brief descriptions of the material
terms of, and should be read in conjunction with, such contract or document.
NCRIC, A Mutual Holding Company has filed with the Department of Insurance
and Securities Regulation an application with respect to the conversion. This
prospectus omits certain information contained in the application. The
application may be examined at the principal office of the Department of
Insurance and Securities Regulation, 810 First Street, N.E., Room 701,
Washington, D.C. 20002.
In connection with the offering, NCRIC Group will register its common stock
under Section 12 of the Securities Exchange Act of 1934 and, upon such
registration, NCRIC Group and the holders of its common stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on common stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Securities Exchange Act of 1934. Under the plan of conversion and
reorganization, NCRIC Group has undertaken that it will not terminate such
registration for a period of at least three years following the stock offering.
110
INDEX TO FINANCIAL STATEMENTS
PAGE
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-2
Consolidated Balance Sheets as of December 31, 2002 and 2001 F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2002, 2001, and 2000 F-4
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2002, 2001, and 2000 F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2002, 2001, and 2000 F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2002, 2001, and 2000 F-7
Schedule I - Summary of Investments - Other Than Investments in Related Parties F-26
Schedule II - Condensed Financial Information of Registrant F-27
Schedule III - Supplementary Insurance Information F-31
Schedule IV - Reinsurance F-32
Schedule V - Valuation and Qualifying Accounts F-33
Schedule VI - Supplemental Information Concerning Property-Casualty Insurance
Companies F-34
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
NCRIC Group, Inc. and Subsidiaries
Washington, D.C.
We have audited the accompanying consolidated balance sheets of NCRIC Group,
Inc. and Subsidiaries (the Company) as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ending December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NCRIC Group, Inc. and Subsidiaries
as of December 31, 2002 and 2001, and the results of their operations, and their
cash flows for each of the three years in the period ending December 31, 2002,
in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform with
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets".
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The additional schedules listed in the
table of contents are presented for the purpose of additional analysis and are
not a required part of the basic financial statements. The additional schedules
are the responsibility of the Company's management. Such information has been
subjected to the auditing procedures applied in our audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects when considered in relation to the basic financial statements taken as
a whole.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
February 15, 2003
McLean, Virginia
F-2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2002 AND 2001 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
2002 2001
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes (Amortized cost $110,309 and $95,716) $ 114,696 $ 96,723
Equity securities (Cost $5,561 and $6,691) 5,424 6,402
--------- ---------
Total securities available for sale 120,120 103,125
OTHER ASSETS:
Cash and cash equivalents 10,550 7,565
Reinsurance recoverable 43,231 30,077
Goodwill, net 7,291 7,291
Premiums and accounts receivable, net 9,477 4,802
Deferred income taxes 3,789 2,482
Other assets 8,229 5,660
--------- ---------
TOTAL ASSETS $ 202,687 $ 161,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 70,314 $ 56,802
Loss adjustment expenses 33,708 27,758
--------- ---------
Total losses and loss adjustment expenses 104,022 84,560
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 607 2,408
Unearned premiums 24,211 17,237
Advance premium 2,971 4,138
Reinsurance premium payable 5,045 2,452
Bank debt 995 1,662
Trust preferred securities 15,000 -
Other liabilities 2,019 4,091
--------- ---------
TOTAL LIABILITIES 154,870 116,548
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 4, 6, and 9)
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value 10,000,000 shares authorized;
as of December 31, 2002, 3,708,399 shares issued and outstanding
(net of 34,456 treasury shares); as of December 31, 2001, 3,711,427
shares issued and outstanding (net of 31,428 treasury shares) 37 37
Additional paid in capital 9,630 9,552
Unallocated common stock held by the ESOP (682) (786)
Common stock held by the stock award plan (202) (339)
Accumulated other comprehensive income 2,806 474
Retained earnings 36,518 35,776
Treasury stock, at cost (290) (260)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 47,817 44,454
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 202,687 $ 161,002
========= =========
See notes to consolidated financial statements.
F-3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2002 2001 2000
REVENUES:
Net premiums earned $ 30,098 $ 20,603 $ 14,611
Net investment income 5,915 6,136 6,407
Net realized investment losses (131) (278) (5)
Practice management and related income 5,800 6,156 5,317
Other income 1,013 602 470
-------- -------- --------
Total revenues 42,695 33,219 26,800
-------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 26,829 18,858 11,946
Underwriting expenses 8,168 4,877 3,591
Practice management and related expenses 5,811 6,063 4,970
Other expenses 1,467 1,245 1,237
-------- -------- --------
Total expenses 42,275 31,043 21,744
-------- -------- --------
INCOME BEFORE INCOME TAXES 420 2,176 5,056
-------- -------- --------
INCOME TAX PROVISION (BENEFIT) (322) 597 1,561
-------- -------- --------
NET INCOME $ 742 $ 1,579 $ 3,495
======== ======== ========
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains on securities $ 2,478 $ 1,567 $ 2,119
Reclassification adjustment for gains (losses) included in net income (146) (349) 3
-------- -------- --------
OTHER COMPREHENSIVE INCOME 2,332 1,218 2,122
-------- -------- --------
COMPREHENSIVE INCOME $ 3,074 $ 2,797 $ 5,617
======== ======== ========
Net income per common share:
Basic:
Average shares outstanding 3,557 3,529 3,526
-------- -------- --------
Earnings Per Share $ 0.21 $ 0.45 $ 0.99
======== ======== ========
Diluted:
Weighted average shares outstanding 3,557 3,529 3,526
Dilutive effect of stock options 75 86 33
-------- -------- --------
Weighted average shares outstanding diluted 3,632 3,615 3,559
-------- -------- --------
Earnings Per Share $ 0.20 $ 0.44 $ 0.98
======== ======== ========
See notes to consolidated financial statements.
F-4
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
Additional Unallocated Stock
Common Paid In ESOP Award Treasury
Stock Capital Shares Shares Stock
--------------- --------------- --------------- --------------- ---------------
BALANCE, JANUARY 1, 2000 $ 37 $ 9,433 $ (993) $ (518) $ -
Net income - - - - -
Other comprehensive income - - - - -
Acquistion of treasury stock - - - - (131)
Shares released - 22 104 42 -
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 2000 37 9,455 (889) (476) (131)
Net income - - - - -
Other comprehensive income - - - - -
Acquistion of treasury stock - - - - (129)
Shares released - 97 103 137 -
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 2001 37 9,552 (786) (339) (260)
Net income - - - - -
Other comprehensive income - - - - -
Acquistion of treasury stock - - - - (30)
Shares released - 78 104 137 -
--------------- --------------- --------------- --------------- ---------------
BALANCE, DECEMBER 31, 2002 $ 37 $ 9,630 $ (682) $ (202) $ (290)
=============== =============== =============== =============== ===============
Accumulated
Other Total
Comprehensive Retained Stockholders'
Income (Loss) Earnings Equity
--------------- --------------- ---------------
BALANCE, JANUARY 1, 2000 $ (2,866) $ 30,702 $ 35,795
Net income - 3,495 3,495
Other comprehensive income 2,122 - 2,122
Acquistion of treasury stock - - (131)
Shares released - - 168
--------------- --------------- ---------------
BALANCE, DECEMBER 31, 2000 (744) 34,197 41,449
Net income - 1,579 1,579
Other comprehensive income 1,218 - 1,218
Acquistion of treasury stock - - (129)
Shares released - - 337
--------------- --------------- ---------------
BALANCE, DECEMBER 31, 2001 474 35,776 44,454
Net income - 742 742
Other comprehensive income 2,332 - 2,332
Acquistion of treasury stock - - (30)
Shares released - - 319
--------------- --------------- ---------------
BALANCE, DECEMBER 31, 2002 $ 2,806 $ 36,518 $ 47,817
=============== =============== ===============
See notes to consolidated financial statements.
F-5
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS)
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 742 $ 1,579 $ 3,495
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses 131 278 5
Amortization and depreciation 661 748 656
Provision for uncollectible receivables 1,362 212 238
Deferred income taxes (2,508) (914) 287
Stock released for coverage of benefit plans 319 337 168
Changes in assets and liabilities:
Reinsurance recoverable (13,154) (2,528) (922)
Premiums and accounts receivable (6,037) (1,576) (1,298)
Other assets (2,132) 658 (1,176)
Losses and loss adjustment expenses 19,462 3,426 (3,148)
Retrospective premiums accrued under
reinsurance treaties (1,801) (3,070) (1,686)
Unearned premiums 6,974 5,765 2,574
Advance premium (1,167) 3,372 151
Reinsurance premium payable 2,593 1,649 70
Other liabilities (2,071) (1,682) (248)
------------ ------------ ------------
Net cash flows provided by (used in) operating activities 3,374 8,254 (834)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (52,824) (24,736) (10,286)
Sales, maturities and redemptions of investments 39,027 21,956 10,543
Investment in purchased business, net of cash acquired - (3,014) -
Purchases of property and equipment (895) (400) (727)
------------ ------------ ------------
Net cash flows used in investing activities (14,692) (6,194) (470)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of trust preferred securities 15,000 - -
Payments to acquire treasury stock (30) (129) (131)
Proceeds from bank debt - 1,971 -
Repayment of bank debt (667) (309) -
------------ ------------ ------------
Net cash flows provided by (used in) financing activities 14,303 1,533 (131)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 2,985 3,593 (1,435)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 7,565 3,972 5,407
------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 10,550 $ 7,565 $ 3,972
============ ============ ============
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,200 $ 2,172 $ 1,375
============ ============ ============
Interest paid $ 61 $ 72 $ -
============ ============ ============
</Table>
See notes to consolidated financial statements
F-6
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - On April 20, 1998, the Board of
Governors of National Capital Reciprocal Insurance Company adopted a
plan of reorganization which authorized the formation of NCRIC, A
Mutual Holding Company (Mutual Holding Company) and the conversion
into NCRIC, Inc. (NCRIC), a stock medical professional liability
insurance company. The reorganization became effective on December 31,
1998.
Through a series of stock transfers effected in connection with the
reorganization, Mutual Holding Company owns all of the outstanding
shares of NCRIC Holdings, Inc., which owns all of the outstanding
shares of NCRIC Group, Inc. (Company) which owns all of the
outstanding shares of NCRIC. District of Columbia law provides that
the Mutual Holding Company must at all times own, directly or
indirectly, a majority of the outstanding voting stock of NCRIC. In
1999 the Company completed an initial public offering of 1,480,000
shares, which represented approximately 40% of its outstanding shares.
NCRIC Holdings continues to own approximately 60% of the outstanding
shares of the Company.
On December 4, 2002, the Company formed NCRIC Statutory Trust I for
the purpose of issuing $15,000,000 in trust preferred securities in a
pooled transaction to unrelated investors. (See Note 5)
The Company provides comprehensive professional liability and office
premises liability insurance under nonassessable policies to
physicians having their principal practice in the District of
Columbia, Maryland, Virginia, West Virginia, or Delaware.
The Company also provides (i) practice management services, accounting
and tax services, and personal financial planning services to medical
and dental practices and (ii) retirement planning services and
administration to medical and dental practices and certain other
businesses throughout the Mid-Atlantic Region.
The Company has issued policies on both an occurrence and a
claims-made basis. However, subsequent to June 1, 1986, substantially
all policies have been issued on the claims-made basis.
Occurrence-basis policies provide coverage to the policyholder for
losses incurred during the policy year regardless of when the related
claims are reported. Claims-made basis policies provide coverage to
the policyholder for covered claims reported during the current policy
year provided the related losses were incurred while claims-made basis
policies were in effect.
F-7
Tail coverage is offered for doctors terminating their insurance
policies. This coverage extends ad infinitum the period in which to
report future claims resulting from incidents occurring while a
claims-made policy was in effect. Beginning in 1988, prior acts
insurance coverage was first issued, subject to underwriting criteria
for new insureds. Such coverage extends the effective date of
claims-made policies to designated periods prior to initial coverage.
Principles of Consolidation - The accompanying financial statements
present the consolidated financial position and results of operations
of the Company and its subsidiaries. All significant intercompany
transactions have been eliminated in the consolidation.
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles (GAAP), which differ
from statutory accounting practices prescribed or permitted for
insurance companies by regulatory authorities.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of
three months or less to be cash equivalents.
Investments - The Company has classified its investments as available
for sale and has reported them at fair value, with unrealized gains
and losses excluded from earnings and reported, net of deferred taxes,
as a component of equity and other comprehensive income. Realized
gains and losses are determined using the specific identification
method.
Investment securities are exposed to various risks such as interest
rate, market and credit risk. Fair values of securities fluctuate
based on the magnitude of changing market conditions; significant
changed market conditions could materially affect the portfolio value
in the near term. When a security has a decline in fair value which is
other than temporary, the Company reduces the carrying value of the
security to its current fair value.
The Company evaluates investments for other-than-temporary impairment
whenever events or changes in circumstances, such as business
environment, legal issues and other relevant data, indicate that the
carrying amount of an investment may not be recoverable. Any resulting
impairment loss is reported as a realized investment loss. During the
year ended December 31, 2002 the Company recorded an impairment loss
on securities in the second quarter. These securities were
subsequently sold during 2002. During the years ended December 31,
2001 and 2000, the Company did not find it necessary to recognize an
impairment loss.
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
F-8
method to an impairment-only approach. Amortization of goodwill ceased
upon adoption of SFAS 142 on January 1, 2002. For each of the years
ended December 31, 2001 and 2000, goodwill amortization was $384,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management
Services Segment. NCRIC completed its initial goodwill impairment
testing under SFAS 142 and concluded that the goodwill asset was not
impaired as of the date of implementation of SFAS 142, nor was it
impaired as of December 31, 2002. Goodwill is reported net of
accumulated amortization of $909,000 as of December 31, 2002 and 2001.
Deferred Policy Acquisition Costs - Commissions and premium taxes
associated with acquiring insurance that vary with and are directly
related to the production of new and renewal business are deferred and
amortized over the terms of the policies to which they relate.
Deferred policy acquisition costs totaled approximately $1.5 million
and $850,000 as of December 31, 2002 and 2001, respectively, and are
reported as a component of other assets. Since NCRIC's insurance
policies are generally written for a term of one year, the entire
year-end balance is amortized in the following year. NCRIC amortized
$2.9 million, $1.4 million and $645,000 in the years ended
December 31, 2002, 2001 and 2000, respectively. Amortization is
reported as a component of underwriting expense.
Property and Equipment - Fixed assets are recorded at cost and
reported as a component of other assets. Depreciation is recorded
using the straight-line method over estimated useful lives ranging
from three to five years for computer software and equipment and
furniture and fixtures and ten years for leasehold improvements. The
balances of fixed assets of $2.0 million and $1.6 million as of
December 31, 2002 and 2001, respectively, are net of accumulated
depreciation of $1.9 million and $1.8 million.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for
losses and loss adjustment expenses are established on the basis of
reported losses and a provision for losses incurred but not reported
and related loss adjustment expenses. These amounts are based on the
estimates of management and are subject to risks and uncertainties. As
facts become known, adjustments to these estimates are reflected in
earnings.
Reinsurance - The Company protects itself from excessive losses by
reinsuring certain levels of risk in various areas of exposure.
Amounts recoverable from reinsurance are estimated in a manner
consistent with the loss and loss adjustment expense reserve
associated with the reinsured loss.
Income Taxes - The Company uses the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes
are recognized for tax consequences of temporary differences by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The Company files a
consolidated Federal income tax return.
F-9
Impairment of Long-Lived Assets - The Company reviews long-lived
assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
During the years ended December 31, 2002 and 2001, the Company did not
find it necessary to record a provision for impairment of assets.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant accounts
subject to management estimates are reinsurance recoverable,
liabilities for losses and loss adjustment expenses, retrospective
premiums accrued under reinsurance treaties, retrospective premiums
accrued under risk-sharing programs, and impairment of goodwill.
Concentrations of Credit Risk - Financial instruments which
potentially expose the Company to concentrations of risk consist
principally of cash equivalent investments, investments in securities
and reinsurance recoverables. Concentrations of credit risk for
investments are limited due to the large number of such investments
and their distributions across many different industries and
geographical areas. Concentrations of credit risk for reinsurance
recoverables are limited due to the large number of reinsurers
participating in the program.
Geographic concentration - NCRIC's market territory for its medical
professional liability insurance is limited to the District of
Columbia, Delaware, Maryland, Virginia and West Virginia. Because our
business is concentrated in a limited number of states, we may be
exposed to adverse developments that may have a greater affect on us
than the risks of doing business in a broader market area. In
particular, the lack of tort reform in the District of Columbia and
some of our other market areas exposes NCRIC to the potential for
extremely high jury awards. NCRIC's reinsurance program is designed
to provide protection against such a loss.
Litigation - The Company is subject to claims arising in the normal
course of its business. Management does not believe that any such
claims or assessments will have a material effect on the Company's
financial position, results of operations, or cash flows.
Revenue Recognition - Premiums revenue is earned pro rata over the
terms of the policies. The portion of premiums that will be earned in
the future are deferred and reported as unearned premiums. In 2000 and
1999, the Company declared renewal credit dividends to its
policyholders, which are payable in the form of a premium credit on
the succeeding year's policy premiums. Policyholder renewal credit
dividends are accrued as reductions to premium income in the policy
year declared.
The Company writes policies under certain retrospectively rated
programs. Premium revenue related to these contracts is earned based
on the contractual terms and estimated losses under those contracts.
Earned premiums are premiums written reduced by premium refunds
accrued. Premium refunds are accrued to reflect the risk-sharing
program results on a basis consistent with the underlying loss
experience.
Practice management revenue is recognized as services are performed
under terms of management and other contracts. Revenue is generally
billed in the month following the performance of related services.
F-10
Stock-based compensation - As of December 31, 2002 and 2001 the
company has one stock option plan, which is described more fully in
Note 10. NCRIC Group accounts for compensation cost using the
intrinsic value based method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, no
compensation expense was recognized since the stock options granted
were at an exercise price equal to the fair market value of the common
stock on the date the options were granted.
The Company's pro forma information using the Black-Scholes valuation
model follows:
2002 2001 2000
------------ ------------ ------------
Net income as reported $ 742 $ 1,579 $ 3,495
Less: Total stock based employee compensation,
net of related tax effect 37 64 64
------------ ------------ ------------
Pro forma net income (in thousands) $ 705 $ 1,515 $ 3,431
============ ============ ============
Earnings per share - Basic as reported $ 0.21 $ 0.45 $ 0.99
Basic pro forma $ 0.20 $ 0.43 $ 0.97
Diluted as reported $ 0.20 $ 0.44 $ 0.98
Diluted pro forma $ 0.19 $ 0.42 $ 0.96
Reclassification - Certain prior year amounts have been reclassified
to conform with the current year presentation.
2. ACQUISITION
On January 4, 1999, NCRIC Group acquired all of the outstanding shares
of HealthCare Consulting, Inc., all of the outstanding interests of
HCI Ventures, LLC, and all the assets of Employee Benefits Services,
Inc. Under terms of the purchase agreement, an additional $3.1 million
could be paid in cash if the acquired companies achieve earnings
targets in 2000, 2001 and 2002.
The acquisition has been accounted for using the purchase method.
Goodwill was being amortized over 20 years on a straight-line basis.
With the adoption of SFAS 142 on January 1, 2002, the amortization of
goodwill ceased.
The acquired companies achieved the earnings target for 2000, and
NCRIC paid the prior owners $1.55 million on March 31, 2001. After
analyzing the acquired companies' operations since the acquisition,
terms were negotiated and agreed upon for an early payment of the
second contingent payment originally scheduled to be paid in 2002. As
a result, on June 23, 2001, NCRIC paid $1.46 million, the present
value of the remaining payments, to the prior owners. These payments
were added to the balance of goodwill.
In June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank
to finance payments made in accordance with the purchase of HealthCare
Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services,
Inc. In September, 2002, the Company pledged securities to
collateralize this loan lowering the interest rate from a floating
rate of LIBOR plus two and three-quarter percent to plus one and
one-half percent. The term
F-11
of the loan is 3 years. At December 31, 2002, the
interest rate was 2.93%. Principal and interest payments are due on a
monthly basis.
3. INVESTMENTS
The following tables show the amortized cost and fair value of
investments (in thousands):
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
As of December 31, 2002
U.S. Government and agencies $ 27,664 $ 292 $ (4) $ 27,952
Corporate 32,680 1,567 (488) 33,759
Tax-exempt obligations 30,416 2,309 (21) 32,704
Asset and mortgage-backed securities 19,549 882 (150) 20,281
----------- ---------- ---------- -----------
110,309 5,050 (663) 114,696
Equity securities 5,561 150 (287) 5,424
----------- ---------- ---------- -----------
Total $ 115,870 $ 5,200 $ (950) $ 120,120
=========== ========== ========== ===========
As of December 31, 2001
U.S. Government and agencies $ 4,600 $ 161 $ - $ 4,761
Corporate 43,739 977 (1,311) 43,405
Tax-exempt obligations 19,304 634 (134) 19,804
Asset and mortgage-backed securities 28,073 695 (15) 28,753
----------- ---------- ---------- -----------
95,716 2,467 (1,460) 96,723
Equity securities 6,691 118 (407) 6,402
----------- ---------- ---------- -----------
Total $ 102,407 $ 2,585 $ (1,867) $ 103,125
=========== ========== ========== ===========
The amortized cost and fair value of debt securities at December 31,
2002 and 2001 are shown by maturity. Actual maturities will differ
from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
F-12
DECEMBER 31, 2002 DECEMBER 31, 2001
------------------------ ------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(IN THOUSANDS)
Due in one year or less $ 742 $ 750 $ 757 $ 778
Due after one year through five years 40,685 42,283 14,645 15,152
Due after five years through ten years 36,707 38,825 22,778 23,486
Due after ten years 12,626 12,557 29,463 28,554
----------- ---------- ---------- -----------
90,760 94,415 67,643 67,970
Equity securities 5,561 5,424 6,691 6,402
Asset and mortgage-backed securities 19,549 20,281 28,073 28,753
----------- ---------- ---------- -----------
Total $ 115,870 $ 120,120 $ 102,407 $ 103,125
=========== ========== ========== ===========
Proceeds from bond maturities and redemptions of available for sale
investments during the years ended December 31, 2002, 2001, and 2000,
were $39.0 million, $22.0 million, and $10.5 million, respectively.
Gross gains of $1,437,000, $787,000, and $16,000, and gross losses of
$1,568,000, $1,065,000, and $21,000, were realized on bond redemptions
and available for sale investments during years ended December 31,
2002, 2001, and 2000, respectively.
For the years ended December 31, 2002, 2001, and 2000 net investment
income earned was as follows (in thousands):
2002 2001 2000
---------- ---------- ----------
U. S Government and agencies $ 255 $ 470 $ 811
Corporate 3,038 3,144 2,252
Tax-exempt obligations 1,290 895 727
Asset and mortgage-backed securities 1,178 1,266 2,167
Equity securities 431 433 360
Short term investments 103 241 381
---------- ---------- ----------
Total investment income earned 6,295 6,449 6,698
Investment expenses (380) (313) (291)
---------- ---------- ----------
Net investment income $ 5,915 $ 6,136 $ 6,407
========== ========== ===========
F-13
4. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses represent
an estimate of the ultimate net cost of all losses that are unpaid at
the balance sheet date and are based on the loss and loss adjustment
expense factors inherent in the Company's experience and expectations.
Estimation factors used by the Company reflect current case-basis
estimates, supplemented by industry statistical data, and give effect
to estimates of trends in claim severity and frequency. These
estimates are continually reviewed, and adjustments, reflected in
current operations are made as deemed necessary.
Although the Company believes the liabilities for losses and loss
adjustment expenses are reasonable and adequate for the circumstances,
it is possible that the Company's actual incurred losses and loss
adjustment expenses will not conform to the assumptions inherent in
the determination of the liabilities. Accordingly, the ultimate
settlement of losses and the related loss adjustment expenses may vary
from the amounts included in the financial statements.
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
YEAR ENDED DECEMBER 31,
------------------------------------
2002 2001 2000
---------- ---------- ----------
BALANCE, Beginning of year $ 84,560 $ 81,134 $ 84,282
Less reinsurance recoverable on
unpaid claims 29,624 27,312 25,815
---------- ---------- ----------
NET BALANCE 54,936 53,822 58,467
---------- ---------- ----------
Incurred related to:
Current year 24,063 23,056 17,829
Prior years 2,766 (4,198) (5,883)
---------- ---------- ----------
Total incurred 26,829 18,858 11,946
---------- ---------- ----------
Paid related to:
Current year 1,491 1,599 917
Prior years 18,664 16,145 15,674
---------- ---------- ----------
Total paid 20,155 17,744 16,591
---------- ---------- ----------
NET BALANCE 61,610 54,936 53,822
Plus reinsurance recoverable on
unpaid claims 42,412 29,624 27,312
---------- ---------- ----------
BALANCE, End of year $ 104,022 $ 84,560 $ 81,134
========== ========== ==========
The net change in incurred losses related to prior years represents
development of net losses incurred in prior years. This development
results from the re-estimation and settlement of individual losses not
covered by reinsurance, which are generally losses
F-14
under $500,000. The 2002 change is primarily reflective of adverse
loss development for the 2001 and 2000 loss years, partially offset by
favorable development in the 1999 and 1996 loss years; whereas, the
2000 change is primarily reflective of the favorable loss development
for the 1994, 1996, 1998 and 1999 loss years, partially offset by
adverse development in the 1995 loss year. The 1999 change is
primarily reflective of the favorable loss development for the 1992
through 1996 loss years. The change in development over the three-year
period ended December 31, 2002, reflects the increase in severity,
which reflects the growing size of plaintiff verdicts and settlements.
5. TRUST PREFERRED SECURITIES
On December 4, 2002, the Company issued trust preferred securities
(TPS) in the amount of $15,000,000 in a pooled transaction to
unrelated investors. The Company estimates that the fair value of the
TPS issued approximates the proceeds of cash received at the time of
issuance. The Company contributed $13,500,000 of the funds raised to
the statutory surplus of its insurance subsidiaries.
The TPS have a maturity of thirty years, and bear interest at an
annual rate equal to three-month LIBOR plus 4.00%, payable quarterly
beginning March 4, 2003. Interest is adjusted on a quarterly basis
provided that prior to December 4, 2007, this interest rate shall not
exceed 12.50%. The Company may defer payment of interest on the TPS
for up to twenty consecutive quarters. The TPS are callable by the
Company at par beginning December 4, 2007.
The initial interest rate is 5.42% and $62,000 in interest was accrued
for the year ended December 31, 2002. Issuance costs of $451,000 were
incurred related to the TPS and included in other assets. Issuance
costs will be amortized over thirty years as a component of other
expense.
The Company formed NCRIC Statutory Trust I for the purpose of issuing
the TPS. The gross proceeds from issuance were used to purchase Junior
Subordinated Deferrable Interest Debentures, the Debentures, from the
Company. The Debentures are the sole assets of the NCRIC Statutory
Trust I. The Debentures have a maturity of thirty years, and bear
interest at an annual rate equal to three-month LIBOR plus 4.00%,
payable quarterly beginning March 4, 2003. Interest is adjusted on a
quarterly basis provided that prior to December 4, 2007, the interest
rate shall not exceed 12.50%. The Debentures are callable by the
Company at par beginning December 4, 2007. The Debentures are
unsecured obligations of the Company and are junior in the right of
payment to all future senior indebtedness of the Company. The
Debentures and related investment in NCRIC Statutory Trust I have been
eliminated in consolidation.
F-15
6. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to write
policies with higher coverage limits than it is individually capable
or desirous of retaining by reinsuring the amount in excess of its
retention. The Company has both excess of loss treaties and quota
share treaties.
The Company would sustain the loss in the event the reinsurers are
unable to meet their obligations under these contracts. There were
unused letters of credit executed by reinsurers in favor of the
Company of $128,000 at December 31, 2002 and 2001. Such letters of
credit are issued as security against ceded losses recoverable in the
future.
The effect of reinsurance on premiums written and earned for the years
ended are as follows (in thousands):
DECEMBER 31
---------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
Direct $ 51,799 $ 44,113 $ 34,459 $ 28,192 $ 22,727 $ 19,965
Ceded
Current year (18,409) (14,429) (12,238) (8,992) (7,746) (5,982)
Prior Year 406 406 1,696 1,696 1,872 1,872
---------- ---------- ---------- ---------- ---------- ----------
Total Ceded (18,003) (14,023) (10,542) (7,296) (5,874) (4,110)
---------- ---------- --------- ---------- ---------- ----------
Net before
renewal credits $ 33,796 $ 30,090 $ 23,917 $ 20,896 $ 16,853 $ 15,855
========== ========== ========== ========== ========== ==========
7. INCOME TAXES
Deferred income tax is created by temporary differences that will
result in net taxable amounts in future years due to the differing
treatment of certain items for tax and financial statement purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities
consist of the following (in thousands):
AS OF DECEMBER 31,
-------------------------
2002 2001
---------- ----------
Deferred tax assets:
Unearned Premiums $ 1,670 $ 903
Discounted loss reserves 3,034 2,709
Depreciation and amortization 117 71
Capital loss carry-forwards 150 107
Allowance for doubtful accounts 608 165
Other 163 156
---------- ----------
5,742 4,111
Deferred tax liabilities
Change in tax accounting method - (1,084)
Fair valuation of investments (1,446) (244)
Deferred policy acquisition costs (503) (289)
Other (4) (12)
---------- ----------
(1,953) (1,629)
---------- ----------
Net Deferred tax assets $ 3,789 $ 2,482
========== ==========
F-16
The capital losses can be carried forward for five years. Management
expects to utilize the current capital loss carry-forwards within that
period.
The income tax provision (benefit) consists of the following:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
2002 2001 2000
--------- --------- ---------
Federal:
Current $ 2,214 $ 1,734 $ 1,220
Deferred (2,501) (1,206) 298
--------- --------- ---------
(287) 528 1,518
State:
Current (28) 83 53
Deferred (7) (14) (10)
--------- --------- ---------
(35) 69 43
--------- --------- ---------
Total provision (benefit) $ (322) $ 597 $ 1,561
========= ========= =========
Federal income tax expense differs from that calculated using the
established corporate rate primarily due to nontaxable investment
income, as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
2002 2001 2000
---------------------- ----------------------- ----------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
Federal income tax
at statutory rates $ 142 34% $ 740 34% $ 1,719 34%
Tax-exempt income (374) (89) (259) (12) (209) (4)
Dividends received (87) (21) (88) (4) (73) (1)
Goodwill - - 115 5 74 1
Other (3) (1) 89 4 50 1
------------ ------ ------------ ------ ------------ ------
Income tax at
effective rates $ (322) (77)% $ 597 27% $ 1,561 31%
============ ====== ============ ====== ============ ======
F-17
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
Net income $ 742 $ 1,579 $ 3,495
============ ============ ============
Weighted average common shares outstanding - basic 3,557 3,529 3,526
Dilutive effect of stock options 75 86 33
------------ ------------ ------------
Weighted average common shares outstanding - diluted 3,632 3,615 3,559
------------ ------------ ------------
Net income per common share:
Basic $ 0.21 $ 0.45 $ 0.99
============ ============ ============
Diluted $ 0.20 $ 0.44 $ 0.98
============ ============ ============
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding for the period.
9. COMMITMENTS
NCRIC entered into an operating lease for office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are for
10 years with a monthly base rent of $35,000 and a 2.0% annual
escalator. The Company also maintains office space in Lynchburg,
Richmond, and Fredericksburg, Virginia as well as in Greensboro, North
Carolina.
F-18
As of December 31, 2002, the future minimum annual commitments under
noncancellable leases are as follows:
2003 $ 628,000
2004 624,000
2005 638,000
2006 652,000
2007 643,000
Thereafter 177,000
------------
Total $ 3,362,000
============
Rent expense during the years ended December 31, 2002, 2001, and 2000
was $634,000, $662,000, and $678,000, respectively.
NCRIC has established 3 letters of credit to secure specified amounts
of appellate bonds for cases, which are in the District of Columbia
appellate process. As of December 31, 2002, these letters of credit
totaled $3.2 million.
The Company and its subsidiaries have entered into four employment
agreements with certain key employees. These agreements include
covenants not to compete and provide for aggregate annual compensation
of $945,000.
In June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank
to finance payments made in accordance with the purchase of HealthCare
Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services,
Inc. In September, 2002, the Company pledged securities held in our
investment portfolio with a fair value of $1.5 million at December 31,
2002, to collateralize this loan lowering the interest rate from a
floating rate of LIBOR plus two and three-quarter percent to plus one
and one-half percent. The term of the loan is 3 years. At December 31,
2002, the interest rate was 2.93%. At December 31, 2001, the interest
rate was 4.83%. Principal and interest payments are due on a monthly
basis.
10. BENEFIT PLANS
Defined Contribution Plans - NCRIC sponsors a defined contribution
401(k) profit-sharing plan. Employees who are 21 years or older and
have completed 30 days of service are eligible for participation in
the plan. Employees may elect to contribute up to 15% of total
compensation, and all contributions are 100% vested. Effective January
1, 2002 both NCRIC MSO plans were merged into NCRIC's plan. NCRIC is
not required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by NCRIC
for the years ended December 31, 2002, 2001, and 2000, were $328,000,
$145,000, and $177,000, respectively.
NCRIC MSO sponsored two plans for its employees. The first plan was a
defined contribution money purchase plan in which employees who are 21
years or older and have two years of service are eligible to
participate. Under the plan, NCRIC MSO contributed 3% of each
participant's total annual compensation. All contributions are 100%
vested. The contributions from NCRIC MSO for the years ended December
31, 2001, and 2000 were $67,000, and $57,000.
F-19
The second plan was a defined contribution 401(k) profit-sharing plan.
Employees who were 21 years or older and had one year of service were
eligible for participation in the plan. Employees could elect to
contribute up to 15% of total compensation. All contributions were
100% vested. NCRIC MSO was not required to make matching contributions
to the plan, but could make discretionary contributions. Total
contributions to the plan by NCRIC MSO for year ended December 31,
2000 were $76,000. No contribution was made for the year ended
December 31, 2001.
Stock Option Plan - NCRIC Group has a stock option plan for directors
and officers of Mutual Holding Company and its subsidiaries. Options
for common stock in an aggregate amount of 74,000 shares were granted
at July 29, 1999. The options have terms of ten years and an exercise
price of $7 per share, the fair market value of the common stock at
the date of grant. The options became exercisable at a rate of 33-1/3%
at the end of each 12 months of service with NCRIC Group or its
subsidiaries after the date of grant. As of December 31, 2002, all
options are exercisable.
NCRIC Group accounts for compensation cost using the intrinsic value
based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, no compensation expense was
recognized since the stock options granted were at an exercise price
equal to the fair market value of the common stock on the date the
options were granted. Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, requires disclosure of
the pro forma net income and earnings per share as if the Company had
accounted for its stock options under the fair value method defined in
that Statement.
The exercise price per share for the 74,000 options outstanding at
December 31, 2002 is $7.00. The weighted average remaining contractual
life of those options is 6.6 years, 7.6 years, and 8.6 years at
December 31, 2002, 2001, 2000, respectively. There was no change in
the number of options outstanding or the exercise price since December
31, 1999.
For pro forma disclosure purposes, the fair value of stock options was
estimated at the date of grant using a Black-Scholes option pricing
model using the following assumptions: risk free rate of return of
3.50%; no dividends granted during the life of the option; volatility
factors of the expected market price of the Company's common stock
ranging from .489 to .843; and an expected life of the option of 10
years.
Employee Stock Ownership Plan - NCRIC Group has an ESOP for employees
who have attained age 21 and completed one year of service. As part of
the stock offering, the ESOP borrowed $1.0 million from NCRIC Group to
purchase 148,000 shares, which are held in a trust account for
allocation among participants as the loan is repaid. For shares
allocated to the accounts of the ESOP participants as the result of
payments made to reduce the ESOP loan, the compensation charge is
based upon the average fair value of the shares over the service
period. Scheduled loan repayments on December 31, 2002,
F-20
2001, and 2000 have been made. During the years ended December 31,
2002, 2001, and 2000 contributions were made to the plan of $162,800,
162,800 and $120,000, respectively. During 2002, 2001 and 2000, 14,800
shares were allocated to the plan.
Stock Award Plan - NCRIC Group has a stock award plan under which
directors, officers and employees of Mutual Holding Company and its
subsidiaries would be awarded common stock. As a part of the stock
offering, the stock award plan borrowed $518,000 from NCRIC Group to
purchase 74,000 shares, which are held in a trust account for
allocation among participants. Scheduled loan repayments on December
31, 2002, 2001, and 2000 have been made. On September 10, 2000, NCRIC
Group granted 74,000 shares of common stock to directors and officers
under its stock award plan. The compensation expense is measured at
the fair value of the stock on the grant date, $7.875 per share, over
the vesting period. For the years ended December 31, 2002, 2001 and
2000, the expense was $153,800, $153,800 and $47,200, respectively.
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences
between the statutory basis of accounting prescribed or permitted by
the District of Columbia Department of Insurance and Securities
Regulation (DISR) and GAAP are summarized below (in thousands):
DECEMBER 31,
------------------------------------------
2002 2001 2000
------------ ------------ ------------
POLICYHOLDERS' SURPLUS - STATUTORY BASIS $ 44,269 $ 32,759 $ 29,764
Fair valuation of investments 2,806 474 (744)
Deferred taxes 3,012 2,726 1,535
Group stock issuance 7,642 7,353 7,145
Capital contribution (13,500) - -
Nonadmitted assets and other 3,588 1,142 3,749
------------ ------------ ------------
STOCKHOLDERS' EQUITY - GAAP BASIS $ 47,817 $ 44,454 $ 41,449
============ ============ ============
NET INCOME - STATUTORY BASIS $ (1,510) $ 593 $ 4,409
Deferred taxes 2,508 1,220 (287)
GAAP consolidation and other (256) (234) (627)
------------ ------------ ------------
NET INCOME - GAAP BASIS $ 742 $ 1,579 $ 3,495
============ ============ ============
As of December 31, 2002, 2001, and 2000, statutory capital and surplus
for NCRIC was sufficient to satisfy regulatory requirements. Each
insurance company is restricted under the applicable Insurance Code as
to the amount of dividends it may pay without regulatory consent.
F-21
In March 1998, the National Association of Insurance Commissioners
adopted the Codification of Statutory Accounting Principles
(Codification). The Codification, which is intended to standardize
regulatory accounting and reporting for the insurance industry, was
effective January 1, 2001. The effect on NCRIC's statutory surplus on
January 1, 2001 was an increase of $1.6 million. This increase is
primarily due to the effect of the recognition of deferred taxes and
the removal of the excess of statutory reserves over statement
reserves penalty, partially offset by charges to surplus for overdue
premium receivables.
The District of Columbia has adopted the National Association of
Insurance Commissioners' statutory accounting practices as the basis
of its prescribed statutory accounting practices. In addition the
Commissioner of the DISR has the right to permit other specific
practices that may deviate from prescribed practices.
During 1999, NCRIC received permission from DISR to include as
admitted assets its investments in asset-backed securities, which are
not specifically authorized as permitted investments under D.C.
regulations as the total investment exceeds five percent of total
admitted assets.
12. REPORTABLE SEGMENT INFORMATION
The Company has two reportable segments: Insurance and Practice
Management Services. The insurance segment provides medical
professional liability and other insurance. The practice management
services segment provides medical practice management services to
private practicing physicians. The accounting policies of the segments
are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on profit
and loss from operations before income taxes.
The Company's reportable segments are strategic business units that
offer different products and services and therefore are managed
separately. Selected financial data is presented below for each
business segment for the year ended December 31 (in thousands):
2002 2001 2000
------------ ------------ ------------
INSURANCE
Revenues from external customers $ 31,023 $ 21,118 $ 14,990
Net investment income 5,877 6,087 6,317
Depreciation and amortization 524 193 208
Segment profit before taxes 1,323 2,834 5,394
Segment assets 190,522 152,130 137,618
Segment liabilities 138,297 114,424 102,542
Expenditures for segment assets 637 153 677
PRACTICE MANAGEMENT SERVICES
Revenues from external customers $ 5,886 $ 6,239 $ 5,396
Net investment income 27 55 84
Depreciation and amortization 137 555 448
Segment profit before taxes 83 205 456
Segment assets 8,290 9,188 8,114
Segment liabilities 2,800 3,762 2,541
Expenditures for segment assets 82 247 50
TOTAL
Revenues from external customers $ 36,909 $ 27,357 $ 20,386
Net investment income 5,904 6,142 6,401
Depreciation and amortization 661 748 656
Segment profit before taxes 1,406 3,039 5,850
Segment assets 198,812 161,318 145,732
Segment liabilities 141,097 118,186 105,083
Expenditures for segment assets 719 400 727
F-22
The following are reconciliations of reportable segment revenues, net
investment income, assets, liabilities, and profit to the Company's
consolidated totals (in thousands):
2002 2001 2000
------------ ------------ ------------
REVENUES:
Total revenues for reportable segments $ 36,909 $ 27,357 $ 20,386
Other Income 8 12 23
Elimination of intersegment revenues (6) (8) (11)
------------ ------------ ------------
Consolidated total $ 36,911 $ 27,361 $ 20,398
============ ============ ============
Net Investment Income:
Total investment income for reportable segments $ 5,904 $ 6,142 $ 6,401
Elimination of intersegment income (4) (6) -
Other Unallocated amounts 15 - 6
------------ ------------ ------------
Consolidated total $ 5,915 $ 6,136 $ 6,407
============ ============ ============
Assets:
Total assets for reportable segments $ 198,812 $ 161,318 $ 145,732
Elimination of intersegment receivables (1,324) (1,675) (740)
Elimination of affiliate receivables 120 1,139 487
Other unallocated amounts 5,079 220 385
------------ ------------ ------------
Consolidated total $ 202,687 $ 161,002 $ 145,864
============ ============ ============
Liabilities:
Total liabilities for reportable segments $ 141,097 $ 118,186 $ 105,083
Elimination of intersegment payables (1,324) (1,675) (740)
Other liabilities 15,097 37 72
------------ ------------ ------------
Consolidated total $ 154,870 $ 116,548 $ 104,415
============ ============ ============
Profit before taxes:
Total profit for reportable segments $ 1,406 $ 3,039 $ 5,850
Other unallocated amounts (986) (863) (794)
------------ ------------ ------------
Consolidated total $ 420 $ 2,176 $ 5,056
============ ============ ============
13. TRANSACTIONS WITH AFFILIATES
NCRIC MSO rented an office building for one of its divisions from a
partnership whose partners are HealthCare Consulting senior
executives. The lease terminated October 31,
F-23
2002. For this property, NCRIC MSO paid approximately $57,000 in rent
for the year ended December 31, 2002 and $62,000 for the years ended
December 31, 2001 and 2000.
During 2002, 2001, and 2000, members of the Company's Board of
Directors paid NCRIC MSO approximately $163,000, $183,000 and
$157,000, respectively, for practice management related services.
14. SUBSEQUENT EVENTS
January 28, 2003, the Mutual Holding Company and the Company announced
that their respective boards of directors approved a plan of
conversion and reorganization for NCRIC MHC which will complete the
transition of the Company to full public stock ownership.
As part of the conversion, the Mutual Holding Company will terminate
its existence, and the ownership interest of the Mutual Holding
Company in the Company will be offered for sale to members and others
on a priority basis in a subscription offering. The Mutual Holding
Company currently owns approximately 60% of the outstanding shares of
the Company.
To complete the conversion, approval is needed from the members of
Mutual Holding Company, the Commissioner of the District of Columbia
Department of Insurance and Securities Regulation, and shareholders of
the Company. It is expected that members of the Mutual Holding Company
and shareholders of the Company will be asked to approve the proposed
conversion and reorganization plan in June 2003.
The Mutual Holding Company members will receive priority subscription
rights to purchase shares issued in the conversion offering. Any
shares of the Company that are not purchased by members, the Company's
employee stock ownership plan, and officers, directors, and employees
will be offered for sale to the public in a community offering.
As part of the conversion, shareholders of the Company will have their
existing shares exchanged for new shares of NCRIC Group, Inc., a
Delaware corporation, based on an exchange ratio that assures that
they receive the same proportionate ownership interest in the new
corporation as their existing ownership interest in the Company
immediately prior to the conversion and reorganization.
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of
operations for 2002, 2001 and 2000:
Year Ended December 31, 2002
FIRST SECOND THIRD FOURTH
------- -------- ------- ---------
Premiums earned and other revenues $ 8,339 $ 8,702 $ 9,478 $ 10,392
Net investment income 1,550 1,524 1,444 1,397
Realized investment gains (losses) (36) (574) 6 473
Net income (loss) 534 198 (791) 801
Basic earnings per share of common
stock $ 0.15 $ 0.06 $ (0.22) $ 0.22
Diluted earnings per share of
common stock $ 0.15 $ 0.05 $ (0.22) $ 0.22
F-24
Year Ended December 31, 2001
FIRST SECOND THIRD FOURTH
------- -------- ------- --------
Premiums earned and other revenues $ 6,494 $ 6,397 $ 6,909 $ 7,561
Net investment income 1,558 1,538 1,521 1,519
Realized investment gains (losses) 95 2 97 (472)
Net income (loss) 930 315 646 (312)
Basic earnings per share of common
stock $ 0.26 $ 0.09 $ 0.18 ($ 0.09)
Diluted earnings per share of
common stock $ 0.26 $ 0.09 $ 0.18 ($ 0.09)
Year Ended December 31, 2000
FIRST SECOND THIRD FOURTH
------- -------- ------- --------
Premiums earned and other revenues $ 5,106 $ 5,094 $ 5,224 $ 4,974
Net investment income 1,594 1,588 1,632 1,593
Realized investment gains (losses) - - - (5)
Net income 878 851 842 924
Basic earnings per share of common
stock $ 0.25 $ 0.24 $ 0.24 $ 0.26
Diluted earnings per share of
common stock $ 0.25 $ 0.24 $ 0.24 $ 0.26
F-25
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002 (IN THOUSANDS)
AMOUNT AT
WHICH SHOWN IN
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET
Fixed Maturities:
United States Government and government
agencies and authorities $ 27,664 $ 27,952 $ 27,952
States, municipalities, and political subdivisions 30,416 32,704 32,704
All other corporate bonds 32,680 33,759 33,759
Asset and mortgage-backed securities 19,549 20,281 20,281
Redeemable preferred stocks 4,561 4,330 4,330
----------------- ---------------- -----------------
Total fixed maturities 114,870 119,026 119,026
Equity securities:
Industrial, miscellaneous, and all other - - -
Nonredeemable preferred stocks 1,000 1,094 1,094
----------------- ---------------- -----------------
Total equity securities 1,000 1,094 1,094
Total investments $ 115,870 $ 120,120 $ 120,120
================= ================ =================
(1) Original cost of equity securities, and, as to fixed maturities, original
costs reduced by repayments and adjusted for amortization of premiums or accrual
of discounts.
F-26
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2002 AND 2001 (IN THOUSANDS)
2002 2001
---------- ----------
ASSETS
INVESTMENTS:
Investments in subsidiaries* $ 58,179 $ 42,248
Bonds 3,392 -
---------- ----------
Total investments 61,571 42,248
OTHER ASSETS:
Cash and cash equivalents 99 25
Receivables 60 133
Property and equipment, net 973 904
Due from subsidiaries* 120 1,162
Other assets 555 18
---------- ----------
TOTAL ASSETS $ 63,378 $ 44,490
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Junior Subordinated Deferrable Interest Debentures $ 15,464 $ -
Other liabilities 97 36
---------- ----------
TOTAL LIABILITIES 15,561 36
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock 37 37
Other stockholders' equity, including unrealized gains
or losses on securities of subsidiaries 47,780 44,417
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 47,817 44,454
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 63,378 $ 44,490
========== ==========
* Eliminated in consolidation.
See notes to condensed financial statements.
F-27
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (IN THOUSANDS)
2002 2001 2000
REVENUES:
Net investment income $ 16 $ - $ 7
Dividends from subsidiaries* 1,750 1,500 1,500
Other income 7 12 22
---------- ---------- ----------
Total revenues 1,773 1,512 1,529
---------- ---------- ----------
EXPENSES:
Other operating expenses 670 875 824
---------- ---------- ----------
Total expenses 670 875 824
---------- ---------- ----------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 1,103 637 705
Equity in undistributed earnings of subsidiaries (361) 942 2,790
---------- ---------- ----------
NET INCOME $ 742 $ 1,579 $ 3,495
========== ========== ==========
* Eliminated in consolidation.
See notes to condensed financial statements.
F-28
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 (IN THOUSANDS)
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 742 $ 1,579
Adjustments to reconcile net income
to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries 361 (942)
Amortization and depreciation 106 51
Stock released for coverage of benefit plans 319 337
Other changes in assets and liabilities: 639 (604)
---------- ----------
Net cash flows from operating activities 2,167 421
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (3,392) -
Investment in purchased business (13,960) (300)
Purchases of property and equipment (175) (73)
---------- ----------
Net cash flows from investing activities (17,527) (373)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from Junior Subordinated Deferrable Interest Debentures 15,464 -
Payments to acquire treasury stock (30) (129)
---------- ----------
Net cash flows from financing activities 15,434 (129)
NET CHANGE IN CASH AND CASH EQUIVALENTS 74 (81)
---------- ----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 25 106
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 99 $ 25
========== ==========
SUPPLEMENTARY INFORMATION:
Interest paid $ - $ -
========== ==========
See notes to condensed financial statements.
F-29
NOTES TO CONDENSED FINANCIAL STATEMENTS
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes of NCRIC Group, Inc. and
Subsidiaries.
I. REORGANIZATION
On December 31, 1998, National Capital Reciprocal Insurance Company consummated
its plan of reorganization from a reciprocal insurer to a stock insurance
company and became a wholly owned subsidiary of NCRIC Group, Inc. (Group) and
converted into NCRIC, Inc. Group has no historical operations and was organized
in December, 1998, as part of the plan to reorganize its corporate structure.
II. BASIS OF PRESENTATION
In Group's financial statements, investment in subsidiaries is stated at cost
plus equity in undistributed earnings of subsidiaries since date of
reorganization plus unrealized gains and losses of subisidiaries' investments.
III. ACQUISITION
On January 4, 1999, Group acquired all of the outstanding shares of HealthCare
Consulting, Inc., all of the outstanding interests of HCI Ventures, LLC, and all
the assets of Employee Benefit Services. See Note 2 of the Notes to the
Consolidated Financial Statements.
IV. INVESTMENTS
See Investments in the Consolidated Financial Statements and in Note 3 of the
Notes to the Consolidated Financial Statements.
V. JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES
See Note 5 of the Notes to the Consolidated Financial Statements
VI. COMPREHENSIVE INCOME
See Comprehensive Income in the Consolidated Financial Statements.
VII. INCOME TAXES
Group and its eligible subsidiaries file a consolidated U.S Federal Income tax
return. Income tax liabilities or benefits are recorded by each subsidiary based
upon separate return calculations.
For further information on income taxes, see Income Taxes in Note 7 of the Notes
to the Consolidated Financial Statements.
VIII. ACCOUNTING CHANGES
For information concerning new accounting standards adopted in 2002 and 2001,
see Note 1 of the Notes to the Consolidated Financial Statements.
F-30
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2002, 2001, AND 2000 (IN THOUSANDS)
DEFERRED FUTURE POLICY OTHER POLICY BENEFITS,
POLICY BENEFITS, LOSSES, CLAIMS AND NET LOSSES AND
ACQUISITION CLAIMS, AND UNEARNED BENEFITS PREMIUM INVESTMENT LOSS
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES
- ----------- ------------- ----------------- ---------- -------------- --------- ------------ ------------
Insurance:
2002 $ 1,480 $ 104,022 $ 24,211 $ - $ 30,098 $ 5,915 $ 26,829
2001 $ 851 $ 84,560 $ 17,237 $ - $ 20,603 $ 6,136 $ 18,858
2000 $ 252 $ 81,134 $ 11,472 $ - $ 14,611 $ 6,407 $ 11,946
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
- ----------- -------------- ----------- ----------
Insurance:
2002 $ 2,890 $ 5,728 $ 51,799
2001 $ 1,337 $ 3,890 $ 34,459
2000 $ 645 $ 3,310 $ 22,727
F-31
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
CEDED ASSUMED PERCENTAGE
PROPERTY AND GROSS TO OTHER FROM OTHER NET OF ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- -------------------- -------- ----------- ------------ --------- ------------
2002 $ 44,113 $ (14,023) $ - $ 30,090 0%
2001 $ 28,192 $ (7,296) $ - $ 20,896 0%
2000 $ 19,965 $ (4,110) $ - $ 15,855 0%
F-32
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2002 AND 2001 (IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
- ----------------------- ------------ ------------ ------------ ---------
2002
Allowance for Doubtful
Accounts $ 562 $ 1,367 $ (5) $ 1,924
2001
Allowance for Doubtful
Accounts $ 350 $ 415 $ (203) $ 562
F-33
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE COMPANIES
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
(IN THOUSANDS)
DEFERRED RESERVE FOR LOSS AND LOSS
POLICY UNPAID CLAIMS NET NET ADJUSTMENT EXPENSES
ACQUISITION AND CLAIM UNEARNED PREMIUMS INVESTMENT RELATED TO : (1)
COSTS ADJUSTMENT EXPENSES PREMIUMS EARNED INCOME CURRENT YEAR PRIOR YEAR
------------- --------------------- ---------- ---------- ------------ -------------- ------------
2002 $ 1,480 $ 104,022 $ 24,211 $ 30,098 $ 5,915 $ 24,063 $ 2,766
2001 $ 851 $ 84,560 $ 17,237 $ 20,603 $ 6,136 $ 23,056 $ (4,198)
2000 $ 252 $ 81,134 $ 11,472 $ 14,611 $ 6,407 $ 17,829 $ (5,883)
AMORTIZATION
OF DEFERRED PAID LOSS
POLICY AND LOSS
ACQUISITION ADJUSTMENT PREMIUMS
COSTS EXPENSES (1) WRITTEN
-------------- -------------- ----------
2002 $ 2,890 $ 20,155 $ 51,799
2001 $ 1,337 $ 17,744 $ 34,459
2000 $ 645 $ 16,591 $ 22,727
(1) Loss and loss adjustment expenses shown net of reinsurance
F-34
- --------------------------------------------------------------------------------
You should rely only on the information contained in this prospectus or that to
which we have referred you. have not authorized anyone to provide you with
information that is different. This prospectus does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered by
this prospectus to any person in any jurisdiction in which such offer or
solicitation would be unlawful. The affairs of NCRIC Group, Inc. may change
after the date of this prospectus. Delivery of this document and the sales of
shares made hereunder does not mean otherwise.
Up to _________ Shares
(Anticipated Maximum)
NCRIC Group, Inc.
COMMON STOCK
par value $0.01 per share
------------------
PROSPECTUS
------------------
Sandler O'Neill & Partners, L.P.
_________, 2003
----------------
Until __________, 2003 or 25 days after commencement of the syndicated community
offering, if any, whichever is later, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments of subscriptions.
- --------------------------------------------------------------------------------
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Amount
------
* Legal Fees and Expenses............................................ $ 300,000
* Printing, Postage and Mailing (includes EDGAR)..................... 61,000
* Appraisal Fees and Expenses........................................ 51,500
* Accounting Fees and Expenses....................................... 156,975
* Conversion Agent and Data Processing Fees.......................... 10,000
** Marketing Agent Fees and Expenses.................................. 696,000
* Filing Fees (DC Commissioner, NASD, Nasdaq and SEC)................ 127,362
* Other.............................................................. 78,000
-----------
* Total ............................................................. $ 1,480,837
===========
- --------------
* Estimated
** NCRIC Group, Inc. has retained Sandler O'Neill & Partners, L.P. to assist
in the sale of common stock on a best efforts basis in the offerings. Fees
are estimated at the midpoint of the offering range.
Item 14. Indemnification of Directors and Officers
Articles TENTH and ELEVENTH of the Certificates of Incorporation of NCRIC
Group, Inc. (the "Corporation") sets forth circumstances under
which directors, officers, employees and agents of the Corporation may be
insured or indemnified against liability which they incur in their capacities as
such:
TENTH:
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH:
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
Item 15. Recent Sales of Unregistered Securities
Not Applicable.
Item 16. Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) List of Exhibits
1.1 Form of Agency Agreement between the NCRIC Group, Inc. and Sandler
O'Neill & Partners, L.P. *
2 Plan of Conversion and Reorganization of NCRIC, A Mutual Holding Company
3.1 Certificate of Incorporation of NCRIC Group, Inc.
3.2 Bylaws of NCRIC Group, Inc.
4.1 Form of Common Stock Certificate of NCRIC Group, Inc.
5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities
being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick
10.1 Employment Agreement with R. Ray Pate, Jr.**
10.2 Employment Agreement with Stephen S. Fargis**
10.3 Employment Agreement with Rebecca B. Crunk**
10.4 Employment Agreement with William E. Burgess
10.5 Lease***
10.6 Amendment to Lease***
10.7 NCRIC Group, Inc. 2003 Stock Option Plan****
10.8 NCRIC Group, Inc. 2003 Stock Award Plan****
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included
as Exhibits 5 and 8.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between the NCRIC Group, Inc. and RP Financial, LC.
99.2 Appraisal Report of RP Financial, LC.*****
99.3 Marketing Materials*
99.4 Order and Acknowledgment Form*
99.5 Opinion of RP Financial, LC. with respect to Subscription Rights
99.6 Prospectus Supplement for participants in the NCRIC Group, Inc. Profit
Sharing Plan and Trust*
99.7 Annual Meeting Proxy Statement
- -------------------------------
* To be filed supplementally or by amendment.
** Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-25505), originally filed with the Commission on March 27,
2002.
*** Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (File No. 333-69537) filed with the Commission on December 23,
1998.
**** Included in the Registrant's Annual Meeting Proxy Statement filed as
Exhibit 99.7 herein.
***** Supporting financial schedules filed pursuant
to Rule 202 of Regulation S-T.
(b) Financial Statement Schedules
No financial statement schedules are filed because the required information is
not applicable or is included in the consolidated financial statements or
related notes.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
duration from the low or high and of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Washington, D.C. on
March 25, 2003.
NCRIC Group, Inc.
By: /s/ R. Ray Pate, Jr.
--------------------------------------------
R. Ray Pate, Jr.
Vice Chairman, President and Chief Executive
Officer (Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of NCRIC Group, Inc. (the
"Company") hereby severally constitute and appoint R. Ray Pate, Jr. as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said R. Ray Pate, Jr. may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said R. Ray Pate, Jr. shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ R. Ray Pate, Jr. Vice Chairman, President and March 25, 2003
------------------------------- Chief Executive Officer
R. Ray Pate, Jr. (Principal Executive Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 25, 2003
------------------------------- Financial Officer (Principal
Rebecca B. Crunk Financial and Accounting Officer)
/s/ Nelson P. Trujillo Chairman March 25, 2003
-------------------------------
Nelson P. Trujillo
/s/ Vincent C. Burke, III Director March 25, 2003
-------------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman Director March 25, 2003
-------------------------------
Pamela W. Coleman
/s/ Martin W. Dukes, Jr. Director March 25, 2003
-------------------------------
Martin W. Dukes, Jr.
/s/ Leonard M. Glassman Director March 25, 2003
-------------------------------
Leonard M. Glassman
/s/ Luther W. Gray, Jr. Director March 25, 2003
-------------------------------
Luther W. Gray, Jr.
/s/ Prudence P. Kline Director March 25, 2003
-------------------------------
Prudence P. Kline
/s/ Edward G. Koch Director March 25, 2003
-------------------------------
Edward G. Koch
/s/ J. Paul McNamara Director March 25, 2003
-------------------------------
J. Paul McNamara
/s/ Leonard M. Parver Director March 25, 2003
-------------------------------
Leonard M. Parver
/s/ Raymond Scalettar Director March 25, 2003
-------------------------------
Raymond Scalettar
/s/ David M. Seitzman Director March 25, 2003
-------------------------------
David M. Seitzman
/s/ Robert L. Simmons Director March 25, 2003
-------------------------------
Robert L. Simmons
As filed with the Securities and Exchange Commission on March 25, 2003
Registration No. 333-________
================================================================================
--------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
NCRIC Group, Inc.
Washington, D.C.
================================================================================
EXHIBIT INDEX
1.1 Form of Agency Agreement between the NCRIC Group, Inc. and Sandler
O'Neill & Partners, L.P.*
2 Plan of Conversion and Reorganization of NCRIC, A Mutual Holding Company
3.1 Certificate of Incorporation of NCRIC Group, Inc.
3.2 Bylaws of NCRIC Group, Inc.
4.1 Form of Common Stock Certificate of NCRIC Group, Inc.
5 Opinion of Luse Gorman Pomerenk & Schick regarding legality of securities
being registered
8.1 Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick
10.1 Employment Agreement with R. Ray Pate, Jr.**
10.2 Employment Agreement with Stephen S. Fargis**
10.3 Employment Agreement with Rebecca B. Crunk**
10.4 Employment Agreement with William E. Burgess
10.5 Lease***
10.6 Amendment to Lease***
10.7 NCRIC Group, Inc. 2003 Stock Option Plan****
10.8 NCRIC Group, Inc. 2003 Stock Award Plan****
21 Subsidiaries of Registrant
23.1 Consent of Luse Gorman Pomerenk & Schick (contained in Opinions included
as Exhibits 5 and 8.1)
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of RP Financial, LC.
24 Power of Attorney (set forth on signature page)
99.1 Appraisal Agreement between the NCRIC Group, Inc. and RP Financial, LC.
99.2 Appraisal Report of RP Financial, LC.*****
99.3 Marketing Materials*
99.4 Order and Acknowledgment Form*
99.5 Opinion of RP Financial, LC. with respect to Subscription Rights
99.6 Prospectus Supplement for participants in the NCRIC Group, Inc. Profit
Sharing Plan and Trust*
99.7 Annual Meeting Proxy Statement
- -------------------------------
* To be filed supplementally or by amendment.
** Incorporated by reference to the Registrant's Annual Report on Form 10-K
(File No. 0-25505), originally filed with the Commission on March 27,
2002.
*** Incorporated by reference from the Registrant's Registration Statement on
Form SB-2 (File No. 333-69537) filed with the Commission on December 23,
1998.
**** Included in the Registrant's Annual Meeting Proxy Statement filed as
Exhibit 99.7 herein.
***** Supporting financial schedules filed pursuant
to Rule 202 of Regulation S-T.