EXHIBIT 99.2
-----------------------------------------
PRO FORMA VALUATION UPDATE REPORT
FOR SECOND STEP CONVERSION
NCRIC GROUP, INC.
Washington, DC
Dated As Of:
May 2, 2003
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Prepared By:
RP Financial, LC.
1700 North Moore Street
Suite 22110
Arlington, Virginia 22209
RP FINANCIAL, LC.
- ---------------------------------------
Financial Services Industry Consultants
May 2, 2003
Board of Directors
NCRIC, A Mutual Holding Company
NCRIC Holdings, Inc.
NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, DC 20007
Members of the Board:
At your request, we have completed and hereby provide an updated
independent appraisal ("Update") of the estimated pro forma market value of the
Common Stock which is to be offered in connection with the Plan of Conversion
and Reorganization ("Reorganization") described below. This Update may be relied
upon by the Department of Insurance and Securities Regulation of the District of
Columbia (the "Department") in its review of the Reorganization. This appraisal
is furnished pursuant to the laws of the District of Columbia, including
Chapters 7 and 9 of Title 31 of the District of Columbia Code. Our original
appraisal report, dated March 11, 2003 (the "Original Appraisal"), is
incorporated herein by reference. As in the preparation of our Original
Appraisal, we believe the data and information used herein is reliable; however,
we cannot guarantee the accuracy and completeness of such information.
Description of Plan of Conversion and Reorganization
In January 2003, the Board of Directors of NCRIC, A Mutual Holding Company
(the "MHC") and its subsidiaries, NCRIC Holdings, Inc. ("NCRIC Holdings") and
NCRIC Group, Inc. ("NCRIC" or the "Company") adopted the Plan of Conversion and
Reorganization (the "Plan"). NCRIC is the majority-owned subsidiary of NCRIC
Holdings which is itself, wholly-owned by the MHC, a District of Columbia
chartered mutual holding company. Currently, NCRIC Holdings owns 2,220,000
shares of NCRIC's common stock outstanding, or 59.9%, with the remaining
1,488,399 shares, or 40.1%, owned by public shareholders. The MHC currently owns
100% of NCRIC Holdings.
In connection with the Plan, NCRIC will be reorganized as a Delaware
corporation. In conjunction with the mutual-to-stock conversion, the MHC and
NCRIC Holdings will merge with and into the Company and NCRIC will sell the
59.9% ownership interest in the MHC to members and the public through
Subscription and Community Offerings (i.e., the "second step
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Washington Headquarters Telephone: (703) 528-1700
Rosslyn Center Fax No.: (703) 528-1788
1700 North Moore Street, Suite 2210 Toll-Free No.: (866) 723-0594
Arlington, VA 22209 E-Mail: mail@rpfinancial.com
www.rpfinancial.com
Board of Directors
May 2, 2003
Page 2
conversion" or "conversion"), based on the appraised value. The offering
proceeds will be retained as capital by NCRIC and its subsidiaries. Concurrent
with the second step conversion, the MHC will be merged into the Company, with
the Company being the surviving corporation. Upon completion of the second step
conversion, 100% of the shares will be owned by public shareholders.
NCRIC will retain up to 25% of the net offering proceeds from the second
step conversion, and the balance will be downstreamed to NCRIC, Inc., its
wholly-owned insurance subsidiary. The net proceeds at NCRIC and the insurance
subsidiaries will initially be invested into short-term investments pending
longer-term deployment. NCRIC's activities are expected to be consistent with
the past.
It is anticipated that the public shares will be issued to the following
categories: (1) Members of the MHC as of January 28, 2003; (2) the Company's
employee benefit plans, including the ESOP and Stock Award Plan; and (3)
directors, officers and employees who are not entitled to purchase shares in
Category (1). Any shares that are not sold in the Subscription Offering may be
offered in the Community offering. Preference in the Community Offering will be
given to: (i) persons who are policyholders, who are not members; (ii)
policyholders of Commonwealth Medical Liability Insurance Company; and (iii)
existing stockholders of NCRIC. The Community Offering may begin concurrently
with, during or promptly after the Subscription Offering. The Company 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.
RP Financial, LC.
RP Financial, LC. ("RP Financial") is a financial consulting firm serving
the financial services industry nationwide that, among other things, specializes
in financial valuations and analyses of business enterprises and securities,
including the pro forma valuation for companies undertaking the demutualization
process including mutual savings institutions and insurance companies. The
background and experience of RP Financial is detailed in Exhibit V-1. We believe
that, except for the fee we will receive for our appraisal, we are independent
of NCRIC and the other parties engaged by the Company to assist in the stock
issuance process.
Limiting Factors and Considerations
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the estimated pro
forma market value thereof. The appraisal does not take into account any trading
activity with respect to the
Board of Directors
May 2, 2003
Page 3
purchase and sale of common stock in the secondary market, and reflects only a
valuation range as of this date for the pro forma market value of NCRIC
immediately upon issuance of the stock.
RP Financial's Update was determined based on the financial condition,
operations and shares outstanding of NCRIC as of March 31, 2003, the latest date
of the financial data to be included in the prospectus, and updated market
pricing characteristics of publicly-traded insurance companies. The proposed
exchange ratio to be received by the current public stockholders of NCRIC and
the exchange of the public shares for newly issued shares of NCRIC common stock
as a full public company was determined independently by the Boards of Directors
of the MHC and NCRIC. RP Financial expresses no opinion on the proposed exchange
ratio to public stockholders or the exchange of public shares for newly issued
shares.
RP Financial is not a seller of securities within the meaning of any
federal and state securities laws and any report prepared by RP Financial shall
not be used as an offer or solicitation with respect to the purchase or sale of
any securities. RP Financial maintains a policy which prohibits RP Financial,
its principals or employees from purchasing stock of its client institutions.
At NCRIC's request, the valuation will be updated and such updates will
consider, among other things, any developments or changes in the Company's
financial performance and condition, management policies, and current conditions
in the equity markets for the shares of insurers. These updates may also
consider changes in other external factors which impact value including, but not
limited to: various changes in the legislative and regulatory environment, the
stock market and interest rates. Should any such new developments or changes be
material, in our opinion, to the valuation of the shares, appropriate
adjustments to the estimated pro forma market value will be made. The reasons
for any such adjustments will be explained in the update at the date of the
release of the update.
Discussion of Relevant Considerations
This Update reflects the following items: (1) the Company's recent
financial developments through March 31, 2003; (2) an updated comparison of the
Company's financial condition and operations in relation to the Peer Group; and
(3) updated stock market conditions since the Original Appraisal date, along
with updated stock prices as of May 2, 2003.
1. Financial Results
Table 1 presents summary balance sheet details as of December 31,
2002, and updated unaudited financial information through March 31, 2003. The
overall composition of NCRIC's updated balance sheet was comparable to the
December 31, 2002 data, with the Company experiencing asset growth during the
quarter, reflecting both the impact of growth in overall business volumes as
well as the significant balance of premiums received in the first quarter of the
year.
Board of Directors
May 2, 2003
Page 4
Table 1
NCRIC Group, Inc.
Historical Balance Sheets
At At
December 31, 2002 March 31, 2003
----------------- -----------------
% of % of
Amount Assets Amount Assets
-------- ------ -------- ------
($000) (%) ($000) (%)
ASSETS
INVESTMENTS:
Securities Available for Sale, At Fair Value:
Bonds and U.S. Treasury Notes $114,696 56.59% $132,011 57.00%
Equity Securities 5,424 2.68% 35 0.02%
-------- ------ -------- ------
Total Securities Available for Sale $120,120 59.26% $132,046 57.02%
OTHER ASSETS:
Cash and Cash Equivalents 10,550 5.21% 18,829 8.13%
Reinsurance Recoverable 43,231 21.33% 43,433 18.75%
Goodwill 7,291 3.60% 7,291 3.15%
Premiums and Accounts Receivable 9,471 4.67% 16,740 7.23%
Deferred Federal Income Taxes 3,789 1.87% 4,426 1.91%
Other Assets 8,229 4.06% 8,820 3.81%
-------- ------ -------- ------
TOTAL ASSETS $202,687 100.00% $231,585 100.00%
======== ====== ======== ======
LIABILITIES & EQUITY
LIABILITIES:
Losses and Loss Adjustment Expenses:
Losses $ 70,314 34.69% $ 73,370 31.68%
Loss Adjustment Expenses 33,708 16.63% 35,014 15.12%
-------- ------ -------- ------
Total Losses and Loss Adjustment Expenses $104,022 51.32% $108,384 46.80%
Other Liabilities:
Retrospective Premium Accrued Under Reinsurance Treaties 607 0.30% 607 0.26%
Unearned Premiums 24,211 11.95% 38,739 16.73%
Advance Premium 2,971 1.47% 171 0.07%
Reinsurance Premium Payable 5,045 2.49% 4,481 1.93%
Bank Debt 995 0.49% 823 0.36%
Trust Preferred Securities 15,000 7.40% 15,000 6.48%
Other Liabilities 2,019 1.00% 15,094 6.52%
-------- ------ -------- ------
TOTAL LIABILITIES $154,870 76.41% 183,299 79.15%
STOCKHOLDERS' EQUITY $ 47,817 23.59% $ 48,286 20.85%
-------- ------ -------- ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $202,687 100.00% $231,585 100.00%
======== ====== ======== ======
Source: Audited and unaudited financial statements.
Board of Directors
May 2, 2003
Page 5
Growth Trends
NCRIC's total assets increased by $28.9 million over the three
months ended March 31, 2003, to equal $231.6 million. As noted above, strong
asset growth has been fueled by expansion of overall business volumes, including
growth in premium revenues and reflects a continuation of the growth trend since
early 2002.
Overall, liabilities also increased modestly, primarily
reflecting growth in unearned premiums (as a large portion of the Company's
policies renew at the end of the calendar year). Other liabilities increased
owing to the purchase of $9 million of securities which had not been closed as
of quarter end, while the increase in the value of insurance in force resulted
in higher loss reserves and loss adjustment expenses ("LAE").
Stockholders' equity increased during the most recent quarter due
to retained earnings. As of March 31, 2003, stockholder's equity totaled $48.3
million, equal to 20.85% of assets. On a tangible basis at the same date, the
Company's tangible equity of $41.0 million represented 17.70% of assets.
As the Company continues to expand - through expansion of product
lines in existing markets, entry into new markets through acquisitions and/or
employment of alternative delivery channels - the balance sheet is expected to
grow accordingly. The capital raised in the stock offering will cause a
significant increase in total assets, which is expected to further facilitate
NCRIC's ability to expand and diversify business lines.
Investment Securities
As of March 31, 2003, NCRIC's investment portfolio totaled $132.0
million, equal to 57.02% of assets, and was primarily comprised of debt
securities. The composition of the portfolio changed modestly during the quarter
as the newly-retained investment advisor (Standish Mellon Asset Management, LLC)
restructured the portfolio, selling securities perceived to be volatile or
entailing a relatively high level of credit risk exposure. As a result, the
equity portfolio diminished to de minimis levels, while over 85% of the
portfolio consisted of U.S.Government and agency securities, or corporate
securities rated AA or better, reflecting an increase from 66% one year earlier.
Cash and Cash Equivalents
Cash and cash equivalents are generally maintained at moderate
levels and fluctuate based on the timing of cash inflows and the Company's cash
needs. As of March 31, 2003, NCRIC's balance of cash and cash equivalents
totaled $18.8 million, equal to 8.1% of total assets.
Reinsurance Recoverable
The Company establishes a reinsurance recoverable asset
reflecting the actuarial established value of funds to be recovered from
reinsurance treaties (or contracts) pursuant to SFAS No. 113. As of March 31,
2003, the reinsurance recoverable assets totaled $43.4 million, equal to 18.8%
of total assets. The reinsurance recoverable assets are reviewed at least
semi-annually by both management and the independent actuaries, as well as by
Deloitte &
Board of Directors
May 2, 2003
Page 6
Touche, LLP. Management believes that all of the reinsurance recoverable assets
are collectible in full.
Goodwill
The Company's goodwill balance was unchanged since December 31,
2002, and is evaluated for impairment at least annually.
Premiums and Accounts Receivable
Premiums and accounts receivable reflect the premium balance due
on policies in effect on which premiums have yet to be collected. The balance of
premiums receivable fluctuates throughout the year but generally have trended
upwards reflecting the growth in business volume. Premiums and accounts
receivable increased to $16.6 million, or 7.23% of assets, as of March 31, 2003.
Deferred Federal Income Taxes
Deferred federal income taxes totaled $4.4 million, equal to 1.9%
of total assets as of March 31, 2003, and is principally related to the accrual
of losses and loss adjusted expenses ("LAE") for book purposes, which will only
be realized in the future for tax purposes. Other significant timing differences
between the GAAP books and tax liability exist with respect to unearned
premiums, unrealized losses on AFS securities, net operating loss carryforwards
and deferred policy acquisition costs.
Other Assets
The Company's other assets primarily consists of property and
equipment, and various other miscellaneous accruals and assets. While there was
a slight balance increase during the quarter, the percent to assets declined due
to asset growth.
Losses and Loss Adjustment Expenses
Losses and LAE continued to trend upward during the quarter ended
March 31, 2003. The loss reserves have been increasing in dollar terms but
decreasing as a percent of assets over the last several years reflecting: (1)
the actual loss development in recent periods has been relatively unfavorable;
(2) implementation of more stringent underwriting standards; and (3)
management's intention to maintain a conservative level of loss reserves. As of
March 31, 2003, losses and LAE equaled $108.4 million, or 46.8% of assets.
Unearned and Advance Premiums
Unearned and advance premiums consist of premiums collected for
insurance coverage to be rendered over the balance of the life of the policy,
which is generally a one year term for the Company. As of March 31, 2003,
unearned premiums and advance premiums totaled $38.7 million and $171,000,
respectively. Unearned premiums have been increasing over the last several years
as overall premium revenues have increased; the first quarter of the year
typically reflects notable growth given the concentration of policy renewals at
the first of the year.
Board of Directors
May 2, 2003
Page 7
Other Miscellaneous Liabilities
Other liabilities consist of a variety of accounts including
reinsurance premium payables, bank debt, trust preferred securities and other
liabilities. The only account to change significantly over the quarter was other
liabilities, primarily reflecting the purchase of $9 million of investment
securities which had not closed as of March 31, 2003.
Stockholders' Equity
Stockholders' equity increased to $48.3 million, equal to 20.85%
of assets as of March 31, 2003. The increase was primarily the result of
retained earnings, which was offset by a modest reduction in unrealized gains on
securities classified as available for sale ("AFS").
Income and Expense Trends
Table 2 shows the Company's historical income statements for 12
months ended December 31, 2002, and updated information as of March 31, 2003,
both reflected as a percent of average assets and as a percent of total
revenues. NCRIC's earnings were substantially unchanged based on updated
financial data, as net income equaled $722,000 for the 12 months ended March 31,
2003, versus $742,000 for the 12 months ended December 31, 2002.
Premium Income
Net premiums earned continued to reflect growth, which management
attributes to expansion of business outside of the District of Columbia and
Maryland. Additionally, premium rate increases continue to be an important
factor in the growth of premium income. Overall, net premiums earned on a
trailing 12 month basis increased by 16% to $35.0 million for the 12 months
ended March 31, 2003, equal to 17.25% of average assets and 2.80% of total
revenues.
Net Investment Income
Net investment income continued to decline over the quarter,
reflecting the reinvestment of maturing investments at lower rates, as well as
the portfolio restructuring during the quarter which lowered the average
portfolio yield. Net investment income totaled $5.7 million, equal to 2.80% of
average assets and 11.96% of revenues for the 12 months ended March 31, 2003.
Net Realized Investment Gains
Net realized investment gains equaled $104,000 for the 12 months
ended March 31, 2003, versus a loss of $131,000 for the 12 months ended December
31, 2002. The reversal of the net investment losses to gains reflects the
portfolio restructuring undertaken and the current interest rate environment.
Board of Directors
May 2, 2003
Page 8
Table 2
NCRIC Group, Inc.
Historical Income Statements
For the Fiscal Year Ended For the 12 Months Ended
December 31, 2002 March 31, 2003
------------------------------ ------------------------------
% of Avg. % of % of Avg. % of
Amount Assets Revenues Amount Assets Revenues
------- --------- -------- ------- --------- --------
($000) (%) (%) ($000) (%) (%)
REVENUES:
Net Premiums Earned $30,098 16.55% 70.50% $34,981 17.25% 73.58%
Net Investment Income 5,915 3.25% 13.85% 5,687 2.80% 11.96%
Net Realized Investment Losses (131) -0.07% -0.31% 104 0.05% 0.22%
Practice Management and Related Revenue 5,800 3.19% 13.58% 5,614 2.77% 11.81%
Other Income 1,013 0.56% 2.37% 1,154 0.57% 2.43%
------- ----- ------ ------- ----- ------
Total Revenues 42,695 23.48% 100.00% 47,540 23.45% 100.00%
EXPENSES:
Losses and Loss Adjustment Expenses $26,829 14.75% 62.84% $30,692 15.14% 64.56%
Underwriting Expenses 8,168 4.49% 19.13% 9,071 4.47% 19.08%
Practice Management and Related Expenses 5,811 3.20% 13.61% 5,692 2.81% 11.97%
Other Expenses 1,467 0.81% 3.44% 1,745 0.86% 3.67%
------- ----- ------ ------- ----- ------
Total Expenses 42,275 23.25% 99.02% 47,200 23.28% 99.28%
------- ----- ------ ------- ----- ------
INCOME BEFORE INCOME TAXES $ 420 0.23% 0.98% $ 340 0.17% 0.72%
INCOME TAX (BENEFIT) PROVISION ($322) -0.18% -0.75% ($382) -0.19% -0.80%
------- ----- ------ ------- ----- ------
NET INCOME $ 742 0.41% 1.74% $ 722 0.36% 1.52%
======= ===== ====== ======= ===== ======
Combined Ratio:
Expense Ratio 27.14% 25.93%
Loss Ratio 89.14% 87.74%
------- -------
Combined Ratio 116.28% 113.67%
Source: Audited and unaudited financial statements.
Board of Directors
May 2, 2003
Page 9
Practice Management and Related Revenue
NCRIC continued to experience a reduction in practice management
revenue, declining by 3% to $5.6 million for the 12 months ended March 31, 2003.
NCRIC attributes such reduction primarily to lower revenues generated through
one-time consulting engagements. In this regard, many solo and small-group
physician practices have had less discretionary income in the current market
environment than in prior years as insurance company/Medicare reimbursements
have tightened while the costs related to their medical practices have continued
to escalate.
Other Income
For the 12 months ended March 31, 2003, other income increased
modestly to nearly $1.2 million, and remained generally consistent as a percent
of assets and total revenues relative to fiscal 2002 ratios. As discussed in the
Original Appraisal, the level of other income reflects a growth trend which
management attributes to increased brokerage reinsurance treaty commission
income generated by higher reinsurance premiums ceded and from service fees
generated by the installment payments premiums for insurance policies (the
Company offers an installment payment option to its policyholders charging a fee
for the service).
Losses and Loss Adjustment Expenses
Losses and LAE continued to increase for the 12 months ended
March 31, 2003, to equal $30.7 million, as compared to $26.8 million of the 12
months ended December 31, 2002, reflecting an increase as a percent of assets
and total revenues. The relatively large increase is primarily the result of
expansion of insurance in force coupled with rising frequency and severity of
losses from prior years.
Underwriting Expenses
Underwriting expenses consist of all the other administrative
expenses directly related to underwriting insurance (excluding losses and LAE).
Underwriting expenses increased to equal $9.1 million for the 12 months ended
March 31, 2003, remaining consistent with the prior period as a percent of
average assets and total revenues. Management attributes the increase to overall
growth, including growth in agent business which has increased commission
expenses. Additionally, the Company incurred a $364,000 expense as a result of
fraud committed by a former agent, which further increased total underwriting
expenses.
Practice Management Expenses
Practice management expenses continued to decrease during the
most recent period, largely reflecting the elimination of client service
transition expenses associated with the employment termination of two former
owners of the acquired business at the termination of their employment contracts
in 2002. Practice management expenses totaled $5.7 million for the 12 months
ended March 31, 2003, versus $5.8 million for the 12 months ended December 31,
2002.
Board of Directors
May 2, 2003
Page 10
Other Expenses
Other expenses, including interest costs, increased to $1.7
million for the 12 months ended March 31, 2003. The increase is primarily
attributable to the interest expense on the trust preferred securities
(principal balance of $15 million) issued in December 2003. The annual interest
expense level is expected to increase as a full year's interest expense on the
trust preferred securities is realized.
Income Taxes
The Company's financial statements continue to reflect a tax
benefit for the most recent 12 month period, which is attributable to the impact
of tax-advantaged securities in NCRIC's portfolio which created a tax loss for
the year, notwithstanding positive pre-tax income reported for financial
reporting purposes
2. Peer Group Financial Comparisons
The most updated financial characteristics and operating results
available for NCRIC and the Peer Group are set forth in Exhibit 1. NCRIC's
ratios are based on financial data through March 31, 2003, while the Peer
Group's ratios are as of December 31, 2002, the latest date for which complete
financial information is publicly available.
The balance sheet characteristics and growth trends relative to
the Peer Group remain comparatively unchanged, given the limited amount of time
which has elapsed since the date of the Original Appraisal. In this regard,
NCRIC's equity remains above the Peer Group average, and will be substantially
increased with the infusion of the net conversion proceeds. Invested assets
remain the largest component of the asset bases for NCRIC and the Peer Group
while the portion of liabilities is comprised of policy reserves, which
represent reserves established for future claims.
NCRIC continues to generate greater balance sheet and revenue
growth in comparison to the Peer Group, reflecting the Company's strong
financial condition and efforts to expand in response to its perceived ability
to profitably underwrite new business, particularly in markets where competing
providers have contracted or withdrawn entirely in certain circumstances. By
comparison, the majority of the Peer Group companies (four out of seven) have
reported operating losses for the most recent twelve month period and the
resulting erosion of capital, coupled with unfavorable market conditions, has
led to their comparatively moderate balance sheet growth.
NCRIC's recent financial performance continues to compare
favorably to the Peer Group average. In this regard, while NCRIC's operations
have been negatively impacted by adverse industry trends (i.e., rising frequency
and severity of losses coupled with diminishing investment income), it has been
less impacted than the Peer Group companies. As reference above, a majority of
the Peer Group companies (four out of seven) have reported losses for the most
recent twelve months based on updated financial data. Overall, the Company
operates with a favorable loss ratio, which coupled with a relatively similar
expense ratio, provides for a favorable combined ratio. Additionally, NCRIC
maintains a relatively favorable pre-tax
Board of Directors
May 2, 2003
Page 11
underwriting profit margin but overall margins (including all revenue sources)
are adversely impacted by the operations of the MSO.
3. Stock Market Conditions
Since the date of the Original Appraisal, the conditions
prevailing in the overall stock market have been favorable, as major indices
such as the Dow Jones Industrial Average ("DJIA") have fluctuated, but generally
trended upward. In this regard, the commencement of war with Iraq produced a
rally in the stock market, amid initial expectations that a conflict in Iraq
would end quickly. However, the rally was not sustained, as stocks declined at
the close of the first quarter on renewed worries about the economy and fears
that the war in Iraq could be longer and more difficult than investors had
anticipated.
Stocks rebounded at the start of the second quarter on news of
U.S. war successes in Iraq. As investors shifted their focus from the war to
first quarter earnings, the broader stock market settled into a narrow trading
range through most of April and into early May 2003. On May 2, 2003, the DJIA
closed at 8582.68, an increase of 14.1% since the date of the Original Appraisal
(of 7524.06). Since the date of the Original Appraisal, the insurance sector has
generally outperformed the overall stock market. On May 2, 2003, the Standard &
Poor's Insurance Index had closed up 25.0% since the Original Appraisal (from
210.68 to 263.35 as of May 2nd). Table 3 sets charts the performance of the
Standard & Poor's Insurance Index versus the Dow Jones Industrial Average.
The Peer Group's stock prices have increased since the date of
the Original Appraisal as: (1) six of the seven Peer Group companies have
experienced an increase in their respective price per share; and (2) the average
and median price increase approximated 28% and 29%, respectively. However,
trends with respect to the Peer Group's pricing ratios have been mixed as shown
in Table 4 below. The median P/E multiples for the Peer Group, based on the
updated analysts' consensus estimate of 2003 forward earnings reflect a decline
of 15%, while the corresponding ratios for the Medical Professional Liability
Sub Group reflect a decline of 21.6%. In this regard, updated consensus
analysts' earnings estimates for the Medical Professional Liability Sub Group
reveal that SCPIE Holdings is now forecasted to post a loss whereas earnings
estimates for SCPIE Holdings were previously forecast at $0.23 per share for
2003 at the date of the Original Appraisal - as a result, the forward P/E is not
meaningful. Thus, the forward P/E multiple for the Medical Professional
Liability Sub Group currently reflects the median of only two companies
(ProAssurance and FPIC Insurance Group).
Conversely the median P/TB increased by 21.6% for the Peer Group
and by 25.2% for the Medical Professional Liability Sub Group. The
Price/Revenues ratio declined for the Peer Group as a whole, primarily as a
result of strong revenue growth for one company (RTW, Inc.), while the
Price/Revenues increased by 26.1% for the Medical Professional Liability Sub
Group.
RP Financial, LC.
- ---------------------------------------
Financial Services Industry Consultants
Table 3
Dow Jones Industrial Index and S&P Insurance Index
[CHART]
[Line Chart]
1/02 2/02 3/02 4/02 5/02 6/02 7/02 8/02 9/02
---- ----- ----- ---- ---- ---- ---- ---- ----
DJIA 9920 10106 10404 9946 9925 9243 8737 8664 7592
S&P Insur. 311 319 319 316 305 298 276 270 240
10/02 11/02 12/02 1/03 2/03 3/03 3/11/03 4/03
----- ----- ----- ---- ---- ---- ------- ----
DJIA 8397 8896 8342 8054 7891 7992 7524 8480
S&P Insur. 260 272 253 245 229 230 211 260
Board of Directors
May 2, 2003
Page 13
Table 4
NCRIC Group, Inc.
Median Pricing Characteristics of Peer Group
March 11, May 2, %
2003 (1) 2003 Change
--------- ------ ------
Peer Group
Price/earnings (x) 15.15x 1.26x N.M.(2)
Price/core earnings (x) 15.15 1.26 N.M.(2)
Price/2003 estimated earnings (x) 10.55 8.97 (15.0)%
Price/book (%) 60.18% 73.10% 21.5
Price/tangible book (%) 60.18 73.19 21.6
Price/revenues (x) 0.60x 0.52x (13.3)
Medical Professional Liability Sub Group
Price/earnings (x) N.M. N.M. N.M.(2)
Price/core earnings (x) N.M. N.M. N.M.(2)
Price/2003 estimated earnings (x) 20.37x 15.97x (21.6)%
Price/book (%) 51.46% 64.36% 25.1
Price/tangible book (%) 54.38 68.09 25.2
Price/revenues (x) 0.46x 0.58x 26.1
(1) Adjusted for the November 2002 2:1 reverse stock split by RTW, Inc., which
was not recognized by SNL Securities until after Form 10K became available
in March 2003.
(2) Not meaningful since only one Peer Group company reported a meaningful
earnings multiple based on trailing 12 month earnings (i.e., a P/E multiple
below 30 times). Only three Peer Group companies reported positive earnings
for the 12 months ended December 31, 2003.
Source: SNL Securities, corporate filings, RP Financial calculations.
Summary of Adjustments
Based on the foregoing, we have not changed the valuation parameters as set
forth in the Original Appraisal as shown below.
Board of Directors
May 2, 2003
Page 14
Key Valuation Parameters Valuation Adjustment
------------------------ --------------------
Financial Condition Moderate Upward
Profitability, Growth and Viability of Earnings Moderate Upward
Risk Assessment Slight Upward
Primary Market and Growth Moderate Upward
Dividends Moderate Upward
Liquidity of the Shares Moderate Downward
Marketing of the Issue Moderate Downward
Organization and Management Slight Upward
Regulatory Environment No Adjustment
There were no material changes in the updated financial conditions or
earnings of the Company and the Peer Group. Thus, the valuation adjustments for
financial condition and profitability, growth, and viability of earnings remain
unchanged from those applied in the Original Appraisal. The factors concerning
the valuation parameters of risk assessment, primary market area, dividends,
liquidity of the shares, organization and regulatory environment did not change
since the Original Appraisal date. Accordingly, those parameters were not
discussed further in this update.
The general market indices for all stocks are higher since the date of the
Original Appraisal and the market for insurance companies generally, as measured
by the Standard and Poor's Insurance Index, has increased by 25.0%. Likewise,
the prices of the Peer Group companies have increased, as measured by their
share prices and as reflected in the increase in their P/B and P/TB ratios. At
the same time, both the Company and the Peer Group continue to be impacted by
difficult market conditions which have led to operating losses reported by the
majority of the Peer Group companies. Overall, taking into account the foregoing
factors, we believe that an increase in the Company's estimated pro forma market
value as set forth in the Original Appraisal is appropriate.
Valuation Approaches
In applying the pro forma market value approach, we considered the four key
pricing ratios in valuing NCRIC's to-be-issued stock - price/earnings ("P/E"),
price/book ("P/B"), price/revenue ("P/Rev") and price/assets ("P/A") approaches
- - all performed on a pro forma basis including the effects of the stock offering
proceeds. In computing the pro forma impact of the second step conversion and
the related pricing ratios, we have incorporated the valuation parameters
disclosed in NCRIC's prospectus for the effective tax rate, offering expenses
and stock benefit plan assumptions (summarized in Exhibits 2 and 3). In
addition, we have incorporated a 4.50% pre-tax reinvestment rate to the
reinvestable cash proceeds, which is consistent with the anticipated return
based on the near term use of proceeds.
Consistent with the Original Appraisal, this Update continues to be based
primarily on fundamental analysis techniques applied to the Peer Group,
including the P/E approach, the P/B
Board of Directors
May 2, 2003
Page 15
approach the P/Revenues approach and the P/A approach. We have also considered
the recent trading price of NCRIC's stock in our determination of value (as
discussed later). Based on the foregoing, and taking into account the increase
in the Peer Group's P/B and P/TB ratios, tempered by the reduction in the median
P/E based on forward earnings, RP Financial concluded that, as of May 2, 2003,
the aggregate pro forma market value of the Company's stock should be increased
to $55,124,850 at the midpoint, equal to 5,512,485 shares, based on an offering
price of $10.00 per share. Accordingly, the midpoint value of all the shares
indicates a $33.0 million public offering at the midpoint value based on the
sale of 59.9% of the stock in the second step conversion. This update reflects a
10% increase relative to the midpoint valuation established in the Original
Appraisal.
1. P/E. The application of the P/E valuation method requires
calculating the Company's pro forma market value by applying a valuation P/E
multiple to the pro forma earnings base. Ideally, the pro forma earnings base is
composed principally of the Company's recurring earnings base, that is, earnings
adjusted to exclude any one-time non-operating items, plus the estimated
after-tax earnings benefit of the reinvestment of net offering proceeds. NCRIC's
reported earnings were $722,000 for the 12 months ended March 31, 2003, which
included a modest amount of investment gains ($199,000), a valuation allowance
established for a delinquent premium receivable ($1.2 million), and a
non-recurring expense related to fraud by a former agent ($364,000). For
valuation purposes, we have excluded such non-recurring items in computing the
valuation earnings base of $1,624,000.
Based on reported earnings, the Company's pro forma P/E multiple was
41.16 times, in contrast to the 35.94 times earnings figure reported by the Peer
Group based on the average (the median was 47.78x). Based on the core earnings
base calculated above, NCRIC's pro forma P/E multiple equaled 24.60 times
earnings while the Peer Group's median P/E multiple based on core earnings was
equal to 46.62 times. The P/E multiples for the Peer Group are rendered less
meaningful by the fact that only three companies were reporting positive
earnings and as the indicated multiples for companies with positive earnings
were at widely varying levels.
In light of weak reported and adjusted earnings for NCRIC and the weak
earnings or losses reported by the Peer Group, we continue to assess NCRIC's pro
forma P/E multiple based on budgeted earnings for fiscal 2003 of $2.4 million in
comparison to the forward multiple based on the analysts' consensus earnings for
2003 for the Peer Group. Specifically, NCRIC's pro forma forward earnings
multiple based on budgeted earnings equaled 18.27 times at the midpoint, in
comparison to the Peer Group median and average of 8.97 times and 12.21 times,
respectively. Accordingly, the valuation reflects a premium of 50% relative to
the Peer Group average and 104% relative to the Peer Group median. The valuation
premiums have increased relative to the 20% and 60% premiums relative to the
Peer Group average and median, respectively, established in our Original
Appraisal. On balance, the larger P/E premiums are appropriate in view of the
larger P/B discount relative to the Peer Group.
The premium forward earnings multiple for NCRIC takes into account the
fact that the pro forma calculations reflect the initial reinvestment of the
proceeds in investment securities at yields lower than the anticipated returns
from the Company's expansion and growth strategy over the longer term.
Additionally, the earnings estimate for 2003 for NCRIC of $2.4 million
Board of Directors
May 2, 2003
Page 16
has not been adjusted from the level incorporated in the Original Appraisal.
However, we note that core earnings for the first quarter of fiscal 2003
approximated $600,000 ($2.4 million annualized) which suggests that the 2003
earnings estimate for NCRIC may be exceeded as the impact of recent rate
increases and premium growth are fully realized into trailing 12 month earnings
(i.e., NCRIC's core earnings tend to trend higher as the year progresses).
Relative to the Medical Professional Liability Sub-Group the Company's
pro forma forward earnings multiple is at a 14% premium relative to the Peer
Group average and median. By comparison, NCRIC was discounted by 2% relative to
the average and by 17% relative to the median in the Original Appraisal. As in
the Original Appraisal, we continue to compare NCRIC with the larger
ProAssurance in that both pursued capital raising transactions to fund
expansionary plans to take advantage of prevailing market conditions and
perceived opportunities. Relative to ProAssurance's forward earnings multiple of
25.04 times, the Company's pro forma forward earnings multiple is discounted by
27%, which reflects an increase from the 17% discount reflected in the Original
Appraisal.
2. P/B. The application of the P/B valuation method requires
calculating the Company's pro forma market value by applying a valuation P/B
ratio to NCRIC's pro forma book value. In applying the P/B approach, we also
considered tangible book value (i.e., book value net of intangible assets)
because historically the market has not generally given credit for intangible
assets.
At the midpoint value, NCRIC's pro forma reported and tangible P/B
ratios of 71.81% and 79.35%, respectively, remained discounted to the Peer
Group's average reported and tangible P/B ratios of 87.02% and 95.80%,
respectively. Accordingly, the Company's pro forma reported and tangible P/B
ratios are discounted by 18% and 17%, respectively. Comparatively, the Company's
pro forma reported and tangible P/B ratios were discounted by 13% and 10%,
respectively, in the Original Appraisal. On balance, the steeper book value
ratio discounts were considered appropriate in view of the higher earnings
multiple premiums.
Relative to the Medical Professional Liability Sub-Group the Company's
pro forma P/TB ratio is discounted 6% relative to the average (as compared to a
12% premium in the Original Appraisal), and at a premium of 16% relative to the
median (as compared to 39% in the Original Appraisal). In comparison to
ProAssurance's P/TB ratio of 159.85%, NCRIC is discounted by 50% at the midpoint
of the valuation range, as compared to 44% in the Original Appraisal.
3. P/Revenues. The P/Revenues valuation methodology determines market
value by applying a valuation P/Revenue ratio to the Company's pro forma
revenues. At the midpoint of the valuation range, NCRIC's value equaled 1.13
times of pro forma revenues. The foregoing P/Revenue ratio remains above the
Peer Group average of 0.63 times and median of 0.52 times. The Company's
P/Revenues ratio remains at a premium relative to the Medical Professional
Liability Sub-Group as well, whose average and median ratios were 0.70 times and
0.58 times, respectively. NCRIC's P/Revenue ratio is discounted by 19% to
ProAssurance's P/Revenue ratio of 1.39 times. A benefit of the revenues approach
is that it is not significantly impacted by the offering proceeds, unlike the
earnings and book value approaches. At the same time, we
Board of Directors
May 2, 2003
Page 17
believe that investors tend to focus more heavily on overall net earnings levels
rather than the magnitude of overall revenues in evaluating insurance companies.
4. P/A. The P/A valuation methodology determines market value by
applying a valuation P/A ratio to the Company's pro forma asset base. At the
midpoint of the valuation range, NCRIC's value equaled 21.20% of pro forma
assets. Comparatively, the Peer Group companies exhibited average and median P/A
ratios of 16.57% and 10.84%, respectively, which imply Company premiums of 28%
and 96%. NCRIC's P/A ratio at the midpoint is at a 28% premium to the average
and a 49% premium to the median of the P/A ratios relative to the Medical
Professional Liability Sub-Group. Relative to the large ProAssurance, however,
NCRIC's P/A ratio is at a 29% discount. We placed less weight on this valuation
methodology, as size is a less important valuation criteria to the investment
community.
5. Trading of NCRI Stock. Converting insurance companies generally do
not have stock outstanding. NCRIC, however, has public shares outstanding due to
the mutual holding company form of ownership. Since NCRI is currently traded on
the NASDAQ, the stock price is a limited indicator of investor interest in
NCRIC's conversion stock following the offering and therefore we cannot ignore
market expectations. At the same time, the investment community typically does
not have full information access and appraisal expertise, and the stock trading
since the announcement of the second step conversion appears to have been
subject to speculation. Based on the May 2, 2003, stock price of $16.20 per
share and the 3,708,399 shares of the Company's stock issued and outstanding,
the implied market value of NCRIC following the second step conversion is $60.0
million, which falls between the midpoint and maximum of the valuation
conclusion in this Update.
Valuation Conclusion
Based on the foregoing, it is our opinion that, as of May 2, 2003, the
estimated aggregate pro forma market value of NCRIC, inclusive of the sale of
the MHC's ownership interest to the public shareholders has increased to
$55,124,850 at the midpoint, which reflects a 10% increase relative to the
valuation midpoint established in the Original Appraisal. Based on this
valuation and the approximate 59.9 ownership interest being sold in the public
offering, the midpoint value of the Company's stock offering was $33,000,000,
equal to 3,300,000 shares at a per share value of $10.00. The offering range
includes a minimum value of $28,050,000, equal to 2,805,000 shares at $10.00 per
share (85.0% of the midpoint) and a maximum value of $37,950,000, equal to
3,795,000 shares at $10.00 per share (115.0% of the midpoint). If warranted by
market conditions, the Company may sell conversion stock up to a supermaximum
value of $43,642,500 (15% above the maximum), equal to 4,364,250 shares at
$10.00 per share, without requiring a resolicitation. The pro forma valuation
calculations relative to the Peer Group are shown in Table 5 and are detailed in
Exhibit 2 and Exhibit 3.
Establishment of the Exchange Ratio
The Plan provides that the minority (or "public") stockholders are entitled
to exchange their shares of the Company's common stock for newly issued shares
of the Company on a fully
Board of Directors
May 2, 2003
Page 18
converted basis. The Board of Directors has independently established a formula
to determine the exchange ratio. The formula has been designed to preserve the
current aggregate public ownership percentage in Company equal to 40.14% as of
May 2, 2003. Pursuant to this formula, the exchange ratio to be received by the
existing minority shareholders of Company will be determined at the end of the
offering based on the total number of shares sold in the Subscription and
Community Offerings. As shown in Table 5, based on the appraised value
determined herein, the exchange ratio for the minority shareholders would be
1.2635 shares, 1.4865 shares, 1.7095 shares and 1.9659 shares at the minimum,
midpoint, maximum and supermaximum of the offering range, respectively. RP
Financial expresses no opinion on the proposed exchange of newly issued shares
for the shares held by the minority stockholders or on the proposed exchange
ratio.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ Ronald S. Riggins
-----------------------------------
Ronald S. Riggins
President and Managing Director
/s/ James P. Hennessey
-----------------------------------
James P. Hennessey
Senior Vice President
RP Financial, LC
Table 5
Public Market Pricing
NCRIC Group, Inc. and the Peer Group
Prices As of May 2, 2003
Market Capitalization Per Share Data
------------------------ -------------------------------------------------------------
TTM Earnings Book Value
Primary Price/ Shares Market ---------------------------- -------------- TTM
Ticker Line Share Out. Value Actual Core 2003 Est.(2) GAAP Tang. Rev. Assets
- ------ ------- ------ ------ -------- ------ ------ ------------ ------ ------ ------ -------
($) (000) ($000) ($) ($) ($) ($) ($) ($) ($)
NCRIC Group, Inc. PL
Supermaximum $10.00 7,290 $ 72,903 $0.21 $0.34 $0.44 $11.83 $10.83 $ 6.76 $ 36.97
Maximum $10.00 6,339 $ 63,394 $0.23 $0.37 $0.49 $12.81 $11.66 $ 7.73 $ 41.72
Midpoint $10.00 5,512 $ 55,125 $0.24 $0.41 $0.55 $13.93 $12.60 $ 8.86 $ 47.18
Minimum $10.00 4,686 $ 46,856 $0.27 $0.46 $0.62 $15.44 $13.89 $10.38 $ 54.56
Peer Group Aggregate
Average $15.86 14,481 272,655 ($1.13) ($1.35) $0.84 $18.55 $17.20 $25.44 $ 95.44
Median -- -- -- -- -- -- -- -- -- --
Professional Liability Peer Group
Average $17.53 13,980 289,491 ($1.80) ($1.86) $0.48 $22.99 $22.12 $27.91 $108.95
Median -- -- -- -- -- -- -- -- -- --
Workers Compensation Peer Group
Average $13.63 15,149 250,206 ($0.24) ($0.67) $1.33 $12.64 $10.64 $22.16 $ 77.44
Median -- -- -- -- -- -- -- -- -- --
Professional Liability Peer Group
ACAP American Physicians PL $23.85 8,695 207,376 ($1.98) ($1.01) $0.50 $32.24 $32.24 $32.26 $121.78
FPIC FPIC Ins. Grp. PL $ 9.67 9,391 90,811 ($1.57) ($1.57) $1.40 $17.67 $15.55 $23.52 $109.30
PRA Pro Assurance PL $27.04 28,500 770,640 $0.46 $0.58 $1.08 $17.72 $16.92 $19.50 $ 90.74
SKP SCPIE Holdings PL $ 9.55 9,334 89,138 ($4.12) ($5.44) ($1.05) $24.34 $23.77 $36.34 $113.97
Workers Compensation Peer Group
AGII Argonaut Grp. WC $11.10 21,581 $239,549 ($4.04) ($4.84) $1.24 $15.18 $10.29 $21.22 $102.35
RTWI RTW, Inc. WC $ 3.50 5,099 17,847 $2.78 $2.78 $0.39 $ 5.85 $ 5.85 $13.17 $ 43.90
ZNT Zenith National WC $26.28 18,768 493,223 $0.55 $0.05 $2.35 $16.89 $15.77 $32.09 $ 86.06
Pricing Ratios Dividends
-------------------------------------------------------------- --------------------
Earnings Book Value
----------------------------- ---------------- TTM Amt./ Payout
Ticker Actual Core 2003 Est.(2) GAAP Tang. Rev. Assets Share Yield Ratio
- ------ ------ ------- ------------ ------- ------- ----- ------ ----- ----- ------
(x) (x) (x) (%) (%) (x) (%) ($) (%) (%)
NCRIC Group, Inc.
Supermaximum 47.12x 29.76x 22.60x 84.52% 92.32% 1.48x 27.05% $0.00 0.00% 0.00%
Maximum 44.15x 27.11x 20.36x 78.09% 85.80% 1.29x 23.97% $0.00 0.00% 0.00%
Midpoint 41.16x 24.60x 18.27x 71.81% 79.35% 1.13x 21.20% $0.00 0.00% 0.00%
Minimum 37.72x 21.85x 16.04x 64.76% 72.02% 0.96x 18.33% $0.00 0.00% 0.00%
Peer Group Aggregate
Average 35.94x 191.16x 12.21x 87.02% 95.80% 0.63x 16.57% $0.06 0.60% N.M.
Median 47.78x 46.62x 8.97x 73.10% 73.99% 0.52x 10.84% -- -- --
Professional Liability Peer Group
Average 58.78x 46.62x 15.97x 80.14% 84.05% 0.70x 16.65% $0.10 1.05% N.M.
Median 58.78x 46.62x 15.97x 64.36% 68.09% 0.58x 14.22% -- -- --
Workers Compensation Peer Group
Average 24.52x 263.43x 9.70x 96.18% 111.46% 0.54x 16.45% $0.00 0.00% N.M.
Median 24.52x 263.43x 8.97x 73.10% 107.91% 0.52x 10.84% -- -- --
Professional Liability Peer Group
ACAP American Physicians N.M. N.M. N.M. 73.99% 73.99% 0.74x 19.58% $0.00 0.00% N.M.
FPIC FPIC Ins. Grp. N.M. N.M. 6.91x 54.73% 62.20% 0.41x 8.85% $0.00 0.00% N.M.
PRA Pro Assurance 58.78x 46.62x 25.04x 152.60% 159.85% 1.39x 29.80% $0.00 0.00% N.M.
SKP SCPIE Holdings N.M. N.M. N.M. 39.24% 40.18% 0.26x 8.38% $0.40 4.19% N.M.
Workers Compensation Peer Group
AGII Argonaut Grp. N.M. N.M. 8.95x 73.10% 107.91% 0.52x 10.84% $0.00 0.00% N.M.
RTWI RTW, Inc. 1.26x 1.26x 8.97x 59.87% 59.87% 0.27x 7.97% $0.00 0.00% N.M.
ZNT Zenith National 47.78x 525.60x 11.18x 155.58% 166.61% 0.82x 30.54% $0.00 0.00% N.M.
Based on
Analysts
Consensus (1)
-------------- Exch. Gross
Ticker ROA ROE Ratio Proceeds
- ------ ------ ------ ------- --------
(%) (%) (x) ($Mil)
NCRIC Group, Inc.
Supermaximum 1.20% 3.74% 1.9659x $43.64
Maximum 1.18% 3.84% 1.7095x $37.95
Midpoint 1.16% 3.93% 1.4865x $33.00
Minimum 1.14% 4.04% 1.2635x $28.05
Peer Group Aggregate
Average 0.98% 5.56%
Median 1.20% 7.01%
Professional Liability Peer Group
Average 0.49% 2.81%
Median 0.80% 3.82%
Workers Compensation Peer Group
Average 1.97% 11.04%
Median 1.97% 11.04%
Professional Liability Peer Group
ACAP American Physicians 0.41% 1.55%
FPIC FPIC Ins. Grp. 1.28% 7.92%
PRA Pro Assurance 1.19% 6.10%
SKP SCPIE Holdings -0.92% -4.31%
Workers Compensation Peer Group
AGII Argonaut Grp. 1.21% 8.17%
RTWI RTW, Inc. N.A. N.A.
ZNT Zenith National 2.73% 13.91%
(1) Based on analysts consensus estimates for the Peer Group. Assumes NCRIC
Group earns $2.4 million in fiscal 2003 which is consistent with NCRIC's
budget before factoring in the impact of the second step conversion.
Note: TTM = Trailing 12 months.
Source: Audited and unaudited financial statements, corporate reports and
offering circulars.
The information provided in this table has been obtained from sources we
believe are reliable, but we cannot guarantee the accuracy or completeness
of such information.