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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
For the quarterly period ended March 31, 1999
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the transition period from _______________ to _______________
Commission File Number: 333-69537
NCRIC Group, Inc.
- - --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
District of Columbia 52-2134774
- - ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
------------------
(Issuer's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes No X
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 1, 1999, there were 1,000 shares of NCRIC Group, Inc. common stock
outstanding.
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Table of Contents
Part I -- Financial Information
Item 1.Condensed Consolidated Financial Statements (unaudited)
NCRIC Group, Inc. and Subsidiaries:
Condensed Consolidated Balance Sheets ........................... 3
Condensed Consolidated Statements of Operations ................. 4
Condensed Consolidated Statements of Comprehensive Income ....... 5
Condensed Consolidated Statements of Cash Flows ................. 6
Notes to Condensed Consolidated Financial Statements ............ 7
Item 2.Management's Discussion and Analysis ............................. 11
Part II -- Other Information
Item 6.Exhibits and Reports on Form 8-K ................................. 19
Signatures ................................................................ 20
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE DATA)
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<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
(unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 93,429 $ 91,135
Preferred stocks 5,184 5,213
-------- --------
Total securities available for sale 98,613 96,348
Investments in management service organizations 18 --
-------- --------
Total investments 98,631 96,348
OTHER ASSETS:
Cash and cash equivalents 8,514 6,083
Reinsurance recoverable 25,777 24,944
Goodwill 5,096 --
Deferred federal income taxes 3,511 2,742
Other assets 6,957 4,209
-------- --------
TOTAL ASSETS $148,486 $134,326
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 62,787 $ 60,127
Loss adjustment expenses 27,919 27,573
-------- --------
Total losses and loss adjustment expenses 90,706 87,700
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 7,613 6,492
Unearned premiums 12,083 3,348
Bank debt 2,200 --
Other liabilities 6,173 5,775
-------- --------
TOTAL LIABILITIES 118,775 103,315
-------- --------
STOCKHOLDER'S EQUITY:
Common stock $0.01 par value - 10,000,000 shares
authorized; 1,000 shares issued and outstanding -- --
Additional paid in capital 798 798
Accumulated other comprehensive income 417 2,016
Retained earnings 28,496 28,197
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TOTAL STOCKHOLDER'S EQUITY 29,711 31,011
-------- --------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $148,486 $134,326
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (IN THOUSANDS)
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<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
REVENUES:
Premium income:
Premiums written $ 14,927 $ 16,806
Premiums ceded (1,103) (858)
Change in unearned premiums (9,872) (12,972)
Renewal credit dividends to policyholders (347) (430)
-------- --------
Net premiums earned 3,605 2,546
Net investment income 1,418 1,526
Net realized investment gains 52 28
Practice management and related income 1,243 --
Other income 91 152
-------- --------
Total revenues 6,409 4,252
-------- --------
EXPENSES:
Losses and loss adjustment expenses 3,564 3,139
Underwriting expenses 927 1,033
Practice management and related expenses 1,116 34
Other 473 259
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Total expenses 6,080 4,465
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INCOME BEFORE INCOME TAXES 329 (213)
INCOME TAX (BENEFIT) PROVISION 30 (140)
-------- --------
NET INCOME (LOSS) $ 299 $ (73)
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(IN THOUSANDS)
- - ----------------------------------------------------------------------
Three Months Ended March 31,
1999 1998
NET INCOME (LOSS) $ 299 $ (73)
OTHER COMPREHENSIVE INCOME:
Unrealized holding losses on investments
during the period (2,371) (85)
Benefit associated with unrealized
holding losses 806 30
Less: reclassification adjustment for gains
included in net income (loss) (52) (28)
Taxes associated with reclassification
adjustment 18 10
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OTHER COMPREHENSIVE LOSS (1,599) (73)
------- -------
COMPREHENSIVE LOSS $(1,300) $ (146)
======= =======
See notes to condensed consolidated financial statements.
5
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NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS)
- - ---------------------------------------------------------------------------
Three Months Ended March 31,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 299 $ (73)
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (52) (28)
Amortization and depreciation 119 48
Deferred federal income taxes (170) (166)
Changes in assets and liabilities:
Reinsurance recoverable (833) (2,928)
Other assets (2,206) (2,428)
Losses and loss adjustment expenses 3,006 3,869
Retrospective premiums accrued
under reinsurance treaties 1,121 (382)
Unearned premiums 8,735 11,630
Other liabilities 124 (876)
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Net cash flows from operating activities 10,143 8,666
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (12,713) (24,921)
Sales, maturities and redemptions of investments 8,076 19,360
Investment in purchased business (5,238) --
Purchases of property and equipment (37) (424)
-------- --------
Net cash flows from investing activities (9,912) (5,985)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 2,200 --
-------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 2,431 2,681
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 6,083 4,065
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 8,514 $ 6,746
======== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ 45 $ --
======== ========
See notes to condensed consolidated financial statements.
6
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NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited consolidated financial statements were prepared in
accordance with instructions to Form 10-QSB and therefore do not include all
disclosures necessary for a complete presentation under generally accepted
accounting principles. 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 31,1999 are not
necessarily indicative of the results that may be expected for the year
ending December 31,1999. These 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, 1998, which were filed with
the Securities and Exchange Commission on Form SB-2.
2. Acquisition
On January 4, 1999, NCRIC Group acquired all of the outstanding shares of
HealthCare Consulting, Inc., all of the outstanding interests of HCI
Ventures, LLC, and all the assets of Employee Benefits Services, Inc. for
$5.1 million in cash and mandatorily convertible notes in the aggregate
principal amount of $300,000. Under terms of the purchase agreement, an
additional $3.1 million could be paid in cash if the acquired companies
achieve earnings targets in 2000, 2001 and 2002. These companies provide
practice management, employee benefit services and financial services to
physicians throughout the Mid-Atlantic region.
The acquisition has been accounted for using the purchase method. Goodwill is
amortized over 20 years on a straight-line basis. The contingent payment
would be an addition to goodwill and would be amortized over 20 years.
In connection with the acquisition, NCRIC Group borrowed $2.2 million from
Sequoia National Bank to finance a portion of the purchase price. The term of
the loan is 7.5 years and the interest rate is prime plus 0.75% per annum,
with an additional one-half point paid at closing. Monthly payments are
interest only for the first six months and blended payments of interest and
principal thereafter. Sequoia has the option to call the loan at the end of 6
months and 3.5 years of the term. Security for the loan consists of an
assignment of the capital stock of NCRIC MSO, Inc., a subsidiary of NCRIC
Group, and a blanket lien of all of the receivables of HealthCare Consulting
and Employee Benefits Services. There is no penalty for prepayment of the
loan. The President of Sequoia National Bank serves on NCRIC Group's Board of
Directors.
7
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The following pro forma information presents the results of operations for
the three months ended March 31, 1998 as though the acquisition had occurred
at January 1, 1998 (in thousands):
NCRIC Acquired Pro forma
Group Companies Combined
----- --------- --------
Revenue ............. $ 4,252 $ 1,291 $ 5,543
Net income (loss).... (73) 159 86
3. Initial Public Offering
The Form SB-2 Registration Statement for NCRIC Group common stock was
declared effective by the Securities and Exchange Commission on May 10, 1999.
Since the offering of securities has not yet closed, the shares outstanding
at March 31, 1999 are wholly-owned by NCRIC Holdings, Inc., the immediate
parent of NCRIC Group. Accordingly, earnings per share are not presented.
4. Reportable Segment Information
NCRIC Group has two reportable segments: Insurance and practice management
and financial services. The insurance segment provides medical professional
liability and other insurance. The practice management and financial services
segment provides practice management and financial services primarily to
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 for the
three-month periods ended March 31,1999 and 1998:
At or For the
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(in thousands)
INSURANCE:
Revenues from external customers $ 3,696 $ 2,698
Net investment income 1,415 1,526
Net realized investment gains 52 28
Depreciation and amortization 35 40
Segment profit (loss) before taxes 607 (130)
Expenditures for segment assets 21 424
Segment assets 142,446 135,917
Segment liabilities 115,395 108,598
8
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At or For the
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(in thousands)
PRACTICE MANAGEMENT AND FINANCIAL SERVICES:
Revenues from external customers $ 1,243 $ --
Net investment income 3 --
Net realized investment gains -- --
Depreciation and amortization 84 8
Segment loss before taxes (111) (83)
Expenditures for segment assets 16 --
Segment assets 6,680 51
Segment liabilities 963 151
TOTAL:
Revenues from external customers $ 4,939 $ 2,698
Net investment income 1,418 1,526
Net realized investment gains 52 28
Depreciation and amortization 119 48
Segment profit (loss) before taxes 496 (213)
Expenditures for segment assets 37 424
Segment assets 149,126 135,968
Segment liabilities 116,358 108,749
The following are reconciliations of reportable segment assets and liabilities
and profit to NCRIC Group's consolidated totals:
March 31,
---------------------
1999 1998
------ ------
(in thousands)
Assets:
Total assets for reportable segments $ 149,126 $ 135,968
Elimination of intersegment receivables (368) (153)
Elimination of affiliate receivables (1,327) --
Other unallocated amounts 1,055 --
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Consolidated total $ 148,486 $ 135,815
========= =========
Liabilities:
Total liabilities for reportable segments $ 116,358 $ 108,749
Elimination of intersegment payables (368) (153)
Other liabilities 2,785 --
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Consolidated total $ 118,775 $ 108,596
========= =========
9
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Three Months Ended March 31,
-----------------------------
1999 1998
---------- --------
(in thousands)
Profit (loss) before taxes:
Total profit (loss) for reportable segments $ 496 $(213)
Other expenses (107) --
Elimination of intersegment interest income (60) --
------ ------
Consolidated total $ 329 $(213)
====== ======
10
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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
consolidated financial statements and related notes included in Form 10-QSB.
References to "NCRIC" mean NCRI Group and its subsidiaries, including their
predecessors.
General
The financial statements have been prepared in accordance with generally
accepted accounting principles, GAAP, unless otherwise noted. GAAP differs from
statutory accounting practices used by regulatory authorities in their oversight
responsibilities of insurance companies.
On January 4, 1999, NCRIC Group acquired all the outstanding shares of
HealthCare Consulting, Inc., the interests of HCI Ventures, LLC and the assets
of Employee Benefits Services, Inc. The acquisition was recorded as a purchase.
The results of operations for the three months ended March 31, 1999 include the
results of the acquired businesses for that period.
Consolidated net income and comprehensive income results - Three months ended
March 31, 1999 compared to three months ended March 31, 1998
Net income and comprehensive income results. Net income increased to
$299,000 for the three months ended March 31, 1999, up $372,000 from a loss of
$73,000 for the three months ended March 31, 1998. The primary contributors to
the increased earnings were an improvement in net underwriting results and
earnings from the recently acquired businesses, partially offset by legal fees
incurred for litigation brought by the NCRIC Physicians Organization, continuing
start-up costs for the NCRIC MSO District of Columbia operations and interest
expense on acquisition debt.
Comprehensive income was a loss of $1.3 million for the three months ended
March 31, 1999 compared to a loss of $146,000 for the three months ended March
31, 1998. The decrease in comprehensive income results from the decline in
unrealized investment gains, net of deferred income taxes.
11
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Net premiums earned. Following is a summary of NCRIC's net premiums earned:
Three Months Ended March 31,
----------------------------
1999 1998
----------- ------------
(in thousands)
Gross premiums written ..................... $ 14,927 $ 16,806
Change in unearned premiums ................ (9,872) (12,972)
--------- ---------
Gross premiums earned before renewal
credits .............................. 5,055 3,834
Reinsurance premiums ceded ................. (1,103) (858)
--------- ---------
Net premiums earned before renewal
credits .............................. 3,952 2,976
Renewal credits ............................ (347) (430)
--------- ---------
Net premiums earned ........................ $ 3,605 $ 2,546
========= =========
Gross premiums written decreased by $1.9 million to $14.9 million for the
three months ended March 31, 1999 from $16.8 million for the three months ended
March 31, 1998. Starting in the fourth quarter of 1997 and continuing through
the first quarter of 1999, NCRIC began to stagger policy renewal dates. Premiums
written decreased $1.8 million for the three months ended March 31, 1999 and
increased by $0.1 million for the three months ended March 31, 1998 due to the
staggering of premium writing dates. There is a one-time effect when the policy
renewal is staggered which increases premiums written in the period of the new
renewal date and reduces premiums written in the subsequent period corresponding
to the original renewal date; premiums written will, all else being equal,
return to the previous level in the subsequent calendar year. While the
staggering of the renewal dates affects premiums written, earned premiums are
not affected. The gross premiums written include premiums for experience-rated
programs of $436,000 for the three months ended March 31, 1999 and $572,000 for
the three months ended March 31, 1998.
Gross premiums written adjusted for the staggering of renewal dates and
experience-rated premiums increased $200,000, to $16.3 million for the three
months ended March 31, 1999 from $16.1 million for the three months ended March
31, 1998. The increase resulted from the increase in the number of policyholders
to 1,259 at March 31, 1999, up from 1,182 at March 31, 1998, offset by a change
in the mix of business in new policies written.
The change in unearned premiums for the period decreased by $3.1 million
to $9.9 million from $13.0 million. This decrease resulted from a $2.5 million
decrease in the unearned portion of the policy premium due to the staggering of
renewal dates, as well as a $575,000 decrease in retrospectively determined
policyholder refunds for 1999 due to higher loss experience in the
experience-rated programs.
12
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Gross premiums earned before renewal credits increased $1.2 million, or
32%, to $5.0 million for the three months ended March 31, 1999 from $3.8 million
for the three months ended March 31, 1998. The increase was due to $0.6 million
of additional premiums earned under non experience-rated policies for the three
months ended March 31, 1999 plus $0.6 million of additional premiums earned
under experience-rated programs.
Reinsurance premiums ceded increased by $245,000 to $1.1 million for the
three months ended March 31, 1999 from $858,000 for the three months ended March
31, 1998. The increase was the net result of the increase in current year
premiums due to the increase in gross premiums earned before renewal credits
offset by an increase in the credit from prior year premiums under the swing
rated reinsurance treaty due to favorable loss experience.
Renewal credits decreased $83,000 to $347,000 for the three months ended
March 31, 1999 from $430,000 for the three months ended March 31, 1998
reflecting a decrease in the credit rate to 10% from 12.5%.
Net premiums earned before renewal credits increased by $1.0 million to
$4.0 million for the three months ended March 31, 1999 from $3.0 million for the
three months ended March 31, 1998. Net premiums earned after renewal credits
increased similarly by $1.1 million to $3.6 million for the three months ended
March 31, 1999 from $2.5 million for the three months ended March 31, 1998.
Net investment income. Net investment income decreased by $0.1 million, or
7%, for the three months ended March 31, 1999 compared to the first quarter of
the prior year, due to a decline in yields which was only partially offset by an
increase in invested funds and a decrease in investment expenses. Average
invested assets, which includes cash equivalents, increased by $1.8 million, or
1.7%, to $105.2 million at March 31, 1999 from $103.4 million at March 31, 1998
due to additional invested funds partially offset by the change in unrealized
gains. Maturing investments were primarily invested in corporate bonds and
positive cash flow was primarily invested in cash equivalents during the first
quarter of 1999. $2.9 million of funds were used in the January 4, 1999
acquisition of the businesses of HealthCare Consulting, HCI Ventures and
Employee Benefit Services. The average effective yield was approximately 5.38%
for the three months ended March 31, 1999 and 5.90% for the three months ended
March 31, 1998. The tax equivalent yield was approximately 5.96% for the first
quarter of 1999 and 6.55% for the first quarter of 1998. The decrease in
investment yields reflects the market decrease in interest rates in 1999
compared to 1998.
Practice management and related revenue. Practice management and related
revenue of $1.2 million consisted of fees generated by NCRIC MSO through the
businesses acquired on January 4, 1999, HealthCare Consulting and Employee
Benefits Services.
13
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Loss and loss adjustment expenses. The expense for incurred losses and LAE
for the first quarter of each year net of reinsurance is summarized as follows:
Three Months Ended March 31,
----------------------------
1999 1998
----------- ----------
(in thousands)
Incurred loss and LAE related to:
Current year -- losses ................ $ 4,450 $ 3,439
Prior years -- development ............ (886) (300)
--------- --------
Total incurred for the year ................. $ 3,564 $ 3,139
========= ========
Total incurred loss and LAE expense of $3.6 million for the first quarter
of 1999 is up $425,000 over the $3.1 million incurred for the first quarter of
1998.
Current year losses in the three months ended March 31, 1999 totaled $4.4
million, up $1.0 million compared to the three months ended March 31, 1998. More
new claims were reported in the first quarter of 1999 than in the first quarter
of 1998, returning to the level experienced in 1997. NCRIC experienced favorable
development on estimated losses for prior years' claims in the first quarter of
both years. The favorable loss development related to prior years claims was
$886,000 in the first quarter of 1999, and $300,000 in the first quarter of
1998. Prior year development results from the re-estimation and settlement of
individual losses not covered by reinsurance, which are generally losses under
$500,000.
Underwriting expenses. Underwriting expenses decreased $106,000 to $927,000
for the three months ended March 31, 1999 from $1,033,000 for the three months
ended March 31, 1998. The decrease in expense was due primarily to an increase
of $46,000 in the profit commission on reinsurance ceded, a decrease of $91,000
in premium taxes related to the decrease in gross written premiums offset
partially by increases in other categories of expenses, principally salaries and
benefits of $86,000.
Practice management and related expenses. Practice management and related
expenses of $1.1 million consisted primarily of expenses, such as salaries,
other general office expenses and goodwill amortization related to NCRIC MSO for
the operations of the businesses acquired January 4, 1999.
Other expenses. 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 and related operations,
including insurance brokerage, insurance agency and physician services.
Other expenses increased $214,000 to $473,000 for the three months ended
March 31, 1999 from $259,000 for the three months ended March 31, 1998. The
primary components of the increase were legal fees of $206,000 incurred in
connection with litigation brought by NCRIC Physicians Organization and interest
on acquisition debt of $45,000 offset by a decrease of $85,000 in expenses in
connection with the 1998 reorganization.
14
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Federal income taxes. The effective tax rate for NCRIC is lower than the
federal statutory rate principally due to nontaxable investment income.
Three Months Ended March 31,
----------------------------
1999 1998
------------ ---------
Federal income tax at statutory rates ......... 34% 34%
Tax exempt income ............................. (25) (42)
Dividends received ............................ (6) (10)
Reorganization costs .......................... -- 17
Goodwill amortization ......................... 5 --
Other, net .................................... 1 3
-------- --------
Federal income tax at effective rates ......... 9% (66)%
======== ========
Financial condition, liquidity and capital resources
NCRIC Group
Financial condition and capital resources. NCRIC Group is a stock holding
company whose operations and assets primarily consist of its ownership of NCRIC,
Inc. and NCRIC MSO. In addition, as a result of the reorganization, NCRIC Group
has greater access to the capital markets. This allows NCRIC Group to assist its
subsidiaries in their efforts to compete effectively and to create long-term
growth. As a part of this strategy, NCRIC Group may seek to take advantage of
acquisition opportunities and alternative financing.
On January 4, 1999, Sequoia National Bank approved a loan to NCRIC Group
in the (amount of $2,200,000 at an annual interest rate of prime + 3/4 of a
percentage point to finance the) acquisition of HealthCare Consulting, Inc., HCI
Ventures, LLC and the assets of Employee Benefits Services, Inc. The loan is
secured by all of the stock of NCRIC MSO, as well as its receivables; and an
assignment of the membership interests of HCI Ventures, LLC. In connection with
the loan, NCRIC, Inc. is required to covenant to pay dividends to NCRIC Group,
subject to regulatory limits, to service the loan if the combined cash flow of
NCRIC Group and NCRIC MSO is inadequate to service the loan.
Liquidity. Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs. NCRIC Group's cash
flow from operations consists of dividends from subsidiaries, if declared and
paid, and other permissible payments from its subsidiaries, offset by fees paid
to NCRIC, Inc., for management services and other expenses. NCRIC Group intends
to rely primarily on this cash flow from subsidiaries to pay dividends on its
common stock, if any. The amount of future cash flow available to NCRIC Group
may be influenced by a variety of factors, including NCRIC, Inc.'s financial
results and regulation by the District of Columbia Department of Insurance and
Securities Regulation.
15
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The payment of dividends to NCRIC Group by NCRIC, Inc. is subject to
limitations imposed by the District of Columbia Holding Company System Act of
1993. Under the DC Holding Company Act, NCRIC, Inc. must seek prior approval
from the Commissioner of Insurance and Securities to pay any dividend which,
combined with other dividends made within the preceding 12 months, exceeds the
lesser of (A) 10% of the surplus at the end of the prior year or (B) the prior
year's net income excluding realized capital gains. Net income, excluding
realized capital gains, for the 2 years preceding the current year is carried
forward for purposes of the calculation to the extent not paid in dividends. The
law also requires that an insurer's statutory surplus following a dividend or
other distribution be reasonable in relation to the insurer's outstanding
liabilities and adequate to meet its financial needs. The District of Columbia
permits the payment of dividends only out of unassigned statutory surplus. Using
these criteria, as of March 31, 1999 NCRIC, Inc. would have had available
approximately $2.4 million of unassigned statutory surplus available for
dividends.
Subsidiaries of NCRIC Group
Liquidity. The primary sources of NCRIC subsidiaries' liquidity are
insurance premiums, net investment income, practice management and financial
services fees, recoveries from reinsurers and proceeds from the maturity or sale
of invested assets. Funds are used to pay claims, LAE, operating expenses,
reinsurance premiums and taxes; and to purchase investments.
NCRIC subsidiaries had positive cash flow from operations for the three
months ended March 31, 1999 and March 31, 1998. Cash provided by operating
activities of NCRIC subsidiaries was $10.1 million in the three months ended
March 31, 1999 and $8.7 million in the three months ended March 31, 1998. The
$1.5 million of increased cash flow in 1999 compared to 1998 resulted primarily
from $400,000 of additional net premiums collected, $700,000 of decreased
underwriting expenses and $200,000 from the newly acquired companies, offset by
$200,000 of additional losses and LAE paid. 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, Inc. can vary substantially from year to year.
Financial condition and capital resources. NCRIC subsidiaries invest their
positive cash flow from operations primarily in investment grade, fixed maturity
securities. As of March 31, 1999, the carrying value of NCRIC subsidiaries'
securities portfolio was $98.6 million, compared to a carrying value of $96.3
million as of December 31, 1998. The portfolios were invested as follows:
As of As of
March 31, December 31,
1999 1998
--------- ------------
U.S. Government and agencies ........................ 25% 25%
Asset-backed and mortgage-backed securities ......... 30 28
Tax-exempt securities ............................... 20 21
Corporate bonds and preferred stocks ................ 25 26
16
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Over 76% of the portfolio was invested in US Government/agency securities
or had a rating of AAA or AA. For regulatory purposes, 99% of the securities
portfolio was rated OClass 1O for all periods presented, which is the highest
quality rated group as classified by the NAIC.
NCRIC subsidiaries believe that all of their fixed maturity securities are
readily marketable. Investment duration is closely monitored to provide adequate
cash flow to meet operational and maturing liability needs. Asset and liability
modeling, including sensitivity analyses and cash flow testing, are performed on
a regular basis.
NCRIC subsidiaries have no corporate debt. The $2.5 million line of credit
available as of March 31, 1999 is restricted to working capital for claims
settlements. The line of credit is unsecured and renewable annually. NCRIC
subsidiaries have not drawn down on this facility. As of March 31, 1999, NCRIC
subsidiaries have no material commitments for capital expenditures. NCRIC Group
and its subsidiaries are required to pay aggregate annual salaries in the amount
of $975,000 to six persons under employment agreements.
The equity of NCRIC subsidiaries was $29.9 million at March 31, 1999 and
$31.0 million at December 31, 1998. The $1.1 million decrease for the three
months ended March 31, 1999 was due to a $1.6 million decrease in unrealized
appreciation net of tax in the investment portfolio, offset by net income.
Effects of inflation and interest rate changes
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that losses and LAE reserve levels and NCRIC's
ratemaking process adequately incorporate the effects of inflation.
Interest rate changes expose NCRIC to a market risk on its investment
portfolio. This market risk is the potential for financial losses due to the
decrease in the value or price of an asset resulting from broad movements in
prices, such as interest rates. In general, the market value of NCRIC's fixed
maturity portfolio increases or decreases in an inverse relationship with
fluctuation in interest rates. In addition, NCRIC's net investment income
increases or decreases in a direct relationship with interest rate changes on
monies re-invested from maturing securities and investments of positive cash
flow from operating activities.
Year 2000 issues
Many hardware computer and software computer programs were designed to
accommodate only two-digit fields to represent a given year; for example, "98"
represents 1998. The computer hardware and software automatically understands
the two-digit indicator to be associated with the twentieth century and assigns
the first two digits as "19." This design results
17
<PAGE>
in the inability of these computer systems to recognize post-twentieth century
dates and to properly accept, process or display information related to the next
century. If not corrected, this could result in system or electronic equipment
failures, or miscalculations causing disruption of NCRIC's business operations.
NCRIC's overall compliance initiatives have included the assignment of a
task force to provide an assessment of NCRIC's exposure to the Year 2000 issues.
The comprehensive program to address each aspect of the Year 2000 issues has
included an assessment of all critical business systems; remediation or
upgrading of critical systems; implementation of modified and updated systems;
testing of both modified and updated systems as well as integrated systems
testing; and contingency planning. The study has included an evaluation of both
NCRIC's internal hardware and software systems, as well as exposure from service
providers, brokers and other external business partners.
NCRIC has completed an assessment of all its critical internal hardware
and software systems. Internal computer hardware has been determined to be Year
2000 compliant based on manufacturers' representations. Software systems that
are not Year 2000 compliant are in the process of being upgraded through updates
supplied by vendors; being replaced by new systems; or being brought into
compliance through the remediation efforts of outside vendors under NCRIC's
direction. Specifically, NCRIC's computer systems and application software that
relate to policy administration, billing and claims and office automation are
Year 2000 compliant.
For those systems which are in compliance, NCRIC has successfully
completed stand-alone testing. During 1999, NCRIC will complete testing of those
systems which are in the process of being modified. In addition, while most of
NCRIC's computer hardware, software, telecommunications and desktop applications
operate as stand-alone systems, there is some level of interdependency among the
systems. NCRIC intends to complete full-scope integrated systems testing during
1999. NCRIC has begun to contact its outside vendors and critical business
partners concerning their Year 2000 compliance efforts. This process will be
completed in 1999.
NCRIC estimates that it has incurred internal and external costs
associated with the Year 2000 effort of approximately $3,200 for the three
months ended March 31, 1999 and $15,000 and $36,000 for the years ended December
31, 1998 and 1997. NCRIC anticipates incurring internal and external costs of
approximately $5,000 during the remainder of 1999.
Although there can be no assurance, NCRIC believes that its internal
operations will be sufficiently compliant that the Year 2000 issues should not
cause a material disruption in its business. Despite these efforts, there can be
no guarantee that the systems of other companies on which NCRIC relies will be
Year 2000 compliant. Any failure associated with this non-compliance could have
a material effect on NCRIC. While NCRIC believes that the Year 2000 issues will
not cause an adverse effect on its ability to conduct its operations, it has
begun to explore various contingency plans in order to complete the most
critical aspects of its business operations in the event of any failures in the
remediation efforts.
18
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1* ......... Articles of incorporation of NCRIC Group
3.2* ......... Bylaws of NCRIC Group
10.1* ........ Lease
10.2* ........ Amendment to Lease
10.3* ........ Stock Option Plan
10.4* ........ Employee Stock Ownership Plan
10.5* ........ Stock Award Plan
10.6* ........ Employment Agreement between National Capital
Underwriters, Inc. and R. Ray Pate, Jr.
10.7* ........ Amendment to Employment Agreement between
NCRIC, Inc. and R. Ray Pate, Jr.
10.8* ........ Employment Agreement between National Capital
Underwriters, Inc. and Stephen S. Fargis
10.9* Employment Agreement between NCRIC, Inc.
and Rebecca B. Crunk
10.10* ....... Employment Agreement between NCRIC MSO, Inc.
and L.E. Shepherd, Jr.
10.11* ....... Employment Agreement between NCRIC MSO, Inc.
and William A. Hunter, Jr.
10.12* ....... Employment Agreement between NCRIC MSO, Inc.
and Barry S. Pillow
10.13* ....... Administrative Services Agreement
10.14* ....... Tax Sharing Agreement
10.15* ....... Operating Agreement among NCRIC Group,
NCRIC MSO, Inc., HealthCare Consulting, HCI Ventures,
L.E. Shepherd, Jr., William A. Hunter and Barry S. Pillow
27 ........... Financial Data Schedule
- - ----------------
* Incorporated by reference to the NCRIC Group, Inc. Registration Statement on
Form SB-2, File No. 333-69537
(b) Reports on Form 8-K
NCRIC Group, Inc. did not file any reports on Form 8-K during the quarter
ended March 31, 1999.
19
<PAGE>
SIGNATURES
In accordance with 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.
June 11, 1999 R. Ray Pate, Jr.
-------------------- ------------------------------------------------
R. Ray Pate, Jr., President & CEO
June 11, 1999 Rebecca B. Crunk
-------------------- ------------------------------------------------
Rebecca B. Crunk, Sr. Vice President & CFO
20
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<PERIOD-START> JAN-01-1999
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