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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2000
Commission File Number: 0-25505
[LOGO]
NCRIC Group, Inc.
District of Columbia 52-2134774
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
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(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock par value $.01 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the Nasdaq SmallCap Market on February 28, 2001 was
approximately $10.0 million.
The number of shares outstanding of the Issuer's Common Stock, the issuer's
only class of outstanding capital stock, as of February 28, 2001 was 3,725,355.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into certain items of
Part III.
TABLE OF CONTENTS
PART I. Page
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Item 1. Business of the Company........................................ 1
Item 2. Properties..................................................... 41
Item 3. Legal Proceedings.............................................. 41
Item 4. Submission of Matters to a Vote of Security Holders............ 41
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters........................................................ 41
Item 6. Selected Financial Data........................................ 42
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 44
Item 7A. Quantitative and Qualitative Disclosures about Market Risks.... 66
Item 8. Financial Statements........................................... 68
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 101
PART III.
Item 10. Directors and Officers of the Registrant....................... 101
Item 11. Executive Compensation......................................... 101
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................... 101
Item 13. Certain Relationships and Related Transactions................. 101
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 101
PART I
Item 1. Business of the Company
Background
NCRIC Group, Inc., a District of Columbia corporation, is a holding company
that owns NCRIC, Inc., a medical professional liability insurance company, and
NCRIC MSO, Inc., a physician practice management and financial services company.
The principal operations of NCRIC, Inc. and NCRIC MSO are conducted in the
District of Columbia, Maryland, Virginia, and North Carolina. References to
"NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
NCRIC Group was organized in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into a mutual
holding company structure (the "Reorganization"). 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. Effective
July 29, 1999, NCRIC Group completed a public offering (the "Stock 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 Group owns all of the outstanding shares of NCRIC, Inc. and NCRIC
MSO. The following chart illustrates the organizational structure pursuant to
which the Company operates.
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NCRIC, A Mutual Holding Company
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|
100% of Shares |
|
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NCRIC Holdings, Inc.
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60% of Shares |
|
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NCRIC Group, Inc. 40% of Shares Public
------------- Stockholders
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|
100% of Shares | 100% of Shares
|
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| |
| |
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NCRIC, Inc. NCRIC MSO, Inc d/b/a
HealthCare Consulting
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| |
| |
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Subsidiaries Subsidiaries
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District of Columbia law provides that NCRIC, A Mutual Holding Company must
at all times own, directly or indirectly, a majority of the outstanding voting
stock of NCRIC, Inc.
NCRIC is the leading provider of medical professional liability insurance
in the District of Columbia, based on direct premiums written in 1999. Medical
professional liability insurance insures the physician against liabilities
arising from the rendering of, or failure to render, professional medical
services. NCRIC is one of the leading providers of practice management and
financial services to physicians in Virginia and North Carolina. In January
1999, NCRIC expanded its operations through the acquisition of HealthCare
Consulting, Inc., a physician practice management company, its affiliate, HCI
Ventures, LLC, a provider of capital and financial services to management
services organizations, and of Employee Benefits Services, Inc., a provider of
employee benefits services, owned by the stockholders of HealthCare Consulting.
Net proceeds received by NCRIC in the Stock Offering were $8.4 million. In
connection with the Stock Offering, NCRIC loaned $1,036,000 to the Employee
Stock Ownership Plan, ESOP, and $518,000 to the stock award plan. The loans from
NCRIC enabled the ESOP to purchase 148,000 shares of NCRIC's common stock, and
the stock award plan to purchase 74,000 shares of NCRIC's common stock. Of the
net proceeds, $5.1 million were used to repay indebtedness incurred through the
acquisition of HealthCare Consulting.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company servicing
healthcare providers in the District of Columbia and Maryland. NCRIC, Inc.'s
wholly-owned subsidiary, Commonwealth Medical Liability Insurance Company, CML,
sells medical professional liability insurance to healthcare providers in
Virginia, Maryland, West Virginia, and Delaware. CML's policies closely resemble
NCRIC's policies except that insureds of CML do not become members of NCRIC, A
Mutual Holding Company.
Created by District of Columbia physicians in 1980 when medical
professional liability insurance was either unavailable or prohibitively
expensive, NCRIC has provided high quality insurance products to its insureds in
the District of Columbia, a legal jurisdiction which has rejected tort reform
and has the highest cumulative average medical professional liability jury
awards of any jurisdiction in the United States. NCRIC's success rests, among
other factors, on its ability to successfully litigate claims, reduce its
insured's loss exposure through effective risk management and provide its
insureds with individualized service. Recognizing the value of NCRIC's insurance
products, 96% of NCRIC's insureds renewed their policies in 2000. NCRIC believes
that it successfully managed the medical professional liability insurance crisis
of the early 1980's and has prospered since through a combination of physician
governance and professional management expertise. As of December 31, 2000, the
insurance companies had 32 employees.
Over the past four years, NCRIC has distributed a customer satisfaction
survey. In 2000, 93% of those responding indicated that they were "always
pleased" or "almost always pleased" with NCRIC's service, which is comparable to
1999's rating of 94%.
According to A.M. Best Company, in 1999, 54% of the direct premiums written
for physician and hospital professional liability insurance in the District of
Columbia were written by NCRIC. In addition, during the year ended December 31,
2000, NCRIC generated 20% of its premiums in Maryland and Virginia. NCRIC's
market share is less than 3% in each of these markets. As of December 31, 2000,
NCRIC had approximately
1,800 medical professional liability policies outstanding in all of its markets.
The majority of NCRIC's premiums are generated from individual and small-group
practices, but it also has risk sharing programs with groups of physicians
sponsored by metropolitan Washington, D.C. area hospitals. NCRIC markets its
products directly to its physician clients. NCRIC also markets its products
through independent brokers and agents who produced 59% of new premiums in 2000
as compared to 43% in 1999.
Medical professional liability insurance insures the physician or other
healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
NCRIC's direct insurance premiums written were $22.7 million, $21.4
million, and $19.2 million for the years ended December 31, 2000, 1999 and 1998,
respectively. The historic results of operations may not be indicative of future
operations. The operating results of medical professional liability insurers are
subject to significant fluctuation, which can result in net losses due to a
number of factors, including:
o adverse claims experience;
o judicial trends;
o changes in the investment and interest rate environment; and
o general economic conditions.
NCRIC believes it can best leverage its strengths and appeal to customers
by maintaining conservatism in its financial accounts. In line with this
philosophy, as of December 31, 2000, NCRIC has established, on a gross basis,
$81.1 million in loss reserves. NCRIC's conservative estimation of loss reserves
is demonstrated by its favorable loss developments in each year since 1990.
These favorable loss developments have contributed significantly to NCRIC's
reported earnings. While NCRIC believes that its loss reserves are adequate,
there is ultimately no guarantee that reserve levels will be adequate as losses
develop.
Practice management and financial services
NCRIC believes that its practice management and financial services business
diversifies its operations while solidifying the already strong relationship
NCRIC has with its existing insureds. As NCRIC successfully diversifies into
practice management and financial services, its goal is to increase its profits
and provide an additional market for its core insurance products. NCRIC MSO was
established in 1997 as NCRIC's vehicle to provide practice management and
financial services to physicians. NCRIC's business strategy is to develop a
range of practice management services which will give physicians the management
expertise they need to conduct their practices without requiring them to
relinquish ownership or control of their practices. NCRIC intends to be a
partner that physicians can rely on to understand their problems and who has the
foresight to develop services to fit their needs. In order to substantially
accelerate its entry into the practice management, financial services and
employee benefits markets, NCRIC acquired HealthCare Consulting, HCI Ventures
and Employee Benefits Services. Since the acquisition, NCRIC MSO has been doing
business as HealthCare Consulting.
Other NCRIC Group subsidiaries
In addition to NCRIC, Inc., CML, and NCRIC MSO operations, NCRIC has a
reinsurance brokerage operation, an insurance agency, and a physicians
organization.
National Capital Insurance Brokerage, Ltd., a wholly-owned subsidiary of
NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance broker.
National Capital Insurance Brokerage, Ltd. has retained commission income that
would otherwise have been paid to outside reinsurance brokers. This income has
been used by NCRIC to offset other operating expenses. National Capital
Insurance Brokerage has also played a critical role in restructuring NCRIC's
reinsurance program to provide effective and comprehensive reinsurance coverage
without reducing NCRIC's profitability.
NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC, Inc. formed in
1989, offers life, health and disability insurance as well as property and
casualty insurance products. NCRIC Insurance Agency had commission income of
$80,312 in 2000 compared to $71,051 in 1999 and $81,573 in 1998. NCRIC Insurance
Agency offers its products in the same markets as NCRIC. As an insurance agent,
NCRIC Insurance Agency receives commissions for business it places for insurance
companies it represents. NCRIC Insurance Agency markets insurance products not
underwritten by NCRIC. This permits NCRIC's core insureds to obtain a wider
range of insurance products through NCRIC.
NCRIC Physicians Organization, Inc., organized in 1994, a wholly-owned
subsidiary of NCRIC MSO, manages a coalition of physicians which is organized to
contract with managed care payers as an exclusive healthcare provider network.
Approximately one-half of NCRIC Physicians Organization's members are insureds
of NCRIC. NCRIC Physicians Organization ended all of its contracts in 1999 and
formed an agreement with American Medical Security, AMS, to provide its network
to a developing PPO health plan by AMS for the Washington, D.C. metropolitan
area. NCRIC Physicians Organization reached a settlement with AMS, effective
October 1, 1999, that will provide NCRIC Physicians Organization with $6,000 per
month over a five year period. The monthly fee of $6,000 is reduced by $0.75 for
each subscriber who enrolls in the network plan.
Current Business Environment
The physicians served by NCRIC continue to face new challenges in the three
critical areas that underpin our healthcare system: cost, quality and delivery.
NCRIC has strived to create a financial services organization that will assist
physicians in each of these critical areas and to be adaptive to provide new
services and products that will meet changing cost, quality and delivery issues
within a physician's practice and the provider community.
Cost
The cost of health care has seen a sharp rise through 2000 and into 2001.
Managed care rose in power and dominance in the 1990s by trying to limit access
to health care resources under fixed payment reimbursements to the providers of
the resources, principally physicians. Large commercial payers and the federal
government tightened restrictions on service utilization and lowered payment
levels in an effort to gain control over costs. These methods have shown to be
largely a failure at cost control and have disenfranchised both the providers
and consumers of healthcare. Physicians face these cost issues
daily both through the frustration of dissatisfied patients and through their
own concerns as to the limitations placed by health plans on the access to care
needed by their patients. The restrictions increase the possibility of patient
litigation and lead to fiscal stress for the physician's practice.
NCRIC stands ready to assist physicians in their struggle with the health care
cost environment in both its malpractice insurance and practice management
operations. NCRIC has seen a rise in the cost of malpractice insurance through
an increase in the cost of losses, both the indemnity portion and litigation
expense, and has taken steps to better protect its insured physicians by
judiciously adjusting the rates to reflect the underlying costs for the
insurance protection. While this may increase the price to physicians, it
alleviates the risk to the medical practice of facing a sizeable rate increase,
or worse, a carrier with insufficient rates which ultimately leaves the
physician with no malpractice coverage at all. NCRIC continues to develop new
risk structures to better assist physicians with loss control and risk
assumption. Equally, NCRIC continues to assist physician practices with
management services to negotiate better contracts with payers, assess which
contracts provide a physician with fair reimbursement, and provide cost control
and revenue generation strategies for their practice.
Last year NCRIC began providing full evaluations of contracts and often removing
our physicians from managed care contracts when they were detrimental to the
cost of delivery. Additionally to protect NCRIC's assets and provide the highest
level of service at the appropriate cost, in 2001 rates were increased
throughout our licensed jurisdictions.
Quality
Quality is a dominating influence for patients and for the reputation and
provision of service by physicians. It works hand in hand with cost, for it is
difficult in the health care industry to provide high quality health care at a
cheap rate. Managed care in the 1990's impacted the level of quality of the
services delivered. The strict controls of resource utilization and referral for
services forced physicians into an unmanageable situation in an era of "managed
care" and often tied their hands to deliver the quality of care they are trained
to deliver. Occurring in tandem with managed care during the 1990's was the rise
of national publicly traded physician practice management companies (PPMCs). The
physician community is littered with the fallout from the self-destruction of
these companies and their inability to add value and quality to physician
practices.
NCRIC is in a position to offer to physicians, including those who have
disengaged from the PPMCs and other ownership models that proved unsuccessful, a
management structure that allows the physician to focus on the delivery of
quality healthcare while NCRIC focuses on improving their business practices.
NCRIC has also improved its position to assist its insured physicians with risk
management education and practices that focus on improving patient communication
and relationships to improve their quality of service while reducing the
likelihood of litigation.
NCRIC has developed new programs, services and insurance coverages to meet
changing regulatory requirements such as the Health Insurance Portability
Protection Act (HIPPA) and new Medicare/Medicaid Fraud and Abuse regulations in
order to increase the level of assurance and quality provided by a physician.
NCRIC has begun this by implementing its PracticeGard policy and compliance
planning services. Additionally, to help physicians readily with quality
education, NCRIC has increased access to its services by utilizing its Web site
for risk management education, discussion groups for NCRIC's management
consultants and requests for services from its insureds and management clients.
Delivery
The dissolution of public PPMCs disrupted many physician practices from
continuing the delivery of care in the manner by which they had been reorganized
by PPMCs, nor could they readily revert to their former practice course of
delivery, i.e., "pre-PPMC". The PPMC model had created a drain on revenue from
the payment of high management fees and promise of wealth through ownership in a
publicly traded company. As noted above in Cost and Quality, the effect of
managed care interrupted the appropriate delivery of care through its stringent
control over referrals of patients, allowable charges for services and
utilization of necessary resources.
NCRIC believes that its model of providing critical management and business
services has worked well for those physicians who needed to re-establish their
practices after the fallout of being owned or managed by a PPMC. NCRIC deems it
to be critical to provide fundamental practice management services, without
having ownership in the physician's practice. This allows the physician to
provide the necessary delivery of care and services without being jeopardized by
other ownership interests. NCRIC also understands that it is critical to help
physicians improve the delivery of care from a malpractice risk perspective by
proactively providing necessary loss and risk information related to new
clinical services and rising issues of existing services. This provides the
physician with the necessary information and the ability to deliver care in a
manner that provides appropriate consent for the patient, while improving
communication of the risks of such services. NCRIC also believes that its risk
sharing arrangements in partnerships with hospitals and physicians provides a
covenant of improved risk information among all providers that reduces the risk
associated with the delivery of those clinical services that NCRIC has helped
organize and manage risk for the providers.
NCRIC has initiated products and services to help the physician improve the
delivery of their services. Primarily NCRIC began a new service product,
Alliance Risk Management Service, that enjoins it with physicians and hospitals
to evaluate providers' risks of malpractice and develop benchmarks and risk
management methods for risk reduction and prevention of malpractice. Further,
NCRIC has transitioned several individual practitioners into private practice
from PPMCs, which has allowed these physicians to reconstruct their delivery of
care into a model that allows for the quality of care at the high level they
desire to provide. Additionally, NCRIC has assisted several large groups in 2000
in renegotiating their payer contracts with more favorable terms. This has
reduced the burden of managed care for the practice and opened access by the
patient to the physician.
NCRIC remains focused on developing and providing needed services to the
physician and provider community that address the issue of cost, improves the
quality of services and eases the access for better delivery of care. NCRIC
believes the above shows how it has begun addressing current and forward-looking
issues through the development of new products and services, while maintaining
and building on the core strength of its current companies.
Our vision
NCRIC intends to become a healthcare financial services organization which
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. NCRIC believes that it is well
positioned to accomplish these goals because it has a loyal policyholder and
management client base to build upon.
The direct channels of distribution and the strong retention of clients by
NCRIC will assist it in cross-selling its expanded range of services and
products. NCRIC's insurance operations will sell its medical professional
liability products and services to some of its management and financial services
approximately 1,100 physician clients. Since the HealthCare Consulting
acquisition closed on January 4, 1999, NCRIC has sold 58 medical malpractice
insurance policies to clients of HealthCare Consulting which, in turn, provides
services to 21 NCRIC physicians through its D.C. operations. In addition, a full
range of practice management and financial services is being marketed to the
community at large, and a dedicated marketing team has been deployed in the D.C.
market.
The HealthCare Consulting acquisition will also permit NCRIC to provide
practice management and employee benefit services to its approximately 2,000
insureds. In 2000, NCRIC's practice management revenue from its insured
physicians was approximately $365,000. Altogether in 2000 NCRIC provided
products and services to approximately 3,100 physicians, up from approximately
2,600 physicians in 1999.
Core Insurance Products
NCRIC underwrites medical professional, office premises, and medical
billings, errors, and omissions liability policy risks for physicians, physician
medical groups and clinics, and other providers in the healthcare industry.
NCRIC currently issues policies on a claims-made basis. Claims-made policies
provide coverage to the policyholder for claims occurring and reported during
the period of coverage. NCRIC also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting NCRIC's underwriting criteria.
This coverage extends the effective date of claims-made policies to designated
periods prior to the physician's becoming an insured of NCRIC. Insureds are
insured continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy forms
for physicians who are solo practitioners and for those who practice as part of
a medical group or clinic. The policy issued to solo practitioners includes
coverage for professional liability that arises in the medical practice and also
for a number of "premises" liabilities that may arise in the non-professional
operations of the medical practice, such as slip and fall accidents. The
professional liability insurance for solo practitioners and for medical groups
provides protection against the legal liability of the insureds for injury
caused by or as a result of the performance of patient treatment, failure to
treat and failure to diagnose and related types of malpractice.
Policy limits. NCRIC offers limits of insurance up to $5 million per claim,
with up to a $7 million aggregate policy limit for all claims reported for each
calendar year or other 12-month policy period. The most common limit is $1
million per claim, subject to a $3 million aggregate policy limit. Higher limits
and excess coverage can also be written in conjunction with special reinsurance
arrangements.
Reporting endorsements. Reporting endorsements are offered for physicians
terminating their policies with NCRIC. This coverage extends the period
indefinitely for reporting future claims resulting from incidents occurring
while a claims-made policy was in effect. The price of the reporting endorsement
coverage is based on the length of time the insured has been covered by NCRIC.
NCRIC provides reporting endorsement coverage at no additional cost for insured
physicians who die or who become disabled so that they cannot practice their
specialty during the coverage period of the policy and to those who have been
insured by NCRIC for at least three consecutive years, attain the age of 60 and
retire completely from the practice of medicine.
PracticeGard. NCRIC has established a limited defense reimbursement benefit
of up to $25,000 for proceedings by governmental disciplinary boards. NCRIC
provides this coverage to its insureds automatically without a surcharge.
PracticeGard provides legal counsel to defend licensure actions brought by the
District of Columbia or a State Medical Licensing Board, actions involving
medical staff credentialing committees, actions to remove physicians from
participation in a managed care plan and actions to limit participation in
government programs like Medicare and Medicaid.
PracticeGard Plus. In 1999, NCRIC began providing PracticeGard Plus,
offering to physicians and hospitals coverage for Medicare and Medicaid billings
errors and omissions liability. This coverage provides up to $1 million in
limits, inclusive of the cost of civil defense, penalties and fines but provides
no coverage should a physician or hospital be found criminally liable. Coverage
is provided under a separate claims made policy and can be extended to three
years of prior acts coverage.
Program for physicians who do not meet usual underwriting standards. NCRIC
also has a program for physicians who do not meet some of NCRIC's usual
underwriting standards. NCRIC carefully evaluates the additional risk it assumes
when it insures these physicians. A surcharge is applied to the premiums of
these physicians to compensate NCRIC for the higher level of risk it is
assuming. NCRIC monitors the activities of these insureds more closely than
those of its other insureds and attempts to rehabilitate these insureds through
risk management training. This program was not a significant source of revenue
in 2000.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of February 16, 2001.
Direct Premiums Percentage
Group Size Written of Total
- ---------- --------------- --------
(in thousands)
Solo practitioner physicians............................... $ 11,476 44%
Groups with two physicians................................. 1,826 7
Groups with three or more physicians....................... 7,796 30
Sponsored programs, including risk sharing................. 4,808 19
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Total.............................................. $ 25,906 100%
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Occurrence basis policies. Until July 1, 1986, NCRIC issued policies on an
occurrence basis. Occurrence policies provide coverage to the policyholder for
all losses incurred during the policy year regardless of when the claims are
reported. As of December 31, 2000, NCRIC has loss and LAE reserves in the amount
of $5.9 million in connection with its potential liability under occurrence
policies.
Maintenance and expansion of core insurance products
NCRIC's future success rests on its ability to ensure that its core
insurance products continue to meet the needs of existing insureds and other
healthcare providers. Growth and retention of NCRIC's core insurance business
will be sought through expanding NCRIC's relationships with larger groups of
physicians, broadening its geographical boundaries and enhancing its
distribution systems. NCRIC will also continue developing appropriate risk
financing vehicles for larger groups. The key elements of NCRIC's strategy to
compete effectively and create profitable long-term growth for its core
insurance products are the following:
Maintain its strong franchise or close relationship 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 and
the District of Columbia's physicians. NCRIC maintains the exclusive endorsement
of the Medical Society of the District of Columbia, as well as that of the
Virginia-based Arlington County Medical Society. NCRIC's endorsement agreement
with the Medical Society of the District of Columbia requires NCRIC, A Mutual
Holding Company to reserve a seat on its board of directors for an individual
nominated by the Medical Society of the District of Columbia. NCRIC also
maintains a good working relationship with and is a recommended carrier of the
Medical Society of Virginia.
NCRIC continues to maintain a target of at least a 95% annual retention
rate for its core insurance business. The articles of incorporation of NCRIC, A
Mutual Holding Company require that at least two-thirds of the members of their
respective boards of directors be physicians. This direct involvement of
physicians enables NCRIC to better understand medical practice patterns, claims,
customer needs and other relevant matters. It also maintains NCRIC's strong ties
with the physician community.
Growth through geographic expansions and increased distribution channels.
NCRIC intends to build on its strong franchise in the District of Columbia area
and its recent growth in Virginia and Maryland to expand into adjoining states.
According to A.M. Best Company, in 1999 the states in which NCRIC is currently
licensed produced $290 million in medical professional liability direct premiums
written. NCRIC is also pursuing potential expansion opportunities in other
Mid-Atlantic states. If NCRIC expands into areas where it is inexperienced, it
will have to attract and retain qualified personnel. Competition for qualified
personnel may be intense and NCRIC may be unable to attract and retain qualified
persons.
NCRIC must continue to expand and support its brokers and agents in its new
markets and for its new products. Its direct distribution in the District of
Columbia area has held down expenses and provided close ties to its insureds.
Direct distribution provided 92% of NCRIC's renewal premiums in 2000. However,
new growth has largely come from its appointed agent and broker distribution
channel. Of premiums written with new insureds, 41% were through direct
distribution and 59% through brokers and independent agents. NCRIC believes it
can further increase new business through greater use of brokers and independent
agents, both in connection with geographic expansion and in marketing to larger
healthcare providers. This will increase NCRIC's dependence on insurance brokers
and other intermediaries. There is also a possibility that brokers and other
intermediaries will be unwilling to offer NCRIC's products or that they will
only do so if NCRIC contractually agrees not to directly market NCRIC's policies
to clients of the insurance broker.
Enhance current insurance product offerings with new coverages to increase
sales and strengthen ties with physicians. NCRIC has developed other insurance
products in addition to its core medical professional liability insurance
offerings. These products include comprehensive premises liability coverage for
medical offices and NCRIC PracticeGard Plus. PracticeGard Plus is designed to
protect physicians from costly civil fees and penalties related to the
government's new regulations regarding billing coding and compliance.
Additionally, NCRIC has developed a new program, CompliancePlus, which couples
its insurance product with needed compliance and educational services. The
CompliancePlus package consists of (a) Compliance Advantage, a comprehensive,
Internet-based risk evaluation tool, which serves as a primary source for
information on billing compliance; (b) CompliancePlus Office Program, a survey
and written plan which outlines areas of risk that may need special interest or
attention both now and in the future; and (c) PracticeGard Plus, a billings
errors and omissions insurance product that provides defense and indemnity
coverage for attorney costs as well as civil fines and penalties brought under
compliance violations enforced by Medicare and Medicaid agencies.
Captive insurance subsidiary as new expansion. NCRIC has filed under new
D.C. legislation for the establishment of a captive insurance company subsidiary
to meet the needs of larger healthcare provider risks that desire to retain a
part of their own risk with reinsurance protection. It also plans to establish
and provide administration and management services to other captive
organizations that license in D.C., and, where appropriate, provide reinsurance
on the captive risks.
Growth through strategic acquisitions. NCRIC believes that consolidation
will continue in the medical professional liability insurance industry. This may
give rise to opportunities for NCRIC to make strategic acquisitions to expand
its business, product offerings and geographic scope. As a result of the
reorganization, NCRIC is better positioned to make acquisitions, since it has
greater access to capital and can issue stock in connection with an acquisition.
In addition, NCRIC intends to diversify into other healthcare-related
enterprises through strategic acquisitions such as the HealthCare Consulting
acquisition. NCRIC may be unable to acquire other medical professional liability
insurers or other physician practice management companies. An unsuccessful or
poorly performing acquisition could have a material adverse effect on NCRIC's
business or financial results.
Maintain conservative balance sheet and strong ratings. Management believes
that existing and prospective clients evaluate, among other factors, the
financial strength of NCRIC in any decision regarding the purchase of medical
liability coverage.
Use legal and risk management expertise to vigorously reduce loss costs.
NCRIC's experience with, commitment to and focus on medical professional
liability insurance for over 20 years has allowed it to develop strong knowledge
of the local healthcare and legal environments and to build an extensive
database of medical professional liability claims experience. NCRIC uses this
expertise to select and price risks, to provide risk management services to
prevent or reduce the severity of losses and to aggressively defend against
unjustified claims or excessive settlement demands.
Practice Management Services
On January 4, 1999, NCRIC Group acquired all of the outstanding shares of
HealthCare Consulting, Inc. and all of the outstanding membership interests of
HealthCare Consulting's affiliate, HCI Ventures. NCRIC Group also purchased all
of the assets of Employee Benefits Services, an
employee benefits company formed by the three stockholders of HealthCare
Consulting. NCRIC Group assumed all of the liabilities of HealthCare Consulting,
HCI Ventures and those relating to the assets of Employee Benefits Services.
HealthCare Consulting has been merged into NCRIC MSO, and HCI Ventures has
become a wholly-owned subsidiary of NCRIC MSO. HealthCare Consulting and
Employee Benefits Services continue to operate as divisions of NCRIC MSO. The
HealthCare Consulting acquisition has greatly enhanced NCRIC's ability to
provide practice management services, employee benefit services and financial
services to physicians in the Washington, D.C. metropolitan area and throughout
the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its predecessor
has provided practice management services, accounting and tax services and
personal financial planning services to medical and dental practices throughout
the Mid-Atlantic region. HealthCare Consulting offers its clients extensive
experience and expertise in:
o practice management;
o managed care contracting;
o information systems implementation;
o practice evaluations;
o billing and collections;
o personnel;
o practice structure; and
o management and market recognition among key players in the healthcare
industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; Washington, D.C.; and Greensboro, North Carolina.
HealthCare Consulting has been doing business in Greensboro, North Carolina
since September 1, 1993. It offers the same services in Greensboro as in its
other locations. HealthCare Consulting's Greensboro operations accounted for
approximately 16% of its 2000 revenues. As of December 31, 2000, HealthCare
Consulting had approximately 43 employees, of whom 12 served as practice
management consultants.
The following table indicates the sources of HealthCare Consulting's revenues
during the past three calendar years:
2000 1999 1998
---- ---- ----
Practice management...................... 52.4% 46.2% 48.9%
Accounting............................... 31.3 35.8 32.1
Tax & personal financial planning........ 12.7 13.0 13.2
Other.................................... 3.6 5.0 5.8
---- ---- ----
Total.................................... 100% 100% 100%
==== ==== ====
HCI Ventures. HCI Ventures provides start-up capital to newly-formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for whom HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
Employee Benefits Services. Employee Benefits Services provides employee
benefits services, plan design, plan administration and plan asset accounting to
approximately 300 clients in the Mid-Atlantic region. The principal assets that
NCRIC acquired from Employee Benefits Services were its established client base
and the systems it had developed to service its clients. Employee Benefits
Services also manages documentation and required forms filings. Over 78% of
HealthCare Consulting's physician practice clients who qualify for plan
administration services utilize Employee Benefits Services as their employee
benefit plan administrator. While Employee Benefits Services initially provided
services only to healthcare businesses, currently over 41% of its clients are
non-healthcare related. As of December 31, 2000, Employee Benefits Services had
eleven employees.
The following table indicates the sources of Employee Benefits Services'
revenues during the past three years:
2000 1999 1998
---- ---- ----
Retirement Plan Accounting and Administration.. 90% 91% 90%
Section 125 Administration..................... 10 9 10
---- ---- ----
Total..................................... 100% 100% 100%
==== ==== ====
Maintenance and expansion of core practice management services
The growth and future success of our practice management company will be best
served through increased services to existing clients, development of new
services to address the changing health care environment and governmental
regulations, and focusing on acquisitions that supplement and strengthen our
core practice management services.
Retain existing clientele and bring additional services to strengthen our
relationship. NCRIC's acquisition of HealthCare Consulting brought to NCRIC some
long-standing business relationships, some of which span back to 1973. NCRIC's
practice management company has experienced significant growth and, in addition
to that growth, has seen the stability of providing services to satisfied
clients who retain our services with them year to year. NCRIC maintains a target
of retaining at least 95% of its core clientele. Throughout the year NCRIC
analyzes additional services a client may need to improve their medical practice
and review fee levels for appropriateness. Additional services, if accepted by
the client, integrate NCRIC into the success of their practice and strengthens
its relationship with these clients.
Expand through the development of new products and services that meet changing
physician needs from regulations, other providers and payers. NCRIC continues to
monitor the ever-changing healthcare environment for the development of needed
services for physicians. NCRIC evaluates changes in state and federal
regulations, hospital organizational changes, revamping reimbursement and payer
requirements. These issues force physicians to redirect how they may price their
services, deliver and market their services, and with whom they should have
business relationships. Since the beginning of 2000, NCRIC has focused on
developing needed compliance services to meet federal changes for Medicare, OSHA
and CLIA and the impact these regulations have on the expenses of running a
medical practice. With pending changes for health care data information NCRIC
has assisted in evaluation of appropriate office technology. Also, NCRIC has
assisted several large groups in disengaging from PPMCs and hospital owned
relationships, resulting in a mutual benefit both for the hospital and the
physicians.
Focus on services that integrate with our insurance products and can be
cross-sold. NCRIC continues to focus on cross-selling all of its services across
each company discipline. As an example, NCRIC has developed a new program,
CompliancePlus, that bundles its PracticeGard Plus policy with its compliance
planning services. A three-year service agreement is required for which the
client/insured receives the insurance policy, access to an Internet-based risk
evaluation tool, chart audits and a compliance plan and educational services.
This product will also be offered through NCRIC's captive insurance company on a
nationwide basis.
Growth through strategic acquisitions. NCRIC believes that there are many
smaller organizations that provide a niche service, such as billing, or
accounting, that will supplement its core base of services with additional
resources and personnel. NCRIC is also able to offer target acquisitions the
opportunity to expand their product offerings with a viable purchase and
transition option, particularly for those nearing retirement. NCRIC may be
unable to acquire other companies and a poorly performing acquisition could have
an adverse effect on NCRIC's business or financial results.
Maintain fee schedules and focus on profitability of services. NCRIC believes it
is critical to develop profitable services as opposed to loss leaders. On an
annual basis, each account is evaluated and its resource commitment to assess if
fee adjustments are appropriate. Additionally, the overall rate structure is
evaluated to ensure continued profitability of NCRIC services. As a result,
NCRIC may not have competitive prices for all its services.
Marketing and policyholder services
NCRIC markets directly to its insureds through seven employees by providing
marketing/sales and communications services. NCRIC markets directly to solo
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians by
targeting medical residents and physicians just entering medical practice. In
addition, NCRIC participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar programs. NCRIC believes that this personal,
comprehensive approach to marketing is essential to providing medical
professional liability insurance, where special knowledge and experience are a
prerequisite.
NCRIC's primary marketing channel for new business is its contracted
brokers and agents who in 2000 produced 59% of new premiums and 8% of renewing
premiums. Healthcare providers frequently utilize agents when they purchase
medical professional liability insurance. Therefore, NCRIC believes that
developing its broker relationships in Virginia, Maryland, West Virginia and
Delaware is important to grow its market share. NCRIC selects brokers and agents
that it believes have demonstrated growth and stability in the medical
professional liability insurance industry, strong sales and marketing
capabilities, and expertise in selling medical professional liability insurance.
Brokers and agents receive market rate commissions and other incentives
averaging 9% based on the business they produce. NCRIC strives to maintain
relationships with those brokers and agents who are committed to promoting
NCRIC's products and are successful in producing business for NCRIC.
NCRIC also has a policyholder services department that provides account
information to all insureds and strives to maintain a close relationship with
the small medical groups and solo practitioners insured by NCRIC. Each of these
smaller practices has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospital
based programs and large and mid-size medical groups, NCRIC has an account
manager assigned to each group who heads a service team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. NCRIC
believes this approach has resulted in its high customer retention rate, year
after year.
Risk management
NCRIC provides risk management services that are designed to reduce
potential loss exposures and improve medical practice. The Risk Management
Committee, comprised of physicians representing various medical specialties,
assists the risk management department to identify loss trends in the local and
national markets. Through these efforts, NCRIC is able to present topical loss
prevention programs. As NCRIC's market has expanded into Virginia and other
states, the risk management department has provided services to these areas. In
addition to on-site seminars, the risk management services have expanded and
adapted to include home study and on-line programs, all of which carry CME
accreditation. In addition, NCRIC will soon have risk management staff located
in its Richmond office to provide all of the risk management services to the
insureds located throughout Virginia outside of the D.C. metropolitan area.
Many of NCRIC's claims result from a physician's failure to adequately
communicate or document their medical care. NCRIC addressed these topics as well
as others in its 2000 Risk Management Educational Program. The seminars "Basic
Risk Management Principles" and "The Claim Process: A view from the Plaintiff,
Defense and Insurance Company" dealt with documentation and communication.
Medication errors have been highlighted in the national news, and NCRIC
addressed the issue with its timely seminar entitled "Causes and Preventions of
Medication Errors." Regulatory issues related to the Health Insurance
Portability Accountability Act were addressed in "Informatics: Medicine in the
Information Age." Recognizing that the physician's office staff plays a large
part in helping to reduce risk and improve care rendered in the office, seminars
were presented for office staffs, both in a large group setting as well as for
specific offices on request. In 2000, 60% of NCRIC's insureds utilized its risk
management services (seminar, office assessment, or home study course), earning
continuing medical education credits as well as a policy premium discount.
NCRIC also produces a quarterly newsletter to advise insureds of emerging
risks and additional topics of interest. When immediate dissemination of
information is warranted, a risk management alert is distributed. NCRIC's risk
management staff is also available for consultation with insureds on an
individual basis to review issues which may arise in the insured's practice. The
risk management department conducts physician office visits on both voluntary
and involuntary bases. Risk management reviews may be performed at the request
of the underwriting or claims committees, with the review report provided to the
requesting committee. NCRIC also provides office assessments for physicians on a
voluntary basis, consisting of an on-site visit with a review of medical records
and office practices. Feedback is given to the physician in a meeting where
suggestions are made to reduce risk factors in the medical practice office.
Risk management services also supplement NCRIC's marketing efforts. The
value added services that are provided augment the claims and policyholder
services NCRIC provides. NCRIC also intends to begin offering its risk
management services independent of its core insurance products. Healthcare
providers, such as self-insured hospitals and clinics, will be able to purchase
risk management services directly from NCRIC. The risk management services will
be offered through direct marketing efforts and by agents and brokers to their
larger self-insured accounts.
Claims and litigation experience
The claims department of NCRIC is responsible for claims investigation,
establishment of appropriate case reserves for loss and LAE, defense planning
and coordination, monitoring of attorneys engaged by NCRIC to defend a claim and
negotiation of the settlement or other disposition of a claim. NCRIC's policy
obligates it to provide a defense for its insureds in any suit involving a
medical incident covered by its policy, which is in addition to the limit of
liability under the policy. Medical professional liability claims often involve
the evaluation of highly technical medical issues, significant injuries and
conflicting expert opinions. In most cases, the person bringing the claim
against the physician is already represented by legal counsel when NCRIC learns
of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of claims. When
a claim is reported, claims department professionals complete an initial
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.
Over the last year, NCRIC significantly increased the number of its
insureds in Virginia. Claims and risk management services have expanded into
Virginia. Through on-site visits, interviews with local law firms, discussions
with insureds and communications with NCRIC's Virginia offices, the medical and
legal climates were analyzed in order to plan NCRIC's strategy for structuring
claims and risk management services in Virginia. One of the claims department's
most experienced staff members is relocating to NCRIC's Richmond office in early
2001 to direct the delivery of those services. This will enable NCRIC to
reliably deliver its claims services and risk programs, sharing successful
solutions through a team approach. Attorneys located throughout Virginia who
have a successful track record in medical liability defense and share NCRIC's
philosophy have been identified for defending claims against NCRIC insureds. As
NCRIC expands its insurance coverage into other jurisdictions, a similar process
will be utilized to ensure the delivery of quality claims and risk management
services in all its markets.
As of December 31, 2000, NCRIC had approximately 315 open cases with an
average of 71 cases being handled by each claims representative. The claims
representatives at NCRIC are all certified paralegals who have on average
approximately 13 years of experience with NCRIC and an average of 13 years of
prior experience handling medical professional liability cases. NCRIC limits the
number of claims handled by each representative to approximately 70 cases.
Management believes that by limiting the case loads of its claims
representatives, all of its insureds who face claims will receive personalized,
professional service, thus enabling claims to be thoroughly investigated,
well-managed and, if they have merit, quickly resolved.
NCRIC retains locally based attorneys specializing in medical professional
liability defense to defend claims. NCRIC also obtains the services of medical
experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery and neurosurgery,
obstetrics, internal medicine and radiology. The claims committee 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 in
that there is an opportunity to obtain the opinions of several different
specialists meeting to share their expertise and experience in the area of
liability evaluation and general peer review. This service is invaluable to the
claims representatives and insureds as it provides in-depth analysis of claims.
Federal law requires that any claim payment, regardless of amount, be
reported to a national practitioner data bank, which can be accessed by various
state licensing and disciplinary boards, hospitals, other healthcare entities
and professional societies. Thus, the physician is often placed in a difficult
position of knowing that a settlement may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to communicate effectively NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
expedient. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
District of Columbia Superior Court rules impact NCRIC's claims handling,
particularly in the area of claims handling expenses. The discovery period,
during which the plaintiff's case must be discerned and, in conjunction with an
attorney, the defense developed, generally takes place over a six- to
eight-month period of intense activity, which increases claims handling
expenses. The court-imposed mediation process has not proven to successfully
resolve NCRIC's cases in part because the volunteer mediators are frequently
plaintiffs' attorneys. Trials are being set about one to one and one-half years
from the date of service of the complaint. Despite obstacles presented by the
legal environment, management believes its aggressive claims handling procedures
effectively assist NCRIC to reduce losses and obtain favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include meeting regularly throughout the year with defense
attorneys retained by NCRIC for coordination, discussion and presentations on
all aspects of claims handling.
Claims closed in the 36-month period from January 1998 through December
2000 resulted in 15% of cases closed with indemnity payment and 85% of cases
closed with no payment. Indemnity payments during this three-year period totaled
$29.3 million, with an average payment per paid claim of $305,242.
Trial results for the 36-month period from January 1998 through December
2000 reveal that of the 63 cases tried, 37, or 59%, were won by NCRIC, 13 trials
resulted in verdicts for the plaintiff, 9 ended in mistrials or hung juries, and
4 were settled. Of the 13 plaintiff verdicts, 5 awarded amounts in excess of
NCRIC's $500,000 retention. Trial results for 2000 reveal that of the 16 cases
tried, 5, or 31%, resulted in plaintiff verdicts, 7 cases in defense verdicts, 2
ended in mistrials or hung juries, which will need to be retried, and 2 cases
were settled. Of the 5 plaintiff verdicts in 2000, no amounts were awarded in
excess of NCRIC's $500,000 retention while the two cases which were settled did
exceed NCRIC's $500,000 retention.
Underwriting
NCRIC's underwriting committee consists of 12 physicians, all of whom are
insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has a policyholder services department, consisting
of three technicians, who are trained in underwriting, and an administrative
assistant. NCRIC believes that this combination of medical professionals and
insurance industry professionals gives NCRIC a competitive advantage in
underwriting services. The physicians on the underwriting committee are able to
assist the underwriting department's insurance professionals by applying their
medical knowledge to better assess risk.
NCRIC's 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 for
all of the coverages underwritten by NCRIC. The policyholder services department
provides information to the underwriting committee to assist the physicians on
the committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative procedures
with respect to the issuance of all physician 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. NCRIC
performs its own independent verification of these matters and conducts an
investigation to determine if there are any lawsuits that may not have been
disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. 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. Each
year, NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The policyholder services department submits all recommendations for
premium surcharges or non-renewal to the underwriting committee for a final
decision. Physicians have the right to seek reconsideration of surcharges by
NCRIC's board of directors, although to date, every request for reconsideration
has resulted in the underwriting committee's decision being upheld. As insureds
are often more comfortable discussing claims and practice issues with their
peers, NCRIC has found that physician interchange with the committee is a
strength of NCRIC.
Rates
NCRIC establishes, through its management and independent actuaries, rates
and rating classifications for its physician and medical group insureds based on
the loss and LAE experience it has developed over the past 20 years and the loss
and LAE experience for the entire medical professional liability market. NCRIC
has various rating classifications based on practice location, medical specialty
and other factors. NCRIC utilizes various discounts, including discounts for
part-time practice, physicians just entering medical practice, claim-free
insureds and risk management participation. Most discounts are designed to
encourage lower risk physicians to insure with NCRIC. Total discounts granted to
a policyholder cannot exceed 25% of the policyholder's premium. Effective rates
equal NCRIC's base rate, less any discounts and renewal credits provided to the
insured.
NCRIC's base rates remained unchanged in 2000 and 1999, and increased 6% in
1998. In recognition of the increase in the severity of losses, NCRIC raised
base premiums an average of 7.5% effective January 1, 2001. NCRIC establishes
its rates based on its previous loss experience, loss expense adjustments,
anticipated policyholder discounts and NCRIC's fixed and variable expenses.
Since 1993, NCRIC, Inc. has authorized renewal premium dividend credits to
physician insureds who renew their policies. Renewal credits are a premium
credit on the renewal policy's premium. Renewal credits stabilize policyholder
premiums and improve NCRIC, Inc.'s competitive position relative to other
insurers by encouraging policyholder renewals. For accounting purposes, renewal
credits are accrued in the policy year declared as a reduction of premium
income. NCRIC's insureds are not automatically entitled to renewal credits and
only renewing insureds receive renewal credits. NCRIC has in the past, and will
in the future, consider general insurance market conditions as well as the
previous years' loss and loss adjustment expenses in determining whether or not
to authorize renewal credits and the amounts of any renewal credits.
NCRIC has authorized renewal credits of the following amounts:
Percentage of Earned
Year Renewal Premiums Amount
---- ---------------- ----------
2000 10% $1,033,000
1999 10 1,068,940
1998 12.5 1,888,794
1997 16 2,245,918
1996 10 1,452,308
1995 10 1,560,907
1994 10 1,806,450
If the rising trend in severity continues, NCRIC anticipates that it will not
provide a renewal premium credit for 2002 renewals.
Risk sharing arrangements
Since its inception, NCRIC has entered into agreements for risk sharing
programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. One type of risk sharing arrangement offered
by NCRIC involves the initial funding of a portion of a premium being held by
NCRIC to pay losses. In this type of arrangement, NCRIC receives its full gross
premium, less applicable credits otherwise granted, and pays quota share losses
from the amount being held; thereafter, any remaining funds are returned to the
insured should a review of actual loss experience show favorable loss
experience.
Another type of risk sharing arrangement previously offered by NCRIC is one
in which physicians practicing at a hospital pay lower individual premiums if
the physicians in their hospital group, taken as a whole, have favorable loss
experience and comply with risk management protocols. Under such a risk sharing
arrangement, physicians receive an initial premium reduction or credit. At the
end of the policy year covered by the premium, a review of the actual loss
experience of the physician group is completed. Should the group's loss
experience be unfavorable, NCRIC will require additional premium payments to
offset the unfavorable losses.
Risk sharing arrangements help lower NCRIC's 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.
Loss and LAE reserves
The determination of loss and LAE reserves involves projection of ultimate
losses through an actuarial analysis of the claims history of NCRIC and other
medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's 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
may 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 NCRIC's results of operations for the period in which
the adjustments are made.
NCRIC's estimates of the ultimate cost of settling the claims are based on:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and severity;
o predictions of future inflation rates;
o judicial theories of liability;
o judicial interpretations of insurance contracts;
o legislative activity; and
o other factors.
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
NCRIC may not promptly modify its underwriting practices and change its 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 NCRIC's underwriting and reserving practices.
NCRIC's independent actuaries review NCRIC's reserves for losses and LAE
periodically and prepare semi-annual reports that include a recommended level of
reserves. NCRIC considers 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. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---- ---- ----
(in thousands)
Balance, beginning of year...................... $ 84,282 $ 84,595 $ 72,031
Less reinsurance recoverable on unpaid claims 25,815 24,546 17,077
------------ ------------ ------------
Net balance..................................... 58,467 60,049 54,954
------------ ------------ ------------
Incurred related to:
Current year............................ 17,829 20,795 19,140
Prior years............................. (5,883) (7,928) (3,463)
------------ ------------ ------------
Total incurred...................... 11,946 12,867 15,677
------------ ------------ ------------
Paid related to:
Current year............................ 917 817 1,247
Prior years............................. 15,674 13,632 9,335
------------ ------------ ------------
Total paid........... 16,591 14,449 10,582
------------ ------------ ------------
Net balance..................................... 53,822 58,467 60,049
Plus reinsurance recoverable on
unpaid claims............,,,,,,,,,........... 27,312 25,815 24,546
------------ ------------ ------------
Balance, end of year............................ $ 81,134 $ 84,282 $ 84,595
============ ============ ============
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 generally accepted
accounting principles.
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. The years
1991 through 1999 are presented on a direct basis consistent with Statement of
Financial Accounting Standards No. 113. The year of 1990 is presented net of
reinsurance. NCRIC is unable to generate the table on a direct basis for this
year because the records were maintained on a net basis.
The table reflects the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $100,000 was first reserved in
1990 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 1990 through 1995 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.
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid
Losses and LAE...... $32,151 $64,333 $86,727 $88,891 $77,647 $68,928 $68,101 $72,031 $84,595 $84,282
Cumulative Liability
Paid Through End of
Year:
One year later 12,561 13,094 18,103 19,786 21,667 16,084 14,916 9,667 13,865 20,813
Two years later 18,552 27,889 35,861 39,293 34,829 27,634 22,237 21,810 32,778
Three years later 21,605 37,247 51,163 47,348 43,237 32,409 29,135 36,310
Four years later 25,891 47,633 56,648 51,845 45,219 34,657 39,938
Five years later 28,387 51,482 59,473 52,984 45,682 41,578
Six years later 29,115 52,276 60,335 53,208 51,450
Seven years later 29,595 53,098 60,440 58,246
Eight years later 29,939 53,193 63,395
Nine years later 29,973 56,145
Ten years later 30,681
Re-estimated Liability:
One year later 35,942 69,522 79,174 70,640 68,891 62,028 61,121 71,419 72,575 77,373
Two years later 29,123 61,090 65,174 63,248 66,439 53,429 62,097 64,980 66,733
Three years later 28,085 54,208 62,521 65,422 60,858 55,883 58,169 61,336
Four years later 30,692 54,215 65,225 64,460 62,625 53,400 54,324
Five years later 30,136 55,221 67,681 66,275 61,077 50,744
Six years later 30,311 58,324 69,765 64,877 58,220
Seven years later 30,999 60,908 68,415 63,514
Eight years later 31,461 60,218 67,740
Nine years later 31,878 59,031
Ten years later 31,722
Redundancy
(deficiency)........ $ 429 $ 5,302 $18,987 $25,377 $19,427 $18,184 $13,777 $10,695 $17,862 $ 6,909
General office premises liability incurred losses have been less than 1% of
medical professional liability incurred losses in the last five years. NCRIC
does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
Reinsurance
NCRIC follows customary industry practice by reinsuring a portion of its
risks and paying a reinsurance premium based upon the premiums received on all
policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks, reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- an amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary liability
for the full amount of its insurance policies, it contractually obligates the
reinsurer to pay successful claims against NCRIC to the extent of risk ceded.
NCRIC's current reinsurance program is designed to provide coverage through
separate reinsurance treaties for three layers of risk.
(1) Losses in excess of $500,000 per claim up to $1,000,000. Effective
January 1, 2000, the treaty which reinsures NCRIC for losses in excess of
$500,000 per claim up to $1,000,000 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 NCRIC's gross premium earned net of
discounts.
For claims submitted related to 1999 and prior years, NCRIC has a swing
rated treaty which reinsures NCRIC for losses in excess of $500,000 per claim,
subject to an inner aggregate deductible of 5% of gross net earned premium
income, up to $1,000,000. 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 NCRIC must pay losses within
the reinsurance layer until the inner aggregate deductible is satisfied. NCRIC
pays 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
NCRIC has recorded, based on actuarial analysis, management's best estimate
of premium expense under the terms of the swing rated treaty. Each year, for the
most recent treaty year, the premium has been capped at the maximum rate. NCRIC
then adjusts the liability and expense as losses develop in subsequent years.
(2) Losses up to $1,000,000 in excess of $1,000,000 per claim. NCRIC's
first excess layer 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 and thereafter,
NCRIC cedes 100% of its risks and premium under this treaty. For claims related
to 1999 and prior years, NCRIC cedes 91% of its risks to the $1,000,000 excess
layer treaty program and retains 9% of the risks. The premium payable by NCRIC
for the $1,000,000 excess layer treaty is 91% of the premium collected from
insureds for this coverage. NCRIC receives a ceding commission from the
reinsurers to cover the cost associated with issuing this coverage to its
insureds.
(3) Losses up to $3,000,000 in excess of $2,000,000 per claim. The second
excess layer treaty covers losses up to $3,000,000 in excess of $2,000,000 per
claim. NCRIC cedes 100% of its risks to the $2,000,000 excess layer treaty
program and retains 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.
NCRIC receives a ceding commission from the reinsurers to cover the cost
associated with issuing this coverage to its insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the excess layer treaties are deducted from other underwriting expenses. Ceding
commissions were $357,000, $322,000 and $300,000 in 2000, 1999, and 1998.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
Through December 31, 1999 Effective January 1, 2000
------------------------- -------------------------
Total Amount of Individual Loss Company Reinsurers Company Reinsurers
------------------------------- ------- ---------- ------- ----------
$0 - $500,000.......................... 100% 0% 100% 0%
$500,000 - $1,000,000.................. 4 96 0 100
$1,000,000 - $2,000,000................ 9 91 0 100
$2,000,000 - $5,000,000................ 0 100 0 100
The table does not reflect the effect of the inner aggregate deductible for
treaty years through 1999.
NCRIC may provide policy limits in excess of $5,000,000, which are
reinsured through facultative reinsurance programs. Facultative reinsurance
programs are reinsurance programs which are specifically designed for a
particular risk not covered by NCRIC's existing reinsurance arrangements. NCRIC
currently has facultative reinsurance in connection with groups of physicians
who desire policy limits greater than $5,000,000.
NCRIC determines the amount and scope of reinsurance coverage to purchase
each year based upon its evaluation of the risks accepted, consultations with
reinsurance consultants and a review of market conditions, including the
availability and pricing of reinsurance. NCRIC's primary reinsurance treaty is
placed with non-affiliated reinsurers for a three-year term with annual
renegotiations. NCRIC's current three-year treaty expires January 1, 2003.
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 London companies or Lloyds' syndicates;
there is a small percentage placed with a domestic reinsurer. NCRIC relies on
its wholly-owned brokerage firm, National Capital Insurance Brokerage, Ltd.,
Willis Re, Inc. and a London-based intermediary to assist it in the analysis of
the credit quality of its reinsurers. NCRIC also requires 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, 2000 by reinsurer:
Reinsurance
Reinsurer Recoverable
- --------- -----------
(in thousands)
Lloyd's of London syndicates................................. $ 15,576
Hannover Reinsurance......................................... 2,298
CNA Reinsurance of London Limited............................ 3,199
Unionamerica Insurance....................................... 3,291
Transatlantic................................................ 1,327
4 other reinsurers........................................... 1,858
---------
Total............................................ $ 27,549
=========
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2000, 1999, and 1998 is as follows:
Year Ended December 31,
-------------------------------------------------------------------------
2000 1999 1998
----------------------- ---------------------- ---------------------
Written Earned Written Earned Written Earned
-------- ------ ------- ------ ------- ------
(in thousands)
Direct............ $ 22,727 $ 19,965 $ 21,353 $ 18,832 $ 19,214 $ 16,270
Ceded............. (5,874) (4,110) (4,127) (2,977) 3,691 4,089
-------- -------- -------- -------- -------- --------
Net............... $ 16,853 $ 15,855 $ 17,226 $ 15,855 $ 22,905 $ 20,359
======== ======== ======== ======== ======== ========
In late 1999, NCRIC 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. NCRIC reinsures 100% of this risk
and receives a 15% ceding commission. NCRIC intends to evaluate its 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 the operating
results of NCRIC. NCRIC utilizes external investment managers who adhere to
policies established and supervised by the Investment Committee of the Board of
Directors of NCRIC, Inc. NCRIC's 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, NCRIC's investment guidelines, which set the parameters for NCRIC's
investment policy, permit investments in tax-advantaged securities such as
municipal bonds and preferred stock. NCRIC's investment guidelines document is
reviewed and updated annually. Effective January 1, 2000 Scudder Insurance Asset
Management, SIAM, became the external investment manager for NCRIC's fixed
income securities including tax advantaged preferred stocks.
Since 1996, NCRIC and its 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 NCRIC. SIAM supplements stochastic modeling with the
output from their independent investment research and strategy group to develop
a tailored investment approach for NCRIC. Analysis of NCRIC's 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.
SIAM uses Dynamic Financial Analysis, DFA, a total company tool to test the
company's 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 NCRIC to make risk informed decisions on the
structure of its investment portfolio as it relates to its business profile. DFA
output has been especially useful in setting portfolio policy regarding average
duration and optimizing potential equity exposure.
NCRIC has classified its investments as available for sale and reports 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
NCRIC's investment portfolio will generally decline resulting in decreases in
NCRIC's stockholders' equity. Conversely, during periods of falling interest
rates, the fair value of NCRIC's investment portfolio will generally increase
resulting in increases in NCRIC's stockholders' equity.
The following table sets forth the fair value and the amortized cost of the
investment portfolio of NCRIC at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- ----------
As of December 31, 2000 (in thousands)
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
========= ========== ========= ==========
As of December 31, 1999
U.S. Government and agencies............. $ 13,937 $ -- $ (716) $ 13,221
Corporate................................ 27,842 25 (1,605) 26,262
Tax-exempt obligations................... 14,058 22 (289) 13,791
Asset and mortgage-backed securities..... 38,907 2 (1,246) 37,663
--------- ---------- --------- ----------
94,744 49 (3,856) 90,937
Equity securities........................ 4,691 -- (536) 4,155
--------- ---------- --------- ----------
Total.................................... $ 99,435 $ 49 $ (4,392) $ 95,092
========= ========== ========= ==========
As of December 31, 1998
U.S. Government and agencies............. $ 23,728 $ 1,032 $ (16) $ 24,744
Corporate................................ 18,823 704 (40) 19,487
Tax-exempt obligations................... 19,329 1,045 -- 20,374
Asset and mortgage-backed securities..... 26,218 381 (69) 26,530
--------- ---------- --------- ----------
88,098 3,162 (125) 91,135
Equity securities........................ 5,195 88 (70) 5,213
--------- ---------- --------- ----------
Total.................................... $ 93,293 $ 3,250 $ (195) $ 96,348
========= ========== ========= ==========
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 2000, NCRIC held 40 asset and
mortgage-related securities most of which had a quality of Agency/AAA.
Collectively, NCRIC's mortgage-related securities had an average
yield-to-maturity of approximately 6.7%. Approximately 64% of the
mortgage-related securities are pass-thru securities. NCRIC does not have any
interest only or principal only pass-thru securities.
The following table contains the investment quality distribution of NCRIC's
fixed maturity investments at December 31, 2000.
Type/Ratings of Investment Percentage
-------------------------- ----------
Treasury/Agency................................. 32%
AAA............................................. 37
AA.............................................. 9
A............................................... 17
BBB............................................. 5
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 NCRIC's investment portfolio as of December 31,
2000, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
At December 31, 2000
-----------------------------------------------------
Percentage of
Amortized Cost Fair Value Fair Value
-------------- ---------- ----------
(in thousands)
Due in one year or less........................... $ 300 $ 299 0.3%
Due after one year through five years............. 19,717 19,771 20.2
Due after five years through ten years............ 17,203 17,456 17.8
Due after ten years............................... 23,497 22,716 23.1
-------- --------- ----
60,717 60,242 61.4
Equity securities................................. 7,121 6,563 6.7
Asset and mortgage-backed securities.............. 31,335 31,240 31.9
-------- --------- ----
Total................................... $ 99,173 $ 98,045 100%
======== ========= =====
Proceeds from bond maturities, sales and redemptions of available for sale
investments during the years 2000, 1999, and 1998 were $10.5 million, $66.1
million and $58.8 million, respectively. Gross gains of $16,000, $260,000 and
$521,000 and gross losses of $21,000, $331,000 and $362,000 were realized on
available for sale investment redemptions during 2000, 1999, and 1998,
respectively.
The average effective maturity and the average modified duration of the
securities in NCRIC's fixed maturity portfolio as of December 31, 2000 and 1999,
was 5.2 years and 2.8 years, respectively.
Competition
The physician medical professional liability insurance market in the
District of Columbia and NCRIC's other target geographic market areas are highly
competitive. Competition is based on many factors, including the following:
o perceived financial strength of the insurer;
o A.M. Best ratings;
o policy pricing;
o policy terms and conditions; and
o service, reputation and experience.
NCRIC competes principally with three commercial companies, CNA Insurance
Companies, Medical Protective and St. Paul Companies. Each of these companies is
actively engaged in soliciting insureds in NCRIC's markets. According to A.M.
Best Company, NCRIC has 54% of the District of Columbia physician and hospital
professional liability market and these three companies have a combined market
share of less than 25%. However, the A.M. Best Company data includes all medical
professional liability insurance sold in the District of Columbia including
insurance purchased by institutions like hospitals, which NCRIC does not insure,
but which are insured by its principal competitors. Thus, the A.M. Best Company
data does not accurately reflect NCRIC's share of the medical professional
liability insurance markets in which it participates. Several medical
professional liability insurers in NCRIC's markets, including its two principal
competitors, offer products at lower premium rates than NCRIC. A.M. Best Company
calculates that at least 25 other companies offer some type of medical
professional liability insurance in each of NCRIC's markets, and more companies
may enter NCRIC's markets in the future. In addition, NCRIC believes that the
number of healthcare entities that insure their affiliated physicians through
self-insurance may increase.
In addition, as NCRIC expands into new states, it may face strong
competition from carriers that are closely focused on narrow geographic markets.
In particular, NCRIC expects to encounter strong competition from
well-established insurance companies as it carries out its expansion plans in
Maryland, Virginia, West Virginia and Delaware. Many of NCRIC's current and
potential competitors have greater financial resources than NCRIC and may seek
to acquire market share by decreasing pricing for their products below
prevailing market rates. If this occurs, NCRIC's profitability will be reduced.
In particular, NCRIC may be forced by competitive pressures to accept
unprofitable premium rates and underwriting terms and conditions. NCRIC's
competitors may also have existing relationships with insurance brokers or other
distribution channels, which NCRIC may be unable to supplant.
NCRIC believes that its principal strengths are:
o its claims management and underwriting expertise;
o its ability to successfully litigate claims;
o its risk management; and
o its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
20-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to its District of Columbia physicians.
Risk Factors
The concentration of NCRIC, Inc.'s business in the District of Columbia leaves
it vulnerable to a decrease in the number of medical practices or an increase in
damage awards in the District of Columbia
In 2000, District of Columbia insureds accounted for approximately 80% of
NCRIC, Inc.'s direct premiums written. The concentration of NCRIC, Inc.'s
business in the District of Columbia means that NCRIC, Inc.'s revenues and
profitability depend heavily on conditions in the District of Columbia medical
community. NCRIC, Inc. is the most significant subsidiary of NCRIC Group.
If we established inadequate loss and LAE reserves, our profitability will
diminish
NCRIC reserves for losses and loss adjustment expenses or LAE are estimates
of amounts needed to pay reported and unreported claims and related LAE. If
NCRIC experiences greater than expected severity or frequency of claims, or
both, there is a risk that currently established reserves will prove inadequate.
Indemnity payments in medical professional liability cases are rising and there
is a risk that a very high jury award could be rendered against NCRIC
We cannot predict the impact of clusters of cases, like the breast implant
or "Fen-Phen" cases. Also, from time to time NCRIC has had, and may in the
future have, very high jury awards rendered against it. This risk is heightened
by the District of Columbia's rejection of tort reform. According to the
National Practitioner Data Bank, between September 1, 1990 and December 31,
1999, the District of Columbia had the highest cumulative mean medical liability
payment average in the United States at $316,958. The next closest jurisdiction
is Alabama with a cumulative mean medical liability payment of $265,962 during
the same period. In addition, according to the Physician Insurers Association of
America 1998 Data Sharing Report cited in the August edition of A.M. Best's
Review, the medical professional liability insurance industry's average claim
costs increased 17% between 1996 and 1997 following a 13% increase in the
previous year.
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 in the medical professional
liability insurance purchasing decision. In 2000, 51% of NCRIC's gross premiums
came from physicians practicing alone or in groups of less than three
physicians.
NCRIC may be unable to obtain affordable reinsurance from high quality
reinsurers, which would increase the risk borne by NCRIC and restrict NCRIC's
ability to insure larger risks
NCRIC's ability to provide medical professional liability insurance at
competitive premium rates and coverage limits on a continuing basis depends in
part on its ability to secure adequate reinsurance at commercially reasonable
rates. The amount and cost of NCRIC's reinsurance is governed by prevailing
market conditions beyond the control of NCRIC. At times in the past, insurance
industry conditions have resulted in reinsurance being either unavailable or
prohibitively expensive. Reinsurance permits NCRIC to reduce its net liability
on individual risks and to protect itself against large losses. The reinsurance
program automatically passes on the risks insured by NCRIC in excess of NCRIC's
retention and quota share participation, up to the maximum reinsurance policy
limit offered.
While NCRIC seeks to obtain reinsurance with coverage limits that it
believes are appropriate for the risk exposures it assumes, there is a risk that
losses experienced by NCRIC will not be within the coverage limits of its
reinsurance.
NCRIC is also subject to credit risk because reinsurance does not relieve
NCRIC of its obligation to pay claims to its insureds for the risks ceded to
reinsurers. A significant reinsurer's inability or refusal to make payment under
reinsurance terms could have a material adverse effect on NCRIC.
We may purchase less reinsurance and retain more risk ourselves which will
increase our exposure to larger losses
We may reduce our insurance costs by retaining more risk ourselves. This
means that NCRIC would assume the risk of individual losses up to an increased
maximum exposure amount. Any decrease in reinsurance will increase the amount
NCRIC pays for losses.
We may be unable to sell our products to doctors outside of the District of
Columbia metropolitan region or expand our sales to dentists because we have not
had significant sales to either group in the past
Expansion and diversification of our product lines will require adequate
capital, marketing success and the ability to set profitable rates and comply
with applicable regulatory requirements. We may be unable to accomplish any or
all of these requirements. NCRIC's current new policy initiatives include
selling professional liability and office and equipment insurance policies to
dentists. NCRIC has not had a significant presence in the dental insurance
market in the past and may be unable to break into it in the future. NCRIC has
recently obtained licenses to sell medical professional liability insurance in
West Virginia and Delaware. There is a risk that NCRIC will be unable to
penetrate the West Virginia and Delaware markets.
There is also a risk that the cross-selling activity of our practice
management and insurance services by non-traditional channels of distribution
(i.e., practice management consultants marketing medical malpractice insurance
and malpractice underwriters marketing practice management services) will be
thwarted by the incumbent underwriters and management service company.
In the absence of regulations governing a full demutualization, there is a risk
that any future regulations will disadvantage minority stockholders like
yourself
The Commissioner of Insurance and Securities has not issued regulations
regarding the conversion of a District of Columbia mutual holding company to the
stock form of organization. If regulations are issued by the Commissioner of
Insurance and Securities, there is a risk that the regulations may be onerous or
burdensome or may include provisions which are disadvantageous to the
stockholders of NCRIC Group other than NCRIC, A Mutual Holding Company.
Public stockholders will not be able to determine matters submitted for
stockholder approval, including whether fundamental corporate changes will be
made
NCRIC, A Mutual Holding Company possesses voting control of NCRIC Group.
Minority stockholders will not be able to control the election of directors or
other matters, including whether NCRIC, A Mutual Holding Company will fully
demutualize or whether NCRIC Group will be merged into another entity.
Regulation
NCRIC, A Mutual Holding Company and NCRIC, Inc. are domiciled in the
District of Columbia, and Commonwealth Medical Liability Insurance Company is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of NCRIC.
Regulation of NCRIC, A Mutual Holding Company after the reorganization.
District of Columbia law provides that NCRIC, A Mutual Holding Company must at
all times own, directly or indirectly, a majority of the outstanding voting
stock of NCRIC, Inc. At least two-thirds of the members of the boards of
directors of NCRIC, A Mutual Holding Company and NCRIC must at all times be
policyholders of NCRIC, Inc. NCRIC may not, without approval of the Commissioner
of Insurance and Securities, by way of an acquisition or investment in a
subsidiary, or otherwise, diversify out of the healthcare and insurance fields.
NCRIC, A Mutual Holding Company, as a mutual insurance holding company
organized in the District of Columbia, is subject to regulation at a level
substantially equal to that of a District of Columbia domestic insurance
company. The Commissioner of Insurance and Securities retains jurisdiction over
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group and NCRIC,
Inc. to assure that policyholders' interests are protected.
Conversion of NCRIC, A Mutual Holding Company to the stock form of
organization. District of Columbia law provides that NCRIC, A Mutual Holding
Company may fully demutualize, which is a conversion from a mutual holding
company form of organization to a stock form of organization. NCRIC, A Mutual
Holding Company's Board of Directors has no current plan to undertake a full
demutalization. If a full demutualization does not occur, then NCRIC Group will
always be controlled by NCRIC, A Mutual Holding Company, its majority
stockholder.
Under District of Columbia law, if a full demutalization occurs, eligible
policyholders would receive the right to subscribe for additional shares of the
new stock holding company that would be formed in the full demutualization. By
order dated January 27, 1999, the Commissioner of Insurance and Securities
stated that in a full demutualization, each share of common stock outstanding
and held by persons other than NCRIC, A Mutual Holding Company would be
converted automatically into shares of common stock of the new stock holding
company. Specifically, the number of shares that each stockholder would receive
would be determined under an exchange ratio that ensures that after the
transaction, the percentage of the to-be outstanding shares of the new stock
holding company received by a stockholder in exchange for his or her common
stock equals the percentage of the outstanding shares of common stock owned by
the stockholder immediately prior to the full demutualization. To date, the
Commissioner of Insurance and Securities has not issued regulations regarding
the conversion of a District of Columbia mutual holding company to stock form,
and there is a risk that any regulations will not be effective when NCRIC, A
Mutual Holding Company may wish to undertake a full demutualization. Moreover,
there is a risk as to what form any regulations may take and what conditions the
Commissioner of Insurance and Securities may impose on a full demutualization of
NCRIC, A Mutual Holding Company.
Under legislation approved by the Council of the District of Columbia,
prior to the implementation of a proposed full demutualization, a tender offer
for more than 50% of the outstanding shares of the corporation is prohibited
unless approved by the Commissioner of Insurance and Securities.
Governance of NCRIC. An order of the District of Columbia Commissioner of
Insurance and Securities requires that at least two-thirds of the members of
NCRIC, A Mutual Holding Company's board of directors be NCRIC, Inc.
policyholders. Currently, there are three non-policyholders on NCRIC, A Mutual
Holding Company's 18-member board of directors. In addition, 9 of 13 members of
NCRIC Group's, board of directors are currently policyholders of NCRIC, Inc. As
the number of non-policyholders on NCRIC's various boards of directors is
limited, there is a risk that if the interests of policyholders and stockholders
conflict, the interests of policyholders will prevail to the detriment of
stockholders.
Holding company regulation. A mutual insurance holding company is subject
to regulation at a level substantially equal to that of a District of Columbia
domestic insurance company. The Commissioner of Insurance and Securities has
jurisdiction over an intermediate holding company, like NCRIC Group. In
addition, District of Columbia law provides that the assets of NCRIC, A Mutual
Holding Company are available to satisfy claims of NCRIC's policyholders in the
event that the Commissioner of Insurance and Securities initiates a liquidation
proceeding.
As part of a holding company system, NCRIC, A Mutual Holding Company, NCRIC
Holdings, Inc., NCRIC Group and NCRIC, Inc. are subject to the DC Holding
Company System Act of 1933, D.C. Law 10-44. NCRIC, Inc., as the parent of
Commonwealth Medical Liability Insurance Company, is also subject to Title 38 of
the Virginia Code, which includes in Chapter 13 provisions regarding insurance
holding companies. The Holding Company Acts require NCRIC, A Mutual Holding
Company to file information periodically with the Department of Insurance and
Securities Regulation and Virginia
regulatory authorities, including information relating to its capital structure,
ownership, financial condition and general business operations. Some
transactions between an insurance company and its affiliates, including sales,
loans or investments that are deemed "material" require prior approval by the
District of Columbia or Virginia insurance regulators, as applicable. 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.
The Holding Company Acts 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. The Holding Company Acts also effectively restrict NCRIC from
consummating significant reorganizations or mergers without prior regulatory
approval.
Regulation of dividends from insurance subsidiaries. The DC Holding Company
Act limits 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 NCRIC's 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. Based on
this limitation and 2000 results, NCRIC, Inc. would be able to pay approximately
$3.0 million in dividends to NCRIC in 2001 under the stated formula.
Commonwealth Medical Liability Insurance Company's dividend restrictions are
similar to NCRIC, Inc.'s. Based on its 2000 operating results, under Virginia
insurance law, Commonwealth Medical Liability Insurance Company would not be
able to pay dividends without prior approval from Virginia's Bureau of
Insurance.
Insurance company regulation. NCRIC, Inc. is subject to supervision and
regulation by the District of Columbia Department of Insurance and Securities
Regulation and insurance authorities in Maryland. Commonwealth Medical Liability
Insurance Company is subject to supervision and regulation by the Virginia State
Corporation Commission Bureau of Insurance and insurance authorities in West
Virginia, Delaware, Maryland, and the District of Columbia. 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 NCRIC's
profitability. The extent of regulation varies by jurisdiction, but this
regulation usually includes:
o regulating premium rates and policy forms;
o setting minimum capital and surplus requirements;
o regulating guaranty fund assessments;
o licensing of insurers and agents;
o approving accounting methods and methods of setting statutory loss and
expense reserves;
o underwriting limitations;
o the terms upon which a full demutualization transaction can occur;
o restrictions on transactions with affiliates;
o setting requirements for and limiting the types and amounts of
investments;
o establishing requirements for the filing of annual statements and
other financial reports;
o conducting periodic statutory examinations of the affairs of insurance
companies;
o approving proposed changes of control; and
o 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, NCRIC, Inc. may not diversify out of the healthcare and
insurance fields through an acquisition or otherwise.
Codification. The National Association of Insurance Commissions, or NAIC,
is an association of the insurance regulators of all 50 states and the District
of Columbia. The Codification of Statutory Accounting Principles was developed
by the NAIC as a comprehensive guide to statutory accounting that will provide
analysts and other users with more comparable financial statements. Many of the
changes to statutory accounting are based on generally accepted accounting
principles, or GAAP, with modifications that emphasize the concepts of
conservatism and solvency inherent in statutory accounting. The Codification has
been mandated by the NAIC to be effective as of January 1, 2001. Any statutory
accounting changes resulting from this guidance will 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 NCRIC does 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. NCRIC
makes accruals for its portion of assessments related to any insolvencies
considered to be probable of assessment by the guaranty associations. In the
District of Columbia, insurance
companies are assessed in three categories: automobile, workers' compensation
and all other. An insurance company licensed to do business in the District of
Columbia is only liable to pay an assessment if another insurance company within
its category becomes insolvent. NCRIC is in the "all other" category.
Significant assessments could have a material adverse effect on NCRIC's
financial condition or results of operations. While NCRIC will not necessarily
be liable to pay assessments each year, the insolvency of another insurance
company within its category of insurance could result in the maximum assessment
being imposed on NCRIC over several years. NCRIC cannot predict the amount of
future assessments. In each of the jurisdictions in which NCRIC carries on
business, the amount of the assessment cannot exceed 2% of the direct premiums
written per year by NCRIC 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 National Capital Reciprocal Insurance Company, based on
December 31, 1996 financial statements, was completed on October 29, 1997, and a
final report was issued on February 9, 1999. The final report positively
assessed NCRIC's financial stability and operating procedures. NCRIC, Inc. is
currently in the process of a periodic financial examination on December 31,
1999 financial statements. It is anticipated that this examination will be
completed during the first quarter of 2001. The last final periodic financial
examination of Commonwealth Medical Liability Insurance Company, based on
December 31, 1998 financial statements, was issued on May 12, 1999. The periodic
financial examination positively assessed Commonwealth Medical Liability
Insurance Company's financial stability and operating procedures.
Approval of rates and policies. The District of Columbia, Virginia and
Delaware require NCRIC 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 Maryland,
rates must be submitted to regulators 30 days prior to their effectiveness. West
Virginia is also a prior approval jurisdiction. 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. If these items
are not filed correctly, the possibility exists that NCRIC 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. NCRIC principally writes medical
professional liability insurance, and additional requirements are placed upon it
to report detailed information with regard to settlements or judgments against
its insureds. In addition, NCRIC is 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 by
NCRIC like terminations or surcharges with respect to its insureds. Penalties
may attach if NCRIC fails 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 NCRIC, the adoption of others
could adversely affect NCRIC. Public discussion of a broad
range of healthcare reform measures will likely continue in the future. These
measures that would affect our medical malpractice business and our practice
management products and services include:
o spending limits;
o price controls;
o limits on increases in insurance premiums;
o limits on the liability of doctors and hospitals for tort claims; and
o changes in the healthcare insurance system.
A.M. Best Company ratings
A.M. Best Company, which rates insurance companies based on factors of
concern to policyholders, rated NCRIC, Inc. and Commonwealth Medical Liability
Insurance Company "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 Commonwealth
Medical Liability Insurance Company in 2000. A.M. Best reviews its ratings
periodically. If A.M. Best reduces NCRIC, Inc.'s and Commonwealth Medical
Liability Insurance Company's ratings from their current "A- (Excellent)" level,
it may be more difficult for them to attract insureds and to develop a network
of insurance brokers and agents.
A.M. Best Company'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:
o the company's profitability, leverage and liquidity;
o its book of business;
o the adequacy and soundness of its reinsurance;
o the quality and estimated market value of its assets;
o the adequacy of its reserves and surplus;
o its capital structure;
o the experience and competence of its management; and
o its market presence.
Item 2. Properties
NCRIC's principal business operations are conducted from its 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 ten
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. NCRIC's rent is partially offset by payments from a subtenant equal to
$36,816 per year. 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.
NCRIC has the option to renew the lease for one additional term of five years.
NCRIC also has business operations located in Lynchburg, Virginia. Annual rental
is $61,692 with the lease term expiring in December, 2001. NCRIC and its
subsidiaries lease additional office space that management believes is adequate
for its present needs.
Item 3. Legal Proceedings
NCRIC is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. NCRIC vigorously defends these
actions, unless a reasonable settlement appears appropriate. NCRIC believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on NCRIC's consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's Common Stock has been publicly traded on the Nasdaq SmallCap
Market since July 29, 1999 under the symbol "NCRI". At March 13, 2001, the
Company had 316 stockholders of record. The following table sets forth for the
periods indicated the price ranges per share in each quarter.
High Low
------ ------
2000
- ----
First quarter 9.000 6.875
Second quarter 8.875 7.375
Third quarter 9.000 6.625
Fourth quarter 10.000 8.000
1999
- ----
Third quarter 9.250 7.500
Fourth quarter 9.125 8.500
Item 6. Selected Financial Data
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", which are included elsewhere in this Form 10-K.
Year Ended December 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- -------- --------- ---------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Gross premiums written........................ $ 22,727 $ 21,353 $ 19,214 $ 17,869 $ 19,017
========= ========= ======== ========= =========
Net premiums written after renewal credits.... $ 15,610 $ 16,188 $ 21,014 $ 13,935 $ 13,351
========= ========= ======== ========= =========
Net premiums earned........................... $ 14,611 $ 14,666 $ 18,459 $ 13,532 $ 13,351
Net investment income......................... 6,407 6,089 5,996 6,045 5,656
Net realized investment (losses) gains........ (5) (71) 159 90 229
Practice management and related income........ 5,317 4,576 78 - -
Other income.................................. 470 373 357 355 660
--------- --------- -------- --------- ---------
Total revenues...................... 26,800 25,633 25,049 20,022 19,896
Losses and LAE................................ 11,946 12,867 15,677 15,591 15,236
Other underwriting expenses................... 3,591 3,010 3,858 2,918 2,438
Practice management and related expenses...... 4,970 4,845 378 - -
Other expenses................................ 1,237 1,439 1,510 676 928
--------- --------- -------- --------- ---------
Total expenses..................... 21,744 22,161 21,423 19,185 18,602
Income before income taxes.................... 5,056 3,472 3,626 837 1,294
Income tax provision (benefit)................ 1,561 967 1,079 (122) 303
--------- --------- -------- --------- ---------
Net income.................................... $ 3,495 $ 2,505 $ 2,547 $ 959 $ 991
========= ========= ======== ========= =========
BALANCE SHEET DATA
Invested assets............................... $ 98,045 $ 95,092 $ 96,348 $ 94,362 $ 91,008
Total assets.................................. 145,864 140,947 134,326 121,841 116,664
Total liabilities............................. 104,415 105,152 103,315 94,355 91,240
Total stockholders' equity.................... 41,449 35,795 31,011 27,486 25,424
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio............................ 81.7% 87.7% 84.9% 115.2% 114.1%
Underwriting expense ratio.................... 24.6% 20.5% 20.9% 21.6% 18.3%
Combined ratio after renewal credits.......... 106.3% 108.2% 105.8% 136.8% 132.4%
SELECTED STATUTORY DATA:
Loss and LAE ratio............................ 75.3% 80.8% 82.5% 99.9% 103.2%
Underwriting expense ratio.................... 19.2% 16.6% 15.2% 19.7% 18.4%
Combined ratio................................ 94.5% 97.4% 97.7% 119.6% 121.6%
Policyholders' surplus........................ $ 29,764 $ 29,212 $ 24,116 $ 23,258 $ 22,365
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. For a discussion of the differences between statutory
and GAAP reporting, see Note 11 to the consolidated financial statements.
Item 7. 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 Form 10-K. References to
"NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
General
The financial statements and data presented in the Form 10-K 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.
On January 4, 1999 NCRIC Group acquired all the outstanding shares of
HealthCare Consulting, Inc., the interests of HCI Ventures, LLC, and the assets
of Employee Benefits Services, Inc. The acquisition was recorded as a purchase.
The results of operations for the years ended December 31, 2000 and 1999 include
the results of the acquired businesses for those periods. Under terms of the
purchase agreement, an additional purchase payment could be paid in cash if the
acquired business achieved an earnings target in 2000; the target was met and
the resulting additional purchase payment of $1.55 million was accrued as of
December 31, 2000.
See Note 11 to the consolidated financial statements for a reconciliation
of NCRIC's net income and equity between GAAP and statutory accounting bases.
Discussed below are selected key financial concepts:
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 NCRIC of reducing NCRIC's 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, NCRIC has insurance programs where the premiums are
retrospectively determined based on losses during the period. 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.
Prior to 1997, NCRIC's policies were written with a January 1 renewal date.
Beginning in 1997 and continuing in 1998 and 1999, NCRIC began staggering policy
renewal dates throughout the year, which results in a one-time effect when the
policy is staggered. Written premiums are increased during the periods when
policies are being re-issued, returning to the previous level in the subsequent
period. In accordance with GAAP, premiums are earned ratably over the terms of
NCRIC's policies, so this change in renewal dates has no effect on premiums
earned for any period.
Unearned premiums represent premiums billed but not yet fully earned at the
end of the reporting period. Premiums receivable represent annual billed
premiums and retrospective program premiums which have not yet been collected.
Losses and loss adjustment expenses. Loss and LAE reserves are estimates of
future payments for reported and unreported claims and related expenses of
adjudicating claims with respect to insured events that have occurred. The
change in these reserves from year to year is reflected as an increase or
decrease to NCRIC's loss and loss adjustment expenses. Medical professional
liability loss and LAE reserves are established based on an estimate of these
future payments as reflected in NCRIC's 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 continues to be a complex
and uncertain process, requiring the use of informed estimates and judgements.
Although NCRIC follows a practice of conservatively estimating its future
payments relating to losses incurred, there can be no assurance that currently
established reserves will prove adequate in light of subsequent actual
experience.
NCRIC, in consultation with its independent actuaries, utilizes several
methods in order to estimate loss and LAE reserves by projecting ultimate
losses. By utilizing and comparing the results of these methods, NCRIC is better
able to analyze loss data and establish an appropriate reserve. The loss and LAE
reserves are established by management on a monthly basis and reviewed
periodically by NCRIC's independent actuaries. The independent actuarial review
includes an evaluation of the appropriateness of methods used and changes in
methodology if needed, as well as a reflection of updated experience.
The inherent uncertainty in establishing reserves is relatively greater for
companies writing long-tail casualty business, like NCRIC. Due to the extended
nature of the claim resolution process of professional liability claims,
established reserve estimates may be adversely impacted by: judicial expansion
of liability standards; expansive interpretations of contracts; inflation
associated with medical claims; and the propensity of individuals to file
claims. Because of the existence of these uncertainties, NCRIC has historically
taken a conservative posture in establishing reserves. NCRIC refines 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. NCRIC manages its exposure to individual claim losses, annual
aggregate losses, and LAE through its reinsurance program. Reinsurance is a
customary practice in the industry. It allows NCRIC to obtain indemnification
against a specified portion of losses associated with insurance policies it has
underwritten by entering into a reinsurance agreement with other insurance
enterprises or reinsurers. NCRIC pays or cedes part of its policyholder premium
to reinsurers. The reinsurers in return agree to reimburse NCRIC 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 NCRIC of
liability to its insureds.
Under NCRIC's 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 1999 and prior, in accordance with one of NCRIC's primary reinsurance
contracts, the portion of the policyholder premium ceded to the reinsurers is
"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 NCRIC during the initial policy
year. An additional liability, "retrospective premiums accrued under reinsurance
treaties" is recorded by NCRIC 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 recorded in a manner consistent with the recording of NCRIC's loss
reserves.
NCRIC's practice for accounting for the liability for retrospective
premiums accrued under reinsurance treaties has been to record the current year
swing rated reinsurance premium at management's best estimate of the ultimate
liability, which has generally been the maximum rate payable under terms of the
treaty. Due to the long tail nature of the medical malpractice 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.
NCRIC has historically ceded to its reinsurers over 90% of its exposure to
individual losses in excess of $1 million, known as excess layer coverage.
Excess layer premiums are recorded as current year reinsurance ceded costs.
Under the excess layer treaties, effective January 1, 2000, NCRIC cedes 100% of
its risks and premiums related to these coverage layers.
Recent industry performance. NCRIC's 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. According to the January, 2001 Best's Review/Preview published
by A.M. Best Company, 2000 was a transition year for the medical-malpractice
market with prices beginning to firm as the result of poor underwriting
experience and increasing reinsurance costs. In this article Best predicts 2001
trends to include sustained price increases and worsening claims severity. NCRIC
actively monitors these industry trends and considers them in relation to
NCRIC's circumstances when setting rates or establishing reserves.
Accounting Literature. - In December 1999, the SEC issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements, SAB No. 101,
summarizing certain of the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. Based on a
review of the NCRIC's revenue recognition polices, the impact of adopting SAB
No. 101 is not material to its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. SFAS 133, as amended by SFAS 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
NCRIC will adopt SFAS 133, as amended, on January 1, 2001. NCRIC believes that
the impact of adopting SFAS 133 will not be material to its financial
statements.
Consolidated net income - Years ended December 31, 2000, 1999 and 1998
Year ended December 31, 2000 compared to year ended December 31, 1999
Net income totaled $3.5 million for the year ended December 31, 2000
compared to $2.5 million for the year ended December 31, 1999. Improvement both
in net underwriting results and in practice management results contributed to
the increased earnings. Practice management results in 2000 included improvement
due to lower legal fees relating to the litigation brought by the NCRIC
Physicians Organization and settled in 1999.
Year ended December 31, 1999 compared to year ended December 31, 1998
Net income totaled $2,505,000 for the year ended December 31, 1999 compared
to $2,547,000 for the year ended December 31, 1998. The primary contributor to
the decreased earnings was increased reinsurance costs of $7.1 million due to
the reduction in favorable prior years development under the swing rated treaty.
Largely offsetting this increased cost was an increase of $3.3 million in gross
earned premiums after renewal credits and a reduction of $2.8 million in
incurred losses and LAE.
-------------------------------
Net premiums earned
-------------------------------
Following is a summary of NCRIC's net premiums earned:
Year Ended December 31,
-------------------------------------------
2000 1999 1998
--------- --------- --------
(in thousands)
Gross premiums written*...................... $ 22,727 $ 21,353 $ 19,214
Change in unearned premiums.................. (2,762) (2,521) (2,945)
-------- -------- --------
Gross premiums earned before renewal
credits................................... 19,965 18,832 16,269
Reinsurance premiums ceded related to:
current year.............................. (5,982) (6,395) (5,623)
prior year................................ 1,872 3,418 9,712
-------- -------- --------
Total reinsurance premiums ceded.......... (4,110) (2,977) 4,089
-------- -------- --------
Net premiums earned before renewal
credits................................... 15,855 15,855 20,358
Renewal credits.............................. (1,244) (1,189) (1,899)
-------- -------- --------
Net premiums earned.......................... $ 14,611 $ 14,666 $ 18,459
======== ======== ========
*Net premiums written after renewal
credits................................... $ 15,610 $ 16,188 $ 21,014
======== ======== ========
Year ended December 31, 2000 compared to year ended December 31, 1999
Gross premiums written increased by $1.4 million, or 6%, to $22.7 million
for the year ended December 31, 2000 from $21.3 for the year ended December 31,
1999. Starting in the fourth quarter of 1997 and continuing through 1999, NCRIC
began staggering policy renewal dates. Premiums written for the year ended
December 31, 2000 did not include any additional premiums from the staggering of
renewal dates, while premiums written for the year ended December 31, 1999
included approximately $2.0 million due to the re-writing of policies. There is
a one-time effect when the policy renewal is staggered which increases premiums
written in the period in which the renewal date is moved; premiums written will,
all else being equal, return to the previous level in the subsequent period.
While the staggering of the renewal dates affects premiums written, earned
premiums are not affected for either period. The gross premiums written include
premiums for retrospectively rated programs of $2.5 million for the year ended
December 31, 2000 and $733,000 for the year ended December 31, 1999. The
increase includes $1.3 million for the billing of previously accrued premium for
one of the risk sharing programs further discussed below.
Gross premiums written adjusted for the staggering of renewal dates and
retrospective program premiums increased by $1.7 million, or 9%. This increase
was due primarily to net new business written in 2000, increasing the number of
policyholders by 31%, offset partially by a change in the mix of business in new
policies written. Gross premiums written on excess layer coverage increased
$200,000 to $2.7 million for the year ended December 31, 2000 from $2.5 million
for the year ended December 31, 1999.
Late in the second quarter it was determined that one of NCRIC's
retrospective programs would not be renewed at the September 1 renewal. Under
this type of risk sharing program, physicians are underwritten directly by NCRIC
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 is completed. Should the group's loss
experience be unfavorable, NCRIC will require additional premium payments from
the sponsoring hospital to offset the unfavorable losses.
This hospital-sponsored program, which terminated September 1 included 70
physicians insured directly with NCRIC and accounted for approximately $2.3
million in annualized premium. The majority of the physicians formerly in this
terminated program have renewed their coverage and initiated participation in
other hospital-sponsored programs where NCRIC provides the insurance coverage.
Based on the actual accumulated loss experience of the terminated program
through September 1, 2000, NCRIC has billed the hospital sponsor $1.3 million
under terms of the contract based on actual loss experience through the
termination date. Because this bill was not paid when due, NCRIC has initiated
legal proceedings to collect. NCRIC will use all means legally available to
collect the amount it is due. NCRIC believes that resolution of this matter will
not have a material adverse effect on its financial position or results of
operations. However, the ultimate outcome cannot be determined at this time.
The change in unearned premiums for the period increased by $240,000 to
$2.8 million for the year ended December 31, 2000 from $2.5 million for the year
ended December 31, 1999. This increase resulted primarily from net new business
written.
Gross premiums earned before renewal credits increased $1.2 million, or 6%,
to $20.0 million for the year ended December 31, 2000 from $18.8 million for the
year ended December 31, 1999. The increase was primarily due to $1.6 million of
additional premiums earned under basic medical malpractice insurance offset by
$450,000 less in premiums earned from risk sharing programs due to improved loss
experience under the programs.
Reinsurance premiums ceded increased by $1.1 million to $4.1 million for
the year ended December 31, 2000 from $3.0 million for the year ended December
31, 1999. Reinsurance premiums are affected by current year premiums payable to
the reinsurers, as well as the retrospective adjustments to accruals for prior
year premiums. The increase was the result of a decrease in the credit from
prior years premiums for favorable loss experience under the swing rated
reinsurance treaty.
Current year reinsurance premiums ceded decreased by $413,000, or 6%, to
$6.0 million for the year ended December 31, 2000 from $6.4 million for the year
ended December 31, 1999. This decrease is due to the reduced reinsurance premium
rate on the primary layer premium as the result of the reinsurance treaty
effective January 1, 2000 offset by increased gross premium reinsured. The
reinsurance premium due for excess layer coverage at $2.3 million for the year
was unchanged. The liability "retrospective premiums accrued under reinsurance
treaties" decreased to $5.5 million at December 31, 2000 from $7.2 million at
December 31, 1999.
Reinsurance premiums related to prior years under the swing rated treaty
were reduced by $1.9 million in 2000 and $3.4 million in 1999 due to favorable
loss development of reinsured losses compared to prior estimates by NCRIC.
Generally, losses covered by the swing rated treaty are in the range excess of
$500,000 to $1 million. The 2000 change is primarily reflective of the favorable
loss development in the 1993 through 1996 years. The 1999 change is primarily
reflective of the favorable loss development in the 1992 though 1996 loss years.
Renewal credits increased $55,000 to $1.2 million for the year ended
December 31, 2000 reflecting an increase in premiums on policies eligible for
the renewal credit. In general, renewal credits apply to policies written in the
District of Columbia and Maryland. A growing proportion of NCRIC's business is
written in other jurisdictions where renewal credits are not issued.
Net premiums earned before renewal credits at $15.9 million for the year
ended December 31, 2000 are flat compared to the year ended December 31, 1999.
Net premiums earned after renewal credits decreased by $55,000, less than 1%, to
$14.6 million for the year ended December 31, 2000 from $14.7 million for the
year ended December 31, 1999. The decrease reflects the $1.5 million lower
reinsurance ceded favorable prior year development in 2000 compared to 1999
largely offset by the increase in gross earned premiums.
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 net earned premium in Virginia, largely as the result of sales by
agents and to clients of the Practice Management Services Segment. For the year
ended December 31, 2000, net earned premiums from Virginia totaled approximately
$1.7 million, an increase of $944,000 over the total of approximately $743,000
for the year ended December 31, 1999.
The mix of business produced directly by NCRIC versus by agents has changed
between years as shown on the following chart of new gross written premium. The
proportion of business produced by NCRIC's independent agency force has
increased to 59% of total new business written in 2000 from 43% in 1999.
Year ended December 31,
------------------------------------------
2000 1999
-------------- -------------
Direct $ 1.8 million $ 1.4 million
Agent 2.6 million 1.0 million
In 2000, premium written to clients of the Practice Management Services
Segment totaled $483,000, or 11% of total new gross written premium, compared to
$56,000 in 1999, or 2% of new gross written premium.
Year ended December 31, 1999 compared to year ended December 31, 1998
Gross premiums written increased by $2.1 million, or 11%, to $21.3 million
for the year ended December 31, 1999 from $19.2 million for the year ended
December 31, 1998. Starting in the fourth quarter of 1997 and continuing through
1999, NCRIC began staggering policy renewal dates. Premiums written for the year
ended December 31, 1999 increased approximately $400,000 over the premiums
written for the year ended December 31, 1998 due to the re-writing of policies.
There is a one-time effect when the policy renewal is staggered which increases
premiums written in the current period; premiums written will, all else being
equal, return to the previous level in the subsequent period. While the
staggering of the renewal dates affects premiums written, earned premiums are
not affected for either period.
Gross premiums written, adjusted for the staggering of renewal dates,
increased $1.8 million for the year ended December 31, 1999 over the year ended
December 31, 1998 due to net new business written in 1999, increasing the number
of policyholders by 13%. Gross premiums written on excess layer coverage
increased $500,000 to $2.5 million for the year ended December 31, 1999 from
$2.0 million for the year ended December 31, 1998.
The change in unearned premiums for the period decreased by $424,000 to
$2.5 million for the year ended December 31, 1999 from $2.9 million for the year
ended December 31, 1998. This decrease resulted from a $1.9 million increase due
to the staggering of renewal dates, new business written and extended reporting
endorsement coverage offset by a $2.3 million decrease in retrospectively
determined policyholder refunds for 1999 due to higher loss experience in the
experience-rated programs.
Gross premiums earned before renewal credits increased $2.5 million, or
15%, to $18.8 million
for the year ended December 31, 1999 from $16.3 million for the year ended
December 31, 1998. The increase was primarily due to $2.4 million of additional
premiums earned under experience-rated programs.
Reinsurance premiums ceded increased by $7.1 million to $3.0 million for
the year ended December 31, 1999 from a credit of $4.1 million for the year
ended December 31, 1998. Reinsurance premiums are affected by current year
premiums payable to the reinsurers, as well as the retrospective adjustments to
accruals for prior year premiums. The increase was the result of a decrease in
the credit from prior years premiums under the swing rated insurance treaty due
to favorable loss experience.
Current year reinsurance premiums ceded increased by $772,000, or 14%, to
$6.4 million for the year ended December 31, 1999 from $5.6 million for the year
ended December 31, 1998. This increase is due to an increase in the excess layer
coverages purchased by the policyholders plus an increase in the swing rated
premium on the primary layer. The reinsurance premium due for excess layer
coverage increased by $408,000, or 22%, to $2.3 million for the year ended
December 31, 1999 from $1.9 million for the year ended December 31, 1998,
consistent with an increase in premiums written for the excess layer coverage.
In addition, the premiums related to the swing rated cession program increased
by $364,000, or 10%. The liability "retrospective premiums accrued under
reinsurance treaties" increased to $7.2 million at December 31, 1999 from $6.5
million at December 31, 1998.
Reinsurance premiums related to prior years under the swing rated treaty
were reduced by $3.4 million in 1999 and $9.7 million in 1998 due to favorable
loss development of reinsured losses compared to prior estimates by NCRIC.
Generally, losses covered by the swing rated treaty are in the range excess of
$500,000 to $1 million. The 1999 change is primarily reflective of the favorable
loss development in the 1992 though 1996 loss years. The 1998 change is
primarily reflective of the favorable loss development for the 1993 through 1995
loss years. The favorable loss development results largely from NCRIC's decision
in 1996 to more aggressively defend high exposure loss cases.
Renewal credits decreased $710,000 to $1.2 million for the year ended
December 31, 1999 from $1.9 million for the year ended December 31, 1998
reflecting a decrease in the credit rate to 10% from 12.5%.
Net premiums earned before renewal credits decreased by $4.5 million, or
22%, to $15.9 million for the year ended December 31, 1999 from $20.4 million
for the year ended December 31, 1998. Net premiums earned after renewal credits
decreased by $3.8 million, or 21%, to $14.7 million for the year ended December
31, 1999 from $18.5 million for the year ended December 31, 1998. The decreases
reflect the lower reinsurance ceded favorable prior year development in 1999
compared to 1998 partially offset by the increase in gross earned premiums.
-------------------------------
Net investment income
-------------------------------
Year ended December 31, 2000 compared to year ended December 31, 1999
Net investment income increased by $318,000, or 5%, for the year ended
December 31, 2000 compared to the prior year reflecting an increase in yields,
partially offset by a lower base of average invested assets. Net investment
income for the year ended December 31, 2000 was $6.4 million
compared to $6.1 million for the year ended December 31, 1999. Average invested
assets, which include cash equivalents, decreased by $4.2 million, or 4%, to
$101.6 million at December 31, 2000. Maturing investments were primarily
reinvested in corporate and tax-exempt securities. The average effective yield
was approximately 6.31% for the year ended December 31, 2000 and 5.74% for the
year ended December 31, 1999. The tax equivalent yield was approximately 6.72%
at December 31, 2000 and 6.18% at December 31, 1999. The change in investment
yields is reflective of the market change in interest rates in 2000 compared to
1999.
Year ended December 31, 1999 compared to year ended December 31, 1998
Net investment income increased by $93,000, or 1.6%, for the year ended
December 31, 1999 compared to the prior year reflecting a slight increase in
yields. Net investment income for both years was approximately $6.0 million.
Average invested assets, which include cash equivalents, were maintained at
essentially the same level in both periods. Maturing investments were primarily
reinvested in asset and mortgaged backed securities. $2.9 million of funds were
used in the January 4, 1999 acquisition of the businesses of HealthCare
Consulting, HCI Ventures and Employee Benefit Services. The average effective
yield was approximately 5.74% for the year ended December 31, 1999 and 5.68% for
the year ended December 31, 1998. The tax equivalent yield was approximately
6.18% at December 31, 1999 and 6.24% at December 31, 1998. The change in
investment yields is reflective of the market change in interest rates in 1999
compared to 1998.
-------------------------------
Net realized investment gains (losses)
-------------------------------
Year ended December 31, 2000 compared to year ended December 31, 1999
Net realized investment losses were $5,000 for the year ended December 31,
2000 compared to $71,000 for the year ended December 31, 1999. 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.
Year ended December 31, 1999 compared to year ended December 31, 1998
Net realized investment losses were $71,000 for the year ended December 31,
1999 compared to net realized gains of $159,000 for the year ended December 31,
1998. Realized losses in 1999 were primarily from the sale of asset and
mortgage-backed securities and U.S. government and agencies.
-------------------------------
Practice management and related
income
-------------------------------
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Year Ended December 31,
2000 1999
----- -----
Practice management 44% 40%
Accounting 28 31
Tax & personal financial planning 11 11
Retirement plan accounting & admin 13 13
Other 4 5
----- -----
Total 100% 100%
===== =====
Year ended December 31, 2000 compared to year ended December 31, 1999
Practice management and related revenues increased by $741,000, or 16%, to
$5.3 million for the year ended December 31, 2000, from $4.6 million for the
year ended December 31, 1999. This revenue consists of fees generated by NCRIC
MSO through HealthCare Consulting and Employee Benefits Services. The increase
results from both recurring fee business and one-time consulting assignments.
Approximately $365,000 of revenue in 2000 results from services provided to
existing insureds of NCRIC reflecting results of the cross-selling initiative.
Year ended December 31, 1999 compared to year ended December 31, 1998
Practice management and related revenues of $4.6 million and $78,000 for
the years ended December 31, 1999 and 1998, consisted of fees generated by NCRIC
MSO primarily through the businesses acquired on January 4, 1999, HealthCare
Consulting and Employee Benefits Services. HealthCare Consulting serves more
than 1,100 physician clients in Virginia, North Carolina, South Carolina,
Tennessee, and the District of Columbia.
-------------------------------
Other income
-------------------------------
Other income includes revenues from insurance brokerage, insurance agency
and physician services, as well as service charge income from NCRIC's financing
of physician premiums.
Year ended December 31, 2000 compared to year ended December 31, 1999
Other income increased $97,000, or 26%, to $470,000 for the year ended
December 31, 2000 from $373,000 for the year ended December 31, 1999. Of the
increase, $53,000 was in NCRIC Physicians Organization as a result of the 1999
litigation settlement.
Year ended December 31, 1999 compared to year ended December 31, 1998
Other income increased $16,000, or 4%, to $373,000 for the year ended
December 31, 1999 from $357,000 for the year ended December 31, 1998. The
primary source of the increase was in brokerage commission income as the result
of increased excess layer reinsurance ceded.
-------------------------------
Loss and loss adjustment expenses
incurred and combined ratio results
-------------------------------
The expense for incurred losses and LAE for each year net of reinsurance
can be summarized as follows. All loss expense amounts incurred are reported net
of reinsurance amounts recoverable.
Year Ended December 31,
---------------------------------------------
2000 1999 1998
---------- ----------- ----------
(in thousands)
Incurred losses and LAE related to:
Current year - losses ................... $17,829 $20,795 $19,140
Prior years - development ............... (5,883) (7,928) (3,463)
------- ------- -------
Total incurred for the year .................. $11,946 $12,867 $15,677
======= ======= =======
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,
------------------------------
2000 1999 1998
------ ------ ------
Loss and LAE ratio:
Current year losses ................. 122.0% 141.8% 103.7%
Prior year losses ................... (40.3) (54.1) (18.8)
------ ------ ------
Total Loss and LAE ratio ................ 81.7 87.7 84.9
Underwriting expense ratio .............. 24.6 20.5 20.9
------ ------ ------
Combined ratio........................... 106.3% 108.2% 105.8%
====== ====== ======
Year ended December 31, 2000 compared to year ended December 31, 1999
Total incurred loss and LAE expense of $11.9 million for year ended
December 31, 2000 represented a decrease of $921,000, or 7%, compared to $12.9
million incurred for the year ended December 31, 1999.
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 decreased by $3.0 million, or 14%, to $17.8
million for the year ended December 31, 2000 from $20.8 million for the year
ended December 31, 1999. The number of new claims reported in 2000 was greater
than in 1999; however, the frequency, the number of claims reported per 100 full
time equivalent insureds, was flat in 2000 relative to the 1999 level. An
increase in severity was first noted in 1996 and continued through 2000. The
increase in severity reflects the growing size of plaintiff verdicts and
settlements. NCRIC's 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, NCRIC's reinsurance program for losses in excess of $500,000
provides protection against the increase in severity of losses.
NCRIC 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 $5.9 million for the year ended December 31,
2000, and $7.9 million for the year ended December 31, 1999. The total loss and
LAE ratio was reduced by 40 points for the year
ended December 31, 2000 and 54 points for the year ended December 31, 1999, as a
result of this favorable development. 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; whereas, the 1999
change is primarily reflective of the favorable loss development for the 1992
through 1996 loss years. The reduced level of favorable development in 2000
compared to 1999 reflects the increase in severity noted above.
The underwriting expense ratio increased to 24.6% for the year ended
December 31, 2000 from 20.5% for the year ended December 31, 1999. This increase
is reflective of the 19% increase in underwriting expenses in addition to the
increase in reinsurance ceded premiums previously described. Underwriting
expenses increased $581,000 to $3.6 million for the year ended December 31, 2000
from $3.0 million for the year ended December 31, 1999. See "Underwriting
expenses."
The combined ratio decreased to 106.3% for the year ended December 31, 2000
from 108.2% for the year ended December 31, 1999. The decrease in incurred
losses resulted in a combined ratio at the second lowest level for the 1995
through 2000 period.
The statutory combined ratio was 94.5% for the year ended December 31, 2000
compared to 97.4% for the year ended December 31, 1999. This decrease reflects
the same premium and loss level factors noted previously.
Year ended December 31, 1999 compared to year ended December 31, 1998
Total incurred loss and LAE expense of $12.9 million for year ended
December 31, 1999 represented a decrease of $2.8 million, or 18%, compared to
$15.7 million incurred for the year ended December 31, 1998.
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 $1.7 million, or 9%, to $20.8
million for the year ended December 31, 1999 from $19.1 million for the year
ended December 31,1998. The frequency, number of new claims reported, in 1999
was greater than in 1998 but remained less than the 1997 level. An increase in
severity was first noted in 1996 and continued through 1999. The increase in
frequency combined with the continuing heightened level of severity resulted in
an increase in the current year loss and LAE ratio to 141.8% for the year ended
December 31, 1999 from 103.7% for the year ended December 31, 1998.
NCRIC experienced favorable development on estimated losses for prior
year's claims for both years. The favorable loss development related to prior
years claims was $7.9 million for the year ended December 31, 1999, and $3.5
million for the year ended December 31, 1998. The total loss and LAE ratio was
reduced by 54 points for the year ended December 31, 1999 and 19 points for the
year ended December 31, 1998, as a result of this favorable development. The
1999 change is primarily reflective of the favorable loss development for the
1992 through 1996 loss years, whereas, the 1998 change is primarily reflective
of the favorable loss development for the 1993 through 1995 loss 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 underwriting expense ratio decreased to 20.5% for the year ended
December 31, 1999 from 20.9% for the year ended December 31, 1998. This decrease
is reflective of the 22% decrease in underwriting expenses partially offset by
the decrease in net premiums earned due to the substantial decrease in
reinsurance premiums previously described. Underwriting expenses decreased
$848,000 to
$3.0 million for the year ended December 31, 1999 from $3.9 million for the year
ended December 31, 1998. See "Underwriting expenses".
The combined ratio increased to 108.2% for the year ended December 31, 1999
from 105.8% for the year ended December 31, 1998, reflecting the decrease in net
premiums earned previously described, partially offset by lower incurred losses.
The statutory combined ratio was 97.4% for the year ended December 31, 1999
compared to 97.7% for the year ended December 31, 1998. This decrease reflects
the same premium and loss level factors noted previously.
. -------------------------------
Loss and loss adjustment
expenses liability
-------------------------------
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
Year Ended December 31,
-----------------------
2000 1999
-------- --------
(in thousands)
Liability for:
Losses ................................. $ 55,785 $ 56,462
Loss adjustment expenses ............... 25,349 27,820
-------- --------
$ 81,134 $ 84,282
======== ========
Reinsurance recoverable on losses ............... $ 27,549 $ 26,627
======== ========
Losses in the medical professional liability industry can take up to eight
to ten years, or occasionally more, to fully settle. Actual amounts are not due
from the reinsurers until NCRIC settles a claim.
NCRIC believes that all of its reinsurance recoverables are collectible.
See "Business - Reinsurance" for a discussion on the reinsurance program.
------------------------------
Underwriting expenses
-------------------------------
Salaries and benefits accounted for approximately 45% of other underwriting
expenses; with professional fees, including legal, auditing and director's fees,
accounting for approximately another 20% of the underwriting expenditures.
Premium taxes and commissions related to the change in unearned premiums are
treated as deferred acquisition costs. Guaranty fund assessments are based on
industry loss experience in the jurisdictions where NCRIC does business, which
is not entirely predictable.
Year ended December 31, 2000 compared to year ended December 31, 1999
Underwriting expenses increased $581,000, or 19%, to $3.6 million for the
year ended December 31, 2000 from $3.0 million for the year ended December 31,
1999. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in commission
and other underwriting costs, plus increased premium taxes and an increase in
the allowance for uncollectible premium receivables.
Year ended December 31, 1999 compared to year ended December 31, 1998
Underwriting expenses decreased $848,000, or 22%, to $3.0 million for the
year ended December 31, 1999 from $3.9 million for the year ended December 31,
1998. The decrease in expense was due primarily to a decrease in premium taxes
related to the reduction in the premium tax rate, a decrease in guaranty fund
assessments and a decrease in directors fees and salaries as a result of the
reorganization.
-------------------------------
Practice management and related
expenses
-------------------------------
Practice management and related expenses consist primarily of expenses,
such as salaries, general office expenses, and goodwill amortization 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.
Year ended December 31, 2000 compared to year ended December 31, 1999
Practice management and related expenses increased $125,000, or 3%, to $5.0
million for the year ended December 31, 2000 compared to $4.8 million for the
year ended December 31, 2000. The increase is due to general increases in
operating expenses, principally compensation, related to supporting a growing
base of business.
Year ended December 31, 1999 compared to year ended December 31, 1998
Practice management and related expenses of $4.8 million for the year ended
December 31, 1999 increased over the 1998 level due to the businesses acquired
on January 4, 1999.
-------------------------------
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 physician services, as well
as costs associated with unrelated one-time events like the reorganization.
Year ended December 31, 2000 compared to year ended December 31, 1999
Other expenses decreased $202,000 to $1.2 million for the year ended
December 31, 2000 from $1.4 million for the year ended December 31, 1999. The
primary component of the decrease was a reduction of legal expenses incurred in
connection with litigation brought by NCRIC Physicians Organization and settled
in 1999 as well as the non-recurrence of interest expense. These decreases were
partially offset by an increase in expenses due to meeting the various
requirements associated with having common stock traded in the public market and
the expense of the stock grants made in September, 2000 under the Stock Award
Plan.
Year ended December 31, 1999 compared to year ended December 31, 1998
Other expenses decreased $71,000 to $1.4 million for the year ended
December 31, 1999 from $1.5 million for the year ended December 31, 1998. The
change resulted primarily from the decrease in expenses in connection with the
1998 reorganization and in expenses for National Capital Insurance Brokerage
related to a consulting contract that was transferred to NCRIC, Inc. during 1999
offset largely by an increase of $307,000 in legal fees incurred in connection
with litigation brought by NCRIC Physicians Organization, interest on
acquisition debt and parent company expenses for directors fees. The litigation
was settled in 1999 with terms including a guarantee of a minimum payment to the
NCRIC Physicians Organization of $6,000 per month for 60 months.
-----------------------------
Income taxes
-----------------------------
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income.
Year Ended December 31,
------------------------
2000 1999 1998
Federal income tax at statutory rates ........... 34% 34% 34%
Tax exempt income................................ (4) (7) (9)
Dividends received............................... (1) (2) (2)
Goodwill amortization............................ 1 2 --
Reorganization costs ............................ -- -- 6
Other, net ...................................... 1 1 1
----- ----- -----
Income tax at effective rates ................... 31% 28% 30%
===== ===== =====
NCRIC's 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.
Year Ended December 31,
-----------------------------
2000 1999
----------- -----------
Deferred federal income tax asset ........... $ 1,918,000 $ 3,298,000
=========== ===========
Year ended December 31, 2000 compared to year ended December 31, 1999
Tax expense for the year ended December 31, 2000 was $1.6 million compared
to $1.0 million for the year ended December 31, 1999. The Federal corporate
income tax rate of 34% was reduced to an effective tax rate of 31% for the year
ended December 31, 2000 due to tax-exempt income and nontaxable dividends
received, partially offset by non-deductible goodwill amortization. The
effective rate of 28% for the year ended December 31, 1999 was lower than the
2000 effective rate primarily due to a lower level of tax exempt income in 2000.
The increase in the provision for income tax is reflective of the increased
income before tax combined with the increase in the effective tax rate.
Year ended December 31, 1999 compared to year ended December 31, 1998
Tax expense for the year ended December 31, 1999 was $1.0 million compared
to $1.1 million for the year ended December 31, 1998. The Federal corporate
income tax rate of 34% was reduced to an effective tax benefit rate of 28% for
the year ended December 31, 1999 due to tax-exempt income and nontaxable
dividends received, partially offset by non-deductible goodwill amortization.
The effective rate was 30% for the year ended December 31, 1998, higher than the
1999 effective rate primarily due to 1998 reorganization costs. The decrease in
federal income tax is reflective of the decreased income before tax for the
period combined with the reduction in the effective tax rate.
Financial condition, liquidity and capital resources
NCRIC Group
Financial condition and capital resources. NCRIC Group is a stock holding
company whose operations and assets primarily consist of its ownership of NCRIC,
Inc. and NCRIC MSO, Inc. As a result of the 1998 reorganization, NCRIC Group has
greater access to the capital markets. This allows NCRIC Group to assist its
subsidiaries in their efforts to compete effectively and create long-term
growth. As a part of this strategy, NCRIC Group may seek to take advantage of
acquisition opportunities and alternative financing.
On January 4, 1999, Sequoia National Bank approved a loan to NCRIC Group in
the amount of $2,200,000 at annual interest rate of prime + 3/4 of a percentage
point to finance the acquisition of HealthCare Consulting, Inc. and HCI
Ventures, LLC and the assets of Employee Benefits Services, Inc. On July 29,
1999, the loan was repaid from the proceeds of the issuance of common stock.
Liquidity. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. NCRIC Group's cash
flow from operations will consist of dividends from subsidiaries, if declared
and paid, and other permissible payments from its subsidiaries, offset by fees
paid to NCRIC, Inc., for management services and other expenses. NCRIC Group
intends to rely primarily on this cash flow from NCRIC, Inc. and NCRIC MSO, Inc.
to pay dividends on its common stock, if any. The amount of the future cash flow
available to NCRIC Group 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 NCRIC Group 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, 2000, NCRIC, Inc. would have had available
approximately $3.0 million of unassigned statutory surplus available for
dividends.
Subsidiaries of NCRIC Group
Liquidity. The primary sources of NCRIC subsidiaries' liquidity are
insurance premiums, net investment income, practice management and financial
services fees, recoveries from reinsurers and proceeds from the maturity or sale
of invested assets. Funds are used to pay claims, LAE, operating expenses,
reinsurance premiums and taxes; and to purchase investments.
NCRIC subsidiaries had negative cash flows from operations for the year
ended December 31, 2000 and positive cash flows from operations for the years
ended December 31, 1999 and 1998. Cash used in operating activities of NCRIC
subsidiaries was $931,000 in 2000 compared to cash provided by operating
activities of $5.1 million in 1999 and $3.0 million in 1998. The $6.0 million of
decreased cash flow in 2000 compared to 1999 results primarily from a $1.6
million increase in payments for losses and LAE, an increase of $1.3 million in
income taxes paid, an increase of $2.4 million for reinsurance under the swing
rated treaty, a $1.5 million dividend to the parent company, and a decrease in
interest income of $100,000, partially offset by an increase in premiums
collected of $900,000. The $2.1 million of increased cash flow in 1999 compared
to 1998 results primarily from $2.8 million of additional premiums collected, an
increase of $1.3 million in receipts from reinsurers, a decrease of $700,000 in
income and premium taxes paid, and net cash inflows of $400,000 from the
operations of the practice management and financial services companies acquired
January, 1999, partially offset by a $3.1 million increase in payments for
losses and LAE. Because of the long-term nature of both payment of claims and
the settlement of swing rated reinsurance premiums due to the reinsurers, cash
from operations for a medical professional liability insurer like NCRIC, Inc.
can vary substantially from year to year.
Comprehensive income was a gain of $5.6 million for the year ended December
31, 2000 compared to a loss of $2.4 million for the year ended December 31,
1999. The increase in comprehensive income results from the increase in
unrealized investment gains, net of deferred income taxes, added to the increase
in net income.
Financial condition and capital resources. NCRIC subsidiaries invest their
positive cash flow from operations primarily in investment grade, fixed maturity
securities. As of December 31, 2000, the carrying value of NCRIC subsidiaries
securities portfolio was $98.0 million, compared to a carrying value of $94.3
million at December 31, 1999. The portfolios were invested as follows:
December 31,
-----------------------
2000 1999
------ ------
U.S. Government and agencies..................... 14% 15%
Asset and mortgage-backed securities............. 32 40
Tax-exempt securities ........................... 16 14
Corporate bonds and equity securities............ 38 31
Over 78% of the bond portfolio at December 31, 2000 was invested in US
Government and agency securities or has a rating of AAA or AA. For regulatory
purposes as of December 31, 2000, 95% of the securities portfolio is rated
"Class 1", which is the highest quality rated group as classified by the NAIC.
NCRIC subsidiaries believe that all of their 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.
NCRIC subsidiaries have no corporate debt. The $2.5 million line of credit
available as of December 31, 2000 is restricted to working capital for claim
settlements. The line of credit is unsecured and renewable. NCRIC subsidiaries
have not drawn down on this facility. As of December 31, 1999, a NCRIC
subsidiary had entered into a contract to purchase new policy administration
software; future payments under the contract are required as services are
completed by the vendor and total $35,000. NCRIC subsidiaries have no other
material commitments for capital expenditures. NCRIC Group and its subsidiaries
are required to pay aggregate annual salaries in the amount of $1.1 million to
six persons under employment agreements. In addition, under terms of the
purchase agreement between NCRIC Group and the previous owners of HealthCare
Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc.,
contingency payments totaling $3.1 million could be paid in cash if the acquired
companies achieve earnings targets in 2000, 2001, and 2002. During 2000, the
earnings target was met and NCRIC Group will pay the prior owners $1.55 million
on March 31, 2001.
The equity of NCRIC subsidiaries was $35.5 million at December 31, 2000 and
$29.1 million at December 31, 1999. The $6.4 million increase for the year ended
December 31, 2000 was due to $4.3 million of net income plus $2.1 million of
unrealized investment gains net of tax. The $1.9 million decrease for the year
ended December 31, 1999 was due to $3.0 million of net income offset by $4.9
million of unrealized investment losses net of tax.
Effects of inflation and interest rate changes
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that loss and LAE reserve levels and NCRIC's ratemaking
process adequately incorporates the effects of inflation.
Interest rate changes expose NCRIC to a market risk on its 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 NCRIC's fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, NCRIC's 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, NCRIC filed a consolidated
United States Federal income tax return with its parent and subsidiaries. For
tax years after the stock offering, NCRIC does 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 1997, 1998 and 1999 are open but not currently
under audit. In 2000 the Internal Revenue Service approved a change in
accounting method for NCRIC relative to the timing of revenue recognition for
tax purposes.
Regulatory matters
NAIC statutory accounting codification. The National Association of
Insurance Commissioners or 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 applies
commencing January 1, 2001. Statutory accounting changes resulting from this
codification will 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 NCRIC's statutory surplus
on January 1, 2001 is an increase of $1.2 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 the
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 the
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.
For 2000, NCRIC's 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 1999 and 1998, another subsidiary, NCRIC, Inc., was outside the
usual range for two ratios as the result of fluctuations in reinsurance ceded
premiums under the swing rated reinsurance program.
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 or "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. For all periods presented, NCRIC's and
Commonwealth Medical Liability Insurance Company's total adjusted capital levels
were significantly in excess of the authorized control level of RBC. As a
result, the RBC requirements are not expected to have an impact upon NCRIC's
operations. Following is a presentation of the total adjusted capital for NCRIC
and Commonwealth Medical Liability Insurance Company compared to the authorized
control level of RBC:
Authorized Control Level
Risk-based Capital Total Adjusted Capital
------------------ ----------------------
NCRIC CML NCRIC CML
------ ------ ------- -------
(in millions)
December 31, 2000........... $3.7 $0.19 $29.8 $4.5
1999........... 4.1 0.17 29.2 5.0
1998........... 4.5 0.15 24.1 5.0
Forward-looking information
A number of statements made by NCRIC in this document are forward-looking
statements which involve known and unknown risks and uncertainties which may
cause NCRIC's actual results to be materially different from historical results
or from the results expressed or implied by the forward-looking statements.
These risks and uncertainties include:
o general economic conditions including changes in interest rates and
the performance of financial markets;
o NCRIC, Inc.'s concentration in a single line of business primarily in
the District of Columbia;
o the impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o price competition;
o uncertainties associated with expanding business in new market areas,
including uncertainties associated with claims adjudication
experience;
o regulatory changes;
o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance;
o the mutual holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially
and adversely affect NCRIC Group's results of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
NCRIC's 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, 2000, fixed maturity securities
comprised 93% of total investments at market value. U.S. government and
tax-exempt bonds represent 30% of the fixed maturity securities. Equity
securities, consisting primarily of preferred stock, account for the remainder
of the investment portfolio. NCRIC has classified its investments as available
for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure NCRIC has on its investment portfolio. In
general, the market value of NCRIC's 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 NCRIC's investment portfolio
will generally decline resulting in decreases in NCRIC's stockholders' equity.
Conversely, during periods of falling interest rates, the fair value of NCRIC's
investment portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity. In addition, NCRIC's 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.
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, NCRIC's investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
NCRIC's investment policy also provides that all security purchases be limited
to rated securities or unrated securities approved by management on the
recommendation of NCRIC's investment advisor. Approximately 69% of the portfolio
is Treasury or Agency related or rated AAA, the highest rating for a security.
One common measure of the interest sensitivity of fixed maturity securities
is effective duration. Effective duration utilizes maturities, yields, and call
terms to calculate an average age of expected cash flows. The following table
shows the estimated fair value of NCRIC's fixed maturity portfolio based on
fluctuations in the market interest rates.
Projected Market Value
Yield Change (bp) Market Yield (in thousands)
----------------- ------------ --------------
-300 3.24 $112.1
-200 4.24 106.8
-100 5.25 101.9
Current Yield** 6.25 97.2
100 7.25 92.5
200 8.26 88.1
300 9.26 83.9
** Current yield is as of December 31, 2000.
The actual impact of the market interest rate changes on the securities may
differ from those shown in the sensitivity analysis above.
Item 8.
INDEX TO FINANCIAL STATEMENTS
Page
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT 69
Consolidated Balance Sheets as of December 31, 2000 and 1999 70
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999, and 1998 71
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999, and 1998 72
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999, and 1998 73
Notes to Consolidated Financial Statements for the Years Ended
December 31, 2000, 1999, and 1998 74
Schedule I - Summary of Investments - Other Than Investments
in Related Parties 92
Schedule II - Condensed Financial Information of Registrant 93
Schedule III - Supplementary Insurance Information 97
Schedule IV - Reinsurance 98
Schedule V - Valuation and Qualifying Accounts 99
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Companies 100
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, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ending December 31, 2000. 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, 2000 and 1999, and the results of their operations, and their
cash flows for each of the three years in the period ending December 31, 2000,
in conformity with accounting principles generally accepted in the United States
of America.
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.
Deloitte & Touche LLP
February 5, 2001
McLean, Virginia
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 91,482 $ 90,937
Equity securities 6,563 4,155
--------- ---------
Total securities available for sale 98,045 95,092
OTHER ASSETS:
Cash and cash equivalents 3,972 5,407
Reinsurance recoverable 27,549 26,627
Goodwill, net 6,218 4,928
Deferred income taxes 1,918 3,298
Other assets 8,162 5,595
--------- ---------
TOTAL ASSETS $ 145,864 $ 140,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 55,785 $ 56,462
Loss adjustment expenses 25,349 27,820
--------- ---------
Total losses and loss adjustment expenses 81,134 84,282
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 5,478 7,164
Unearned premiums 11,472 8,898
Other liabilities 6,331 4,808
--------- ---------
TOTAL LIABILITIES 104,415 105,152
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 9)
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized; as of
December 31, 2000, 3,725,355 shares issued and outstanding (net of
17,500 treasury shares); as of December 31,
1999, 3,742,855 shares issued and outstanding 37 37
Additional paid in capital 9,455 9,433
Unallocated common stock held by the ESOP (889) (993)
Unallocated common stock held by the stock award plan (476) (518)
Accumulated other comprehensive loss (744) (2,866)
Retained earnings 34,197 30,702
Treasury stock, at cost (131) -
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 41,449 35,795
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 145,864 $ 140,947
========= =========
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
REVENUES:
Net premiums earned $14,611 $14,666 $18,459
Net investment income 6,407 6,089 5,996
Net realized investment (losses) gains (5) (71) 159
Practice management and related income 5,317 4,576 78
Other income 470 373 357
------- ------- -------
Total revenues 26,800 25,633 25,049
------- ------- -------
EXPENSES:
Losses and loss adjustment expenses 11,946 12,867 15,677
Underwriting expenses 3,591 3,010 3,858
Practice management and related expenses 4,970 4,845 378
Other expenses 1,237 1,439 1,510
------- ------- -------
Total expenses 21,744 22,161 21,423
------- ------- -------
INCOME BEFORE INCOME TAXES 5,056 3,472 3,626
------- ------- -------
INCOME TAX PROVISION 1,561 967 1,079
------- ------- -------
NET INCOME $ 3,495 $ 2,505 $ 2,547
======= ======= =======
OTHER COMPREHENSIVE INCOME GAIN (LOSS), NET OF TAX:
Unrealized holding gains (losses) on securities 2,119 (4,835) 1,122
Reclassification adjustment for gains (losses) included in net income 3 (47) 105
------- ------- -------
OTHER COMPREHENSIVE INCOME GAIN (LOSS) 2,122 (4,882) 1,227
------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ 5,617 $ (2,377) $ 3,774
======= ======== =======
Net income per common share:
Basic $ 0.99 $ 0.90 N/A
======= ======== =======
Diluted $ 0.98 $ 0.90 N/A
======= ======== =======
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------------------------
Unallocated Accumulated
Additional Unallocated Stock Other Total
Common Paid In ESOP Award Treasury Comprehensive Retained Stockholders'
Stock Capital Shares Shares Stock Income (Loss) Earnings Equity
----- ------- ------ ------ ----- ------------- -------- ------
BALANCE, JANUARY 1, 1998 $ - $ 797 $ - $ - $ - $ 789 $ 25,900 $ 27,486
Net income - - - - - - 2,547 2,547
Other comprehensive income - - - - - 1,227 - 1,227
Capital contribution from parent - 1 - - - - - 1
Stock split 22 (22) - - - - - -
Cash dividend to stockholder - - - - - - (250) (250)
---------- ---------- ----------- ---------- -------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1998 22 776 - - - 2,016 28,197 31,011
Net income - - - - - - 2,505 2,505
Other comprehensive loss - - - - - (4,882) - (4,882)
Issuance of common stock 15 8,647 (1,036) (518) - - - 7,108
ESOP shares released - 10 43 - - - - 53
---------- ---------- ----------- ---------- -------- ------------ --------- ----------
BALANCE, DECEMBER 31, 1999 37 9,433 (993) (518) - (2,866) 30,702 35,795
Net income - - - - - - 3,495 3,495
Other comprehensive income - - - - - 2,122 - 2,122
Acquistion of treasury stock - - - - (131) - - (131)
Shares released - 22 104 42 - - - 168
---------- ---------- ----------- ---------- -------- ------------ --------- ----------
BALANCE, DECEMBER 31, 2000 $ 37 $ 9,455 $ (889) $ (476) $ (131) $ (744) $ 34,197 $ 41,449
========== ========== =========== ========== ======== ============ ========= ==========
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,495 $ 2,505 $ 2,547
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses (gains) 5 71 (159)
Amortization and depreciation 656 651 235
Deferred income taxes 288 1,734 (579)
Stock released for coverage of benefit plans 168 53 -
Changes in assets and liabilities:
Reinsurance recoverable (922) (1,683) (7,867)
Other assets (2,236) (543) (252)
Losses and loss adjustment expenses (3,148) (313) 12,565
Retrospective premiums accrued under
reinsurance treaties (1,686) 672 (7,270)
Unearned premiums 2,574 2,445 2,945
Other liabilities (28) (1,243) 838
------- ------- -------
Net cash flows (used in) provided by operating activities (834) 4,349 3,003
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (10,286) (72,341) (58,781)
Sales, maturities and redemptions of investments 10,543 66,129 58,811
Investment in purchased business, net of cash acquired - (5,238) -
Purchases of property and equipment (727) (383) (766)
------- ------- -------
Net cash flows used in investing activities (470) (11,833) (736)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock - 6,808 1
Payment to acquire treasury stock (131) - -
Dividend to stockholder - - (250)
------- ------- -------
Net cash flows (used in) provided by financing activities (131) 6,808 (249)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,435) (676) 2,018
------- ------- -------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 5,407 6,083 4,065
------- ------- -------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 3,972 $ 5,407 $ 6,083
======= ======= =======
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 1,375 $ 100 $ 700
======= ======= =======
Interest paid $ - $ 120 $ -
======= ======= =======
See notes to consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
- -----------------------------------------------------
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.
The reorganization separated the contract rights and the membership
interests of the policyholders so that their contract rights remain
with NCRIC while their membership interests are in the Mutual Holding
Company. Each policyholder of a policy that was in force as of December
31, 1998, and who was a member of National Capital Reciprocal Insurance
Company, pursuant to the reorganization, became a member of the Mutual
Holding Company.
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.
On January 4, 1999, the Company 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, Inc.
(See Note 2.)
On July 29, 1999, the Company completed an initial public offering of
1,480,000 shares, which generated net proceeds of $8.4 million. The
proceeds were used to repay the indebtedness incurred in connection
with the HealthCare Consulting acquisition, to establish an employee
stock ownership plan and a stock award plan, and to expand current
corporate operations. The reconciliation of gross to net proceeds is as
follows (in thousands):
Gross offering proceeds $ 10,360
Less offering expenses (1,998)
--------
Net proceeds 8,362
Less: ESOP loan (1,036)
Stock Award Plan loan (518)
---------
Net proceeds, as adjusted $ 6,808
========
The accompanying financial statements present the consolidated
financial position and results of operations of NCRIC Group, Inc. and
subsidiaries.
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. A majority of the Company's
insurance business is written in the District of Columbia.
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
were 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.
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 consolidated financial statements
include the accounts 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.
Goodwill - Goodwill arising from the Company's acquisition 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 is amortized on a straight-line basis over 20
years. Goodwill is shown net of accumulated amortization of $525,000
and $259,000 as of December 31, 2000 and 1999, respectively.
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 at December 31, 2000 and 1999 of $1,542,000 and
$1,219,000, respectively, are net of accumulated depreciation of
$1,477,000 and $1,066,000.
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.
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.
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, 2000 and 1999, 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, and retrospective
premiums accrued under reinsurance treaties.
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.
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,
1999, and 1998, 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.
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.
New Accounting Pronouncements and Standards - In December 1999, the SEC
issued Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements, SAB No. 101, summarizing certain of the staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. Based on a review of the Company's
revenue recognition polices, the impact of adopting SAB No. 101 is not
material to its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires
companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value.
SFAS 133, as amended by SFAS 138, is effective for all fiscal quarters
of fiscal years beginning after June 15, 2000. The Company will adopt
SFAS 133, as amended, on January 1, 2001. The adoption of this standard
will not have a material effect on the financial position or results of
operations of the Company.
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.
for $5.1 million in cash and mandatorily convertible notes in the
aggregate principal amount of $300,000. The notes were converted to
42,855 shares of common stock upon completion of the initial public
offering described in Note 3. 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. These companies
provide practice management, employee benefit services and financial
services to physicians throughout the Mid-Atlantic region.
The acquisition has been accounted for using the purchase method.
Goodwill is amortized over 20 years on a straight-line basis. The
contingent payments would be additions to goodwill and would be
amortized over 20 years.
The acquired companies achieved the earnings target for 2000. The
resulting contingent purchase payment of $1,550,000 is due to be paid
on March 31, 2001. This payment has been added to the balance of
goodwill and accrued as a liability as of December 31, 2000.
In connection with the acquisition, NCRIC Group borrowed $2.2 million
from Sequoia National Bank to finance a portion of the purchase price.
The loan was repaid in full on July 29, 1999 from proceeds of the stock
offering, and $107,000 in interest was paid for the period of time that
the loan was outstanding. The President of Sequoia National Bank serves
on NCRIC Group's Board of Directors.
The following pro forma information presents the results of operations
for the year ended December 31, 1998 as though the acquisition had
occurred at January 1, 1998 (in thousands):
NCRIC Acquired Pro forma
Group Companies Combined
-------- --------- --------
Revenue. . . . . . . . . . . $ 25,049 $ 4,975 $ 30,024
Net Income . . . . . . . . . 2,547 436 2,983
3. INITIAL PUBLIC OFFERING
The initial public offering (IPO) of common stock closed on July 29,
1999 for a total offering of 1,480,000 shares with net proceeds of $8.4
million.
The composition of shares issued in conjunction with the IPO is as
follows (in thousands):
Issued in initial public offering 1,480
Issued to NCRIC Holdings 2,220
-----
3,700
Issued in exchange of convertible notes 43
-----
Total shares issued July 29, 1999 3,743
ESOP loan shares (148)
Stock Award Plan loan shares (74)
-----
Net shares outstanding as of July 29, 1999 3,521
=====
The 2,220,000 shares issued to NCRIC Holdings has been recognized as a
stock split in which its initial 1,000 shares of outstanding stock were
replaced by 2,220,000 shares effective with the conclusion of the IPO
retroactive to December 31, 1998.
4. 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, 2000 (in thousands)
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
========= ========== ========= ==========
As of December 31, 1999
U.S. Government and agencies............. $ 13,937 $ -- $ (716) $ 13,221
Corporate................................ 27,842 25 (1,605) 26,262
Tax-exempt obligations................... 14,058 22 (289) 13,791
Asset and mortgage-backed securities..... 38,907 2 (1,246) 37,663
--------- ---------- --------- ----------
94,744 49 (3,856) 90,937
Equity securities........................ 4,691 -- (536) 4,155
--------- ---------- --------- ----------
Total.................................... $ 99,435 $ 49 $ (4,392) $ 95,092
========= ========== ========= ==========
The amortized cost and fair value of debt securities at December 31,
2000 and 1999, 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.
December 31, 2000 December 31, 1999
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- -------- --------- --------
(in thousands)
Due in one year or less ................... $ 300 $ 299 $ 846 $ 846
Due after one year through five years ..... 19,717 19,771 13,029 12,730
Due after five years through ten years .... 17,203 17,456 19,457 18,705
Due after ten years ....................... 23,497 22,716 22,505 20,993
--------- -------- --------- --------
60,717 60,242 55,837 53,274
Asset and mortgage-backed securities ...... 7,121 6,563 4,691 4,155
Equity securities ......................... 31,335 31,240 38,907 37,663
--------- -------- --------- --------
Total ..................................... $ 99,173 $ 98,045 $ 99,435 $ 95,092
========= ======== ========= ========
Proceeds from bond maturities and redemptions of available for sale
investments during the years ended December 31, 2000, 1999, and 1998,
were $10.5 million, $66.1 million, and $58.8 million, respectively.
Gross gains of $16,000, $260,000, and $521,000, and gross losses of
$21,000, $331,000, and $362,000, were realized on bond redemptions and
available for sale investments during years ended December 31, 2000,
1999, and 1998, respectively.
For the years ended December 31, 2000 and 1999, net investment income
earned was as follows (in thousands):
2000 1999
-------- -------
U. S Government and agencies $ 811 $ 988
Corporate 2,252 1,424
Tax-exempt obligations 727 723
Asset and mortgage-backed securities 2,167 2,584
Equity securities 360 289
Short term investments 381 412
-------- -------
Total investment income earned 6,698 6,420
Investment expenses (291) (331)
-------- -------
Net investment income $ 6,407 $ 6,089
======== =======
5. 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,
--------------------------------------------
2000 1999 1998
---------- ---------- ---------
(in thousands)
BALANCE, Beginning of year................... $ 84,282 $ 84,595 $ 72,031
Less reinsurance recoverable on
unpaid claims.............................. 25,815 24,546 17.077
--------- --------- ---------
NET BALANCE.................................. 58,467 60,049 54,954
Incurred related to:
Current year............................. 17,829 20,795 19,140
Prior year............................... (5,883) (7,928) (3,463)
--------- --------- ---------
Total paid............................. 11,946 12,867 15,677
--------- --------- ---------
Paid related to:
Current year............................. 917 817 1,247
Prior year............................... 15,674 13,632 9,335
--------- --------- ---------
Total paid............................. 16,591 14,449 10,582
--------- --------- ---------
NET BALANCE ................................. 53,822 58,467 60,049
Plus reinsurance recoverable on
unpaid claims ............................. 27,312 25,815 24,546
--------- --------- ---------
BALANCE, End of year......................... $ 81,134 $ 84,282 $ 84,595
========= ========= =========
The net reduction 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 under $500,000. 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; whereas, the 1999 change is
primarily reflective of the favorable loss development for the 1992
through 1996 loss years. The 1998 change is primarily reflective of the
favorable loss development for the 1993 through 1995 loss years. The
reduced level of favorable development in 2000 compared to 1999
reflects the increase in severity, which reflects the growing size of
plaintiff verdicts and settlements.
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 is contingently liable 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 $149,000 and $170,000 at December 31, 2000 and 1999, respectively.
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
periods ended are as follows (in thousands):
December 31,
-----------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
Written Earned Written Earned Written Earned
Direct $22,727 $19,965 $21,353 $18,832 $19,214 $16,270
Ceded
Current year (7,746) (5,982) (7,545) (6,395) (6,021) (5,623)
Prior year 1,872 1,872 3,418 3,418 9,712 9,712
------- ------- ------- ------- ------- -------
Total ceded (5,874) (4,110) (4,127) (2,977) 3,691 4,089
------- ------- ------- ------- ------- -------
Net $16,853 $15,855 $17,226 $15,855 $22,905 $20,359
======= ======= ======= ======= ======= =======
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):
December 31,
-------------------------
2000 1999
-------- -------
Deferred tax assets:
Unearned premiums $ 825 $ 647
Discounted loss reserves 2,755 2,891
Fair valuation of investments 383 1,477
Depreciation and amortization 17 17
Minimum tax credit carryforward -- 219
State taxes 10 --
Other 271 --
-------- -------
4,261 5,251
Deferred tax liabilities:
Changes in tax accounting method $ (2,208) $(1,852)
Other (135) (101)
-------- -------
(2,343) (1,953)
Net deferred tax assets $ 1,918 $ 3,298
======== =======
The income tax provision consists of the following:
Year Ended December 31,
-----------------------------
2000 1999
--------- --------
Federal:
Current $ 1,220 $ (810)
Deferred 298 1,742
--------- --------
1,518 932
--------- --------
State:
Current 53 43
Deferred (10) (8)
--------- --------
43 35
--------- --------
$ 1,561 $ 967
========= ========
Federal income tax expense differs from that calculated using the
established corporate rate primarily due to nontaxable investment
income as follows (in thousands):
Year Ended December 31,
-----------------------------------------------------------------------------
2000 1999 1998
------------------------ ----------------------- ----------------------
% of Pretax % of Pretax % of Pretax
Amount Income Amount Income Amount Income
Federal income tax at
at statutory rates $ 1,719 34% $ 1,180 34% $ 1,233 34%
Tax-exempt income (209) (4) (250) (7) (321) (9)
Dividends received (73) (1) (59) (2) (69) (2)
Reorganization costs - - - - 221 6
Goodwill 74 1 74 2 - -
Other 50 1 22 1 15 1
------- -- ------- -- ------- ---
Income tax at
effective rates $ 1,561 31% $ 967 28% 1,079 30%
======= === ======= === ======= ===
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 For the year ended
December 31, 2000 December 31, 1999
----------------- -----------------
Net income $ 3,495 $ 2,505
=========== ==========
Weighted average common shares outstanding - basic 3,526 2,777
Dilutive effect of stock options 33 6
---------- ----------
Weighted average common shares outstanding - diluted 3,559 2,783
---------- ----------
Net income per common share:
Basic $ 0.99 $ 0.90
========== ==========
Diluted $ 0.98 $ 0.90
========== ==========
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding for the period. The calculation of
weighted average shares outstanding includes 2,220,000 shares for the
period from January 1, 1999 through July 28, 1999 and the total of
3,520,855 outstanding shares, as described in Note 3 above, plus shares
released for the ESOP, as described in Note 10, for the period from
July 29, 1999 through December 31, 1999. Had the calculation been made
using 3,520,855 as the weighted average outstanding shares for both
periods, that is as if the stock offered in the initial public offering
had been outstanding on January 1, 1999, basic earnings per share would
have been $0.71 for the year ended December 31, 1999.
9. COMMITMENTS
NCRIC entered into an operating lease for new 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.
As of December 31, 2000, the future minimum annual commitments under
noncancellable leases are as follows (in thousands):
2001 $ 652,000
2002 568,000
2003 505,000
2004 497,000
2005 507,000
Thereafter 1,223,000
------------
Total $ 3,952,000
============
Rent expense during the years ended December 31, 2000 and 1999 was
$678,000 and $676,000, respectively.
On December 22, 1997, NCRIC entered into a line-of-credit agreement
with a bank for $2,500,000. This line of credit is unsecured and
renewable. As of December 31, 2000, NCRIC had not drawn on this
facility.
NCRIC has established two 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, 2000, these letters of credit
totaled $2.0 million.
The Company and its subsidiaries have entered into six employment
agreements with certain key employees. These agreements include
covenants not to compete and provide for aggregate annual compensation
of $1.1 million. Another agreement provides an employee with severance
based on his final
12 month's compensation. The Company's estimated obligation for such
severance of $90,000 is reflected as an other liability as of December
31, 2000 and 1999.
Under terms of the purchase agreement between NCRIC Group and the
previous owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and
Employee Benefits Services, Inc., contingent payments totaling $3.1
million could be paid in cash if the acquired companies achieve
earnings targets in 2000, 2001, and 2002. During 2000, the earnings
targets were met, and NCRIC Group will pay the prior owners $1.55
million on March 31, 2001. This payment has been added to the balance
of goodwill and accrued as a liability as of December 31, 2000.
One of the Company's subsidiaries has entered into a contract to
purchase new policy administration software; future payments under the
contract are required as services are completed by the vendor and total
$35,000 as of December 31, 2000.
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 90 days of service are eligible for participation in the
plan. Employees may elect to contribute 1 to 15% of total compensation,
and all contributions are 100% vested. 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, 2000, 1999, and 1998, were $177,000, $171,000, and
$140,000.
NCRIC MSO sponsors two plans for its employees. The first plan is 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 contributes 5% of each
participant's total annual compensation. All contributions are 100%
vested. The contributions from NCRIC MSO for the years ended December
31, 2000 and 1999, were $57,000 and $97,000.
The second plan is a defined contribution 401(k) profit-sharing plan.
Employees who are 21 years or older and have one year of service are
eligible for participation in the plan. Employees may elect to
contribute 1 to 15% of total compensation. All contributions are 100%
vested. NCRIC MSO is not required to make matching contributions to the
plan, but may make discretionary contributions. Total contributions to
the plan by NCRIC MSO for the years ended December 31, 2000 and 1999,
were $76,000 and $56,000.
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 will become first 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.
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, 2000 is $7.00. The weighted average remaining contractual
life of those options is 8.6 years at December 31, 2000 and 9.6 years
at December 31, 1999. There was no change in the number of options
outstanding or the exercise price since December 31, 1999.
The Company's pro forma information using the Black-Scholes valuation
model follows:
2000 1999
------ ------
Pro forma net income (in thousands) $3,431 $2,479
Pro forma earnings per share - Basic $ 0.97 $ 0.89
Pro forma earnings per share - Diluted $ 0.96 $ 0.89
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
5.29%; 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, 2000 and 1999 have been made.
During the years ended December 31, 2000 and 1999, contributions of
$120,000 and $53,000 were made to the plan. During 2000, 14,800 shares
were allocated to the plan. In 1999, 6,167 shares were allocated.
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, 2000 and
1999 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 year ended December 31, 2000, the expense was $47,200.
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,
----------------------------------------
2000 1999 1998
--------- --------- --------
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $ 29,764 $ 29,212 $ 24,116
Fair valuation of investments (744) (2,866) 2,016
Deferred taxes 1,535 1,821 3,781
Group stock issuance 7,145 7,108 --
Nonadmitted assets and other 3,749 520 1,098
--------- --------- --------
STOCKHOLDERS' EQUITY - GAAP BASIS $ 41,449 $ 35,795 $ 31,011
========= ========= ========
NET INCOME - STATUTORY BASIS $ 4,409 $ 5,528 $ 2,577
Deferred taxes (287) (1,734) 579
GAAP consolidation (627) (1,289) (609)
--------- --------- --------
NET INCOME - GAAP BASIS $ 3,495 $ 2,505 $ 2,547
========= ========= ========
As of December 31, 2000, 1999, and 1998, 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.
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.
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, is
effective January 1, 2001. The effect on NCRIC's statutory surplus on
January 1, 2001 is an increase of $1.2 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.
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):
2000 1999 1998
-------- -------- --------
Insurance
Revenues from external customers $ 14,990 $ 15,020 $ 18,806
Net investment income 6,317 6,137 5,996
Depreciation and amortization 208 226 209
Segment profit(loss) before taxes 5,394 4,880 4,316
Segment assets 137,618 134,482 133,780
Segment liabilities 102,542 104,647 102,748
Expenditures for segment assets 677 252 540
2000 1999 1998
-------- -------- --------
Practice Management Services
Revenues from external customers $ 5,396 $ 4,603 $ 88
Net investment income 84 53 --
Depreciation and amortization 448 425 26
Segment profit(loss) before taxes 456 (759) (690)
Segment assets 8,114 6,613 439
Segment liabilities 2,541 1,294 281
Expenditures for segment assets 50 131 226
Total
Revenues from external customers $ 20,386 $ 19,623 $ 18,894
Net investment income 6,401 6,190 5,996
Depreciation and amortization 656 651 235
Segment profit(loss) before taxes 5,850 4,121 3,626
Segment assets 145,732 141,095 134,219
Segment liabilities 105,083 105,941 103,029
Expenditures for segment assets 727 383 766
The following are reconciliations of reportable segment revenues, net
investment income, assets, liabilities, and profit to the Company's
consolidated totals (in thousands):
2000 1999 1998
--------- --------- --------
Revenues:
Total revenues for reportable segments $ 20,386 $ 19,623 $ 18,894
Other income 23 - -
Elimination of intersegment revenues (11) (8) -
--------- --------- --------
Consolidated total $ 20,398 $ 19,615 $ 18,894
========= ========= ========
Net Investment Income:
Total investment income for reportable segments $ 6,401 $ 6,190 $ 5,996
Elimination of intersegment income - (141) -
Other unallocated amounts 6 40 -
--------- --------- --------
Consolidated total $ 6,407 $ 6,089 $ 5,996
========= ========= ========
Assets:
Total assets for reportable segments $ 145,732 $ 141,095 $134,219
Elimination of intersegment receivables (740) (840) (218)
Elimination of affiliate receivables 487 (282) (443)
Other unallocated amounts 385 974 768
--------- --------- --------
Consolidated total $ 145,864 $ 140,947 $134,326
========= ========= ========
Liabilities:
Total liabilities for reportable segments $ 105,083 $ 105,941 $103,029
Elimination of intersegment payables (740) (840) (218)
Other liabilities 72 51 504
--------- --------- --------
Consolidated total $ 104,415 $ 105,152 $103,315
========= ========= ========
Profit before taxes:
Total profit for reportable segments $ 5,850 $ 4,121 $ 3,626
Other unallocated amounts (794) (649) -
--------- --------- --------
Consolidated total $ 5,056 $ 3,472 $ 3,626
========= ========= ========
13. TRANSACTIONS WITH AFFILIATES
On December 31, 1998, in accordance with the Company's plan of
reorganization, NCRIC, Inc. paid a dividend of $250,000 to its ultimate
parent, Mutual Holding Company.
Prior to the acquisition of HCI, NCRIC MSO paid HealthCare Consulting
approximately $150,000 for services performed by HealthCare Consulting
during 1998.
NCRIC MSO rents an office building for one of its divisions from a
partnership whose partners are HealthCare Consulting senior executives.
For this property, NCRIC MSO paid approximately $62,000 in rent for the
years ended December 31, 2000 and 1999.
During 2000 and 1999, members of the Company's Board of Directors paid
NCRIC MSO approximately $157,000 and $150,000, respectively, for
practice management related services.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 2000 and 1999:
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 earned 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
Year Ended December 31, 1999
FIRST SECOND THIRD FOURTH
------- -------- ------- ---------
Premiums earned and other revenues $ 4,939 $ 4,140 $ 4,641 $ 5,895
Net investment income 1,418 1,496 1,567 1,608
Realized investment gains (losses) 52 (199) 45 31
Net Income 299 581 775 850
Basic earned per share of common stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
Diluted earnings per share of common stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2000
(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 $ 13,037 $ 13,513 $ 13,513
States, municipalities, and political subdivisions 15,379 16,010 16,010
All other corporate bonds 32,301 30,719 30,719
Asset and mortgage-backed securities 31,335 31,240 31,240
Redeemable preferred stocks 5,691 5,089 5,089
-------- -------- --------
Total fixed maturities 97,743 96,571 96,571
Equity securities:
Industrial, miscellaneous, and all other 430 443 443
Nonredeemable preferred stocks 1,000 1,031 1,031
-------- -------- --------
Total equity securities 1,430 1,474 1,474
Total investments $ 99,173 $ 98,045 $ 98,045
======== ======== ========
(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.
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 2000 AND 1999 (IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
2000 1999
ASSETS
INVESTMENTS:
Investments in subsidiaries* $ 39,767 $ 34,855
Bonds - 743
-------- --------
Total investments 39,767 35,598
OTHER ASSETS:
Cash and cash equivalents 106 1
Receivables 197 125
Property and equipment, net 882 348
Due from subsidiaries 487 -
Other assets 81 103
-------- --------
TOTAL ASSETS $ 41,520 $ 36,175
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Due to subsidiaries* $ - $ 282
Other liabilities 71 98
-------- --------
TOTAL LIABILITIES 71 380
-------- --------
STOCKHOLDERS' EQUITY:
Common stock 37 37
Other stockholders' equity, including unrealized gains
or losses on securities of subsidiaries 41,412 35,758
-------- --------
TOTAL STOCKHOLDERS' EQUITY 41,449 35,795
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,520 $ 36,175
======== ========
* Eliminated in consolidation.
See notes to condensed financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (IN THOUSANDS)
- --------------------------------------------------------------------------------
2000 1999
REVENUES:
Net investment income $ 7 $ 41
Dividends from subsidiaries* 1,500 -
Other income 22 -
--------- --------
Total revenues 1,529 41
--------- --------
EXPENSES:
Other operating expenses 824 689
--------- --------
Total expenses 824 689
--------- --------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
EARNINGS OF SUBSIDIARIES 705 (648)
Equity in undistributed earnings of 2,790 3,153
subsidiaries --------- --------
NET INCOME $ 3,495 $ 2,505
========= ========
* Eliminated in consolidation.
See notes to condensed financial statements.
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, 2000 AND 1999 (IN THOUSANDS)
- -------------------------------------------------------------------------------
2000 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,495 $ 2,505
Adjustments to reconcile net income
to net cash flows from operating activities:
Equity in undistributed earnings of subsidiaries (2,790) (3,153)
Amortization and depreciation 70 66
Stock released for coverage of benefit plans 168 -
Other changes in assets and liabilities: (846) (134)
--------- ----------
Net cash flows from operating activities 97 (716)
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments - (1,463)
Sales, maturities and redemptions of investments 743 750
Investment in purchased business - (5,238)
Purchases of property and equipment (604) (141)
--------- ----------
Net cash flows from investing activities 139 (6,092)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock - 6,808
Payment to acquire treasury stock (131) -
--------- ----------
Net cash flows from financing activities (131) 6,808
NET CHANGE IN CASH AND CASH EQUIVALENTS 105 -
--------- ----------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1 1
--------- ----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 106 $ 1
========= ==========
SUPPLEMENTARY INFORMATION:
Interest paid $ - $ 260
========= ==========
See notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY)
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
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 subsidiaries' 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 4 of the
Notes to the Consolidated Financial Statements.
V. COMPREHENSIVE INCOME
See Comprehensive Income in the consolidated financial statements.
VI. 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.
VII. ACCOUNTING CHANGES
For information concerning new accounting standards adopted in 2000 and 1999,
see Note 1 of the Notes to the Consolidated Financial Statements.
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
AMORTIZATION
DEFERRED FUTURE POLICY OTHER POLICY BENEFITS, OF DEFERRED
POLICY BENEFITS, LOSSES, CLAIMS AND NET LOSSES AND POLICY OTHER
ACQUISITION CLAIMS, AND UNEARNED BENEFITS PREMIUM INVESTMENT LOSS ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN
- ------- ----- ------------- -------- ------- ------- ------ -------- ----- -------- -------
Insurance:
2000 $ 252 $ 81,134 $ 11,472 $ - $ 14,611 $ 6,407 $ 11,946 $ 645 $ 3,310 $ 22,727
1999 $ 136 $ 84,282 $ 8,898 $ - $ 14,666 $ 6,089 $ 12,867 $ 386 $ 2,945 $ 21,353
1998 $ 33 $ 84,595 $ 6,453 $ - $ 18,459 $ 5,996 $ 15,677 $ 435 $ 3,823 $ 19,214
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE IV
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
- --------------------------------------------------------------------------------
CEDED ASSUMED PERCENTAGE
PROPERTY AND GROSS TO OTHER FROM OTHER NET OF ASSUMED
LIABILITY INSURANCE AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------- ------ --------- --------- ------ ------
2000 $ 19,965 $ (4,110) $ - $ 15,855 0%
1999 $ 18,832 $ (2,977) $ - $ 15,855 0%
1998 $ 16,269 $ 4,089 $ - $ 20,358 0%
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
- --------------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR
----------- ------- -------- ---------- -------
2000
Allowance for Doubtful
Accounts $ 137 $ 238 $ - $ 350
1999
Allowance for Doubtful
Accounts $ 135 $ 17 $ - $ 137
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE COMPANIES
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
RESERVE FOR AMORTIZATION
DEFERRED UNPAID CLAIMS LOSS AND LOSS OF DEFERRED PAID LOSS
POLICY AND CLAIM NET NET ADJUSTMENT EXPENSES POLICY AND LOSS
ACQUISITION ADJUSTMENT UNEARNED PREMIUMS INVESTMENT RELATED TO : (1) ACQUISITION ADJUSTMENT PREMIUMS
COSTS EXPENSES PREMIUMS EARNED INCOME CURRENT YEAR PRIOR YEAR COSTS EXPENSES(1) WRITTEN
----- -------- -------- -------- ---------- ------------ ---------- ----- ----------- --------
2000 $ 252 $ 81,134 $ 11,472 $ 14,611 $ 6,407 $ 17,829 $ (5,883) $ 645 $ 16,591 $ 22,727
1999 $ 136 $ 84,282 $ 8,898 $ 14,666 $ 6,089 $ 20,795 $ (7,928) $ 386 $ 14,449 $ 21,353
1998 $ 33 $ 84,595 $ 6,453 $ 18,459 $ 5,996 $ 19,140 $ (3,463) $ 435 $ 10,582 $ 19,214
(1) Loss and loss adjustment expenses shown net of reinsurance
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Officers of the Registrant
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2001 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 11. Executive Compensation
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2001 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2001 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2001 Annual Meeting of Shareholders is incorporated herein by
reference.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements. The following consolidated financial statements
of NCRIC Group, Inc. and subsidiaries are included herein in accordance
with Item 8 of Part II of this report.
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for the Years Ended December 31,
2000, 1999, and 1998
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 2000, 1999, and 1998
Consolidated Statements of Cash Flows for the Years Ended December 31,
2000, 1999, and 1998
Notes to Consolidated Financial Statements for the Years Ended December
31, 2000, 1999, and 1998
2. Financial Statement Schedules. The following consolidated financial
statement schedules of NCRIC Group, Inc. and subsidiaries are included
herein in accordance with Item 8 of Part II of this report.
I. Summary of Investments - Other Than Investments in Related
Parties
II. Condensed Financial Information of Registrant
III. Supplementary Insurance Information
IV. Reinsurance
V. Valuation and Qualifying Accounts
VI. Supplemental Information Concerning Property-Casualty
Insurance Companies
3. Exhibits. The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of NCRIC Group, Inc.*
3.2 Bylaws of NCRIC Group, Inc.*
4.0 Stock Certificate of NCRIC Group, Inc.*
10.3 Stock Option Plan*
10.4 Employee Stock Ownership Plan*
10.5 Stock Award Plan*
10.6 Employment Agreement between National Capital Underwriters,
Inc and R. Ray Pate, Jr.*
10.7 Amendment to Employment Agreement between NCRIC, Inc. and R.
Ray Pate, Jr.*
10.8 Employment Agreement between National Capital Underwriters,
Inc. and Stephen S. Fargis*
10.9 Employment Agreement between NCRIC Group, Inc. and Stephen S.
Fargis
10.10 Employment Agreement between NCRIC, Inc. and Rebecca B. Crunk*
10.11 Employment Agreement between NCRIC MSO, Inc. and L.E.
Shepherd, Jr.*
10.12 Employment Agreement between NCRIC MSO, Inc. and William A.
Hunter, Jr.*
10.13 Employment Agreement between NCRIC MSO, Inc. and Barry S.
Pillow*
10.14 Administrative Services Agreement*
10.15 Tax Sharing Agreement*
10.16 Operating Agreement between NCRIC Group, Inc., NCRIC MSO,
Inc., HealthCare Consulting, HCI Ventures, L.E. Shepard, Jr.,
William A. Hunter and Barry S. Pillow*
21 Subsidiaries*
23.2 Consent of Deloitte & Touche LLP
27.1 EDGAR Financial Data Schedule
(b) Reports on Form 8-K
None
* Incorporated herein by reference into this document from the Exhibits
to Form SB-2 Registration Statement, initially filed on December 23,
1998 and subsequently amended on April 15, 1999, March 12, 1999 and May
7, 1999, Registration No. 333-69537.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
NCRIC GROUP, INC.
Date: March 23, 2001 By: /s/ R. Ray Pate, Jr.
-----------------------------------
R. Ray Pate, Jr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Nelson P. Trujillo, M.D. Chair of the Board of Directors March 23, 2001
- -----------------------------
Nelson P. Trujillo, M.D.
/s/ R. Ray Pate, Jr. President, Chief Executive Officer March 23, 2001
- ----------------------------- and Director (Principal Executive
R. Ray Pate, Jr. Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 23, 2001
- ----------------------------- Financial Officer (Principal
Rebecca B. Crunk Financial and Accounting Officer)
/s/ Vincent C. Burke, III Director March 23, 2001
- ----------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman, M.D. Director March 23, 2001
- ----------------------------
Pamela W. Coleman, M.D.
/s/ Leonard M. Glassman, M.D. Director March 23, 2001
- ----------------------------
Leonard M. Glassman, M.D.
/s/ Luther W. Gray, Jr., M.D. Director March 23, 2001
- ----------------------------
Luther W. Gray, Jr., M.D.
/s/ Prudence P. Kline, M.D Director March 23, 2001
- ----------------------------
Prudence P. Kline, M.D.
/s/ Edward G. Koch, M.D. Director March 23, 2001
- ----------------------------
Edward G. Koch, M.D.
/s/ J. Paul McNamara Director March 23, 2001
- ----------------------------
J. Paul McNamara
/s/ Leonard Parver, M.D. Director March 23, 2001
- ----------------------------
Leonard Parver, M.D.
/s/ Raymond Scalettar, M.D. Director March 23, 2001
- ----------------------------
Raymond Scalettar, M.D.
/s/ David M. Seitzman, M.D. Director March 23, 2001
- ----------------------------
David M. Seitzman, M.D.
/s/ Robert L. Simmons, M.D. Director March 23, 2001
- ----------------------------
Robert L. Simmons, M.D.