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 March 31, 2003
Commission File Number: 0-25505
[GRAPHIC OMITTED] NCRIC Group, Inc.
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
-------------------------------------------------
(Address of principal executive offices) (Zip Code)
202-969-1866
------------
(Issuer's telephone number, including area code)
Indicate by check mark 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 by check mark whether the registrant is an accelerated filer(as
defined in Rule 12b-2 of the Exchange Act.
Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 1, 2003, there
were 3,708,399 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)
- ------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
ASSETS (unaudited)
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes (Amortized cost $128,002 and $110,309) $ 132,011 $ 114,696
Equity securities (Book value $0 and $5,561) 35 5,424
--------- ---------
Total securities available for sale 132,046 120,120
OTHER ASSETS:
Cash and cash equivalents 18,829 10,550
Reinsurance recoverable 43,433 43,231
Goodwill, net 7,291 7,291
Premiums and accounts receivable, net 16,740 9,477
Deferred income taxes 4,426 3,789
Other assets 8,820 8,229
--------- ---------
TOTAL ASSETS $ 231,585 $ 202,687
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 73,370 $ 70,314
Loss adjustment expenses 35,014 33,708
--------- ---------
Total losses and loss adjustment expenses 108,384 104,022
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 607 607
Unearned premiums 38,739 24,211
Advance premium 171 2,971
Reinsurance premium payable 4,481 5,045
Bank debt 823 995
Trust Preferred Securities 15,000 15,000
Investment purchase obligations 9,752 --
Other liabilities 5,342 2,019
--------- ---------
TOTAL LIABILITIES 183,299 154,870
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized; 3,708,399
shares issued and outstanding (net of 34,456 treasury
shares) 37 37
Additional paid in capital 9,663 9,630
Unallocated common stock held by the ESOP (656) (682)
Common stock held by the stock award plan (169) (202)
Accumulated other comprehensive income 2,669 2,806
Retained earnings 37,032 36,518
Treasury stock, at cost (290) (290)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 48,286 47,817
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,585 $ 202,687
========= =========
See notes to condensed consolidated financial statements.
2
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE DATA)
- -----------------------------------------------------------------------------------------
Three Months Ended March 31,
2003 2002
REVENUES:
Net premiums earned $ 11,449 $ 6,566
Net investment income 1,322 1,550
Net realized investment gains (losses) 199 (36)
Practice management and related income 1,375 1,561
Other income 353 212
-------- --------
Total revenues 14,698 9,853
-------- --------
EXPENSES:
Losses and loss adjustment expenses 9,583 5,720
Underwriting expenses 2,471 1,568
Practice management and related expenses 1,403 1,522
Interest expense on Trust Preferred Securities 201 --
Other expenses 442 365
-------- --------
Total expenses 14,100 9,175
-------- --------
INCOME BEFORE INCOME TAXES 598 678
-------- --------
INCOME TAX PROVISION 84 144
-------- --------
NET INCOME $ 514 $ 534
======== ========
OTHER COMPREHENSIVE LOSS (137) (1,161)
-------- --------
COMPREHENSIVE INCOME (LOSS) $ 377 $ (627)
======== ========
Net income per common share:
Basic:
Average shares outstanding 3,578 3,547
-------- --------
Earnings Per Share $ 0.14 $ 0.15
======== ========
Diluted:
Weighted average shares outstanding 3,578 3,547
Dilutive effect of stock options 72 83
-------- --------
Weighted average shares outstanding -diluted 3,650 3,630
-------- --------
Earnings Per Share $ 0.14 $ 0.15
======== ========
See notes to condensed consolidated financial statements.
3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
Three Months Ended March 31,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 514 $ 534
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses (gains) (199) 36
Amortization and depreciation 234 99
Deferred income taxes (569) (854)
Stock released for coverage of benefit plans 92 85
Changes in assets and liabilities:
Reinsurance recoverable (202) (1,383)
Premiums and accounts receivable (7,263) (9,672)
Other assets (630) 348
Losses and loss adjustment expenses 4,362 3,932
Retrospective premiums accrued under
reinsurance treaties -- (150)
Unearned premiums 14,528 13,375
Advance premium (2,800) (3,472)
Reinsurance premium payable (564) (1,193)
Other liabilities 2,907 89
-------- --------
Net cash flows provided by operating activities 10,410 1,774
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (44,757) (6,280)
Sales, maturities and redemptions of investments 42,882 5,734
Purchases of property and equipment (83) (179)
-------- --------
Net cash flows used in investing activities (1,958) (725)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (173) (163)
-------- --------
Net cash flows used in financing activities (173) (163)
-------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS 8,279 886
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,550 7,565
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 18,829 $ 8,451
======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ -- $ --
======== ========
Interest paid $ 211 $ 18
======== ========
See notes to condensed consolidated financial statements.
4
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-month period ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003. 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, 2002, which were
filed with the Securities and Exchange Commission on Form 10-K.
2. Reportable Segment Information
NCRIC Group 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 period ended March 31, 2003 and 2002 (in thousands):
At or For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Insurance
Revenues from external customers $11,729 $6,760
Net investment income 1,287 1,545
Depreciation and amortization 204 62
Segment profit before taxes 1,056 851
Segment assets 219,575 165,043
Segment liabilities 166,674 127,801
Expenditures for segment assets 49 174
5
At or For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Practice Management Services
Revenues from external customers $1,397 $1,581
Net investment income 3 6
Depreciation and amortization 301 37
Segment profit (loss) before taxes (5) 58
Segment assets 8,403 9,645
Segment liabilities 2,915 4,175
Expenditures for segment assets 5 5
Total
Revenues from external customers $ 13,126 $8,341
Net investment income 1,290 1,551
Depreciation and amortization 234 99
Segment profit before taxes 1,051 909
Segment assets 227,978 174,688
Segment liabilities 169,589 131,976
Expenditures for segment assets 54 179
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):
At or For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Assets:
Total assets for reportable segments $ 227,978 $174,688
Elimination of intersegment receivables (1,653) (1,998)
Elimination of affiliate receivables 698 1,052
Other unallocated amounts 4,562 209
--------- --------
Consolidated total $ 231,585 $173,951
========= ========
Liabilities:
Total liabilities for reportable segments $ 169,589 $131,976
Elimination of intersegment payables (1,653) (1,998)
Other liabilities 15,363 60
--------- --------
Consolidated total $ 183,299 $130,038
========= ========
Revenues from external customers:
Total revenues for reportable segments $ 13,126 $ 8,341
Other income 53 --
Elimination of intersegment revenues (2) (2)
--------- --------
Consolidated total $ 13,177 $ 8,339
========= ========
6
At or For the Three Months
Ended March 31,
---------------
2003 2002
---- ----
Net investment income:
Total investment income for
reportable segments $ 1,290 $ 1,551
Other investmentincome 33 --
Elimination of intersegment income (1) (1)
------- -------
Consolidated total $ 1,322 $ 1,550
======= =======
Profit before taxes:
Total profit for reportable segments $ 1,051 $ 909
Other expenses (453) (231)
------- -------
Consolidated total $ 598 $ 678
======= =======
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 March 31,
---------------
2003 2002
---- ----
Net income $ 514 $ 534
====== ======
Weighted average common
shares outstanding - basic 3,578 3,547
Dilutive effect of stock options
and awards 72 83
------ ------
Weighted average common
shares outstanding - diluted 3,650 3,630
====== ======
Net income per common share:
Basic $ 0.14 $ 0.15
====== ======
Diluted $ 0.14 $ 0.15
====== ======
Earnings per share is calculated by dividing the net income by the weighted
average shares outstanding.
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").
7
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.
NCRIC's goodwill asset resulted from the 1999 acquisition of three
businesses which now operate as divisions of the Practice Management
Services Segment.
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.
There have been no material changes to our accounting policies during the
first quarter. Following is a condensed summary of key financial concepts and of
those accounting policies which we believe to be the most critical. That is,
these are most important to the portrayal of our financial condition and results
of operations and they require management's most complex judgments, including
the need to make estimates about the effect of insurance losses and other
matters that are inherently uncertain.
Premium income. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Net premiums
written are adjusted by any amount which has been billed but not yet earned
during the period in arriving at earned premiums. Extended reporting
endorsements premium is earned in the same period it is written.
For several large groups of policyholders, we have insurance programs where
the premiums are retrospectively determined based on losses during the period.
Under all of the current programs, the full premium level is determined and
billed at the inception of the policy term. The premium level could potentially
be reduced and a premium refund made if the program loss experience is
favorable.
Reserves for losses and loss adjustment expenses. We write one line of
business, medical professional liability. Losses and LAE reserves are estimates
of future payments for reported claims and related expenses of adjudicating
claims with respect to insured events that have occurred in the past. The change
in these reserves from period to period is reflected as an increase or decrease
to our losses and LAE.
8
Medical professional liability losses and LAE reserves are established
based on an estimate of these future payments as reflected in our past
experience with similar cases and historical trends involving claim payment
patterns. Reserving for medical professional liability claims is a complex and
uncertain process, requiring the use of informed estimates and judgments.
Although we intend to estimate conservatively our future payments relating to
losses incurred, there can be no assurance that currently established reserves
will prove adequate in light of subsequent actual experience. Losses and LAE
expenses as stated in the statement of operations are reported net of
reinsurance recoveries.
Reinsurance. We manage our exposure to individual claim losses, annual aggregate
losses, and LAE through our reinsurance program. Reinsurance allows us to obtain
indemnification against a specified portion of losses associated with insurance
policies we have underwritten by entering into a reinsurance agreement with
other insurance enterprises or reinsurers. We pay or cede part of our
policyholder premium to reinsurers. The reinsurers in return agree to reimburse
us for a specified portion of any claims covered under the reinsurance contract.
While reinsurance arrangements are designed to limit losses from large exposures
and to permit recovery of a portion of direct losses, reinsurance does not
relieve us of liability to our insureds.
Investment portfolio. Our investment portfolio is composed principally of fixed
maturity securities classified as available-for-sale. All securities with gross
unrealized losses at the balance sheet date are evaluated for evidence of
other-than-temporary impairment, on a quarterly basis. We write down to fair
value any security with an impairment that is deemed to be other-than-temporary
in the period the determination is made. The assessment of whether such
impairment has occurred is based on management's case-by-case evaluation of the
underlying reasons for the decline in fair value. The evaluation for
other-than-temporary impairments is a quantitative and qualitative process
involving judgments which is subject to risks and uncertainties. The risks and
uncertainties include changes in general economic conditions, the issuer's
financial condition and the effects of changes in interest rates.
Goodwill. Our goodwill asset, $7.3 million as of March 31, 2003, resulted from
the 1999 acquisition of three businesses which now operate as divisions of the
Practice Management Services Segment. We completed our initial goodwill
impairment testing under SFAS 142 and concluded that the goodwill asset was not
impaired as of the date of implementation of SFAS 142, nor was it impaired as of
March 31, 2003.
Three months ended March 31, 2003 compared to three months ended March 31, 2002
Consolidated net income
Net income was $514,000 for the three months ended March 31, 2003 compared
to $534,000 for the three months ended March 31, 2002. Total revenue for the
quarter of $14.7 million was up 49% compared to the same quarter in 2002. The
higher revenue was offset by increases in loss and loss adjustment expenses,
underwriting expenses, and interest expense.
Our insurance segment experienced a significant increase in new business
written during 2002 which resulted in a rise in net premiums earned during the
first quarter of 2003 as
9
compared to first quarter of 2002, in addition to the additional premiums
stemming from 2003 business and rate increases. The profitability of a medical
professional liability insurance policy is designed to emerge over a period of
years rather than in the year the policy is written; profits are designed to
accrue through investment income on the invested premiums and through successful
settlement of claims. Therefore, the large increase in new business written over
the past year causes a strain on current period earnings. In addition, earnings
were impacted by reduced net investment income because of lower market yields
and by an increase in underwriting expense resulting from a fraudulent action of
a former sales agent.
Our practice management segment produced decreased revenue primarily in
non-recurring consulting assignments. Lower revenue was partially offset by
decreased expense levels, principally resulting from the late 2002 retirement of
two senior consultants.
Net premiums earned
Net premiums earned increased by $4.9 million, or 74.2%, to $11.5 million
from $6.6 million for the three months ended March 31, 2003 and 2002,
respectively. The increase is primarily reflective of 1) the change in the risk
retention level from $500,000 under the 2002 reinsurance program to $1 million
in 2003 coupled with 2) the increases in premium rates effective with 2003
renewals, which average 29%, and 3) an increase in premium earned for extended
reporting endorsements issued. Extended reporting endorsements premium is earned
in the same period it is written. Additionally, net premiums earned for the
first quarter of 2003 increased by $451,000 from the March 31, 2002 level due to
unfavorable loss development in the hospital-sponsored retrospectively rated
programs in the first quarter of 2003. Under these programs, additional premiums
are either earned or returned based on a group's adverse or favorable loss
experience.
Gross premiums written of $29.4 million for the three months ended March
31, 2003 increased from $22.9 million for the three months ended March 31, 2002
due to the increase in premium rates, the increase in extended reporting
endorsements, and net new business written, as noted above. The extended
reporting endorsement premium written for the first quarter of 2003 totaled $1.6
million compared to the first quarter 2002 total of $243,000. The increase is
primarily attributable to one group of physicians that added this endorsement to
their expiring policies as they entered into their own captive insurance
program.
The overall level of new business produced in the first quarter of 2003 is
lower than for the first quarter of 2002 due to a decision to slow sales in the
first quarter while we determined our capital availability for 2003 growth.
Following is a table displaying the new business produced in the first quarter
of 2003 and 2002.
Three Months Ended March 31,
----------------------------
2003 2002
---- ----
Direct $ 166,000 $ 350,000
Agent 1,259,000 4,238,000
As the business produced by agents continues to be a significant source of
gross premium written, the distribution of written premium shows notable growth
in our market areas outside of the District of Columbia. The following chart
illustrates the components of gross premium written by state for the first
quarter of 2003 compared to the same period in 2002.
10
Three Months Ended March 31,
----------------------------------------------------
(amounts in thousands)
2003 2002
--------------------- -----------------------
District of Columbia $15,965 54% $13,091 57%
Virginia 5,364 18% 3,671 16%
Maryland 4,583 16% 3,130 14%
West Virginia 2,692 9% 2,690 12%
Delaware 793 3% 266 1%
------- --- ------- ---
$29,397 100% $22,848 100%
======= === ======= ===
Premium collection litigation. During 2000, it was determined that one of
our hospital-sponsored retrospective programs would not be renewed. In
accordance with the terms of the contract, in 2000 we billed the hospital
sponsor $1.3 million, and an additional $700,000 was billed in January 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 quarter of
2002 increased $429,000.
Because the original 2000 bill was not paid when due, we initiated legal
proceedings to collect. In April, 2003, the trial court denied summary judgment
motions for both parties with respect to the calculation of the retrospective
premium. The hospital has also filed certain counterclaims alleging breach of
contract and tortuous conduct. The trial court dismissed one aspect of the
counterclaim but left the bulk of the issues raised by both sides for resolution
at trial. No trial date has been set. Since the amount due us is significant, we
will use all means legally available to collect the amount we are due. Although
we believe that it will prevail, since the premium amount is disputed, an
allowance for uncollectibility was established and in the third quarter of 2002
was increased to cover the full amount of the receivable. The discovery portion
of the litigation is complete; legal fees are expected to be incurred later in
2003 for the trial stage of litigation. The ultimate outcome cannot be
determined at this time.
Net investment income
Net investment income decreased by $228,000 for the three months ended
March 31, 2003 compared to the first quarter of 2002 due to a decrease in yields
partially offset by an increase in average invested funds. The average effective
yield was approximately 3.91% for the three months ended March 31, 2003 and
5.69% for the three months ended March 31, 2002. The tax equivalent yield was
approximately 4.43% for the first quarter of 2003 and 6.26% for the first
quarter of 2002. In addition to the impact of the decline in market yields in
the first quarter of 2003, investment income was reduced as a result of the
first quarter 2003 portfolio restructuring undertaken by our new investment
portfolio manager. The primary objectives of the restructuring were to eliminate
securities with credit concerns and to reallocate holdings to be more consistent
with the investment objective of an investment grade portfolio.
11
Net realized investment gains (losses)
The first quarter of 2003 included net realized gains of $334,000 resulting
from some portfolio restructuring done by our new investment portfolio manager,
partially offset by the recognition of an other than temporary impairment of
$135,000 on an investment in common stock. The circumstance giving rise to the
other than temporary impairment charge was a sharp decline in the value of the
stock in 2003 which we do not expect to be temporary based on available
financial information of the issuer.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services for the following categories of services: practice management,
accounting, tax and personal financial planning, retirement plan accounting and
administration, and other services.
Practice management and related revenue of $1.4 million for the three
months ended March 31, 2003 is down $186,000 compared to $1.6 million for the
three months ended March 31, 2002. The decrease occurred primarily in one-time
consulting assignments in the HealthCare Consulting division, consistent with
declines experienced in the latter part of 2002.
Loss and loss adjustment expenses and combined ratio results
The expense for incurred losses and LAE net of reinsurance is summarized as
follows (in thousands):
Three Months Ended
March 31,
---------
2003 2002
---- ----
Incurred loss and LAE related to:
Current year - losses....................... $ 9,733 $ 6,011
Prior years - development................... (150) (291)
------- --------
Total incurred for the period.................... $ 9,583 $ 5,720
======= ========
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
Three Months Ended
March 31,
---------
2003 2002
---- ----
Loss and LAE ratio.......................... 83.7% 87.1%
Underwriting expense ratio.................. 21.6% 23.9%
Combined ratio.............................. 105.3% 111.0%
Total incurred loss and LAE expense of $9.6 million for the first quarter
of 2003 increased by $3.9 million from the $5.7 million incurred for the first
quarter of 2002. The increase in current year losses to $9.7 million for the
first quarter of 2003 reflects the increase in the level of exposure as a result
of expanding business combined with a rise in the cost of resolving claims. The
favorable development of losses reported in prior years reflects the favorable
experience on the claims closed during the quarter, partially offset by the
continuing upward pressure of severity of losses as noted previously. Prior
years development results from the re-estimation and settlement of individual
losses not covered by reinsurance, which generally are losses under $500,000.
12
The combined ratio of 105.3% for the three months ended March 31, 2003
reflects the higher level of earned premiums in relation to the increase in loss
and loss adjustment expenses and the stable level of core underwriting expenses.
Underwriting expenses in the first quarter of 2003 include $364,000 stemming
from a fraudulent act of a former sales agent, as discussed in the following
Expenses section. This expense item added 3.2 points to the first quarter
underwriting expense ratio.
Expenses
Underwriting expenses of $2.5 million for the three months ended March 31,
2003 increased by $903,000 from $1.6 million for the three months ended March
31, 2002. The increase in expenses results primarily from increases in
commissions and other expenses associated with the increased level of business,
particularly agent produced business. Additionally, in the first quarter of 2003
we incurred an expense of $364,000 as a result of a fraudulent act of a former
sales agent. Although we believe it is reasonably possible that we could incur
additional expense as a result of the fraudulent act, the amount or timing of
the expense is not reasonably estimable at this time.
Practice management and related expenses totaled $1.4 million for the three
months ended March 31, 2003 and $1.6 million for the three months ended March
31, 2002. Expenses decreased due to the elimination of the client service
transition expenses associated with the termination of employment of two of the
former owners at the termination of their employment contracts at the end of
2002.
Interest expense in 2003 is on the Trust Preferred Securities issued in
December 2002. This debt carries interest at 400 basis points over 3-month
LIBOR. The effective annual rate at March 31, 2003 is 5.34%.
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 $442,000 for the three months ended March 31, 2003 compare to
$365,000 for the three months ended March 31, 2002.
Federal income taxes
The effective tax rate for NCRIC at 14% for the three months ended March
31, 2003 and 21% for 2002, is lower than the federal statutory rate principally
due to nontaxable investment income. The lower rate for 2003 compared to 2002 is
principally a result of an increase in investments in tax-exempt securities and
a decrease in pre-tax income compared to the quarter ended March 31, 2002.
13
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 three months ended March 31, 2003, we had cash flows from
operations of $10.4 million compared to $1.8 million for the corresponding
period of 2002. The $8.6 million of increased cash flow results primarily from
higher net premium receipts. This increased cash flow from premiums was
partially offset by higher payments for claims and LAE. 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 period to
period.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in corporate
and tax-exempt securities. As of March 31, 2003, the carrying value of the
securities portfolio was $132.0 million. The portfolio was invested as follows:
At March 31, At December 31,
2003 2002
---- ----
U. S. Government and agencies.................... 20% 23%
Asset and mortgage-backed securities............. 38 28
Tax-exempt securities............................ 25 27
Corporate bonds.................................. 17 17
Equity securities................................ - 5
At March 31, 2003, over 85% of the portfolio was invested in U.S.
Government and agency securities or had a rating of AAA or AA. For regulatory
purposes, 98% of the securities portfolio was rated "Class 1", which is the
highest quality rated group as classified by the NAIC. The accumulated other
comprehensive income totaled $2.7 million at March 31, 2003, compared to $2.8
million at December 31, 2002. At March 31, 2003, the gross unrealized investment
gains totaled $4.2 million and the gross unrealized investment losses totaled
$148,000, with no concentration of unrealized loss in any security or industry.
NCRIC has no material commitments for capital expenditures.
During 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to
finance the contingent purchase payments from the 1999 acquisition of three
companies. The term of the loan is three years at a floating rate of LIBOR plus
one and one-half percent. At March 31, 2003, the interest rate was 2.84%.
Principal and interest payments are due on a monthly basis.
In December, 2002, NCRIC Group issued trust preferred securities in the
amount of $15 million in a pooled transaction to unrelated investors. This debt
has a maturity of 30 years, and bears interest at an annual rate equal to
three-month LIBOR plus 4.0%, payable quarterly beginning March 4, 2003. Interest
is adjusted on a quarterly basis provided that prior to
14
December 4, 2007, this interest rate shall not exceed 12.50% The debt is
callable by NCRIC Group at par beginning December 4, 2007.
Effects of inflation
The primary effect of inflation 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 our results cannot be conclusively known until
claims are ultimately settled. Based on actual results to date, we believe that
losses and LAE reserve levels and our ratemaking process adequately incorporate
the effects of inflation.
Forward-Looking Information
A number of statements made in this document are forward-looking statements
which involve known and unknown risks and uncertainties which may cause our
actual results to be materially different from historical results or from the
results expressed or implied by the forward-looking statements. These
forward-looking statements are subject to significant risks, assumptions and
uncertainties, including, among other things, the following important factors
that could affect the actual outcome of future events:
o general economic conditions, either nationally or in our market area, that
are worse than expected;
o inflation and changes in the interest rate environment and performance of
financial markets;
o adverse changes in the securities markets;
o changes in laws or government regulations affecting medical professional
liability insurance and practice management and financial services;
o NCRIC, Inc.'s concentration in a single line of business;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o changes to our ratings assigned by A.M. Best;
o the cost and availability of reinsurance;
o our ability to successfully integrate acquired entities;
o changes in accounting policies and practices, as may be adopted by our
regulatory agencies and the Financial Accounting Standards Board; and
o changes in our organization, compensation and benefit plans.
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
Our investment portfolio is exposed to various market risks, including
interest rate and equity price risk. Market risk is the potential for financial
losses due to the decrease in the value or price of an asset resulting from
broad movements in prices. At March 31, 2003, fixed maturity securities comprise
99% of total investments at market value. U.S. Government and tax-exempt bonds
represent 44% of the fixed maturity securities. Equity securities, consisting
15
of common stock, account for the remainder of the investment portfolio. We have
classified our investments as available for sale.
Because of the high percentage of fixed maturity securities, interest rate
risk represents the highest exposure we have on our investment portfolio. In
general, the market value of our fixed maturity portfolio increases or decreases
in an inverse relationship with fluctuation in interest rates. During periods of
rising interest rates, the fair value of our investment portfolio will generally
decline resulting in decreases in our stockholders' equity. Conversely, during
periods of falling interest rates, the fair value of our investment portfolio
will generally increase resulting in increases in our stockholders' equity. In
addition, our net investment income increases or decreases in a direct
relationship with interest rate changes on monies reinvested from maturing
securities and investments of positive cash flow from operating activities.
Interest rates have continued at a low level during the first three months
of 2003. Interest rate levels combined with the first quarter 2003 portfolio
restructuring resulted in a slight decrease in the value of our fixed maturity
portfolio. At March 31, 2003, our portfolio was valued at $4.0 million above
amortized cost. At December 31, 2002, the value of the portfolio was $4.3
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, our investment portfolio of fixed maturity
securities consists primarily of intermediate-term, investment-grade securities.
Our investment policy also provides that all security purchases be limited to
rated securities or unrated securities approved by management on the
recommendation of our investment advisor. Approximately 78% of the portfolio is
Treasury or Agency related or rated AAA, the highest rating for a security.
During the three months ended March 31, 2003, there was a change in the
allocation of our portfolio increasing the percentage of asset and mortgage
backed securities to 39% of the total fixed maturity securities compared to 28%
at December 31, 2002. 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 recommended
by the new portfolio manager was based on this goal.
Item 4. Controls and Procedures
The Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days prior to the filing date of this
report, that the disclosure controls and procedures (as defined in Securities
Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. There have been no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the foregoing evaluation.
17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
See the Form 10-K for the fiscal year ended December 31, 2002 for
information on pending litigation.
Item 6. Exhibits and Reports on Form 8-K.
None
18