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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, 2003
Commission File Number: 0-25505
[LOGO](SM)
NCRIC Group, Inc.
Delaware 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 August 1,
2003, there were 6,921,845 shares of NCRIC Group, Inc. common stock outstanding.
1
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, 2003 December 31, 2002
(unaudited)
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes (Amortized cost $155,750
and $110,309) $ 160,301 $ 114,696
Equity securities (Book value $3,791 and $5,561) 3,819 5,424
--------- ---------
Total securities available for sale 164,120 120,120
OTHER ASSETS:
Cash and cash equivalents 13,967 10,550
Reinsurance recoverable 47,421 43,231
Goodwill, net 7,296 7,291
Premiums and accounts receivable, net 14,037 9,477
Deferred income taxes 4,294 3,789
Other assets 8,306 8,229
--------- ---------
TOTAL ASSETS $ 259,441 $ 202,687
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 76,386 $ 70,314
Loss adjustment expenses 36,055 33,708
--------- ---------
Total losses and loss adjustment expenses 112,441 104,022
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 607 607
Unearned premiums 33,634 24,211
Advance premium 1,231 2,971
Reinsurance premium payable 2,791 5,045
Bank debt 646 995
Trust Preferred Securities 15,000 15,000
Investment purchase obligations 3,770 --
Other liabilities 4,512 2,019
--------- ---------
TOTAL LIABILITIES 174,632 154,870
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 12,000,000 shares authorized;
6,921,845 shares issued and outstanding at June 30, 2003;
3,708,399 shares issued and outstanding (net of 34,456
treasury shares) at December 31, 2002 69 37
Preferred stock $0.01 par value - 1,000,000 shares authorized,
0 shares issued -- --
Additional paid in capital 48,891 9,630
Unallocated common stock held by the ESOP (2,702) (682)
Common stock held by the stock award plan (1,791) (202)
Accumulated other comprehensive income 3,022 2,806
Retained earnings 37,320 36,518
Treasury stock, at cost -- (290)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 84,809 47,817
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 259,441 $ 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 June 30, Six Months Ended June 30,
2003 2002 2003 2002
REVENUES:
Net premiums earned $ 10,962 $ 6,945 $ 22,411 $ 13,511
Net investment income 1,389 1,524 2,711 3,074
Net realized investment gains (losses) 1,155 (574) 1,354 (610)
Practice management and related income 1,277 1,525 2,652 3,086
Other income 360 232 713 444
--------- --------- --------- ---------
Total revenues 15,143 9,652 29,841 19,505
--------- --------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses 10,355 5,980 19,938 11,700
Underwriting expenses 2,234 1,530 4,705 3,098
Practice management expenses 1,289 1,547 2,692 3,069
Interest expense on Trust Preferred Securities 204 -- 405 --
Other expenses 395 448 837 813
--------- --------- --------- ---------
Total expenses 14,477 9,505 28,577 18,680
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 666 147 1,264 825
INCOME TAX PROVISION (BENEFIT) 124 (51) 208 93
--------- --------- --------- ---------
NET INCOME $ 542 $ 198 $ 1,056 $ 732
========= ========= ========= =========
OTHER COMPREHENSIVE INCOME (LOSS) 353 944 216 (217)
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 895 $ 1,142 $ 1,272 $ 515
========= ========= ========= =========
Net income per common share:
Basic:
Average shares outstanding 6,660 6,626 6,669 6,623
--------- --------- --------- ---------
Earnings per Share $ 0.08 $ 0.03 $ 0.16 $ 0.11
========= ========= ========= =========
Diluted:
Weighted average shares outstanding 6,660 6,626 6,669 6,623
Dilutive effect of stock options 157 150 146 153
--------- --------- --------- ---------
Weighted average shares outstanding - diluted 6,817 6,776 6,815 6,776
--------- --------- --------- ---------
Earnings per Share $ 0.08 $ 0.03 $ 0.15 $ 0.11
========= ========= ========= =========
See notes to condensed consolidated financial statements.
3
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------------
Six Months Ended June 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,056 $ 732
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment (gains) losses (1,354) 610
Amortization and depreciation 552 217
Deferred income taxes (616) (1,204)
Stock released for coverage of benefit plans 191 164
Changes in assets and liabilities:
Reinsurance recoverable (4,190) (3,011)
Premiums and accounts receivables (4,560) (8,067)
Other assets (424) (3,043)
Losses and loss adjustment expenses 8,419 6,938
Retrospective premiums accrued under
reinsurance treaties -- (1,695)
Unearned premiums 9,423 8,356
Advanced premium (1,740) (3,139)
Reinsurance premium payable (2,254) 451
Other liabilities 2,493 (1,381)
--------- ---------
Net cash flows provided by (used in) operating activities 6,996 (4,072)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (121,722) (13,184)
Sales, maturities and redemptions of investments 82,857 14,034
Purchases of property and equipment (149) (600)
--------- ---------
Net cash flows (used in) provided by investing activities (39,014) 250
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from public stock offering 35,784 --
Repayment of long-term debt (349) (327)
--------- ---------
Net cash flows (used in) provided by financing activities 35,435 (327)
--------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS 3,417 (4,149)
--------- ---------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 10,550 7,565
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 13,967 $ 3,416
========= =========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 1,200 $ 2,050
========= =========
Cash paid for interest $ 421 $ 36
========= =========
See notes to condensed consolidated financial statements.
4
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements for the three and six month
periods ended June 30, 2003 - 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, 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. Second Step Conversion and Public Offering
On June 24, 2003, a plan of conversion and reorganization was approved by
the members of NCRIC, A Mutual Holding Company and by the shareholders of
NCRIC Group, Inc. In the conversion and related stock offering, the Mutual
Holding Company offered for sale its 60% ownership interest in NCRIC
Group. As a result of the conversion and stock offering, the Mutual
Holding Company ceased to exist, and NCRIC Group became a fully public
company.
In the conversion and stock offering, 4,143,701 shares of the common stock
of NCRIC Group were sold to Eligible Members, Employee Benefit Plans,
Directors, Officers and Employees and to members of the general public in
a Subscription and Community Offering at $10.00 per share. The
Subscription stock offering period expired on June 16, 2003. All stock
purchase orders received in the offering were satisfied.
As part of the conversion, 2,778,144 shares were issued to the former
public stockholders of NCRIC Group. The exchange ratio was 1.8665 new
shares for each share of NCRIC Group held by public stockholders as of the
close of business on June 25, 2003. Accordingly, after the conversion,
NCRIC Group has 6,921,845 shares outstanding. For the earnings per share
calculations, the share amounts for periods prior to the conversion and
stock offering have been revised to reflect the share exchange ratio
applied in the conversion. Prior year share data within the consolidated
balance sheet has not been revised for the exchange ratio applied in the
conversion. The issuance of the shares of common stock in the subscription
and community offering and in the exchange offering to existing
stockholders was registered on Form S-1 filed with the SEC (No.
333-104023), which registration statement was declared effective on May
14, 2003.
5
The net proceeds of the offering have been deployed as follows:
o 75% has been added to the capital of NCRIC, Inc.,
o 9% has been used to provide loans to the employee stock ownership
plan and stock award plan to fund the purchase of shares of common
stock in the offering, and
o the remaining amount has been retained for general corporate
purposes.
The reconciliation of gross to net proceeds is as follows (in thousands):
Gross offering proceeds $ 41,437
Less: offering expenses 1,924
--------
Net proceeds 39,513
Less: ESOP loan (2,072)
Stock Award Plan loan (1,657)
--------
Net proceeds as adjusted $ 35,784
========
The composition of shares after the second step conversion and public offering
is as follows (in thousands):
Issued in the conversion and stock offering 4,144
Issued to former public shareholders of NCRIC Group 2,778
--------
Total shares issued June 25, 2003 6,922
ESOP loan shares (270)
Stock Award Plan loan shares (179)
--------
Net shares outstanding as of June 25, 2003 6,473
========
3. 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.
6
Selected financial data is presented below for each business segment at or
for the three-month and six-month periods ended June 30, 2003 and 2002 (in
thousands):
For the Three Months At or For the Six
ended June 30, Months Ended June 30,
-------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Insurance
Revenues from external customers $ 11,248 $ 7,159 $ 22,977 $ 13,919
Net investment income 1,379 1,511 2,666 3,056
Net realized investment gains (losses) 1,136 (574) 1,340 (610)
Depreciation and amortization 277 82 481 144
Segment profit before taxes 1,105 482 2,161 1,333
Segment assets 241,735 160,211
Segment liabilities 158,048 122,357
Expenditures for segment assets 50 409 99 583
Practice Management Services
Revenues from external customers $ 1,298 $ 1,544 $ 2,695 $ 3,125
Net investment income 2 14 5 20
Net realized investment gains (losses) -- -- -- --
Depreciation and amortization 31 36 61 73
Segment profit before taxes 8 9 3 67
Segment assets 9,229 9,714
Segment liabilities 3,736 4,248
Expenditures for segment assets 15 11 20 16
Total
Revenues from external customers $ 12,546 $ 8,703 25,672 $ 17,044
Net investment income 1,381 1,525 2,671 3,076
Net realized investment gains (losses) 1,136 (574) 1,340 (610)
Depreciation and amortization 308 118 542 217
Segment profit before taxes 1,113 491 2,164 1,400
Segment assets 250,964 169,925
Segment liabilities 161,784 126,605
Expenditures for segment assets 65 420 119 599
7
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,
-----------------------
2003 2002
--------- ---------
Assets:
Total Assets for reportable segments $ 250,964 $ 169,925
Elimination of intersegment receivables (2,555) (961)
Other unallocated amounts 11,032 1,919
--------- ---------
Consolidated total $ 259,441 $ 170,883
========= =========
Liabilities:
Total liabilities for reportable segments $ 161,784 $ 126,605
Elimination of intersegment payables (2,555) (961)
Other liabilities 15,403 106
--------- ---------
Consolidated total $ 174,632 $ 125,750
========= =========
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------- ---------------------
2003 2002 2003 2002
-------- -------- -------- --------
Revenues from external customers:
Total revenues for reportable segments $ 12,546 $ 8,703 $ 25,672 $ 17,044
Elimination of reportable segments (3) (1) (5) (3)
Other revenues 56 -- 109 --
-------- -------- -------- --------
Consolidated total $ 12,599 $ 8,702 $ 25,776 $ 17,041
======== ======== ======== ========
Net investment income:
Total investment income for reportable
segments $ 1,381 $ 1,525 $ 2,671 $ 3,076
Elimination of intersegment income (1) (1) (2) (2)
Other investment income 9 -- 42 --
-------- -------- -------- --------
Consolidated total $ 1,389 $ 1,524 $ 2,711 $ 3,074
======== ======== ======== ========
Profit before taxes:
Total profit for reportable segments $ 1,113 $ 491 $ 2,164 $ 1,400
Other expenses (447) (344) (900) (575)
-------- -------- -------- --------
Consolidated total $ 666 $ 147 $ 1,264 $ 825
======== ======== ======== ========
4. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
8
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2003 2002 2003 2002
------- ------- ------- -------
Net income $ 542 $ 198 $ 1,056 $ 732
======= ======= ======= =======
Weighted average common
Shares outstanding - basic 6,660 6,626 6,669 6,623
Dilutive effect of stock options
and awards 157 150 146 153
------- ------- ------- -------
Weighted average common
Shares outstanding - diluted 6,817 6,776 6,815 6,776
======= ======= ======= =======
Net income per common share:
Basic $ 0.08 $ 0.03 $ 0.16 $ 0.11
======= ======= ======= =======
Diluted $ 0.08 $ 0.03 $ 0.15 $ 0.11
======= ======= ======= =======
Earnings per share is calculated by dividing the net income by the weighted
average shares outstanding. For the earnings per share calculations, the share
amounts for periods prior to the conversion and stock offering have been revised
to reflect the share exchange ratio applied in the conversion. Prior year share
data within the consolidated balance sheet has not been revised for the exchange
ratio applied in the conversion.
9
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 this 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
six months ended June 30, 2003. 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 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.
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.
10
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
contracts. 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 are 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 June 30, 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
June 30, 2003.
Consolidated net income
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Net income was $542,000 for the three months ended June 30, 2003 compared
to $198,000 for the three months ended June 30, 2002. Net realized investment
gains, after tax, for the second quarter of 2003 totaled $762,000 compared to
net realized investment losses of $379,000, after tax, for the second quarter of
2002. Total revenue was up 57% for the quarter compared to the same quarter in
2002. Excluding net realized investment gains and losses, second quarter 2003
revenue was 37% ahead of the second quarter of 2002. The higher revenue was
offset by an increase in loss and loss adjustment expenses, principally for
losses on claims reported in 2003, interest on Trust Preferred Securities, and
underwriting expenses.
NCRIC held $650,000 of WorldCom bonds in its portfolio as of June 30,
2002. In the second quarter of 2002 the company recognized an "other than
temporary" decline in value under the provisions of SFAS 115, and accordingly
recorded an after-tax loss on WorldCom bonds in the second quarter of $524,000.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net income totaled $1.1 million for the six months ended June 30, 2003
compared to $732,000 for the six months ended June 30, 2002. Net realized
investment gains, after tax, for the first half of 2003 totaled $894,000
compared to net realized investment losses of $403,000, after tax.
11
for the first half of 2002. Total revenue increased 53% for the six months ended
June 30, 2003 compared to June 30, 2002. Excluding net realized investment gains
and losses, revenue for the first half of 2003 was 42% ahead of the first half
of 2002. The higher revenue was offset by an increase in loss and loss
adjustment expense, interest on Trust Preferred Securities, and underwriting
expenses.
Segment results
The results of our insurance segment for the three months and six months
ended June 30, 2003 were primarily driven by the significant increase in new
business written. 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. The
increase in new business written, coupled with the increased premium rates for
new business written in 2003 as well as for existing policies in force, resulted
in an increase in net premiums earned. However, the strain on current period
earnings as a result of the large increase in new business written in 2002 and
2003, coupled with investment yield declines and an increase in severity on
losses reported in 2003, resulted in pressure on short-term profitability.
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
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Net premiums earned increased by $4.1 million, 59%, to $11.0 million from
$6.9 million for the three months ended June 30, 2003 and 2002, respectively.
The increase is primarily reflective of the increase in business in force as a
result of the growth from new premium written, increases in premium rates
effective with 2003 renewals, which average 29%, and the change in risk
retention level from $500,000 to $1 million effective January 1, 2003.
Gross premiums written of $9.2 million for the three months ended June 30,
2003 increased by $3.5 million or 61% compared to the three months ended June
30, 2002, as the result of net new business written combined with the premium
rate increase effective January 1, 2003. The following chart shows new premium
written for the second quarter (in 000's):
Three Months Ended
June 30,
------------------------
2003 2002
------- -------
Direct $ 161 $ 176
Agent 2,729 1,845
New premium written in the second quarter of 2003 exceeded the level written in
the same quarter of 2002 by 43%.
12
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net premiums earned increased by 66% to $22.4 million from $13.5 million
for the six months ended June 30, 2003 and 2002, respectively. The increase is
primarily reflective of 1) the growth in business in force resulting from the
new premium written, 2) the increases in premium rates effective with 2002 and
2003 renewals, which average 16% and 29%, respectively, 3) the change in risk
retention level from $500,000 to $1 million in 2003,and 4) an increase in
premium earned for extended reporting endorsements issued. Extended reporting
endorsements premium is earned in the same period as it is written.
Additionally, net premiums earned through June 30, 2003, includes an increase of
$225,000 from the June 30, 2002 level due to unfavorable 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.
Gross premiums written of $38.6 million for the six months ended June 30,
2003 increased by $10 million or 35% over the six months ended June 30, 2002,
due to net new business written, which is new business net of lost business,
combined with the premium rate increases. The following chart shows new business
written through the second quarter (in 000's):
Six Months Ended
June 30,
------------------------
2003 2002
------- -------
Direct $ 327 $ 526
Agent 3,988 6,081
For the six months ended June 30, 2003, new business written totaled $4.3
million. The overall level of new business produced in the first six months of
2003 is lower than for the first six months of 2002 due to a decision to slow
sales in the first quarter while we determined our capital availability for 2003
growth.
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, 2003 and 2002 (in 000's).
Six Months Ended June 30
-----------------------------------------
2003 2002
------------------- -------------------
District of Columbia $ 17,432 45% $ 15,153 53%
Virginia 8,862 23% 5,799 20%
Maryland 6,242 16% 3,684 13%
West Virginia 3,131 8% 3,297 12%
Delaware 2,963 8% 655 2%
-------- ------ -------- ------
$ 38,630 100% $ 28,588 100%
======== ====== ======== ======
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.
13
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; approximately $132,000 in legal fees were
incurred during the second quarter of 2003, and additional 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
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Net investment income decreased by $135,000 for the three months ended
June 30, 2003 compared to the second quarter of 2002 due to a decrease in yields
partially offset by an increase in invested funds. The average effective yield
was approximately 4.03% for the three months ended June 30, 2003 and 5.61% for
the three months ended June 30, 2002. The tax equivalent yield was approximately
4.62% for the second quarter of 2003 and 6.22% for the second quarter of 2002.
The decrease in investment yields reflects the market decrease in interest rates
in 2003 compared to 2002 in addition to the impact from the portfolio
restructuring executed in the first half of 2003.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Net investment income decreased by $363,000 for the six months ended June
30, 2003 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
2003 by $29 million compared to the same period of 2002. The average effective
yield was approximately 3.96% for the six months ended June 30, 2003 and 5.67%
for the six months ended June 30, 2002. The tax equivalent yield was
approximately 4.51% for the first six months of 2003 and 6.26% for the first six
months of 2002. The decrease in investment yields reflects the market decrease
in interest rates in 2003 compared to 2002 in addition to the impact from the
portfolio restructuring executed in the first half of 2003. Securities sold as a
part of the restructuring generally had above market rate coupon rates and were
therefore sold at gains. New securities acquired brought current market rate
yields into the portfolio thereby reducing the overall portfolio yield.
Net realized investment gains (losses)
Three months ended June 30, 2003 compared to three months ended June 30, 2002
The second quarter of 2003 included net realized gains of $1.2 million
resulting from the continuation of the portfolio restructuring initiated by our
new fixed income investment portfolio manager beginning in the first quarter.
The portfolio restructuring was performed for the primary purpose of improving
the overall credit quality of the portfolio and secondarily to
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improve the structure of the portfolio through diversification of credits and to
shorten average duration.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
The first six months of 2003 included net realized gains of $1.4 million
resulting from 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. The second quarter of 2002
included realized losses of $610,000 which were due to an "other than temporary"
decline in value under the provisions of SFAS 115, of WorldCom bonds in the
amount of $794,000 partially offset by other realized gains.
Practice management and related income
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.
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Practice management and related revenue of $1.3 million for the three
months ended June 30, 2003 is lower by $248,000 compared to the three months
ended June 30, 2002. The decreased revenue was a result of a reduced level of
one-time consulting assignments compared to 2002 primarily in the HealthCare
Consulting division, consistent with the declines experienced in the latter part
of 2002.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Practice management and related revenue of $2.7 million for the six months
ended June 30, 2003 is down from $3.1 million for the six months ended June 30,
2002. The decreased revenue was a result of a reduced level of one-time
consulting assignments compared to 2002 as discussed above.
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 Six Months Ended
June 30, June 30,
-------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- --------
Incurred loss and LAE related to:
Current year - losses $ 10,507 $ 4,844 $ 20,240 $ 10,855
Prior years - development (152) 1,136 (302) 845
-------- -------- -------- --------
Total incurred for the period $ 10,355 $ 5,980 $ 19,938 $ 11,700
======== ======== ======== ========
15
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums earned:
Six Months Ended
June 30,
--------------------
2003 2002
-------- --------
Loss and LAE ratio 89.0% 86.6%
Underwriting expense ratio 21.0% 22.9%
Combined ratio 110.0% 109.5%
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Total incurred loss and LAE expense of $10.4 million for the second
quarter of 2003 increased by $4.4 million from the $6.0 million incurred for the
second quarter of 2002. The increase in current year losses to $10.5 million for
the second quarter of 2003 reflects 1) the expanded level of exposure as a
result of expanding business combined with 2) a rise in the cost of resolving
claims and 3) losses associated with the increase in retained losses under
reinsurance treaties from $500,000 to $1,000,000 as of January 1, 2003. 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. Prior years 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, 2003 compared to six months ended June 30, 2002
Total incurred loss and LAE expense of $19.9 million for the first six
months of 2003 increased by $8.2 million from the $11.7 million incurred for the
first six months of 2002. The increase in current year losses to $20.2 million
and the favorable development of prior year losses for the first six months of
2003 is consistent with those issues discussed above.
The combined ratio of 110.0% for the six months ended June 30, 2003
compared to 109.5% for the first six months of 2002 reflects the higher level of
earned premiums in relation to the increase in loss and loss adjustment
expenses, the increase in severity in current year losses, and the stable level
of core underwriting expenses.
Expenses
Three months ended June 30, 2003 compared to three months ended June 30, 2002
Underwriting expenses of $2.2 million for the three months ended June 30,
2003 compare to $1.5 million for the three months ended June 30, 2002. 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.
Practice management and related expenses were $1.3 million for the three
months ended June 30, 2003 and $1.5 million for the three months ended June 30,
2002. Expenses decreased primarily due to the elimination of the client service
transition expenses associated with the expiration of two employment contracts
at the end of 2002.
16
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 June 30, 2003 is 5.28%.
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 $395,000 for the three months ended June 30, 2003 compare to
$448,000 for the three months ended June 30, 2002.
Six months ended June 30, 2003 compared to six months ended June 30, 2002
Underwriting expenses increased $1.6 million to $4.7 million for the six
months ended June 30, 2003 from $3.1 million for the six months ended June 30,
2002. 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. 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 $2.7 million for the six
months ended June 30, 2003 and $3.1 million for the six months ended June 30,
2002. Expenses decreased primarily due to the elimination of the client service
transition expenses associated with the termination of employment of two of the
former owners at the expiration 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 June 30, 2003 is 5.28%.
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 $837,000 for the six months ended June 30, 2003 compare to $813,000
for the six months ended June 30, 2002. Expense increases are primarily for
holding company costs.
Federal income taxes
The effective tax rate for NCRIC at 16% for the six months ended June 30,
2003 and 11% for 2002, is lower than the federal statutory rate principally due
to nontaxable investment income. The higher rate for 2003 compared to 2002 is
principally a result of capital gains recognized in 2003 and an increase in
pre-tax income compared to the six months ended June 30, 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.
17
For the six months ended June 30, 2003, we had cash flows from operations of
$7.0 million compared to $4.1 million used in operations for the corresponding
period of 2002. The $11.1 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.
Second Step Conversion and Public Offering. On June 24, 2003, a plan of
conversion and reorganization was approved by the members of NCRIC, A Mutual
Holding Company and by the shareholders of NCRIC Group, Inc. In the conversion
and related stock offering, the Mutual Holding Company offered for sale its 60%
ownership interest in NCRIC Group. As a result of the conversion and stock
offering, the Mutual Holding Company ceased to exist, and NCRIC Group became a
fully public company.
In the conversion and stock offering, 4,143,701 shares of the common stock of
NCRIC Group were sold to Eligible Members, Employee Benefit Plans, Directors,
Officers and Employees and to members of the general public in a Subscription
and Community Offering at $10.00 per share. The Subscription stock offering
period expired on June 16, 2003. All stock purchase orders received in the
offering were satisfied.
As part of the conversion, 2,778,144 shares were issued to the former public
stockholders of NCRIC Group. The exchange ratio was 1.8665 new shares for each
share of NCRIC Group held by public stockholders as of the close of business on
June 25, 2003. Accordingly, after the conversion, NCRIC Group has 6,921,845
shares outstanding. Please see Note 2 in the notes to condensed consolidated
financial statements - unaudited, for additional information.
Financial condition and capital resources. Cash flow from operations, the
proceeds from the stock offering and the proceeds of maturing investments have
primarily been invested in Treasury securities, mortgage-backed, corporate and
tax-exempt fixed income securities. Additionally, in late June a strategic
allocation was made to large-cap and mid-cap equity securities which resulted in
the 2% equity allocation as of June 30, 2003.
As of June 30, 2003, the carrying value of the securities portfolio was
$164.1 million. The portfolio was invested as follows:
At June 30, At December 31,
2003 2002
----------- ---------------
U. S. Government and agencies .................. 18% 23%
Asset and mortgage-backed securities ........... 41 28
Tax-exempt securities .......................... 21 27
Corporate bonds ................................ 18 17
Equity securities .............................. 2 5
At June 30, 2003, over 84% 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 fixed income securities portfolio was rated "Class 1",
which is the highest quality rated group as classified by the NAIC. The
accumulated other comprehensive income totaled $3.0 million at June 30, 2003,
compared to $2.8 million at December 31, 2002. At June 30, 2003, the gross
unrealized
18
investment gains totaled $4.9 million and the gross unrealized investment losses
totaled $358,000, 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 June 30, 2003, the interest rate was 2.62%.
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 December 4, 2007, this
interest rate shall not exceed 12.50%. The debt is callable by NCRIC 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;
19
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 our 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 June 30, 2003, fixed maturity securities comprise
98% of total investments at market value. U.S. Government and tax-exempt bonds
represent 21% of the fixed maturity securities. Equity securities, consisting 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 six months
of 2003. Interest rate levels resulted in an increase in the value of our fixed
maturity portfolio. At June 30, 2003, our portfolio was valued at $4.6 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 six months ended June 30, 2003, there was a change in the
allocation of our portfolio increasing the percentage of asset and mortgage
backed securities to 41% 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.
One common measure of the interest sensitivity of fixed maturity securities is
effective
20
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 millions)
----------------- ------------ -------------
-300 0.96% $182,807
-200 1.96% 175,305
-100 2.96% 168,803
Current Yield** 3.96% 160,301
100 4.96% 152,799
200 5.96% 145,297
300 6.96% 137,795
** Current yield is as of June 30, 2003.
Item 4. Controls and Procedures
Under the supervision and with the participation of the Company's
management, including the Chief Executive Officer and Chief Financial Officer,
the Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this quarterly
report. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period covered by this
quarterly report, the Company's disclosure controls and procedures are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits 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 changes
in the Company's internal controls over financial reporting during the most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, these controls over financial reporting.
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 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of NCRIC Group, Inc. took place
on June 24, 2003.
(b) The following directors were elected and received the following
votes:
21
Number of Votes
Name For Withheld
---- --------- ----------
Leonard M. Glassman 2,989,676 8,814
Stuart A. McFarland 2,989,676 8,814
R. Ray Pate, Jr 2,997,290 1,200
David M. Seitzman 2,989,676 8,814
The following directors continued in office:
Vincent C. Burke, III Martin W. Dukes, Jr.
Pamela W. Coleman Luther W. Gray, Jr.
Prudence P. Kline Edward G. Koch
J. Paul McNamara Leonard M. Parver
Nelson P. Trujillo
(c) Other actions taken along with the votes received were:
Number of Votes
------------------------------
For Against Abstain
--------- --------- ---------
1. Adoption of the NCRIC Group, Inc. 2003 Stock Award Plan 2,988,156 10,334 -0-
2. Adoption of the NCRIC Group, Inc. 2003 Stock Option Plan 2,989,156 9,334 -0-
3. Adoption of the Plan of Conversion & Reorganization 2,995,490 -0- 3,000
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 31.1 and 31.2 - Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
(b) Exhibit 32 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(c) Filings on Form 8-K during the quarter ending June 30, 2003:
1) On May 16, 2003 the Company filed a Form 8-K pursuant to Item
5 announcing the approval by the Commissioner of Insurance of
the Plan of Conversion and the commencement of the offering.
2) On June 25, 2003 the Company filed a Form 8-K pursuant to Item
5 announcing the completion of the Plan of Conversion and
Reorganization of NCRIC, A Mutual Holding Company by the
respective Boards of Directors of the Company and NCRIC, A
Mutual Holding Company, the mutual holding company parent of
the Company and the secondary public offering.
22
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, 2003 /s/ R. Ray Pate, Jr.
----------------------------------------
R. Ray Pate, Jr.,
President & Chief Executive Officer
(Duly Authorized Officer)
August 14, 2003 /s/ Rebecca B. Crunk
----------------------------------------
Rebecca B. Crunk,
Sr. Vice President & Chief Financial Officer
(Principal Financial Officer)
23