U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2002
Commission File Number: 0-25505
NCRIC Group, Inc.
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District of Columbia 52-2134774
-------------------- ----------
(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)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of August 1, 2002, there
were 3,711,427 shares of NCRIC Group, Inc. common stock outstanding.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------
June 30, 2002 December 31, 2001
(unaudited)
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes $ 94,873 $ 96,723
Equity securities 6,465 6,402
--------- ---------
Total securities available for sale 101,338 103,125
OTHER ASSETS:
Cash and cash equivalents 3,416 7,565
Reinsurance recoverable 33,088 30,077
Goodwill, net 7,291 7,291
Premiums and accounts receivable 12,869 4,802
Deferred income taxes 3,797 2,482
Other assets 9,084 5,660
--------- ---------
TOTAL ASSETS $ 170,883 $ 161,002
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 61,290 $ 56,802
Loss adjustment expenses 30,208 27,758
--------- ---------
Total losses and loss adjustment expenses 91,498 84,560
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 713 2,408
Unearned premiums 25,593 17,237
Advance premium 999 4,138
Reinsurance premium payable 2,903 2,452
Bank debt 1,335 1,662
Other liabilities 2,709 4,091
--------- ---------
TOTAL LIABILITIES 125,750 116,548
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized;
3,711,427 shares issued and outstanding (net of 31,428
treasury shares) 37 37
Additional paid in capital 9,596 9,552
Unallocated common stock held by the ESOP (734) (786)
Common stock held by the stock award plan (271) (339)
Accumulated other comprehensive gain 257 474
Retained earnings 36,508 35,776
Treasury stock, at cost (260) (260)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 45,133 44,454
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 170,883 $ 161,002
========= =========
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
2002 2001 2002 2001
REVENUES:
Net premiums earned $ 6,945 $ 4,597 $ 13,511 $ 9,409
Net investment income 1,524 1,538 3,074 3,096
Net realized investment (losses) gains (574) 2 (610) 97
Practice management and related income 1,525 1,654 3,086 3,192
Other income 232 146 444 290
-------- --------- ---------- --------
Total revenues 9,652 7,937 19,505 16,084
-------- --------- ---------- --------
EXPENSES:
Losses and loss adjustment expenses 5,980 4,680 11,700 8,519
Underwriting expenses 1,530 931 3,098 2,200
Practice management expenses 1,547 1,554 3,069 2,893
Other expenses 448 338 813 666
-------- --------- ---------- --------
Total expenses 9,505 7,503 18,680 14,278
-------- --------- ---------- --------
INCOME BEFORE INCOME TAXES 147 434 825 1,806
INCOME TAX (BENEFIT) PROVISION (51) 119 93 561
-------- --------- ---------- --------
NET INCOME $ 198 $ 315 $ 732 $ 1,245
======== ========= ========== ========
OTHER COMPREHENSIVE INCOME GAIN (LOSS) $ 944 $ (338) $ (217) $ 623
-------- --------- ---------- --------
COMPREHENSIVE INCOME (LOSS) $ 1,142 $ (23) $ 515 $ 1,868
======== ========= ========== ========
Net income per common share:
Basic $ 0.06 $ 0.09 $ 0.21 $ 0.35
Diluted $ 0.05 $ 0.09 $ 0.20 $ 0.34
See notes to condensed consolidated financial statements.
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------
Six Months Ended June 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 732 $ 1,245
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses (gains) 610 (97)
Amortization and depreciation 217 353
Deferred income taxes (1,204) (709)
Stock released for coverage of benefit plans 164 144
Changes in assets and liabilities:
Reinsurance recoverable (3,011) (1,224)
Premiums and accounts receivables (8,067) (2,586)
Other assets (3,043) (1,878)
Losses and loss adjustment expenses 6,938 (207)
Retrospective premiums accrued under
reinsurance treaties (1,695) (2,269)
Unearned premiums 8,356 6,415
Advanced premium (3,139) (565)
Reinsurance premium payable 451 264
Other liabilities (1,381) (434)
-------- --------
Net cash flows used in operating activities (4,072) (1,548)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (13,184) (9,025)
Sales, maturities and redemptions of investments 14,034 12,381
Investment in purchased business -- (3,014)
Purchases of property and equipment (600) (211)
-------- --------
Net cash flows provided by investing activities 250 131
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock -- (95)
Repayment of long-term debt (327)
Proceeds from long-term debt -- 1,971
-------- --------
Net cash flows (used in) provided by financing activities (327) 1,876
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS (4,149) 459
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 7,565 3,972
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,416 $ 4,431
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 2,050 $ 2,156
======== ========
Cash paid for interest $ 36 $ 19
======== ========
See notes to condensed consolidated financial statements
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation under
accounting principles generally accepted in the United States of America.
In the opinion of management, all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have
been included.
Operating results for the three and six-month periods ended June 30, 2002
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002. These condensed consolidated financial
statements and notes should be read in conjunction with the financial
statements and notes included in the audited consolidated financial
statements of NCRIC Group, Inc. (NCRIC Group) for the year ended December
31, 2001, which were filed with the Securities and Exchange Commission on
Form 10-K.
2. Reportable Segment Information
NCRIC Group currently 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 primarily to private
practicing physicians. NCRIC Group evaluates performance based on profit or
loss from operations before income taxes. The 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 at or
for the three-month and six-month periods ended June 30, 2002 and 2001 (in
thousands):
For the Three Months At or For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Insurance
Revenues from external customers $ 7,159 $ 4,725 $ 13,919 $ 9,663
Net investment income 1,511 1,527 3,056 3,068
Net realized investment (losses) gains (574) 2 (610) 97
Depreciation and amortization 82 36 144 91
Segment profit before taxes 482 572 1,333 1,979
Segment assets 160,211 140,953
Segment liabilities 122,357 104,150
Expenditures for segment assets 409 21 583 88
Practice Management Services
Revenues from external customers $ 1,544 $ 1,675 $ 3,125 $ 3,233
Net investment income 14 13 20 32
Depreciation and amortization 36 136 73 262
Segment profit before taxes 9 128 67 358
Segment assets 9,714 9,489
Segment liabilities 4,248 3,930
Expenditures for segment assets 11 57 16 110
Total
Revenues from external customers $ 8,703 $ 6,400 $ 17,044 $ 12,896
Net investment income 1,525 1,540 3,076 3,100
Net realized investment (losses) gains (574) 2 (610) 97
Depreciation and amortization 118 172 217 353
Segment profit before taxes 491 700 1,400 2,337
Segment assets 169,925 150,442
Segment liabilities 126,605 108,080
Expenditures for segment assets 420 78 599 198
The following are reconciliations of reportable segment assets,
liabilities, revenues, net investment income, and profit before taxes to
NCRIC Group's consolidated totals (in thousands):
June 30,
--------
2002 2001
---- ----
Assets:
Total assets for reportable segments $ 169,925 $ 150,442
Elimination of intersegment receivables (961) (1,532)
Other unallocated amounts 1,919 1,102
--------- ---------
Consolidated total $ 170,883 $ 150,012
========= =========
Liabilities:
Total liabilities for reportable segments $ 126,605 $ 108,080
Elimination of intersegment payables (961) (1,532)
Other liabilities 106 98
--------- ---------
Consolidated total $ 125,750 $ 106,646
========= =========
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues from external customers:
Total revenues for reportable segments $ 8,703 $ 6,400 $ 17,044 $ 12,896
Elimination of reportable segments (1) (3) (3) (5)
-------- -------- -------- --------
Consolidated total $ 8,702 $ 6,397 $ 17,041 $ 12,891
======== ======== ======== ========
Net investment income:
Total investment income for reportable
segments $ 1,525 $ 1,540 $ 3,076 $ 3,100
Elimination of intersegment income (1) (2) (2) (4)
Other unallocated amounts -- -- -- --
-------- -------- -------- --------
Consolidated total $ 1,524 $ 1,538 $ 3,074 $ 3,096
======== ======== ======== ========
Profit before taxes:
Total profit for reportable segments $ 491 $ 700 $ 1,400 $ 1,452
Other expenses (344) (266) (575) (219)
-------- -------- -------- --------
Consolidated total $ 147 $ 434 $ 825 $ 1,233
======== ======== ======== ========
3. 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 Three Months Ended For the Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 198 $ 315 $ 732 $1,245
====== ====== ====== ======
Weighted average common
shares outstanding - basic 3,550 3,521 3,548 3,524
Dilutive effect of stock options
and awards 80 94 82 91
------ ------ ------ ------
Weighted average common
shares outstanding - diluted 3,630 3,615 3,630 3,615
====== ====== ====== ======
Net income per common share:
Basic $ 0.06 $ 0.09 $ 0.21 $ 0.35
====== ====== ====== ======
Diluted $ 0.05 $ 0.09 $ 0.20 $ 0.34
====== ====== ====== ======
4. New Accounting Pronouncement
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Amortization of
goodwill ceased upon adoption of SFAS 142 on January 1, 2002. For the six
months ended June 30, 2001, goodwill amortization was $172,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management
Services Segment. NCRIC has completed its initial goodwill impairment
testing under SFAS 142 and has concluded that the goodwill asset is not
impaired as of the date of implementation of SFAS 142.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and
financial condition of NCRIC Group should be read in conjunction with the
condensed consolidated financial statements and related notes included in this
Form 10-Q. References to "NCRIC" mean NCRIC Group and its subsidiaries,
including their predecessors.
General
The financial statements and data presented in the Form 10-Q have been
prepared in accordance with accounting principles generally accepted in the
United States of America, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
NCRIC's captive insurance subsidiary, American Captive Corporation (ACC),
developed its first protected-cell captive, the Princeton Community Hospital
Cell (Princeton Cell) in 2002. The Princeton Cell is sponsored by Princeton
Community Hospital in Princeton, West Virginia to provide an alternative source
of risk financing for its admitting physicians. The Princeton Cell has received
preliminary regulatory approval and NCRIC expects to receive final approval by
September 1, 2002.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Amortization of goodwill ceased upon
adoption of SFAS 142 on January 1, 2002. For the six months ended June 30, 2001,
goodwill amortization was $172,000.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management Services
Segment. NCRIC has completed its initial goodwill impairment testing under SFAS
142 and has concluded that the goodwill asset is not impaired as of the date of
implementation of SFAS 142.
Consolidated net income
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Net income was $198,000 for the three months ended June 30, 2002 compared
to $315,000 for the three months ended June 30, 2001. Net realized investment
losses, after tax, for the second quarter of 2002 totaled $379,000 compared to
net realized investment gains of $1,000 for the second quarter of 2001.
Operating earnings for the three months ended June 30, 2002 were $577,000
compared to $314,000 for the same period in 2001. Total revenue was up 22% for
the quarter compared to the same quarter in 2001. Excluding net realized
investment gains and losses, second quarter 2002 revenue was 29% ahead of the
second quarter of 2001. The higher revenue was offset by an increase in loss and
loss adjustment expenses, principally in development of losses on claims
reported in prior years, and in underwriting expenses.
NCRIC holds $650,000 of WorldCom bonds in its $100 million investment
portfolio. NCRIC believes that a reduction in value of this investment in
WorldCom is an "other than temporary" decline in value under the provisions of
SFAS 115, and accordingly is refected as a loss in the income statement rather
than a reduction in market value in accumulated other comprehensive gain. The
after-tax loss on WorldCom bonds in the second quarter was $524,000 or $0.14 per
share on a basic and diluted basis.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Net income totaled $732,000 for the six months ended June 30, 2002 compared
to $1.2 million for the six months ended June 30, 2001. Net realized investment
losses, after tax, for the first half of 2002 totaled $403,000 compared to net
realized investment gains of $64,000 for the first half of 2001. Operating
earnings for the six months ended June 30, 2002 were $1.1 million, $46,000 less
than the same period in 2001. Total revenue increased 21% for the six months
ended June 30, 2002 compared to June 30, 2001. Excluding net realized investment
gains and losses, revenue for the first half of 2002 was 26% ahead of the first
half of 2001. The higher revenue was offset by an increase in loss and loss
adjustment expense, principally in development of losses on claims reported in
prior years, and in underwriting expenses.
Segment results
The operating results of NCRIC's insurance segment for the three months and
six months ended June 30, 2002 were primarily driven by the following factors.
NCRIC continued to experience a significant increase in new business written in
2002. For the six months ended June 30, 2002, new business written was $6.6
million, up $1.8 million or 38%, from $4.8 million for the same six month period
in 2001. The rise in new business written, coupled with the increased premium
rates for new business written in 2002 as well as for existing policies in
force, resulted in an increase in net premiums earned. The strain on current
period earnings as a result of the large increase in new business written,
coupled with investment yield declines, resulted in pressure on short-term
profitability. A reduction in the frequency of claims resulted in a decrease in
current year losses for the three months ended June 30, 2002. Although the
frequency of claims for the six months ended June 30, 2002 was also lower than
expected, this was offset by a rise in the cost of settling claims and resulted
in an increase in current year losses compared to the same period in 2001.
NCRIC's practice management segment had a decrease in net income primarily
as a result of an increase in expenses during 2002 compared to 2001 combined
with a slight decrease in client revenue. Expense increases are primarily
associated with the transition of client service for two of the former owners as
they move towards the expiration of their employment contracts at
the end of 2002 and other transitional costs associated with the continued
integration of the purchased companies. These expense increases were partially
offset by a reduction of expense due to the implementation of SFAS 142 which
eliminates goodwill amortization beginning January 1, 2002.
Net premiums earned
New programs - In 2002 NCRIC initiated a program to provide insurance
coverage to physicians at four HCA hospitals in West Virginia. Under this
arrangement, NCRIC cedes 100% of the insurance exposure to a captive insurance
company affiliated with the sponsoring hospitals. NCRIC receives a ceding
commission for providing complete policy underwriting, claims and administrative
services for these policies. While accounting standards require the premium
written to be included as a part of NCRIC's direct written premium, NCRIC has no
net written nor net earned premium from this program.
In anticipation of the initiation of the Princeton Protected Cell within
ACC, some insurance has been underwritten by NCRIC in the first half of 2002 for
policies that will be 100% reinsured by the Princeton Cell when it becomes
active. The Princeton Cell is sponsored by the Princeton Community Hospital in
Princeton, West Virginia to provide an alternative source of risk-financing for
its admitting physicians. The premium amounts for these policies are separately
identified in the following premium comments to aid comparisons.
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Net premiums earned increased by $2.3 million, 50%, to $6.9 million from
$4.6 million for the three months ended June 30, 2002 and 2001, respectively.
The increase is primarily reflective of the increase in policies in force as the
result of net new business written combined with the increases in base premium
rates. Net premiums earned in the second quarter include $69,000 for business
related to the Princeton Cell program described above.
Gross premiums written of $5.7 million for the three months ended June 30,
2002 increased by $800,000 from $4.9 million for the three months ended June 30,
2001, due to net new business written combined with the premium rate increase
effective January 1, 2002.The following chart shows new business written for the
second quarter (in 000's):
Three Months Ended
June 30,
--------------------
2002 2001
---- ----
Direct $ 176 $ 92
Agent 1,469 1,931
HCA 103 -0-
Princeton Cell 273 -0-
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Net premiums earned increased by 44% to $13.5 million from $9.4 million for
the six months ended June 30, 2002 and 2001, respectively. The increase is
primarily reflective of the increase in policies in force as the result of net
new business written combined with the increase in premium rates. Due to the
2001 decision not to provide a renewal premium credit for 2002 renewals, net
premiums earned increased $245,000 for the first six months of 2002 compared to
the same period of 2001. Additionally, net premiums earned through June 30,
2002, includes a decrease of $618,000 from the June 30, 2001 level due to
favorable loss development in the hospital-sponsored retrospectively rated
programs. Under these programs, additional premiums are either earned or
returned based on a group's adverse or favorable loss experience. Net premiums
earned in the first half of 2002 include $70,000 for business related to the
Princeton Cell program described above
Gross premiums written of $28.6 million for the six months ended June 30,
2002 increased by $9.0 million from $19.6 million for the six months ended June
30, 2001, due to net new business written combined with the premium rate
increase. The following chart shows new premium written through the second
quarter (in 000's):
Six Months Ended
June 30,
--------------------
2002 2001
---- ----
Direct $ 526 $ 437
Agent 5,420 4,322
HCA 379 -0-
Princeton Cell 282 -0-
The distribution of premium written shows notable growth in NCRIC's market
areas outside of the District of Columbia. NCRIC continues to maintain strict
underwriting standards as it expands its business. The following chart
illustrates the components of gross premium written by state for the periods
ended June 30, 2002 and 2001.
Six Months Ended June 30,
---------------------------------------------
(amounts in thousands)
2002 2001
---- ----
District of Columbia $15,153 53% $12,635 64%
Virginia 5,799 20% 2,788 14%
Maryland 3,684 13% 3,319 17%
West Virginia 3,297 12% 554 3%
Delaware 655 2% 329 2%
------- ------- ------- -------
$28,588 100% $19,625 100%
Premium collection litigation. During 2000, it was determined that one of
NCRIC's hospital-sponsored retrospective programs would not be renewed. In
accordance with the terms of the contract, in 2000 NCRIC billed the hospital
sponsor $1.3 million, and an additional $700,000 was billed during the first six
months of 2002 based on the actual accumulated loss experience of the terminated
program. As a result of the amount billed in 2002, written premium for the first
half of 2002 increased by a net amount of $372,000 over the same period in 2001
while net earned premium was unaffected by the billing.
Because the original 2000 bill was not paid when due, NCRIC initiated legal
proceedings to collect. NCRIC has filed a motion for summary judgment, which has
not yet been decided. The hospital sponsor, which stopped admitting patients in
May 2002, has been unwilling to settle the case. Since the amount due to NCRIC
is significant, NCRIC will use all means legally available to collect the amount
it is due. Although NCRIC believes that it will prevail, since the premium
amount is disputed, an allowance for uncollectibility has been established and
is included in underwriting expense. Additionally, legal fees incurred through
the six month period ended June 30, 2002 for this action were approximately
$250,000 higher than in the same period in 2001. The discovery portion of the
litigation is complete; litigation legal fees are expected to be significantly
less in the following quarters of 2002 while awaiting judicial decision. If
NCRIC's motion for summary judgment is not granted, additional legal fees will
be incurred for the trial stage of litigation later in 2002. The ultimate
outcome cannot be determined at this time.
Net investment income
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Net investment income decreased by $14,000 for the three months ended June
30, 2002 compared to the second quarter of 2001 due to a decrease in yields
partially offset by an increase in invested funds. The average effective yield
was approximately 5.61% for the three months ended June 30, 2002 and 6.02% for
the three months ended June 30, 2001. The tax equivalent yield was approximately
6.22% for the second quarter of 2002 and 6.55% for the second quarter of 2001.
The decrease in investment yields reflects the market decrease in interest rates
in 2002 compared to 2001.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Net investment income decreased by $22,000 for the six months ended June
30, 2002 compared to the first six months of the prior year due to a decrease in
yields partially offset by an increase in invested funds. Average invested
assets, which include cash equivalents, were higher in the first six months of
2002 by $4.8 million compared to the same period of 2001. The average effective
yield was approximately 5.67% for the six months ended June 30, 2002 and 5.97%
for the six months ended June 30, 2001. The tax equivalent yield was
approximately 6.26% for the first six months of 2002 and 6.46% for the first six
months of 2001. The decrease in investment yields reflects the market decrease
in interest rates in 2002 compared to 2001.
Practice management and related income
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Practice management 42% 42%
Accounting 25% 24%
Tax & personal financial planning 15% 15%
Retirement plan accounting & admin 15% 11%
Other 3% 8%
--- ---
Total 100% 100%
=== ===
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Practice management and related revenue of $1.5 million for the three
months ended June 30, 2002 is lower by $129,000 compared to the three months
ended June 30, 2001. The decreased revenue was a result of a reduced level of
non-recurring consulting assignments compared to 2001.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Practice management and related revenue of $3.1 million for the six months
ended June 30, 2002 is down from $3.2 million for the six months ended June 30,
2001. The decreased revenue was a result of a reduced level of non-recurring
consulting assignments compared to 2001.
Loss and loss adjustment expenses and combined ratio results
NCRIC continues to experience pressure from the rise in severity of losses,
and it continues to take a cautious approach in evaluating reserves. The expense
for incurred losses and LAE net of reinsurance is summarized as follows (in
thousands):
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
2002 2001 2002 2001
---- ---- ---- ----
Incurred loss and LAE related to:
Current year - losses .................. $ 4,844 $ 5,688 $ 10,855 $ 10,719
Prior years - development..... ......... 1,136 (1,008) 845 (2,200)
----- ------ --- ------
Total incurred for the period ..................... $ 5,980 $ 4,680 $ 11,700 $ 8,519
======== ======== ======== =======
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums earned:
Six Months Ended June 30,
-------------------------
2002 2001
---- ----
Loss and LAE ratio................. 86.6% 90.5%
Underwriting expense ratio......... 22.9% 23.4%
Combined ratio..................... 109.5% 113.9%
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Total incurred loss and LAE expense of $6.0 million for the second quarter
of 2002 increased by $1.3 million from the $4.7 million incurred for the second
quarter of 2001. The decrease in current year losses to $4.8 million for the
second quarter of 2002 reflects a decrease in frequency of reported losses. The
adverse development of losses reported in prior years reflects the continuing
upward pressure of severity of losses as noted in previous reports. Prior year
development results from the re-estimation and settlement of individual losses
not covered by reinsurance, which generally are losses under $500,000.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Total incurred loss and LAE expense of $11.7 million for the first six
months of 2002 increased by $3.2 million from the $8.5 million incurred for the
first six months of 2001. The increase in current year losses to $10.9 million
for the first six months of 2002 reflects a decrease in frequency of reported
claims combined with a rise in the cost of settling claims. The adverse
development of losses reported in prior years reflects the continuing upward
pressure of severity of losses as noted previously.
The combined ratio of 109.5% for the six months ended June 30, 2002
compared to 113.9% for the first six months of 2001 reflects the reduced
frequency of claims and higher level of premiums combined with the increase in
severity of claims reported initially in previous years, as noted above. The
lower underwriting expense component reflects the stable level of core
underwriting expenses coupled with the higher level of premiums.
Expenses
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Underwriting expenses of $1.5 million for the three months ended June 30,
2002 compare to $931,000 for the three months ended June 30, 2001. The increase
in expenses results from increases in commissions, premium taxes, and
administrative costs related to the increased level of business, particularly
agent produced business. Additional costs were incurred in 2002 related to
software maintenance contracts.
Practice management and related expenses were $1.5 million for the three
months ended June 30, 2002 and $1.6 million for the three months ended June 30,
2001. Expenses increased due to: expenses related to the integration of the
human resources function, with an improvement in the employee benefits package;
expenses associated with the transition of client service for two of the former
owners as they move towards the expiration of their employment contracts at the
end of 2002; and interest expense on debt incurred related to the contingent
purchase payments made in 2001 to the prior owners of HealthCare Consulting,
Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc. These increases
were offset by reduced goodwill amortization as the result of implementing SFAS
142 as mentioned previously.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $448,000 for the three months ended June 30, 2002 compare to
$338,000 for the three months ended June 30, 2001. Other expenses for the second
quarter of 2002 include an increase of $17,000 for start-up for the new captive
insurance company subsidiary and increased holding company expenses.
Six months ended June 30, 2002 compared to six months ended June 30, 2001
Underwriting expenses increased $900,000 to $3.1 million for the six months
ended June 30, 2002 from $2.2 million for the six months ended June 30, 2001. In
addition to the increase in legal fees associated with the premium collection
litigation discussed previously, the increase in expenses results from
additional costs incurred in 2002 related to software maintenance contracts and
increases in commissions, premium taxes, and administrative costs related to the
increased level of business.
Practice management and related expenses were $3.1 million for the six
months ended June 30, 2002 and $2.9 million for the six months ended June 30,
2001. Expenses increased due to: expenses related to the integration of the
human resources function, with an improvement in the employee benefits package;
expenses for information technology infrastructure upgrades; expenses associated
with the transition of client service for two of the former owners as they move
towards the expiration of their employment contracts at the end of 2002; and
interest expense on debt incurred related to the contingent purchase payments
made in 2001 to the prior owners of HealthCare Consulting, Inc., HCI Ventures,
LLC, and Employee Benefits Services, Inc. These increases were partially offset
by reduced goodwill amortization as the result of implementing SFAS 142 as
mentioned previously.
Other expenses include amounts for subsidiary and holding company
operations, which are not directly related to the issuance of medical
professional liability insurance or practice management operations. Other
expenses of $813,000 for the six months ended June 30, 2002 compare to $666,000
for the six months ended June 30, 2001. Expense increases are for captive
start-up costs and holding company costs.
Federal income taxes
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income. The lower effective rate for
2002 compared to 2001 is principally a result of (1) the impact of the goodwill
amortization provision of SFAS 142; prior to 2002 some goodwill amortization was
not deductible for tax purposes, causing an increase to the effective tax rate;
and (2) the impact of the net realized investment losses in 2002.
Financial condition, liquidity and capital resources
Liquidity. The primary sources of 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.
For the six months ended June 30, 2002, NCRIC had negative cash flows from
operations of $4.1 million compared to negative cash flows from operations of
$1.5 million for thecorresponding period of 2001. The $2.6 million of decreased
cash flow results primarily from a change in the timing of receipt of premiums.
Prior to 2002, a majority of insureds financed their annual premium through an
outside financing company, which then remitted the full annual premium to NCRIC
at the beginning of the policy year. For policies with 2002 effective dates, the
majority of policyholders financed their premium directly with NCRIC. This has
the impact of spreading the cash receipts from premiums over the policy year.
Because of the long-term nature of both the payments of claims and the
settlement of swing-rated reinsurance premiums due to the reinsurers, cash from
operations for a medical professional liability insurer like NCRIC can vary
substantially from year to year.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in government
and tax-exempt securities. As of June 30, 2002, the carrying value of the
securities portfolio was $101.3 million. The portfolio was invested as follows:
At June 30, At December 31,
2002 2001
---- ----
U. S. Government and agencies ............. 4% 4%
Asset and mortgage-backed securities....... 27 29
Tax-exempt securities ..................... 29 19
Corporate bonds ........................... 34 42
Equity securities ......................... 6 6
Over 70% of the portfolio was invested in U.S. Government/agency securities
or had a rating of AAA or AA. For regulatory purposes, 91% of the securities
portfolio was rated "Class 1" for all periods presented, which is the highest
quality rated group as classified by the NAIC.
The $2.5 million line of credit available as of June 30, 2002 is restricted
to working capital for claims settlements. The line of credit is unsecured and
renewable annually. NCRIC has not drawn down on this facility. NCRIC has no
material commitments for capital expenditures.
Under terms of the purchase agreement between NCRIC and the previous owners
of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits
Services, Inc., additional purchase payments could be paid in cash if the
acquired companies achieved earnings targets. During 2001, $3.1 million was paid
according to this agreement. NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust
Bank to finance these payments. The term of the loan is three years at a
floating rate of LIBOR plus two and three-quarter percent. At June 30, 2002, the
interest rate was 4.65%. Principal and interest payments are due on a monthly
basis.
Effects of inflation
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 losses and LAE reserve levels and NCRIC's
ratemaking process adequately incorporate the effects of inflation.
Safe Harbor 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 and their related impact on the value of
securities;
o NCRIC, Inc.'s concentration in a single line of business principally in the
mid-Atlantic region (previously this risk factor solely indentified NCRIC,
Inc's concentration in a single line of business principally in the
District of Columbia);
o the impact of decreasing revenues to healthcare providers;
o the impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o uncertainties inherent in the valuation of goodwill from the practice
management segment or other acquired businesses;
o uncertainties associated with expanding business,
including uncertainties associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best Company;
o the availability of bank financing and reinsurance;
o the mutual insurance 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's results of operations.
Item 3. 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 June 30, 2002, fixed maturity securities comprise
94% of total investments at market value. U.S. Government and agencies and
tax-exempt bonds represent 34% 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.
At June 30, 2002, NCRIC's fixed maturities were valued at $752,000 above
amortized cost. At December 31, 2001, the value of the portfolio was $1.0
million above amortized cost.
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 61% of the portfolio
is Treasury or Agency related or rated AAA, the highest rating for a security.
During the six months ended June 30, 2002, there was a change in the
allocation of NCRIC's portfolio increasing the percentage of tax-exempt bonds to
30% of the total fixed maturity securities compared to 19% at December 31, 2001.
Management of NCRIC, along with NCRIC's external investment managers, seeks to
maximize after-tax yields while minimizing portfolio credit risk. The decision
to reallocate the portfolio as funds became available was based on this goal.
PART II OTHER INFORMATION
Item 1. Legal proceedings.
See the Form 10-K for the fiscal year ended December 31, 2001 for
information on pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of NCRIC Group, Inc. took place on May
9, 2002.
(b) The following directors were elected and received the following votes:
Number of Votes
---------------
Name For Withheld
---- --- --------
Vincent Burke, III 3,532,241 33,772
Pamela Coleman 3,531,741 34,272
Prudence P. Kline 3,531,741 34,272
J. Paul McNamara 3,532,241 33,772
The following directors continued in office:
Martin W. Dukes R. Ray Pate, Jr.
Leonard Glassman Raymond Scalettar
Luther W. Gray David M. Seitzman
Edward G. Koch Robert L. Simmons
Leonard M. Parver Nelson P. Trujillo
Item 6. Exhibits and Reports on Form 8-K.
Exhibit 99.1 - Certification
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
August 14, 2002 /s/ R. Ray Pate, Jr.
- --------------- ------------------------
Date R. Ray Pate, Jr.,
Chief Executive Officer
August 14, 2002 /s/ Rebecca B. Crunk
- --------------- ------------------------
Date Rebecca B. Crunk,
Chief Financial Officer