<PAGE>
Filed Pursuant to
Rule 424(b)(3)
Registration No. 333-69537
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED MAY 10, 1999
NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, D.C. 20007
(202) 969-1866
[LOGO OF NCRIC
APPEARS HERE]
Maximum 1,840,000 Shares
Minimum 1,360,000 Shares of
Common Stock
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- --------------------------------------------------------------------------------
NCRIC Group, Inc. owns a medical professional liability insurance company
called NCRIC, Inc. and a physician practice management and financial services
company called NCRIC MSO, Inc.
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- --------------------------------------------------------------------------------
This prospectus supplement contains financial information at and for the
quarter ended March 31, 1999 concerning NCRIC Group. This prospectus supplement
amends the attached prospectus of NCRIC Group dated May 10, 1999.
Please refer to risk factors beginning on page 8 of the prospectus. The common
stock is subject to investment risk, including the possible loss of the amount
invested.
Neither the Securities and Exchange Commission, the District of Columbia
Department of Insurance and Securities Regulation, nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus supplement is accurate or complete. Any representation to the
contrary is a criminal offense.
------------------
Sandler O'Neill & Partners, L.P.
------------------
The date of this prospectus supplement is June 7, 1999
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table contains financial information which has been derived
from the unaudited consolidated financial statements of NCRIC Group. The
selected consolidated financial data below should be read in conjunction with
the "Management's Discussion and Analysis of Results of Operations and Financial
Condition" following in this prospectus supplement and with the consolidated
financial statements for each of the years in the three year period ended
December 31, 1998, and "Management's Discussion and Analysis of Results of
Operations and Financial Condition" which are included in the attached
prospectus.
Three Months Ended March 31,
----------------------------
1999 1998
-------- --------
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
Gross premiums written .................... $ 14,927 $ 16,806
======== ========
Net premiums written ...................... $ 11,175 $ 13,037
======== ========
Net premiums earned ....................... $ 3,605 $ 2,546
Net investment income ..................... 1,418 1,526
Net realized investment gains ............. 52 28
Practice management and related revenues .. 1,243 -
Other income .............................. 91 152
-------- --------
Total revenues ...................... 6,409 4,252
Losses and LAE ............................ 3,564 3,139
Underwriting expenses ..................... 927 1,033
Practice management and related expenses .. 1,116 34
Other expenses ............................ 473 259
-------- --------
Total expenses ...................... 6,080 4,465
-------- --------
Income (loss) before income taxes ......... 329 (213)
Income tax (benefit) provision ............ 30 (140)
-------- --------
Net income ................................ $ 299 $ (73)
======== ========
Net income ................................ $ 299 $ (73)
Other comprehensive loss .................. (1,599) (73)
-------- --------
Comprehensive loss ........................ $ (1,300) $ (146)
======== ========
2
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA (Continued)
Three Months Ended March 31,
----------------------------
1999 1998
---------- -----------
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio ....................... 98.9% 123.3%
Underwriting expense ratio ............... 25.7% 40.6%
Combined ratio after renewal credits ..... 124.6% 163.9%
Combined ratio before renewal credits .... 113.7% 140.2%
SELECTED STATUTORY DATA:
Loss and LAE ratio ....................... 90.1% 98.2%
Underwriting expense ratio ............... 7.3% 6.7%
Combined ratio ........................... 97.4% 104.8%
As of As of
March 31, December 31,
1999 1998
------------- ----------------
(dollars in thousands)
BALANCE SHEET AND OTHER DATA:
Invested assets .......................... $ 98,631 $ 96,348
Total assets ............................. 148,486 134,326
Total liabilities ........................ 118,775 103,315
Total equity ............................. 29,711 31,011
Statutory policyholders' surplus ......... 24,632 24,116
Number of employees * .................... 90 30
In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to calculate
the GAAP loss and underwriting expense ratios. For statutory purposes, renewal
credits are not considered a reduction in premium income, and written premiums
are used to calculate the statutory underwriting expense ratio. Due to these
differences in treatment, GAAP combined ratios can differ significantly from
statutory combined ratios. For a discussion of the differences between statutory
and GAAP reporting, see note 9 to the December 31, 1998 consolidated financial
statements included in the prospectus.
- -----------
* The increase in number of employees is primarily attributable to the
acquisition of businesses on January 4, 1999. The correct number of employees on
February 1, 1998 is 27.
3
<PAGE>
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
selected consolidated financial and operating data and consolidated financial
statements and related notes included elsewhere in this prospectus supplement.
References to "NCRIC" in this prospectus supplement mean NCRIC Group and its
subsidiaries, including their predecessors.
General
The financial statements and data presented in this prospectus supplement
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. See note 9 to the December 31, 1998 consolidated financial statements
in the prospectus for a reconciliation of NCRIC's net income and equity between
GAAP and statutory accounting bases.
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.
4
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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.
8
<PAGE>
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
9
<PAGE>
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 "Class 1" 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
10
<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.
11
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- ---------------------------------------------------------------------------
<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
-------- --------
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.
12
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------
<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
-------- --------
Total expenses 6,080 4,465
-------- --------
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.
13
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
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
------- -------
OTHER COMPREHENSIVE LOSS (1,599) (73)
------- -------
COMPREHENSIVE LOSS $(1,300) $ (146)
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
14
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
<S> <C> <C>
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)
-------- --------
Net cash flows from operating activities 10,143 8,666
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (12,713) (24,921)
Sales, maturitites 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 $ -
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
15
<PAGE>
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.
16
<PAGE>
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
17
<PAGE>
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 -
--------- ---------
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 -
--------- ---------
Consolidated total $ 118,775 $ 108,596
========= =========
18
<PAGE>
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)
===== =====
*****
19
<PAGE>
PROSPECTUS
NCRIC Group, Inc.
1115 30th Street, N.W.
Washington, D.C. 20007
(202) 969-1866
[LOGO OF NCRIC
APPEARS HERE]
Maximum 1,840,000 Shares
Minimum 1,360,000 Shares of
Common Stock
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NCRIC Group, Inc. owns a medical professional liability insurance company
called NCRIC, Inc. and a physician practice management and financial services
company called NCRIC MSO, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NCRIC Group offers shares of its common stock for sale in a subscription
offering and, if all shares are not subscribed for, in a community offering and
possibly a syndicated community offering. To purchase shares with a
subscription right, you must submit a properly completed stock order form, with
payment for the shares, on or before 1:00 p.m., Eastern time, on June 30, 1999.
You may purchase a minimum of 100 shares and a maximum of 35,000 shares.
Sandler O'Neill & Partners, L.P. will use its best efforts to assist in selling
shares, but does not guarantee that any shares will be sold. If the minimum
number of shares is not sold, then we will not sell any shares of common stock.
We will place all funds submitted for purchasing shares of common stock in a
deposit account at Summit Bank until we sell at least the minimum shares or
return your funds to you.
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
---------- ----------- -----------
<S> <C> <C> <C>
. Price per share $ 7.00 $ 7.00 $ 7.00
. Number of shares 1,360,000 1,600,000 1,840,000
. Offering expenses $1,000,000 $ 1,033,500 $ 1,067,000
. Net proceeds $8,520,000 $10,166,500 $11,813,000
. Net proceeds per share $ 6.26 $ 6.35 $ 6.42
</TABLE>
The common stock has been conditionally approved for quotation on the Nasdaq
SmallCap Market under the symbol "NCRI."
Please refer to risk factors beginning on page 8 of this prospectus. The common
stock is subject to investment risk, including the possible loss of the amount
invested.
Neither the Securities and Exchange Commission, the District of Columbia
Department of Insurance and Securities Regulation, nor any state securities
regulator has approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is a
criminal offense.
------------------
Sandler O'Neill & Partners, L.P.
------------------
The date of this Prospectus is May 10, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Questions and Answers about the Subscription, Community and Syndicated
Community Offerings.................................................. 4
Summary.................................................................... 5
Risk Factors............................................................... 8
The concentration of NCRIC, Inc.'s business in the District of
Columbia leaves it vulnerable to a decrease in the number of
medical practices or an increase in damage awards in the
District of Columbia............................................. 8
If we have established inadequate loss and LAE reserves, our
profitability will diminish...................................... 8
Indemnity payments in medical professional liability cases
are rising and there is a risk that a very high jury award
could be rendered against NCRIC, Inc............................. 8
Our profitability could be adversely affected by market driven
changes in the healthcare industry............................... 8
NCRIC, Inc. may be unable to obtain affordable reinsurance from
high quality reinsurers, which would increase the risk
borne by NCRIC, Inc. and restrict NCRIC, Inc.'s ability to
insure larger risks.............................................. 9
We may purchase less reinsurance and retain more risk ourselves
which will increase our exposure to larger losses................ 9
We may be unable to sell our products to doctors outside of the
District of Columbia metropolitan region or to expand our
sales to dentists because we have not had significant sales
to either group in the past...................................... 9
In the absence of regulations governing a full demutualization,
there is a risk that any future regulations will disadvantage
minority stockholders like yourself.............................. 10
You and other purchasers in the offerings will not be able to
determine matters submitted for stockholder approval, including
whether fundamental corporate changes will be made............... 10
NCRIC Group has no significant operations of its own and will
require funds from its subsidiaries to meet its obligations...... 10
The absence of other mutual insurance holding companies with a
publicly traded subsidiary means that we will not benefit from
their experience................................................. 10
Our return on equity will decrease immediately following the
subscription,
community and syndicated community offerings..................... 10
We are unable to accurately estimate the total expenses associated
with the ESOP, stock option plan and stock award plan............ 11
Because we are uncertain of how many shares will be sold in
the offerings, we are unable to advise you of the percentage
ownership interest in NCRIC Group that you will acquire.......... 11
We may not be able to complete the subscription, community
or syndicated community offerings within our anticipated
time frame....................................................... 11
Your subscription rights may be taxable.............................. 11
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Forward-Looking Information.............................................. 12
The Subscription, Community and Syndicated Community Offerings........... 12
Purchases in the Subscription, Community and Syndicated
Community Offerings................................................ 17
Use of Proceeds.......................................................... 27
Dividend Policy.......................................................... 28
Market for Common Stock.................................................. 29
Capitalization........................................................... 30
Unaudited Pro Forma Condensed Combined Financial Statements.............. 32
Pro Forma Data........................................................... 36
Selected Financial and Operating Data.................................... 39
Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................ 41
Business................................................................. 63
Management............................................................... 99
Management Compensation.................................................. 105
Agreements............................................................... 112
Ownership of Common Stock................................................ 113
Description of Common Stock.............................................. 113
Legal Opinions........................................................... 114
Experts.................................................................. 114
Available Information.................................................... 114
Index to Financial Statements............................................ 116
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
QUESTIONS AND ANSWERS ABOUT THE SUBSCRIPTION, COMMUNITY AND
SYNDICATED COMMUNITY OFFERINGS
Q: What is the purpose of the subscription, community and syndicated
community offerings?
A: The subscription, community and syndicated community offerings give you
the opportunity to become a stockholder of our newly-formed holding
company, NCRIC Group. By becoming a stockholder, you will be able to share
in our future as a provider of medical professional liability insurance
and other services to physicians. As a stock insurance company operating
through a holding company structure, we will have greater ability to grow
and diversify our business.
Q: Who is eligible to purchase common stock in the subscription offering?
A: (1) Named insureds and extended reporting endorsement holders of NCRIC,
Inc. Extended reporting endorsement holders are former policyholders
who continue to be insured by NCRIC, Inc. against claims arising
from the time when their policy was in effect;
(2) NCRIC Group's tax-qualified employee stock ownership plan and stock
award plan; and
(3) Directors, officers and employees of NCRIC, A Mutual Holding Company
and its subsidiaries.
Subscribers may use their pension plans, other employee benefit plans,
trusts and other entities established for their benefit to purchase shares
of common stock.
Q: What if all shares are not sold in the subscription offering?
A: Shares of common stock not subscribed for in the subscription offering
will be offered on the same terms to the general public in a community
offering and, if necessary, a syndicated community offering.
Q: As a policyholder of NCRIC, Inc., am I obligated to purchase stock?
A: No. You are not required to purchase stock.
Q: What happens if the subscription offering is oversubscribed?
A: If the subscription offering is oversubscribed, we will allocate shares
based upon a formula and the community offering and any syndicated
community offering will be cancelled.
Q: Will the stock be traded on a market?
A: Our stock has been conditionally approved for quotation on the Nasdaq
SmallCap Market. However, NCRIC Group does not assure or guarantee that
the stock will trade on the Nasdaq SmallCap Market or on any market.
4
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
NCRIC Group, Inc.
We are a healthcare financial services organization which provides
individual physicians and groups of physicians with medical professional
liability insurance and practice management and financial services. References
to "NCRIC" in this prospectus mean NCRIC Group and its subsidiaries, including
their predecessors. NCRIC's principal executive offices are located at 1115 30th
Street, N.W., Washington, D.C. 20007. NCRIC's telephone number is (202)
969-1866.
NCRIC, Inc.
NCRIC, Inc. is the leading provider of medical professional liability
insurance in the District of Columbia based on direct premiums written in 1997.
Medical professional liability insurance insures the physician against
liabilities arising from the rendering of, or failure to render, professional
medical services.
NCRIC MSO, Inc.
NCRIC MSO, Inc. was established in 1997 to provide practice management and
financial services to physicians. On January 4, 1999, NCRIC Group significantly
expanded NCRIC MSO's ability to provide practice management and financial
services to physicians in the Mid-Atlantic region by purchasing all of the
outstanding shares of HealthCare Consulting, Inc., a physician practice
management and financial services company, all of the membership interests in
its affiliate, HCI Ventures, LLC, a provider of capital and financial services
to management services organizations, and all of the assets of Employee Benefits
Services, Inc., a provider of employee benefits services, owned by the
stockholders of HealthCare Consulting.
Description of mutual holding company structure
We are part of a mutual holding company structure consisting of NCRIC, A
Mutual Holding Company and its subsidiaries. The shares sold in the
subscription, community and syndicated community offerings will represent a
minority ownership interest of approximately 40% of NCRIC Group's outstanding
common stock. 42,857 shares will be issued to the former stockholders of
HealthCare Consulting on the completion of the subscription, community and
syndicated community offerings. NCRIC Holdings, Inc., a wholly-owned subsidiary
of NCRIC, A Mutual Holding Company, will own the remaining shares of NCRIC
Group's common stock. Under District of Columbia law, NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the voting
shares of NCRIC, Inc.
5
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Organizational structure
The following chart illustrates the organization of NCRIC, A Mutual
Holding Company and its subsidiaries immediately after the subscription,
community and syndicated community offerings.
[ORGANIZATIONAL CHART APPEARS HERE]
Offering center
If you have any questions regarding the subscription, community or
syndicated community offerings, please call the offering center at 800-898-6547.
6
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Use of the proceeds raised from the sale of common stock
The net proceeds from the subscription, community and syndicated community
offerings will be used as follows:
. $5.1 million will be used to repay indebtedness incurred in
connection with the HealthCare Consulting acquisition. This
includes repayment of bank debt of $2.2 million and $2.9
million that NCRIC Group borrowed from NCRIC, Inc.
. Up to $1,288,000 will be loaned to the NCRIC Group's
tax-qualified employee stock ownership plan or ESOP to fund
its purchase of common stock.
. Up to $644,000 will be loaned to the stock award plan to fund
its purchase of common stock.
. We will retain the balance for expansion and diversification
of our activities and for other general corporate purposes.
Until used, the funds will be invested in interest-bearing
securities.
7
- --------------------------------------------------------------------------------
<PAGE>
RISK FACTORS
You should carefully consider the risk factors and other information in
this prospectus prior to making an investment decision regarding the common
stock.
The concentration of NCRIC, Inc.'s business in the District of Columbia leaves
it vulnerable to a decrease in the number of medical practices or an increase in
damage awards in the District of Columbia
In 1998, District of Columbia physicians accounted for approximately 90%
of NCRIC, Inc.'s direct premiums written. The concentration of NCRIC, Inc.'s
business in the District of Columbia means that NCRIC, Inc.'s revenues and
profitability depend heavily on conditions in the District of Columbia medical
community. NCRIC, Inc. is the most significant subsidiary of NCRIC Group.
If we have established inadequate loss and LAE reserves, our profitability will
diminish
NCRIC, Inc.'s reserves for losses and loss adjustment expenses or LAE are
estimates of amounts needed to pay reported and unreported claims and related
LAE. If NCRIC, Inc. experiences greater than expected severity or frequency of
claims, or both, there is a risk that currently established reserves will prove
inadequate.
Indemnity payments in medical professional liability cases are rising and there
is a risk that a very high jury award could be rendered against NCRIC, Inc.
We cannot predict the impact of clusters of cases, like the breast implant
or "Fen-Phen" cases. Also, from time to time NCRIC has had, and may in the
future have, very high jury awards rendered against it. This risk is heightened
by the District of Columbia's rejection of tort reform. According to the
National Practitioner Data Bank, between September 1, 1990 and December 31,
1996, the District of Columbia had the highest cumulative mean medical liability
payment average in the United States at $299,045. The next closest jurisdiction
is Alabama with a cumulative mean medical liability payment of $261,233 during
the same period. In addition, according to the Physician Insurers Association of
America 1998 Data Sharing Report cited in the August 1998 edition of A.M. Best's
Review, the medical professional liability insurance industry's average claim
costs increased 17% between 1996 and 1997 following a 13% increase in the
previous year.
Our profitability could be adversely affected by market driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to conduct a
traditional medical practice. As a result, many physicians have joined or
affiliated with managed care organizations, healthcare delivery systems or
practice management organizations. Larger healthcare systems generally retain
more risk by accepting higher deductibles and self-insured retentions or form
their own captive insurance companies. This consolidation has reduced the role
of the physician and the small medical group in the medical professional
liability insurance purchasing decision.
8
<PAGE>
In 1998, 47% of NCRIC, Inc.'s gross premiums came from physicians practicing
alone or in groups of less than three physicians.
NCRIC, Inc. may be unable to obtain affordable reinsurance from high quality
reinsurers, which would increase the risk borne by NCRIC, Inc. and restrict
NCRIC, Inc.'s ability to insure larger risks
NCRIC, Inc.'s ability to provide medical professional liability insurance
at competitive premium rates and coverage limits on a continuing basis depends
in part on its ability to secure adequate reinsurance at commercially reasonable
rates. The amount and cost of NCRIC, Inc.'s reinsurance is governed by
prevailing market conditions beyond the control of NCRIC, Inc. At times in the
past, insurance industry conditions have resulted in reinsurance being either
unavailable or prohibitively expensive. Reinsurance permits NCRIC, Inc. to
reduce its net liability on individual risks and to protect itself against large
losses. The reinsurance program automatically passes on the risks insured by
NCRIC, Inc. in excess of NCRIC, Inc.'s retention and quota share participation,
up to the maximum reinsurance policy limit offered.
While NCRIC, Inc. seeks to obtain reinsurance with coverage limits that it
believes are appropriate for the risk exposures it assumes, there is a risk that
losses experienced by NCRIC, Inc. will not be within the coverage limits of its
reinsurance.
NCRIC, Inc. is also subject to credit risk because reinsurance does not
relieve NCRIC, Inc. of its obligation to pay claims to its insureds for the
risks ceded to reinsurers. A significant reinsurer's inability or refusal to
make payment under reinsurance terms could have a material adverse effect on
NCRIC, Inc.
We may purchase less reinsurance and retain more risk ourselves which will
increase our exposure to larger losses
We may reduce our reinsurance costs by retaining more risk ourselves. This
means that NCRIC, Inc. would assume the risk of individual losses up to an
increased maximum exposure amount. Any decrease in reinsurance will increase the
amount NCRIC, Inc. pays for losses.
We may be unable to sell our products to doctors outside of the District of
Columbia metropolitan region or to expand our sales to dentists because we have
not had significant sales to either group in the past
Expansion and diversification of our product lines will require adequate
capital, marketing success and the ability to set profitable rates and comply
with applicable regulatory requirements. We may be unable to accomplish any or
all of these requirements. NCRIC, Inc.'s current new product initiatives include
selling professional liability and office and equipment insurance policies to
dentists. NCRIC, Inc. has not had a significant presence in the dental insurance
market in the past and may be unable to break into it in the future. NCRIC, Inc.
has recently obtained licenses to sell medical professional liability insurance
in West Virginia and Delaware. There is a risk that NCRIC, Inc. will be unable
to penetrate the West Virginia and Delaware markets.
9
<PAGE>
In the absence of regulations governing a full demutualization, there is a risk
that any future regulations will disadvantage minority stockholders like
yourself
The Commissioner of Insurance and Securities has not issued regulations
regarding the conversion of a District of Columbia mutual holding company to the
stock form of organization. If regulations are issued by the Commissioner of
Insurance and Securities, there is a risk that the regulations may be onerous or
burdensome or may include provisions which are disadvantageous to the
stockholders of NCRIC Group other than NCRIC, A Mutual Holding Company.
You and other purchasers in the offerings will not be able to determine matters
submitted for stockholder approval, including whether fundamental corporate
changes will be made
NCRIC, A Mutual Holding Company will possess voting control of NCRIC
Group. Purchasers in the offerings, as minority stockholders, will not be able
to control the election of directors or other matters, including whether NCRIC,
A Mutual Holding Company will fully demutualize or whether NCRIC Group will be
merged into another entity.
NCRIC Group has no significant operations of its own and will require funds from
its subsidiaries to meet its obligations
As a holding company without significant operations of its own, NCRIC
Group's ability to meet its ongoing obligations in the future will depend upon
the receipt of sufficient funds from NCRIC, Inc. and its other subsidiaries in
the form of dividends, interest payments, loans, repayment of the ESOP and stock
award plan loans, expense reimbursement and tax payments. District of Columbia
law regulates the payment of dividends by NCRIC, Inc. to NCRIC Group.
The absence of other mutual insurance holding companies with a publicly traded
subsidiary means that we will not benefit from their experience
Although there are numerous thrift institutions that are controlled by a
mutual holding company and have public stockholders, NCRIC knows of only one
insurance company that has a mutual holding company as a parent and has public
stockholders who own a minority of the outstanding shares. As a result, there is
little experience on which to base predictions concerning the responses NCRIC
will receive from its regulators, the marketplace and others.
Our return on equity will decrease immediately following the subscription,
community and syndicated community offerings
Return on equity is a company's net income for a given period divided by
the average balance of the company's stockholder equity during the same period.
This ratio is used by many investors to compare the performance of a particular
insurance company to its peers. NCRIC anticipates that, aside from the
HealthCare Consulting acquisition, it will take time to prudently deploy the
capital raised in the subscription, community and syndicated community
offerings. Accordingly, NCRIC's equity will significantly increase as a result
of the net proceeds received in the subscription, community and syndicated
community offerings without a proportionate and immediate increase in net
income.
10
<PAGE>
We are unable to accurately estimate the total expenses associated with the
ESOP, stock option plan and stock award plan
NCRIC may recognize material employee compensation and benefit expenses
relating to the ESOP, the stock award plan and the stock option plan. NCRIC
cannot predict the aggregate amount of these expenses at the present time
because applicable accounting practices require that in some cases these
expenses be measured based on the future fair market value of the shares of
NCRIC Group common stock.
Because we are uncertain of how many shares will be sold in the offerings, we
are unable to advise you of the percentage ownership interest in NCRIC Group
that you will acquire
There is a difference of 480,000 shares between the minimum and the
maximum of the offering range. A person subscribing for a fixed number of shares
of common stock will have a 26% smaller interest in NCRIC Group if 1,840,000
shares are sold than if 1,360,000 shares are sold. If you exercise your
subscription rights or deliver a purchase order in the subscription, community
or syndicated community offerings, you will not receive a refund or have any
right to withdraw your subscription or purchase order if the updated appraisal
estimates a consolidated pro forma market value that is within the estimated
valuation range. Also, you should be aware that, prior to the consummation of
the subscription, community and syndicated community offerings, you will not
have available to you information concerning the final updated appraisal.
We may not be able to complete the subscription, community or syndicated
community offerings within our anticipated time frame
NCRIC Group expects to complete the subscription, community and any
syndicated community offerings within the time periods indicated in this
prospectus. Nevertheless, it is possible that adverse market, economic or
regulatory conditions or other factors could delay the completion of the
subscription, community or syndicated community offerings and result in
increased costs or changes in the estimated valuation range.
Your subscription rights may be taxable
We have received a letter from RP Financial which states its belief that
the subscription rights granted to policyholders and others to purchase our
common stock have no value. However, RP Financial's view is not binding on the
Internal Revenue Service. If the Internal Revenue Service determines that your
subscription rights have value, then receipt of those rights could result in
taxable income to you. Whether subscription rights have value requires a factual
determination.
11
<PAGE>
FORWARD-LOOKING INFORMATION
A number of statements made by NCRIC Group in this document are
forward-looking statements which involve known and unknown risks and
uncertainties which may cause NCRIC Group's actual results to be materially
different from historical results or from the results expressed or implied by
the forward-looking statements. These risks and uncertainties include:
. general economic conditions including changes in interest rates and
the performance of financial markets;
. NCRIC, Inc.'s concentration in a single line of business;
. the impact of managed healthcare;
. uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
. price competition;
. regulatory changes;
. ratings assigned by A.M. Best;
. the availability of bank financing and reinsurance;
. NCRIC, A Mutual Holding Company's holding company structure; and
. uncertainties associated with NCRIC Group's acquisition strategy.
Other factors not currently anticipated by management may also materially and
adversely affect NCRIC Group's results of operations.
THE SUBSCRIPTION, COMMUNITY AND SYNDICATED COMMUNITY
OFFERINGS
The subscription offering
NCRIC Group is offering, at no cost to a subscriber, rights to purchase
shares of common stock in the subscription offering. Shares are being offered to
the following three categories of subscribers:
(1) named insureds under policies of insurance issued by NCRIC, Inc. and
in force as of the close of business on March 15, 1999 and extended
reporting endorsement holders as of March 15, 1999;
(2) NCRIC Group's tax-qualified ESOP and stock award plan; and
(3) directors, officers and employees of NCRIC, A Mutual Holding Company
and its subsidiaries.
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Pension plans, other employee benefit plans, trusts and other entities
established for the benefit of a subscriber may also purchase shares of common
stock offered to a subscriber.
The amount of common stock that subscribers may purchase will be
determined, in part, by the total number of shares of common stock subscribed
for by all subscribers. If orders for more than 1,840,000 shares are received in
the subscription offering, shares of common stock will be allocated as follows:
. Category One. An aggregate of 1,398,400 shares of common stock, or 76% of
the maximum shares of common stock offered in the subscription and
community offerings, will be allocated among subscribers in category one.
In the event that category one subscribers exercise subscription rights
for more than 1,398,400 shares of common stock, each subscribing category
one subscriber will be entitled first to purchase 100 shares of common
stock. The remaining shares of common stock available to subscribers in
category one will be allocated among the category one subscribers whose
subscriptions remain unsatisfied in the proportion in which the aggregate
number of shares as to which a category one subscriber's subscription
remains unsatisfied bears to the aggregate number of shares as to which
all category one subscribers' subscriptions remain unsatisfied, but no
fractional shares of common stock will be issued.
. Category Two. The ESOP will be entitled to purchase up to 184,000 shares,
or 10% of the maximum shares of common stock offered in the subscription
and community offerings, and the stock award plan will be entitled to
purchase up to 92,000 shares or 5% of the maximum shares of common stock
offered in the subscription and community offerings.
. Category Three. Up to 165,600 shares, or 9% of the maximum shares of
common stock offered in the subscription and community offerings, will be
allocated among subscribing directors, officers and employees of NCRIC, A
Mutual Holding Company and its subsidiaries who are not policyholders of
NCRIC, Inc., plus any shares available to category one subscribers but not
purchased by them. In the event of an oversubscription, shares of common
stock will be allocated in the proportion in which the number of shares
subscribed for by each person in category three bears to the aggregate
number of shares subscribed for by all persons in category three.
Community offering
Concurrently with the subscription offering, NCRIC Group is offering
shares of common stock to the general public in the community offering.
Preference in the community offering will be given first to named insureds under
NCRIC, Inc. policies issued after March 15, 1999, then to providers of goods or
services to, and identified by, NCRIC and then to natural persons and trusts of
natural persons, including individual retirement and Keogh retirement accounts,
who reside in the District of Columbia or the states of Virginia and Maryland.
All determinations as to the status of a person as a resident of the District of
Columbia or the states of Virginia and Maryland shall be made by NCRIC Group in
its sole and absolute discretion.
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Orders for common stock received from members of the general public in the
community offering will be subject to the availability of shares of common stock
after satisfaction of all subscriptions in the subscription offering. If
1,360,000 or more shares of common stock are subscribed for in the subscription
offering, NCRIC Group, in its sole discretion, will determine whether to accept
orders for common stock in the community offering. If 1,840,000 or more shares
of common stock are subscribed for in the subscription offering, no common stock
will be sold in the community offering.
Syndicated community offering
In the sole discretion of NCRIC Group, any shares of common stock not
purchased in the subscription and community offerings may be offered for sale to
the general public in a syndicated community offering through a syndicate of
registered broker-dealers to be formed and managed by Sandler O'Neill acting as
agent of NCRIC Group, to assist NCRIC Group in the sale of the common stock.
NCRIC Group reserves the absolute right to reject orders in the syndicated
community offering, in whole or in part.
The appraisal and pricing of the common stock
The aggregate purchase price of the common stock is based upon RP
Financial's appraisal of NCRIC's value. RP Financial, as part of its financial
advisory business, is engaged regularly in the valuation of assets, securities
and companies in connection with various types of asset and security
transactions, including mergers, acquisitions and private placements, and
valuations for various other purposes and in the determination of adequate
consideration in those transactions. RP Financial will receive a fee from NCRIC,
Inc. of approximately $25,000 for the appraisal.
RP Financial has determined that, based on stock prices as of February 12,
1999 and financial statements through December 31, 1998, the estimated
consolidated pro forma market value of NCRIC Group was between $24.1 million and
$32.5 million. These amounts assumed that the HealthCare Consulting acquisition
had been completed. Based on the appraisal's valuation, NCRIC Group plans to
issue between 1,360,000 and 1,840,000 shares of the common stock in the
subscription, community and syndicated community offerings having an aggregate
price of between $9,520,000 and $12,880,000.
The appraisal is based on a review of internal estimations, and a
comparison of NCRIC's performance relative to medical professional liability
insurance company averages and a peer group of representative publicly-owned
medical professional liability insurance companies. In preparing the appraisal,
RP Financial assumed that the financial and statistical information provided by
NCRIC was accurate and complete. RP Financial did not independently verify the
financial statements and other information provided by NCRIC or value
independently the assets and liabilities of NCRIC. The appraisal considers NCRIC
as a going concern only and is not an indication of the liquidation value of
NCRIC. The appraisal is not intended, and must not be construed, as a
recommendation of any kind by NCRIC Group, Sandler O'Neill or RP Financial as to
the advisability of purchasing common stock.
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Because the appraisal is necessarily based upon estimates and expectations
for the future of a number of matters, all of which are subject to change from
time to time, no assurance can be given that persons purchasing common stock
will thereafter be able to sell their shares at or above the purchase price.
Copies of the appraisal report of RP Financial setting forth the method and
assumptions for the appraisal are on file and available for inspection at the
principal executive offices of NCRIC Group. Any subsequent updated appraisal
report of RP Financial also will be available for inspection and will be filed
with the Securities and Exchange Commission.
Update of appraisal
NCRIC Group may request an updated appraisal at any time during the
offerings. In addition, regardless of whether or not it has previously done so,
NCRIC Group must update the appraisal shortly before the simultaneous closing of
the subscription, community and/or syndicated community offerings. If the value
reflected in an updated appraisal is within the estimated valuation range, the
subscription, community or syndicated community offerings will continue or be
consummated, as the case may be. Orders to purchase common stock may not be
withdrawn if an updated appraisal is within the estimated valuation range.
If the value reflected in an updated appraisal is not within the estimated
valuation range, NCRIC Group will either cancel the offerings and promptly
return your funds to you, with interest, or extend the community and syndicated
community offerings on the terms described below.
If an updated estimated valuation of RP Financial, obtained in
anticipation of a closing, falls within the estimated valuation range, the
following steps will be taken:
Subscription offering meets or exceeds maximum. If, upon expiration
of the subscription offering, the number of shares subscribed for by
participants in the subscription offering is equal to or greater than
1,840,000 shares, NCRIC Group will on the closing date of the subscription
offering, issue shares of common stock to the subscribing participants in
the priorities described above. Any community offering will be canceled
and any funds received from purchasers in a community offering will be
promptly returned to them, with interest.
Subscription offering meets or exceeds minimum but does not meet
maximum. If, upon conclusion of the subscription offering, the number of
shares of common stock subscribed for by participants in the subscription
offering is equal to or greater than 1,360,000 shares, but less than
1,840,000 shares, then NCRIC Group will consummate the subscription
offering, and any community or syndicated community offering, in which
case NCRIC Group will on the closing date issue to the participants in the
subscription offering shares of common stock in an amount sufficient to
satisfy subscriptions in full.
Subscription offering does not meet minimum. If, upon conclusion of
the subscription offering, the number of shares of common stock subscribed
for by participants in the subscription offering is less than 1,360,000
shares, NCRIC Group may
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accept purchase orders received from purchasers in a continuing community
offering and/or sell shares of common stock to purchasers in the
syndicated community offering so that the aggregate number of shares of
common stock sold in the subscription, community and syndicated community
offerings is equal to or greater than 1,360,000 shares.
Subscription, community and syndicated community offerings do not
meet minimum. If the aggregate number of shares of common stock subscribed
for or purchased in the subscription, community and syndicated community
offerings is less than 1,360,000 shares, then NCRIC Group will cancel the
subscription, community and syndicated community offerings and your funds
will be returned promptly to you, with interest, unless the community and
syndicated community offerings are extended on the terms described in the
following paragraphs.
Expiration, closing dates and right of extension
The subscription offering will expire on June 30, 1999 at 1:00 p.m.
Eastern time. Subscription rights not exercised prior to that date will be void.
NCRIC Group may not extend the subscription offering. If no shares are to be
sold in the community or syndicated community offerings and the updated
appraisal is within the estimated valuation range, the subscription offering
will close on or before 5:00 p.m. Eastern time on July 24, 1999. If shares are
to be sold in the community or syndicated community offerings, the subscription
offering will close simultaneously with the community offering and any
syndicated community offering.
The community and syndicated community offerings will close on or before
5:00 p.m. Eastern time on August 14, 1999, unless the community or syndicated
community offerings are extended. If there is an extension, the closing will
occur on or before 5:00 p.m. Eastern time on September 28, 1999, or your funds
will be promptly returned to you, with interest. If there is no extension and
the offerings do not close on or before 5:00 p.m. Eastern time on August 14,
1999, your funds will be promptly returned to you, with interest. Each of the
community and syndicated community offerings will expire on the date on which
they close.
If there is an extension, NCRIC Group will send you written notice of the
extension along with supplemental materials detailing any revised terms of the
offerings on or before 5:00 p.m. Eastern time on August 14, 1999. You will then
have the opportunity to confirm or modify your subscription or purchase order on
or before 5:00 p.m. Eastern time on August 30, 1999. Unless you confirm or
modify your subscription or purchase order on or before 5:00 p.m. Eastern time
on August 30, 1999, your funds will be promptly returned to you, with interest.
Any interest paid to you will be equal to the interest earned on your
funds while they were held in escrow.
Compliance with securities laws
NCRIC Group will make reasonable efforts to comply with the securities
laws of the District of Columbia and all states in the United States in which
persons entitled to subscribe for
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common stock in the subscription offering reside. However, no person will be
offered or allowed to purchase any common stock in the subscription offering if
he or she resides in a foreign country or in a state of the United States with
respect to which any or all of the following apply:
. compliance with securities laws or other laws would, in the opinion
of NCRIC Group, be onerous or impracticable for reasons of cost or
otherwise;
. a small number of persons otherwise eligible to subscribe for shares
under the subscription offering reside in a particular state or
foreign country; or
. the granting of subscription rights or the offer or sale of shares
of common stock to a person would require NCRIC Group or NCRIC, Inc.
or its employees to register, under the securities laws of the state
or foreign country, as a broker, dealer, salesman or agent or to
register or otherwise qualify its securities for sale in the state
or foreign country.
No payments will be made in lieu of the granting of subscription rights to any
person who is denied subscription rights.
PURCHASES IN THE SUBSCRIPTION, COMMUNITY AND SYNDICATED
COMMUNITY OFFERINGS
Use of stock order forms in subscription and community offerings
Any person who desires to subscribe for or purchase shares of common stock
in the subscription or community offerings must do so by delivering by mail to
NCRIC Group, Inc., Placement Agent, P.O. Box 220797, Great Neck, NY 11022, or in
person at NCRIC Group's principal executive offices located at 1115 30th Street,
N.W., Washington, D.C. 20007, a properly executed and completed stock order
form, together with full payment for all shares subscribed for or purchased. An
executed stock order form, once received by NCRIC Group, may not be modified,
amended or rescinded without the consent of NCRIC Group.
Payment for shares in the subscription and community offerings
Payment in full for all shares of common stock subscribed for or purchased
in the subscription and community offerings must accompany all completed stock
order forms in order for subscriptions or purchase orders to be considered
complete. Payment for subscribed shares of common stock must be made by check or
money order in U.S. Dollars. All checks or money orders must be made payable to
"Summit Bank, as Escrow Agent for NCRIC Group, Inc." No wire transfers will be
accepted. Payments will be placed in an escrow account at Summit Bank. The
escrow account will be administered by the escrow agent and the transfer agent.
Funds accompanying stock order forms will not be released until the subscription
or community offerings are completed or terminated. The ESOP and the stock award
plan will not be required to pay for their shares at the time they subscribe,
but will be required to pay for their shares at or before the closing.
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Payment for shares in the syndicated community offering
If a syndicate of selected dealers is formed to assist in the syndicated
community offering, a purchaser may pay for his or her shares with funds held by
or deposited with a selected dealer. If a stock order form is executed and
forwarded to the selected dealer or if the selected dealer is authorized to
execute the stock order form on behalf of a purchaser, the selected dealer is
required to forward the stock order form and check or money order for the
purchase price to the placement agent for deposit in a segregated account.
Alternatively, selected dealers may solicit indications of interest from their
customers to place orders for shares. Selected dealers must subsequently contact
their customers who indicated an interest and seek their confirmation as to
their intent to purchase. Those indicating an intent to purchase shall execute
stock order forms and forward them to their selected dealer or authorize the
selected dealer to execute the stock order forms. The selected dealer will
acknowledge receipt of the order to its customer in writing on the following
business day and will debit the customer's account on the third business day
after the customer has confirmed his or her intent to purchase and on or before
noon of the next business day following the debit date will send stock order
forms and funds to NCRIC Group for deposit in a segregated account. Although
purchasers' funds are not required to be in their accounts with selected dealers
until the debit date, in the event that the alternative procedure is employed,
once a confirmation of an intent to purchase has been received by the selected
dealer, the purchaser has no right to rescind his or her order.
Submission of stock order forms
If a subscriber or purchaser submits a stock order form in the
subscription, community or syndicated community offerings that
(1) is not received by NCRIC Group,
(2) is received after the expiration of the offering in question,
(3) is defectively completed or executed, or
(4) is not accompanied by payment in full for the shares of common stock
subscribed for or purchased,
then the subscription or purchase order will not be honored, and the subscriber
or purchaser will be treated as having failed to return the completed stock
order form within the specified time period. Alternatively, NCRIC Group may, but
will not be required to, waive any irregularity relating to any stock order form
or require the submission of a corrected stock order form or the remittance of
full payment for the shares of common stock subscribed for or purchased by the
date NCRIC Group may specify. NCRIC Group's interpretations of the terms and
conditions of the subscription, community and syndicated community offerings and
determinations with respect to the acceptability of the stock order forms will
be final, conclusive and binding upon all persons, and neither NCRIC Group nor
its directors, officers, employees and agents will be liable to any person in
connection with any interpretation or determination. Photocopies and facsimile
copies of stock order forms will not be accepted.
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Escrow agreement
The escrow agent, transfer agent and NCRIC Group have entered into an
escrow agreement to permit the escrow agent to hold funds received from
subscribers and purchasers in escrow until the closing or termination of the
subscription, community and syndicated community offerings. Funds will only be
released from escrow if at least the minimum number of shares are sold in the
offerings. If the offerings do not close, subscribers and purchasers will have
their funds returned to them in full, with interest.
Nontransferability of subscription rights
Each subscription right granted in the subscription offering may be
exercised only by the person to whom it is issued and only for his or her own
account or the account of any pension plans, other employee benefit plans,
trusts and other entities established for the benefit of a subscriber.
Each person subscribing for shares of common stock in the subscription
offering is required to represent to NCRIC Group that he or she is purchasing
the shares for his or her own account or the account of any pension plans, other
employee benefit plans, trusts and other entities established for his or her
benefit and that he or she has no agreement or understanding with any other
person for the sale or transfer of shares of common stock. NCRIC Group reserves
the right, upon request, to permit a corporation wholly owned by a subscriber or
members of a subscriber's immediate family to purchase shares of common stock in
connection with a subscriber's subscription rights.
Prospectus delivery
To ensure that each purchaser receives a prospectus at least 48 hours
prior to the subscription expiration date in the case of the subscription
offering and the expiration of the community offering or syndicated community
offering in the case of the community offering and syndicated community
offering, in accordance with Rule 15c2-8 under the Securities Exchange Act, no
prospectus will be mailed any later than five days prior to the expiration dates
or hand delivered any later than two days prior to the expiration dates.
Execution of the stock order form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order forms will be distributed only with a prospectus.
Delivery of certificates
Certificates representing shares of the common stock will be delivered to
subscribers in the subscription offering and purchasers in the community and
syndicated community offerings, if any, promptly after completion of the
offering in question. Although trading of the common stock may have commenced,
until certificates for the common stock are available and delivered to
subscribers or purchasers, they may not be able to sell their shares of common
stock. Any certificates returned as undeliverable will be held for the periods
contemplated in applicable escheat laws and then delivered to appropriate
government agencies as required.
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Marketing and underwriting arrangements
NCRIC Group has engaged Sandler O'Neill as a marketing advisor in
connection with the subscription, community and syndicated community offerings,
and Sandler O'Neill has agreed to use its best efforts to assist NCRIC Group
with its solicitation of subscriptions and purchase orders for shares of common
stock in the subscription, community and syndicated community offerings. Sandler
O'Neill is not obligated to take or purchase any shares of common stock in the
subscription, community or syndicated community offerings. NCRIC Group has
agreed to pay Sandler O'Neill a fee equal to 2.0% of the aggregate purchase
price of common stock sold in the subscription and community offerings. Sandler
O'Neill's fee for the subscription and community offerings will be reduced by
$25,000 as a result of a credit provided for in an advisory services agreement
between NCRIC and Sandler O'Neill entered into in connection with the HealthCare
Consulting acquisition.
NCRIC Group may enter into selected dealers' agreements with one or more
National Association of Securities Dealers, Inc. member firms in connection with
a syndicated community offering. NCRIC Group will pay a fee to the selected
dealers, any sponsoring dealer's fees, and a management fee to Sandler O'Neill
of 2.0% for shares sold by the National Association of Securities Dealers, Inc.
member firm under a selected dealer's agreement. However, the aggregate fees
payable to Sandler O'Neill for common stock sold under a selected dealer's
agreement will not exceed 2.0% of the aggregate purchase price and the aggregate
fees payable to Sandler O'Neill and the selected and sponsoring dealers will not
exceed 7.5% of the aggregate purchase price of the shares sold under any
selected dealer's agreement.
Fees to Sandler O'Neill and to any other broker-dealer may be deemed to be
underwriting fees and Sandler O'Neill and any broker-dealers may be deemed to be
underwriters. Sandler O'Neill will be reimbursed for legal fees, in an amount
not to exceed $60,000, and for its other reasonable out-of-pocket expenses.
NCRIC Group has agreed to indemnify Sandler O'Neill in connection with some
claims or liabilities, including liabilities under the Securities Act. Assuming
that all shares offered in the subscription and community offerings are sold,
total fees paid to Sandler O'Neill are expected to be $165,400 and $232,600 at
the minimum and the maximum of the offering range. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
In addition, Sandler O'Neill received an advisory fee in the amount of
$50,000 for advisory services provided to NCRIC in connection with the
reorganization. Sandler O'Neill has also provided investment banking services to
NCRIC in connection with the HealthCare Consulting acquisition, and has received
a fee in the amount of $35,000, $25,000 of which will be credited toward any
fees received by Sandler O'Neill in connection with the offerings.
Directors and executive officers of NCRIC, A Mutual Holding Company and
its subsidiaries may participate in the solicitation of offers to purchase
common stock. Questions from prospective purchasers will be directed to NCRIC
Group's directors or executive officers or to registered representatives of
Sandler O'Neill or any selected dealer. Other employees of NCRIC may participate
in the subscription, community and syndicated community offerings in ministerial
capacities or by providing clerical work in effecting a sales transaction.
Employees of NCRIC who are not executive officers have been instructed not to
solicit offers to purchase
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common stock or provide advice regarding the purchase of common stock. NCRIC, A
Mutual Holding Company and its subsidiaries will rely on Rule 3a4-1 under the
Securities Exchange Act, and sales of common stock will be conducted within the
requirements of Rule 3a4-1 to permit officers, directors and employees to
participate in the sale of common stock. No officer, director or employee of
NCRIC, A Mutual Holding Company or its subsidiaries will be compensated in
connection with his or her participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
common stock.
Tax effects
Reorganization. On April 2, 1999, NCRIC received a private letter ruling
from the Internal Revenue Service confirming that the reorganization of National
Capital Reciprocal Insurance Company, the reciprocal insurance company
predecessor of NCRIC, Inc., from a mutual to stock form of corporation in a
mutual holding company structure constitutes a reorganization within the meaning
of Section 368(a)(1)(E) of the Internal Revenue Code of 1986, and that, for
federal income tax purposes: (1) no gain or loss will be recognized by National
Capital Reciprocal Insurance Company or NCRIC, Inc. as a result of the
reorganization; and (2) NCRIC, Inc.'s basis in its assets, holding period for
its assets, net operating loss carryforward, if any, capital loss carryforward,
if any, earnings and profits and accounting methods will not be affected by the
reorganization.
Subscription rights. Without undertaking any independent investigation of
state or federal law or the position of the Internal Revenue Service with
respect to the issue, RP Financial believes that the subscription rights do not
have any ascertainable market value, based upon RP Financial's observation that
the subscription rights are available to participants without cost, are legally
nontransferable and of short duration and will afford participants the right
only to purchase shares of common stock at the same price as will be paid by
members of the general public in the community and syndicated community
offerings.
NCRIC Group believes that in the event the Internal Revenue Service were
to nevertheless successfully assert that the subscription rights did have a fair
market value, any gain or income realized by a subscriber in categories one or
three as a result of the receipt of subscription rights having fair market value
must be recognized, whether or not the subscription rights are exercised. If
this occurs, the amount of gain or income recognized by a subscriber in
categories one or three would equal the fair market value of subscription rights
received by the subscriber in categories one or three.
Although not free from doubt, provided the subscription rights are capital
assets in the hands of a policyholder or reporting endorsement holder in
category one and are treated as issued to the category one subscriber by NCRIC
Group, any gain resulting from the receipt of the subscription rights should
constitute a capital gain, and provided the common stock that a subscriber would
have received upon exercise of the lapsed subscription rights would have
constituted a capital asset, the resulting loss upon expiration of any
subscription rights should constitute a capital loss. In the case of a category
three officer or director who receives subscription rights, any gain resulting
from the receipt of the subscription rights should constitute ordinary income
although the resulting loss upon expiration of any subscription rights should
still constitute a capital loss. For purposes of determining gain, it is unclear
whether and how the
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Internal Revenue Service would attempt to ascribe a fair market value to the
subscription rights or how to determine the number of subscription rights that
may be allocated to each policyholder, extended reporting endorsement holder,
officer or director during the subscription offering.
The above discussion addresses the potential income tax consequences
should the Internal Revenue Service successfully treat category one subscribers
as transferring policyholder rights to NCRIC Group in exchange for subscription
rights which had an ascertainable fair market value and which were issued by
NCRIC Group to the category one subscribers. In the alternative, the Internal
Revenue Service could attempt to assert that, for federal income tax purposes,
NCRIC Group will be treated as issuing subscription rights to NCRIC, Inc. and
that category one subscribers will be treated as transferring policyholder
rights to NCRIC, Inc. in exchange for subscription rights. If the Internal
Revenue Service were to make this assertion concerning the path of subscription
rights and if the Internal Revenue Service were to also successfully assert that
the subscription rights had an ascertainable fair market value, then the
Internal Revenue Service might also assert that NCRIC, Inc. will recognize gain
on its deemed distribution of subscription rights to category one subscribers
and that gain recognized by category one subscribers on the receipt of
subscription rights is taxable as a dividend. Although not free from doubt, the
amount of gain that would be recognized by NCRIC, Inc. on a deemed distribution
of subscription rights, and by category one subscribers on receipt of a deemed
dividend of subscription rights, should equal the fair market value, if any, of
the subscription rights distributed or received by NCRIC, Inc. and the category
one subscribers.
Because of the absence of authority from the courts and the Internal
Revenue Service, Arent Fox Kintner Plotkin & Kahn, PLLC, counsel for NCRIC, is
unable to render an opinion on (1) the tax treatment of the receipt of the
subscription rights or (2) the path of the subscription rights. Category one and
category three subscribers are encouraged to consult with their tax advisors
about the tax consequences of the reorganization and the subscription offering.
The private letter ruling. The Internal Revenue Service issued the private
letter ruling on the reorganization on the basis of facts and assumptions set
forth by management in the private letter ruling submission. The private letter
ruling held that for federal income tax purposes, the policyholders of National
Capital Reciprocal Insurance Company will recognize no gain or loss on the
deemed exchange of their membership interests in National Capital Reciprocal
Insurance Company for stock in NCRIC, Inc.
In the private letter ruling, the Internal Revenue Service was not asked
to, and did not provide, any rulings on the path of the subscription rights or
on the potential tax effects to NCRIC, Inc. and the subscribers if the Internal
Revenue Service asserts that, for federal income tax purposes, subscribers will
be treated as receiving subscription rights from NCRIC, Inc. and that those
subscription rights have an ascertainable fair market value.
The federal income tax discussion set forth above does not purport to
consider all aspects of federal income taxation which may be relevant to each
category one subscriber or category three subscriber that may be subject to
special treatment under the Internal Revenue Code, including trusts, individual
retirement accounts, other employee benefit plans, insurance companies, and
category one subscribers and category three subscribers who are employees of an
insurance company or who are not citizens or residents of the
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United States. Due to the individual nature of tax consequences, each category
one subscriber and category three subscriber is urged to consult his or her tax
and financial advisor as to the effect of federal income tax consequences on his
or her own particular facts and circumstances, including the receipt and
exercise of subscription rights, and also as to any state, local, foreign or
other tax consequences arising out of the reorganization.
Minimum and maximum limitations on individual purchases of common stock
Except for the ESOP and the stock award plan, no subscriber or purchaser,
together with his or her associates, may purchase less than 100 or more than
35,000 shares of common stock in the subscription, community and syndicated
community offerings. An associate of a subscriber or purchaser is:
(1) any pension plans, other employee benefit plans, trusts and other
entities established for the benefit of a subscriber or purchaser;
(2) any immediate family member of a subscriber or purchaser; and
(3) any corporation which is wholly owned by a subscriber or purchaser.
For purposes of aggregating total shares that may be held by officers and
trustees, the term "associate" does not include shares awarded under the ESOP or
the stock award plan.
Subject to any required regulatory approval and the requirements of
applicable law, NCRIC Group may increase or decrease any of the subscriber
purchase limitations at any time. If the individual purchase limitation is
increased after commencement of the subscription and community offerings, then
NCRIC Group will permit any person who subscribed for the maximum number of
shares of common stock to purchase an additional number of shares, so that he or
she will be permitted to subscribe for the then maximum number of shares
permitted to be subscribed for by him or her, subject to the rights and
preferences of any person who has priority subscription rights. If either the
individual purchase limitation or the number of shares of common stock to be
sold in the subscription, community and syndicated community offerings is
decreased after commencement of the subscription offering, then the order of any
person who subscribed for the maximum number of shares of common stock will be
decreased by the minimum amount necessary so that he or she will be in
compliance with the then maximum number of shares permitted to be subscribed for
by him or her.
Each person purchasing common stock in the offering will be deemed to
confirm that his or her purchase does not conflict with the applicable purchase
limitations. In the event that the purchase limitations are violated by any
person, including any of his or her associates, NCRIC Group will have the right
to purchase from that person at the purchase price all shares acquired by him or
her in excess of any purchase limitation or, if excess shares have been sold, to
receive the gain from the proceeds received by the person from the sale of the
excess shares. This right of NCRIC Group to purchase the excess shares or obtain
the gain is assignable by NCRIC Group.
23
<PAGE>
Proposed management purchases
The following table sets forth information regarding the approximate
number of shares of common stock intended to be purchased by directors and
executive officers of NCRIC Group and NCRIC, A Mutual Holding Company, including
each director's and officer's associates, and by all directors and executive
officers as a group, including all of their associates, and other related
information. For purposes of the following table, it has been assumed that
sufficient shares will be available to satisfy subscriptions in all categories.
<TABLE>
<CAPTION>
Share Share
Ownership Ownership
Expected Expected
Names and Addresses of After Names and Addresses of After
Directors and Officers Offerings Directors and Officers Offerings
- ------------------------ ----------- ------------------------ -----------
<S> <C> <C> <C>
Nelson P. Trujillo, M.D. 28,571 R. Ray Pate, Jr. 21,285
2021 K Street, N.W. 1115 30th Street, N.W.
Suite T-110 Washington, DC 20007
Washington, DC 20006
Bruce J. Ammerman, M.D. 5,357 Arthur A. Becker, M.D. 2,000
3301 New Mexico Avenue 730 24th Street, N.W.
Suite 352 Washington, DC 20037
Washington, DC 20016
Vincent C. Burke, III 300 Pamela W. Coleman, M.D. 3,571
8401 Connecticut Avenue 3619 14th Street, N.W.
Suite 1100 Washington, DC 20010
Chevy Chase, MD 20815
Charles H. Epps, Jr., M.D. 1,428 Robert A. Fischer, M.D. 2,000
2041 Georgia Avenue, N.W. 730 24th Street, N.W.
Tower 4300 Washington, DC 20037
Washington, DC 20060
Sheila Hafter-Gray, M.D. 100 Major P. Gladden, M.D. 3,000
40612 Palisades Station 1140 Varnum Street, N.E.
Washington, DC 20016-0612 Suite 108
Washington, DC 20017
Leonard M. Glassman, M.D. 14,285 Luther W. Gray, Jr., M.D. 1,428
3015 Williams Drive 3301 New Mexico Avenue
Fairfax, VA 22031 Suite 212
Washington, DC 20016
Joseph E. Gutierrez, M.D. 2,000 Florie Hirsch, M.D. 3,571
2440 M Street, N.W. 2440 M Street, N.W.
Suite 417 Suite 318
Washington, DC 20037 Washington, DC 20037
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Share Share
Ownership Ownership
Expected Expected
Names and Addresses of After Names and Addresses of After
Directors and Officers Offerings Directors and Officers Offerings
- ------------------------ ----------- ------------------------ -----------
<S> <C> <C> <C>
J. Paul McNamara 10,714 Leonard Parver, M.D. 7,142
4912 Del Ray Avenue 1145 19th Street, N.W.
Bethesda, MD 20814 Suite 500
Washington, DC 20036
David W. Patterson, M.D. 1,428 Raymond Scalettar, M.D. 3,571
2440 M Street, N.W. 730 24th Street, N.W.
Suite 817 Washington, DC 20037
Washington, DC 20037-1404 3,571 Joel M. Taubin, M.D. 5,000
David M. Seitzman, M.D. 1145 19th Street, N.W.
7117 Nevis Road Suite 504
Bethesda, MD 20817 Washington, DC 20036
Anthony S. Unger, M.D. 3,571 Mervin H. Zimmerman, M.D. 14,285
2021 K Street, N.W. 2600 Virginia Avenue, N.W.
Suite 400 Suite 510
Washington, DC 20006 Washington, DC 20037
Stephen S. Fargis 7,142 William E. Burgess 1,428
1115 30th Street, N.W. 1115 30th Street, N.W.
Washington, DC 20007 Washington, DC 20007
Rebecca B. Crunk 1,428 Directors and Officers as a 148,176
1115 30th Street, N.W. Group
Washington, DC 20007
</TABLE>
The above table does not include:
. shares that may be allocated to officers and other employees under
the ESOP;
. shares that may be awarded to directors, officers and other
employees under the stock award plan; and
. shares that may be purchased by directors, executive officers and
other employees under the stock option plan. Options granted under
the plan do not become exercisable until at least one year after
their grant date.
Directors and officers as a group are expected to own 4.3% of the
outstanding shares after the offerings assuming a minimum number of shares are
sold. No individual officer or director will own more than 1% of the outstanding
shares.
25
<PAGE>
Limitations on resales
The common stock issued in the subscription, community and syndicated
community offerings will be freely transferable under the Securities Act, but
shares issued to directors and senior officers of NCRIC, A Mutual Holding
Company and its subsidiaries will be subject to resale restrictions under Rule
144 under the Securities Act. Shares of common stock issued to directors and
officers will bear a legend giving appropriate notice of these restrictions and
NCRIC Group will give instructions to the transfer agent for the common stock
with respect to these transfer restrictions.
In addition, under guidelines of the National Association of Securities
Dealers, Inc., members of the National Association of Securities Dealers, Inc.
and their associates are subject to restrictions on the transfer of securities
purchased in accordance with subscription rights and reporting requirements upon
purchase of the securities.
Interpretation, amendment and termination of the subscription, community
and syndicated community offerings
All interpretations of the subscription, community and syndicated
community offerings by NCRIC Group will be final. The subscription, community or
syndicated community offerings may be amended or terminated at any time by the
affirmative vote of two-thirds of the directors of NCRIC Group.
Placement agent
Sandler O'Neill, a registered broker-dealer, has been engaged by NCRIC
Group to assist it in effecting the subscription offering, the community
offering and any syndicated community offering by serving as placement agent.
The placement agent will forward copies of this prospectus and subscription
materials to subscribers or purchasers upon request. In addition, the placement
agent will be available to answer questions from potential subscribers or
purchasers during the subscription offering. Following receipt of stock order
forms from prospective subscribers and purchasers, the placement agent will,
among other things, verify that:
. the submitted checks and money orders are honored;
. the stock order form has been fully and properly completed and
signed;
. the subscriber has not previously submitted a subscription; and
. the subscriber is eligible to be a category one or category three
subscriber.
All subscriptions or purchase orders which the placement agent is not able to
verify will be rejected and returned to the prospective subscriber or purchaser,
unless the defect is waived by NCRIC Group.
26
<PAGE>
In addition, the placement agent will receive and hold all funds submitted
by subscribers or purchasers at an account with Summit Bank, the escrow agent,
and, in cooperation with the escrow agent and the transfer agent, will disburse
funds in the event a refund or other return of funds is required.
USE OF PROCEEDS
NCRIC Group estimates that it will receive net proceeds from the
subscription, community and syndicated community offerings of between
approximately $8,520,000 and $11,813,000, which will be used as follows:
. $5.1 million to repay indebtedness which NCRIC Group incurred in
connection with the HealthCare Consulting acquisition. This includes
repayment of bank debt of $2.2 million and $2.9 million that NCRIC
Group borrowed from NCRIC, Inc.
. a loan to the ESOP in the amount necessary to purchase 10% of the
shares of common stock sold in the subscription, community and
syndicated community offerings. The amount of the ESOP loan may
range from $952,000 to $1,288,000. NCRIC Group anticipates that the
ESOP loan will have a ten-year term with a floating interest rate
equal to the prime rate as published in The Wall Street Journal from
time to time. The ESOP loan will be repaid principally from NCRIC,
Inc.'s contributions to the ESOP and dividends, if any, on
unallocated shares. NCRIC Group will use the funds received from the
ESOP for general corporate purposes.
. a loan to the stock award plan in the amount necessary to purchase
5% of the shares of common stock sold in the subscription, community
and syndicated community offerings. The amount of the stock plan
loan may range from $476,000 to $644,000. NCRIC Group anticipates
that the stock plan loan will have a five-year term with a floating
interest rate equal to the prime rate as published in The Wall
Street Journal from time to time. The stock plan loan will be repaid
principally from NCRIC, Inc.'s contributions to the stock award
plan. Upon receipt of funds from the stock award plan, NCRIC Group
will use the funds for general corporate purposes.
. NCRIC Group will retain the balance of the net proceeds for general
corporate purposes, including the expansion and diversification of
NCRIC's activities. Until used, the funds will be invested primarily
in U.S. Government securities, federal agency securities and other
interest-bearing securities. NCRIC Group also may use a portion of
the net proceeds of the subscription, community and syndicated
community offerings to fund the purchase of a maximum of 92,000
shares of common stock, in the open market, for use in connection
with the stock option plan.
27
<PAGE>
The amount of proceeds from the sale of common stock in the subscription,
community and syndicated community offerings will depend upon the total number
of shares actually sold, the relative percentages of common stock sold in the
subscription, community and syndicated community offerings and the actual
expenses of the offerings. As a result, the net proceeds from the sale of common
stock cannot be determined until the subscription, community and syndicated
community offerings are completed. Set forth below are the uses of the estimated
net proceeds to NCRIC Group, assuming the sale of common stock at the minimum,
midpoint and maximum.
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
-------------------------- -------------------------- -------------------------
Percentage Percentage Percentage
Amount of of Amount of of Amount of of
Use of Proceeds Proceeds Proceeds Proceeds Proceeds Proceeds Proceeds
- --------------- ---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Repayment of HealthCare
Consulting acquisition
indebtedness ....................... $ 5,100,000 59.86% $ 5,100,000 50.16% $ 5,100,000 43.18%
Loan to ESOP ....................... 952,000 11.17 1,120,000 11.02 1,288,000 10.90
Loan to stock award plan ........... 476,000 5.59 560,000 5.51 644,000 5.45
Balance of proceeds ................ 1,992,000 23.38 3,386,500 33.31 4,781,000 40.47
----------- ------ ----------- ------ ----------- ------
Total ...................... $ 8,520,000 100.00% $10,166,500 100.00% $11,813,000 100.00%
=========== ====== =========== ====== =========== ======
</TABLE>
With the exception of the HealthCare Consulting acquisition, the ESOP
loan, the stock plan loan and the possible acquisition of common stock in
connection with the stock option plan, NCRIC Group currently has no specific
plans, arrangements or understandings regarding the use of the net proceeds from
the subscription, community and syndicated community offerings. In the judgment
of NCRIC Group's board of directors, it is not necessary to utilize any of the
proceeds of the subscription, community and syndicated community offerings to
improve the quality of NCRIC, Inc.'s medical professional liability insurance
product, maintain its competitive pricing structure or ensure the stability and
longevity of NCRIC, Inc.
DIVIDEND POLICY
Declaration of dividends by NCRIC Group's board of directors depends on a
number of factors, including the requirements of applicable law and the
determination by NCRIC Group's board of directors that the net income, capital
and financial condition of NCRIC, industry trends, general economic conditions
and other factors justify the payment of dividends. At present, NCRIC Group has
not determined whether it intends to pay dividends to its stockholders in the
foreseeable future. There can be no assurance that dividends will be paid or, if
paid initially, that they will continue to be paid in the future. In addition,
the payment of dividends by NCRIC Group will depend significantly upon receipt
of dividends from NCRIC, Inc., which are subject to regulatory restrictions.
28
<PAGE>
MARKET FOR COMMON STOCK
NCRIC Group's common stock has been conditionally approved for quotation
on the Nasdaq SmallCap Market under the symbol "NCRI." The requirements for
listing include a minimum number of publicly traded shares, a minimum market
capitalization, and a minimum number of market makers and record holders.
Sandler O'Neill has indicated its intention to make a market in the common
stock, and NCRIC Group anticipates that it will satisfy the listing
requirements.
There is no market for NCRIC Group's common stock. The existence of a
public trading market having the desirable depth, liquidity and orderliness will
depend upon the presence in the market of a sufficient number of both willing
buyers and willing sellers at any given time. The presence of a sufficient
number of buyers and sellers at any given time is a factor over which neither
NCRIC Group nor any broker or dealer has control. The absence of an active and
liquid trading market may make it difficult to sell common stock and may have an
adverse effect on the price of the common stock. There can be no assurance that
purchasers will be able to resell their shares of common stock or that
quotations will be available on the Nasdaq SmallCap Market. In addition,
fluctuations in the trading price of NCRIC Group's common stock may be unrelated
to its operating performance and may be influenced by many factors, including
investor perceptions and the general economic conditions in the professional
medical liability insurance industry. Purchasers should consider the potentially
illiquid and long-term nature of their investment in the common stock.
29
<PAGE>
CAPITALIZATION
The following table presents NCRIC Group's pro forma capitalization at
December 31, 1998, assuming that the HealthCare Consulting acquisition had been
completed on December 31, 1998, and NCRIC Group's pro forma consolidated
capitalization as of that date. The pro forma data set forth below may change
significantly at the time NCRIC Group completes the subscription, community and
syndicated community offerings due to, among other factors, a change in the
valuation or a change in the current estimated expenses of the subscription,
community and syndicated community offerings.
<TABLE>
<CAPTION>
At December 31, 1998
Pro Forma Capitalization of NCRIC
Group
Pro Forma Assuming that the Acquisition has been
Assuming Completed and Assuming the Sale of
the --------------------------------------
Completion 1,360,000 1,600,000 1,840,000
of the Shares Shares Shares
Acquisition Minimum Midpoint Maximum
----------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Borrowed funds ................................................. $ 2,200 $ -- $ -- $ --
======== ======== ======== ========
Stockholders' equity:
NCRIC Group common stock, $0.01
par value per share; 10,000,000
shares authorized; shares to be issued
as shown ....................................................... $ -- $ 34 $ 40 $ 46
Additional paid-in capital ..................................... 798 9,584 11,224 12,865
Retained earnings .............................................. 28,197 28,197 28,197 28,197
Accumulated other comprehensive
income ......................................................... 2,016 2,016 2,016 2,016
Less:
common stock acquired by
ESOP ..................................................... -- (952) (1,120) (1,288)
common stock acquired by stock
award plan ............................................... -- (476) (560) (644)
-------- -------- -------- --------
Total stockholders' equity ..................................... $ 31,011 $ 38,403 $ 39,797 $ 41,192
======== ======== ======== ========
</TABLE>
The following is an explanation of various items in the above-described
table:
Borrowed funds. NCRIC Group borrowed $2.2 million from Sequoia National
Bank to partially finance the HealthCare Consulting acquisition. NCRIC Group
intends to repay this debt out of the proceeds of the subscription, community
and syndicated community offerings.
30
<PAGE>
Stockholders' equity. Pro forma stockholders' equity is not intended to
represent the fair market value of NCRIC Group's common stock, the net fair
market value of NCRIC Group's assets and liabilities or the amounts, if any,
that would be available for distribution to stockholders in the event of
liquidation. The pro forma data may be affected by a change in the number of
shares to be sold in the subscription, community and syndicated community
offerings and by other factors.
Outstanding shares. The outstanding shares of common stock include all
shares to be issued by NCRIC Group (a) in the subscription, community and
syndicated community offerings, (b) to NCRIC Holdings, Inc. and (c) under the
HealthCare Consulting acquisition $300,000 mandatorily convertible notes. The
number of shares of NCRIC Group common stock to be issued in the subscription,
community and syndicated community offerings may be increased or decreased based
on market and financial conditions prior to completion of the subscription,
community and syndicated community offerings. The value of NCRIC Group's
outstanding shares assumes estimated subscription, community and syndicated
community offerings expenses of $1,000,000, $1,033,500 and $1,067,000 at the
minimum, midpoint and maximum of the estimated valuation range.
Stock option plan shares. The outstanding shares of common stock do not
reflect additional shares of NCRIC Group common stock that could be issued in
connection with the stock option plan, under which selected directors and
officers of NCRIC, A Mutual Holding Company and its subsidiaries will be granted
options to purchase an aggregate amount of NCRIC Group common stock equal to up
to 92,000 shares, which is the equivalent of 5% of the shares of NCRIC Group
common stock offered in the subscription, community and syndicated community
offerings.
ESOP common stock. The amounts of common stock acquired by the ESOP assume
that purchases by the ESOP of a number of shares of NCRIC Group common stock
equal 10% of the subscription, community and syndicated community offerings. The
funds used to acquire the ESOP shares will be borrowed from NCRIC Group. NCRIC
Group intends to make contributions to the ESOP sufficient to service and
ultimately retire this debt. Common stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. As the ESOP debt is repaid, shares will be
released and allocated to participants' accounts, compensation expense will be
recognized, and a corresponding reduction in the charge against stockholders'
equity will occur. Shares designated for allocation to particular accounts will
be recognized as compensation expense.
Stock award plan common stock. The amounts of common stock acquired by the
stock award plan assume that purchases by the stock award plan of a number of
shares of NCRIC Group common stock equal 5% of the subscription, community and
syndicated community offerings. The funds used to acquire the stock award plan
shares will be borrowed from NCRIC Group. NCRIC Group intends to make
contributions to the stock award plan sufficient to service and ultimately
retire this debt. Common stock acquired by the stock award plan is reflected as
a reduction of stockholders' equity. As the stock award plan debt is repaid,
shares will be awarded to participants, and a corresponding reduction in the
charge against stockholders' equity will occur. Share awards to participants
will be recognized as compensation expense.
31
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following financial statements reflect the HealthCare Consulting
acquisition and the subscription, community and syndicated community offerings.
Pro forma adjustments related to the unaudited pro forma combined statements of
operations for the year ended December 31, 1998 have been prepared assuming that
each of the HealthCare Consulting acquisition and the subscription, community
and syndicated community offerings, with net proceeds, as adjusted for the ESOP
and stock award plan shares, of $7.1 million at the minimum of the offering
range, were consummated as of January 1, 1998. The unaudited pro forma combined
balance sheet was prepared assuming that the HealthCare Consulting acquisition
and the subscription, community and syndicated community offerings were all
consummated on December 31, 1998.
The unaudited pro forma combined financial statements have been prepared
using the purchase method of accounting for the HealthCare Consulting
acquisition to record the purchase of the stock of HealthCare Consulting, the
interests of HCI Ventures and the assets of Employee Benefits Services.
The historical portion of the unaudited pro forma combined statement of
operations for the year ended December 31, 1998 has been derived from the
historical consolidated statements of operations of NCRIC Group and from the
historical combined statements of income and comprehensive income of the
practice management and financial services of HealthCare Consulting, HCI
Ventures and Employee Benefits Services for the same period. The unaudited pro
forma combined financial statements should be read in conjunction with the
historical financial statements of NCRIC Group, of the practice management and
financial services of HealthCare Consulting, HCI Ventures and Employee Benefits
Services and the other financial information pertaining to NCRIC Group and
HealthCare Consulting, HCI Ventures and Employee Benefits Services included
elsewhere in this prospectus.
The pro forma combined financial statements do not purport to be
indicative of the financial position or operating results which would have been
achieved had the HealthCare Consulting acquisition and the subscription,
community and syndicated community offerings been consummated as of the dates
indicated and should not be construed as being representative of future
financial position or operating results of NCRIC Group. The pro forma
adjustments are based upon available information and assumptions that NCRIC
Group believes are reasonable under the circumstances.
32
<PAGE>
NCRIC Group, Inc.
Unaudited Pro Forma Combined Balance Sheets
December 31, 1998
<TABLE>
<CAPTION>
Stock
Purchase Combined Offering Pro Forma Footnote
NCRIC Acquisition Adjustments Total Adjustments Combined References
----- ----------- ----------- ----- ----------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S. Treasury Notes ................. $ 91,135 $ -- $ -- $ 91,135 $ -- $ 91,135
Preferred stocks .............................. 5,213 -- -- 5,213 -- 5,213
--------- --------- --------- --------- --------- ---------
Total securities available for sale 96,348 -- -- 96,348 -- 96,348
Investments in management service
organizations ............................... -- 18 -- 18 -- 18
--------- --------- --------- --------- --------- ---------
Total Investments ................. 96,348 18 -- 96,366 -- 96,366
OTHER ASSETS:
Cash and cash equivalents ..................... 6,083 48 (3,007) 3,124 4,892 8,016 (1),(2)
Accounts receivable, net ...................... -- 708 -- 708 -- 708
Reinsurance recoverable ....................... 24,944 -- -- 24,944 -- 24,944
Deferred federal income taxes ................. 2,742 -- (225) 2,517 -- 2,517 (3)
Goodwill ...................................... -- -- 5,184 5,184 -- 5,184 (4)
Other assets .................................. 4,209 287 (238) 4,258 -- 4,258
--------- --------- --------- --------- --------- ---------
TOTAL ASSETS .................................. $ 134,326 $ 1,061 $ 1,714 $ 137,101 $ 4,892 $ 141,993
========= ========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Losses and loss adjustment expenses ........... $ 87,700 $ -- $ -- $ 87,700 $ -- $ 87,700
Retrospective premiums accrued ................ 6,492 -- -- 6,492 -- 6,492
Unearned premiums ............................. 3,348 -- -- 3,348 -- 3,348
Deferred income taxes ......................... -- 225 (225) -- -- -- (3)
Bank debt ..................................... -- -- 2,200 2,200 (2,200) -- (1),(2)
Long-term liabilities ......................... -- 90 -- 90 -- 90
Other liabilities ............................. 5,775 185 300 6,260 (300) 5,960 (1),(2)
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES ............................. 103,315 500 2,275 106,090 (2,500) 103,590
--------- --------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common Stock .................................. -- 1 (1) -- 34 34 (2)
Limited Liability Company capital ............. -- 2 (2) -- -- --
Additional paid-in capital .................... 798 8 (8) 798 8,786 9,584 (2)
Unearned ESOP shares .......................... -- -- -- -- (952) (952) (2)
Unearned stock award plan shares .............. -- -- -- -- (476) (476) (2)
Retained earnings ............................. 28,197 550 (550) 28,197 -- 28,197 (1)
Accumulated other comprehensive
income ...................................... 2,016 -- -- 2,016 -- 2,016
--------- --------- --------- --------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY .................... 31,011 561 (561) 31,011 7,392 38,403
--------- --------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ........................ $ 134,326 $ 1,061 $ 1,714 $ 137,101 $ 4,892 $ 141,993
========= ========= ========= ========= ========= =========
</TABLE>
33
<PAGE>
NCRIC Group, Inc.
Unaudited Pro Forma Combined Statements of Operations
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Stock
Purchase Combined Offering Pro Forma Footnote
NCRIC Acquisition Adjustments Total Adjustments Combined References
----- ----------- ----------- ----- ----------- -------- ----------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Premium income:
Premium written ................... $ 19,214 $ -- $ -- $ 19,214 $ -- $ 19,214
Premiums ceded .................... 4,089 -- -- 4,089 -- 4,089
Change in unearned premiums ....... (2,945) -- -- (2,945) -- (2,945)
Renewal credit dividends to
policyholders ................... (1,899) -- -- (1,899) -- (1,899)
-------- -------- -------- -------- -------- --------
Net premiums earned ... 18,459 -- -- 18,459 -- 18,459
Practice management revenues ...... -- 4,916 -- 4,916 -- 4,916
Net investment income ............. 5,996 59 -- 6,055 -- 6,055 (5)
Net realized investment gains ..... 159 -- -- 159 -- 159
Other income ...................... 435 -- -- 435 -- 435
-------- -------- -------- -------- -------- --------
Total Revenues ........ 25,049 4,975 -- 30,024 -- 30,024
-------- -------- -------- -------- -------- --------
EXPENSES:
Losses and loss adjustment expenses 15,677 -- -- 15,677 -- 15,677
Underwriting expenses ............. 3,858 -- -- 3,858 35 3,893 (6)
Amortization of goodwill .......... -- -- 259 259 -- 259 (7)
Other expenses .................... 1,888 4,982 (1,139) 5,731 -- 5,731 (8)
-------- -------- -------- -------- -------- --------
Total Expenses ........ 21,423 4,982 (880) 25,525 35 25,560
-------- -------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES ........ 3,626 (7) 880 4,499 (35) 4,464
-------- -------- -------- -------- -------- --------
Income tax provision .............. 1,079 (76) 513 1,516 (12) 1,504 (9)
-------- -------- -------- -------- -------- --------
NET INCOME ........................ $ 2,547 $ 69 $ 367 $ 2,983 $ (23) $ 2,960
======== ======== ======== ======== ======== ========
Net income per common share............................................................... $ 0.91 (10)
========
</TABLE>
- -------------------
(1) Purchase adjustment represents cash paid at closing of $2.9 million plus
$107,000, net of prepaid expenses, for HealthCare Consulting acquisition
expenses. The source of funds for the HealthCare Consulting acquisition
consideration was as follows (in thousands):
<TABLE>
<S> <C>
Cash................................................ $2,900
Bank debt........................................... 2,200
Mandatorily convertible note........................ 300
------
Purchase price............................ $5,400
======
</TABLE>
(2) Subscription, community and syndicated community offerings adjustments
represent the net subscription, community and syndicated community
offerings proceeds, as adjusted for the ESOP and stock award plan shares,
of $7.1 million, at the minimum of the offering range less repayment of
the HealthCare Consulting acquisition bank debt of $2.2 million.
(3) Represents the reclassification of HealthCare Consulting, HCI Ventures and
Employee Benefits Services deferred federal income tax to be consistent
with NCRIC Group's combined financial statements.
34
<PAGE>
(4) Since the HealthCare Consulting acquisition has been accounted for as a
purchase, the excess of the HealthCare Consulting acquisition cost over
the fair value of net assets acquired has been recorded, in thousands, as
follows:
<TABLE>
<S> <C>
Purchase price ..................................... $5,400
Plus acquisition expenses .......................... 294
Less estimated fair value of net assets acquired ... 510
------
Goodwill ................................. $5,184
======
</TABLE>
The final allocation of the purchase price will be made April 15, 1999.
Under the terms of the HealthCare Consulting acquisition purchase
agreements, NCRIC Group could also pay up to an additional $3.1 million if
HealthCare Consulting, HCI Ventures and Employee Benefits Services achieve
earnings targets in 2000, 2001 and 2002. This contingent payment would be
an addition to goodwill and would be amortized over 20 years. This
contingent payment has not been included in the pro forma financial
statements.
(5) No interest earnings on the proceeds of the subscription, community and
syndicated community offerings have been included in these pro forma
statements. If interest were applied at a rate of 5% per annum,
approximating the current commercial paper rate, to the estimated adjusted
net proceeds of $7.1 million, at the minimum of the offering range, less
the $2.2 million bank debt repayment and the $2.9 million initial
HealthCare Consulting acquisition cash payment, and $294,000 of
acquisition expenses, net investment income would increase by $85,000 for
the year ended December 31, 1998.
(6) Reflects the net increase in employee benefit expense resulting from the
ESOP and stock award plan offset by a reduction in the existing 401(k)
profit-sharing plan expense. There is no incremental expense reflected in
the pro forma financial statements for the stock award plan because this
expense has been completely offset by a reduction in NCRIC's existing
management incentive compensation plan. The annual expense from the ESOP
and stock award plan, assuming a per share market value equal to the
purchase price, has been assumed to be $190,000 before being offset by a
reduction of $155,000 in contributions to the existing 401(k)
profit-sharing plan and management incentive compensation plan.
(7) Represents straight-line amortization of $5.2 million of HealthCare
Consulting acquisition goodwill over a period of 20 years.
(8) Represents a reduction in compensation expense resulting from the
HealthCare Consulting acquisition. The combined financial statements of
the Practice Management Services of HealthCare Consulting, HCI Ventures
and Employee Benefits Services reflect owners' compensation of $1,589,000
for the year ended December 31, 1998. As a result of the HealthCare
Consulting acquisition, NCRIC MSO has entered into employment agreements
with each of the former owners of HealthCare Consulting, HCI Ventures and
Employee Benefits Services. The employment agreements reduce the aggregate
compensation of the former owners to $450,000 per year.
(9) To record the income tax effect of the adjustments described in notes (6)
through (8). The Purchase Adjustment income tax provision includes the
following three components: (a) additional income tax on the historical
pre-tax income of HealthCare Consulting, HCI Ventures and Employee
Benefits Services to raise the effective tax rate to 40% to recognize the
change in tax posture of the acquired companies, (b) a tax expense on the
reduction in compensation expense described in note (8) above, and (c) a
tax benefit on deductible goodwill amortization.
(10) Represents the net income of NCRIC Group divided by outstanding shares,
which represent the total number of outstanding shares, assuming an
offering at the minimum of the offering range, excluding the unallocated
ESOP and stock award plan shares. For the year ended December 31, 1998,
3,266,057 shares have been assumed to be outstanding.
35
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the NCRIC Group common stock
cannot be determined until the subscription, community and syndicated community
offerings are completed. However, net proceeds are currently estimated to be
between $8.5 million and $11.8 million based upon the following assumptions:
. Sandler O'Neill will receive a fee equal to 2.0% of the aggregate
actual purchase price of all shares of common stock sold in the
subscription and community offerings less a $25,000 credit relating
to the HealthCare Consulting acquisition;
. no shares will be sold in the syndicated community offering; and
. subscription, community and syndicated community offerings expenses,
excluding the fees paid to Sandler O'Neill, will be approximately
$835,000.
Pro forma net income of NCRIC Group for the year ended December 31, 1998
assumes goodwill of $5.2 million amortized over 20 years for the HealthCare
Consulting acquisition. Pro forma net income has been calculated assuming the
shares of NCRIC Group common stock had been sold in the subscription and
community offerings and the HealthCare Consulting acquisition had been
consummated at January 1, 1998. Pro forma stockholders' equity and tangible
stockholders' equity have been calculated assuming that the offerings and
acquisition had been consummated on December 31, 1998.
The following pro forma information may not be representative of the
financial effects of the transactions described above at the dates on which they
actually occur and should not be taken as indicative of future results of
operations. Pro forma consolidated stockholders' equity represents the
difference between the stated amount of assets and liabilities of NCRIC Group
computed in accordance with generally accepted accounting principles or GAAP.
The pro forma stockholders' equity is not intended to represent the fair market
value of NCRIC Group's common stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following table summarizes pro forma data of NCRIC Group at or for the
year ended December 31, 1998 based on the assumptions set forth above and in the
table and should not be used as a basis for projections of market value of NCRIC
Group common stock following the subscription, community and syndicated
community offerings. The table gives effect to the ESOP and stock award plan as
they are described in this prospectus. No effect has been given in the table to
the possible issuance of additional shares of NCRIC Group common stock in
connection with the stock option plan.
36
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31, 1998
--------------------------------------------------
1,360,000 1,600,000 1,840,000
Shares Shares Shares
Sold at $7.00 Sold at $7.00 Sold at $7.00
Per Share Per Share Per Share
Minimum of Midpoint of Maximum of Footnote
Range Range Range References
------------- ------------ ------------- ----------
(in thousands, (except per share amounts)
<S> <C> <C> <C> <C>
Gross Proceeds ..................................... $ 9,520 $ 11,200 $ 12,880
Less offering expenses and commissions ............. (1,000) (1,034) (1,067)
-------- -------- --------
Estimated net proceeds ............................. 8,520 10,166 11,813
Less: Common Stock purchased by ESOP ............... (952) (1,120) (1,288)
Common Stock purchased by stock award
plan ......................................... (476) (560) (644)
-------- -------- --------
Estimated net proceeds, as adjusted ................ $ 7,092 $ 8,486 $ 9,881
======== ======== ========
Net income:
Pro forma combined ........................... $ 2,983 $ 2,983 $ 2,983 (3)
Pro forma benefit plan adjustment ............ (23) (23) (23) (1),(2)
-------- -------- --------
Pro forma net income .................. $ 2,960 $ 2,960 $ 2,960
======== ======== ========
Per share net income:
Pro forma combined ........................... $ 0.92 $ 0.78 $ 0.68
Pro forma benefit plan adjustment ............ (0.01) (0.01) (0.01) (1),(2)
-------- -------- --------
Pro forma net income per share ........ $ 0.91 $ 0.77 $ 0.67 (5)
======== ======== ========
Stockholders' equity:
Pro forma combined ........................... $ 31,011 $ 31,011 $ 31,011 (3)
Estimated net proceeds ....................... 8,520 10,166 11,813
Acquisition stock issuance ................... 300 300 300 (4)
Less: Common Stock acquired by ESOP .......... (952) (1,120) (1,288) (1)
Common Stock acquired by stock
award plan ............................. (476) (560) (644) (1)
-------- -------- --------
Pro forma stockholders' equity $ 38,403 $ 39,797 $ 41,192
======== ======== ========
Pro forma tangible stockholders' equity ............ $ 33,219 $ 34,613 $ 36,008
======== ======== ========
Stockholders' equity per share:
Pro forma combined ........................... $ 9.58 $ 8.16 $ 7.09
Estimated net proceeds ....................... 2.63 2.67 2.71
Acquisition stock issuance ................... 0.09 0.08 0.07
Less: Common Stock acquired by ESOP .......... (0.29) (0.29) (0.29)
Common Stock acquired by stock
award plan ............................. (0.15) (0.15) (0.15)
-------- -------- --------
Pro forma stockholders' equity per share .. $ 11.86 $ 10.47 $ 9.43
======== ======== ========
Pro forma tangible stockholders' equity per share .. $ 10.26 $ 9.10 $ 8.25
======== ======== ========
Offering price as a percentage of pro forma
stockholders' equity per share ..................... 59.02% 66.86% 74.23%
======== ======== ========
Offering price as a percentage of pro forma
tangible stockholders' equity per share ............ 68.23% 76.92% 84.85%
======== ======== ========
Offering price to pro forma net income per share ... 7.69x 9.09x 10.45x
======== ======== ========
</TABLE>
- --------------------
(1) For purposes of this table, the funds used to acquire the shares of NCRIC
Group common stock purchased by the ESOP and the stock award plan are
assumed to have been loaned to the ESOP and the stock award plan by NCRIC
Group. The amount loaned is reflected as a reduction of stockholders'
equity. NCRIC Group intends to make annual contributions to the ESOP and
to the stock award plan. The annual expense from the ESOP
37
<PAGE>
and stock award plan, assuming a per share market value equal to the
purchase price, has been assumed to be $190,000 before being offset by a
reduction of $155,000 in contributions to the existing 401(k)
profit-sharing plan and management incentive compensation plan. This net
additional expense of $35,000 equals after-tax expense of $23,000. The
annual net additional expense is assumed to remain constant across the
entire offering range because management intends to adjust the offsetting
expense to maintain this level of incremental expense. NCRIC Group's total
annual payment of the ESOP and stock award plan loans are based upon the
assumptions that (a) 27,200, 32,000 and 36,800 shares at the minimum,
midpoint and maximum of the offering range, respectively, have been
committed to be released during the year ended December 31, 1998 at an
average fair value of $7.00 per share and were accounted for as a charge
to expense in accordance with Statement of Position No. 93-6; and (b) only
the ESOP and stock award plan shares committed to be released were
considered outstanding for purposes of the net earnings per share
calculations, while no ESOP and stock award plan shares were considered
outstanding for purposes of the stockholders' equity per share
calculations.
(2) No effect has been given to the issuance of additional shares of NCRIC
Group common stock in connection with the stock option plan. NCRIC Group
intends to grant options for its shares at the closing date of the
offerings with an exercise price of $7.00 per share, in an amount equal to
5% of the subscription, community and syndicated community offerings, or
68,000, 80,000 and 92,000 shares, respectively, at the minimum, midpoint
and maximum of the offering range. These shares will be acquired either
through open market purchases or from authorized but unissued shares of
NCRIC Group's common stock or treasury stock of NCRIC Group, if any. NCRIC
Group will provide any funds used to purchase the shares in connection
with the stock option plan. The issuance of authorized but unissued shares
of NCRIC Group's common stock on the exercise of options granted under the
stock option plan instead of open market purchases would dilute the voting
interests of existing stockholders.
(3) The pro forma combined net income and stockholders' equity amounts
represent the amounts reported in the historical financial statements of
NCRIC and of the practice management and financial services of HealthCare
Consulting, HCI Ventures and Employee Benefits Services and adjusted to
reflect purchase adjustments.
(4) The HealthCare Consulting acquisition stock issuance represents the amount
for the 42,857 shares of common stock to be issued on conversion of the
$300,000 in mandatorily convertible notes.
(5) The pro forma financials include no assumption for interest earnings on
the net new investable funds available as the result of the subscription,
community and syndicated community offerings. If interest at 5% per annum,
approximating the current commercial paper rate, had been assumed to have
been earned on the net proceeds, as adjusted, less the $2.2 million bank
debt repayment, the $2.9 million initial HealthCare Consulting acquisition
cash payment and $294,000 for acquisition expenses, net income would have
included an additional $56,000, $102,000 and $148,000 and net income per
share would have been $0.92, $0.80 and $0.71 at the minimum, midpoint and
maximum levels of the offering range, respectively, for the year ended
December 31, 1998.
38
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following table contains financial information which has been derived
from the consolidated financial statements of NCRIC Group. The consolidated
financial statements of NCRIC Group for each of the years in the three-year
period ended December 31, 1998 have been audited by Deloitte & Touche LLP. The
selected consolidated financial data below should be read in conjunction with
the consolidated financial statements and their accompanying notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
-------- --------- ---------
(dollars in thousands)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Gross premiums written .......... $ 19,214 $ 17,869 $ 19,017
======== ========= =========
Net premiums written ............ $ 21,014 $ 13,935 $ 13,351
======== ========= =========
Net premiums earned ............. $ 18,459 $ 13,532 $ 13,351
Net investment income ........... 5,996 6,045 5,656
Net realized investment gains ... 159 90 229
Other income .................... 435 355 660
-------- --------- ---------
Total revenues ........ 25,049 20,022 19,896
Losses and LAE .................. 15,677 15,591 15,236
Other underwriting expenses ..... 3,858 2,918 2,438
Other expenses .................. 1,888 676 928
-------- --------- ---------
Total expenses ........ 21,423 19,185 18,602
Income before income taxes ...... 3,626 837 1,294
Income tax (benefit) provision .. 1,079 (122) 303
-------- --------- ---------
Net income ...................... 2,547 959 991
Other comprehensive income (loss) 1,227 1,103 (1,349)
-------- --------- ---------
Comprehensive income (loss) ..... $ 3,774 $ 2,062 $ (358)
======== ========= =========
BALANCE SHEET DATA:
Invested assets ................. $ 96,348 $ 94,362 $ 91,008
Total assets .................... 134,326 121,841 116,664
Total liabilities ............... 103,315 94,355 91,240
Total equity .................... 31,011 27,486 25,424
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C>
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio .................. 84.9% 115.2% 114.1%
Underwriting expense ratio .......... 20.9% 21.6% 18.3%
Combined ratio after renewal credits 105.8% 136.8% 132.4%
Combined ratio before renewal credits 96.0% 118.6% 119.6%
SELECTED STATUTORY DATA:
Loss and LAE ratio .................. 82.5% 99.9% 103.2%
Underwriting expense ratio .......... 15.2% 19.7% 18.4%
Combined ratio ...................... 97.7% 119.6% 121.6%
Policyholders' surplus .............. $ 24,116 $ 23,258 $ 22,365
</TABLE>
In calculating GAAP underwriting ratios, renewal credits are considered a
reduction of premium income. In addition, earned premium is used to calculate
the GAAP loss and underwriting expense ratios. For statutory purposes, renewal
credits are not considered a reduction in premium income, and written premiums
are used to calculate the statutory underwriting expense ratio. Due to these
differences in treatment, GAAP combined ratios can differ significantly from
statutory combined ratios. For a discussion of the differences between statutory
and GAAP reporting, see note 9 to the consolidated financial statements.
40
<PAGE>
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
selected consolidated financial and operating data and consolidated financial
statements and related notes included elsewhere in this prospectus.
General
The financial statements and data presented in the prospectus 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. See Note 9 to the consolidated financial statements for a
reconciliation of NCRIC's net income and equity between GAAP and statutory
accounting bases. Discussed below are selected key financial concepts:
Premium income. Gross premiums written represent the amounts billed to
policyholders. Gross premiums written are reduced by premiums ceded to
reinsurers and renewal credits in determining net premiums written. Premiums
ceded to reinsurers represent the cost to NCRIC of reducing NCRIC's exposure to
medical professional liability losses by transferring agreed upon insurance
risks to reinsurers through a reinsurance contract or treaty. Renewal credits
are reductions in premium billings to renewing policyholders. Net premiums
written are adjusted by any amount which has been billed but not yet earned
during the period in arriving at earned premiums. For several large groups of
policyholders, NCRIC has insurance programs where the premiums are
retrospectively determined based on losses during the period. Premiums billed
under retrospective programs are recorded as premiums written, while premium
refunds accrued under retrospective programs are recorded as unearned premiums.
Under retrospective programs, premiums earned are premiums written reduced by
premium refunds accrued.
Prior to 1997, NCRIC's policies were written with a January 1 renewal
date. During 1997 and 1998, NCRIC began to stagger policy renewal dates
throughout the year which results in a one-time effect when the policy is
staggered. Written premiums are increased during the periods when policies are
being re-issued, returning to the previous level in the subsequent period. In
accordance with GAAP, premiums are earned ratably over the terms of NCRIC's
policies, so this change in renewal dates has no effect on premiums earned for
any period.
The balance sheet item "advance premiums" represents those premiums
collected on policies prior to their renewal dates. Unearned premiums represent
premiums billed but not yet fully earned at the end of the reporting period.
Premiums receivable represent either annual billed premiums or experience-rated
premiums which have not yet been collected.
Losses and loss adjustment expenses. Loss and LAE reserves are
estimates of future payments for reported and unreported claims and related
expenses of adjudicating claims with respect to insured events that have
occurred. The change in these reserves from year to year is reflected as an
increase or decrease to NCRIC's loss and loss adjustment expenses. Medical
41
<PAGE>
professional liability loss and LAE reserves are established based on an
estimate of these future payments as reflected in NCRIC's past experience with
similar cases and historical trends involving claim payment patterns. Other
factors that modify past experience are also considered in setting the reserves,
including court decisions; economic conditions; current trends in losses; and
inflation. Reserving for medical professional liability claims continues to be
a complex and uncertain process, requiring the use of informed estimates and
judgments. Although NCRIC follows a practice of conservatively estimating its
future payments relating to losses incurred, there can be no assurance that
currently established reserves will prove adequate in light of subsequent actual
experience.
NCRIC, in consultation with its independent actuaries, utilizes
several methods in order to estimate loss and LAE reserves by projecting
ultimate losses. By utilizing and comparing the results of these methods, NCRIC
is better able to analyze loss data and establish an appropriate reserve. The
loss and LAE reserves are estimated by management on a monthly basis and
reviewed periodically by NCRIC's independent actuaries. The independent
actuarial review includes an evaluation of the appropriateness of methods used
and changes in methodology if needed, as well as a reflection of updated
experience.
The inherent uncertainty in establishing reserves is relatively
greater for companies writing long-tail casualty business like NCRIC. Due to
the extended nature of the claim resolution process of professional liability
claims, established reserve estimates may be adversely impacted by: judicial
expansion of liability standards; expansive interpretations of contracts;
inflation associated with medical claims; and the propensity of individuals to
file claims. Because of the existence of these uncertainties, NCRIC has
historically taken a conservative posture in establishing reserves. NCRIC
refines reserve estimates as experience develops and additional claims are
reported or existing claims are closed; adjustments to losses reserved in prior
periods are reflected in the results of the periods in which the adjustments are
made.
Losses and LAE reserve liabilities as stated on the balance sheet are
reported gross before recovery from reinsurers for the portion of the claims
covered under the reinsurance program. Losses and LAE expenses as stated on the
income statement are reported net of reinsurance recoveries.
Reinsurance. NCRIC manages its exposure to individual claim losses,
annual aggregate losses, and LAE through its reinsurance program. Reinsurance
is a customary practice in the industry. It allows NCRIC to obtain
indemnification against a specified portion of losses associated with insurance
policies it has underwritten by entering into a reinsurance agreement with other
insurance enterprises or reinsurers. NCRIC pays or cedes part of its
policyholder premium to the reinsurers. The reinsurers in return agree to
reimburse NCRIC for a specified portion of any claims covered under the
reinsurance contract. While reinsurance arrangements are designed to limit
losses from large exposures and to permit recovery of a portion of direct
losses, reinsurance does not relieve NCRIC of liability to its insureds.
Under one of NCRIC's primary reinsurance contracts, the portion of the
policyholder premium ceded to the reinsurers is "swing rated" or experience
rated on a retrospective basis. This swing rated cession program is subject to
a minimum and maximum premium range to be
42
<PAGE>
paid to the reinsurers in the future, depending upon the extent of losses
actually paid by the reinsurers. A deposit premium is paid by NCRIC during the
initial policy year. An additional liability, "retrospective premiums accrued
under reinsurance treaties" is recorded by NCRIC to represent an estimate of net
additional payments to be made to the reinsurers under the program, based on the
level of loss and LAE reserves recorded. Like loss and LAE reserves, adjustments
to prior year ceded premiums payable to the reinsurers are reflected in the
results of the periods in which the adjustments are made. NCRIC follows a
practice of conservatively estimating its liabilities relating to the swing
rated cession program based on historical loss experience. The swing rated
reinsurance premiums are recorded in a manner consistent with the recording of
NCRIC's loss reserves.
NCRIC's practice for accounting for the liability for retrospective
premiums accrued under reinsurance treaties has been to record the current year
swing rated reinsurance premium at management's best estimate of the ultimate
liability, which has generally been the maximum rate payable under terms of the
treaty. Due to the long tail nature of the medical malpractice insurance
business, it takes several years for the losses for any given report year to
fully develop. Since the ultimate liability for reinsurance premiums depends on
the ultimate losses, among other things, it is several years after the initial
reinsurance premium accrual before the amount becomes known. During the
intervening periods, reevaluations are made and adjustments to the accrued
retrospective premiums are made as considered appropriate by management.
NCRIC has historically ceded to its reinsurers over 90% of its
exposure to individual losses in excess of $1 million, known as excess layer
coverage. Excess layer premiums are recorded as current year reinsurance ceded
costs.
Recent industry performance. NCRIC's results of operations have
historically been influenced by factors affecting the medical professional
liability industry in general. The operating results of the US medical
professional liability industry have been subject to significant variations over
time due to competition, general economic conditions, judicial trends and
fluctuations in interest rates. According to the August, 1998 Best's Review
published by A. M. Best Company, in recent years, medical professional liability
insurers have successfully stabilized premium rates and maintained profits by
drawing on reserve redundancies from the early 1990's. Over the last several
years, premium rates for the industry were basically flat while claim costs were
beginning to rise. NCRIC continues to monitor these industry trends and
consider them in relation to NCRIC's circumstances when setting rates or
establishing reserves.
Consolidated net income and comprehensive income results -- Years ended December
31, 1998, 1997, and 1996
Year ended December 31, 1998 compared to year ended December 31, 1997
Net income for NCRIC increased $1.6 million, from $959,000 for the year
ended December 31, 1997 to $2.5 million for the year ended December 31, 1998.
The substantial increase in income for the year was principally due to a $4.7
million increase in net premiums earned before renewal credits, partially offset
by a $2.2 million increase in expenses and by a $1.2 million increase in Federal
income taxes. The increase in net premiums earned is primarily
43
<PAGE>
due to a $5.9 million decrease in reinsurance costs and a $1.2 million increase
in premiums earned from other than experience-rated plans, offset by a decrease
of $2.4 million in retrospective policyholder premiums under experience-rated
plans. Both the decrease in reinsurance costs and the decrease in premiums due
under retrospective plans are related to favorable loss development. Reinsurance
ceded premiums provided $877,000 less income in the fourth quarter than the
average for the first three quarters of the year. The premiums ceded related to
prior years under the swing rated treaty are re-estimated and adjusted quarterly
based on the most current information available on the related losses. Expenses
increased in 1998 due to costs associated with the reorganization, as well as
expenditures for the beginning of substantive operations of the management
services organization. Federal income taxes increased due to increased income
before income taxes.
Comprehensive income was $3.8 million for the year ended December 31,
1998 compared to $2.1 million for the year ended December 31, 1997. Other
comprehensive income consists of unrealized investment gains net of deferred
income taxes.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net income for NCRIC was $959,000 for the year ended December 31,
1997, down 3% from $991,000 for the year ended December 31, 1996. This decline
was largely due to a combination of offsetting factors. Net premiums earned
increased by $181,000, net investment income increased by $389,000 and a change
from a tax expense in 1996 to a tax benefit in 1997 contributed $425,000. More
than offsetting these positives was an increase in losses and LAE of $355,000,
a decrease in other income and realized capital gains of $444,000 and an
increase in underwriting and other expenses of $228,000.
The $181,000 increase in net premiums earned primarily resulted from
three significant factors: (1) increasingly competitive market conditions and
additional risk-sharing with larger insureds led to an additional $1.5 million
in discounts from NCRIC's base rates; (2) higher renewal credits reduced net
premiums earned by $653,000; the renewal credits were granted in anticipation of
a 6% increase in base rates for 1998; and (3) these reductions were more than
offset by a $2.4 million decrease in reinsurance costs, reflecting a reduction
in reinsurers' pricing based on NCRIC's improved loss exposure on recent loss
years as well as favorable development in retrospective premiums accrued under
reinsurance treaties.
Comprehensive income was $2.1 million for the year ended December 31,
1997 compared to a loss of $358,000 for the year ended December 31, 1996.
44
<PAGE>
Net premiums earned
Following is a summary of NCRIC's net premiums earned:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------- ------------------ ----------------
<S> <C> <C> <C>
(in thousands)
Gross premiums written*.................... $19,214 $17,869 $19,017
Change in unearned premiums................ (2,945) (403) --
------- ------- -------
Gross premiums earned before renewal
credits.................................. 16,269 17,466 19,017
Reinsurance premiums ceded related to:
current year............................. (5,623) (5,474) (7,312)
prior year............................... 9,712 3,620 3,073
------- ------- -------
Total reinsurance premiums ceded......... 4,089 (1,854) (4,239)
------- ------- -------
Net premiums earned before renewal
credits.................................. 20,358 15,612 14,778
Renewal credits............................ (1,899) (2,080) (1,427)
------- ------- -------
Net premiums earned........................ $18,459 $13,532 $13,351
======= ======= =======
*Net premiums written after renewal
credits.................................. $21,014 $13,935 $13,351
======= ======= =======
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
Gross premiums written increased by $1.3 million, or 8%, from $17.9
million for the year ended December 31, 1997 to $19.2 million for the year ended
December 31, 1998. Starting in the fourth quarter of 1997 and continuing
through 1998, NCRIC began to stagger policy renewal dates. Premiums written
increased $836,000 for the year ended December 31, 1998 and $324,000 for the
year ended December 31, 1997 due to re-writing of policies. There is a one-time
effect when the policy renewal is staggered which increases premiums written in
the current period; premiums written will, all else being equal, return to the
previous level in the subsequent period. While the staggering of the renewal
dates affects premiums written, earned premiums are not affected for either
period. The $19.2 million of gross premiums written for the year ended December
31, 1998 includes $697,000 related to experience-rated programs. The $17.9
million of gross premiums written for the year ended December 31, 1997 includes
$1.6 million related to experience-rated programs.
Gross premiums written adjusted for the staggering of renewal dates and
experience-rated premiums increased $1.7 million, or 11%, from $15.9 million for
the year ended December 31, 1997 to $17.7 million for the year ended December
31, 1998. Approximately $1.4 million of this $1.7 million increase is due to
the 6% premium rate increase for 1998; the remainder of the increase results
from a 2% policyholder increase to 1,202. Discounts under policyholder
programs, described more fully below in "Year Ended December 31, 1997 Compared
to Year
45
<PAGE>
Ended December 31, 1996," increased by $208,000, or 4% for the year ended
December 31, 1998 compared to the year ended December 31, 1997. Gross premiums
written on excess layer coverage increased $322,000 from $1.7 million for the
year ended December 31, 1997 to $2.0 million for the year ended December 31,
1998.
The change in unearned premiums for the period increased by $2.5 million
from $403,000 for the year ended December 31, 1997 to $2.9 million for the year
ended December 31, 1998. This change resulted from a $1.0 million increase in
the unearned portion of the policy premium due to non-January 1 renewal dates,
as well as a $1.5 million increase in retrospectively-determined policyholder
refunds for 1998 due to favorable loss experience.
Gross premiums earned before renewal credits decreased $1.2 million, or
7%, from $17.5 million for the year ended December 31, 1997 to $16.3 million for
the year ended December 31, 1998. The $1.2 million decrease described above was
due to approximately $1.2 million of additional premiums earned for the year
ended December 31, 1998, offset by a $2.4 million net reduction in premiums
earned under experience-rated programs.
Reinsurance premiums ceded decreased by $5.9 million from $1.9 million
for the year ended December 31, 1997 to a credit of $4.1 million for the year
ended December 31, 1998. Reinsurance premiums are affected by current year
premiums payable to the reinsurers, as well as the retrospective adjustments to
accruals for prior year premiums.
Current year reinsurance premiums ceded increased by $149,000, or 3%,
from $5.5 million for the year ended December 31, 1997 to $5.6 million for the
year ended December 31, 1998. This increase is due to an increase in the excess
layer coverages purchased by the policyholders, partially offset by a decrease
in the swing rated premium. The reinsurance premium due for excess layer
coverage increased by $268,000 or 16%, from $1.7 million for the year ended
December 31, 1997 to $1.9 million for the year ended December 31, 1998,
consistent with an increase in premiums written for the excess layer coverage.
In addition, the premiums related to the swing rated cession program decreased
by $119,000, or 3%. The liability "retrospective premiums accrued under
reinsurance treaties" decreased from $13.8 million at December 31, 1997 to $6.5
million at December 31, 1998.
Reinsurance premiums related to prior years under the swing rated treaty
were reduced by approximately $3.6 million in 1997 and $9.7 million in 1998 due
to favorable loss development of reinsured losses compared to prior estimates by
NCRIC. Generally, losses covered by the swing rated treaty are in the range
excess of $500,000 to $1 million. The 1997 change in estimate relates primarily
to the favorable loss development in the 1989 and 1992 loss years. The 1998
change is primarily reflective of the favorable loss development for the 1993
through 1995 loss years. The favorable loss development results largely from
NCRIC's decision in 1996 to more aggressively defend high exposure loss cases.
The success of this new policy resulted in reduced loss payments compared to the
original loss estimates.
In the 1990 -- 1991 treaty, NCRIC's incurred losses generated the maximum
premium expense under the terms of the swing rated treaty or 27% of gross net
earned premium income. As a result of the poor loss experience the reinsurers
raised the maximum premium rate effective
46
<PAGE>
in 1992 to 35% and in 1993 to 40% of gross net earned premium income where the
rate remained at 40% until 1996. Beginning in 1996 NCRIC recognized that the
losses incurred in some of the earlier years were developing favorably and NCRIC
expected the losses to generate a reinsurance premium below the maximum
reinsurance premium rate level previously booked. Accordingly, NCRIC began to
reduce the reinsurance premium liability for the older years. This recognition
of favorable emerging loss development in the primary reinsurance layer
continued into 1997 and 1998. Also, as a result of the emerging loss experience
on the 1993 1995 treaty years, the reinsurers reduced the maximum reinsurance
rate for 1996 to 30% and for 1997, 1998 and 1999 to 22.5%.
While NCRIC had recognized in its 1996 and 1997 financial statements
emerging favorable loss development in its estimates of the prior year
reinsurance ceded premiums, there was some indication that the overall level of
the reinsurance premium liability might be too high. In 1998 NCRIC worked with
its independent actuary to study the liability for reinsurance ceded premiums in
conjunction with the reserve liability calculation. The result was to further
reduce the liability, which results in reinsurance ceded premium income.
Renewal credits decreased $181,000, or 9%, from $2.1 million for the year
ended December 31, 1997 to $1.9 million for the year ended December 31, 1998
reflecting a decrease in the credit rate from 16% to 12.5%, partially offset by
an increasing premium base subject to the discount.
Net premiums earned before renewal credits increased by $4.7 million, or
30%, from $15.6 million for the year ended December 31, 1997 to $20.4 million
for the year ended December 31, 1998. This increase primarily reflects the
change in estimate of reinsurance premiums due under the swing rated program.
Net premiums earned after renewal credits increased similarly by $4.9 million,
or 36%, from $13.5 million for the year ended December 31, 1997 to $18.5 million
for the year ended December 31, 1998.
Year ended December 31, 1997 compared to year ended December 31, 1996
Gross premiums written decreased by $1.1 million, or 6%, from $19.0
million for the year ended December 31, 1996 to $17.9 million for the year ended
December 31, 1997. The decrease in policyholder premiums was more than accounted
for by a $2.1 million increase in discounts granted to policyholders under
various discount and risk-sharing programs offered by NCRIC. The decrease was
offset by an additional $1.3 million of premiums collected in 1997 related to
experience-rated programs. Base premium rates and the number of policyholders
were essentially unchanged. Policyholder renewal rates were 97% in 1997 and 95%
in 1996. Gross premiums written on excess layer coverage decreased $419,000
from $2.1 million for the year ended December 31, 1996 to $1.7 million for the
year ended December 31, 1997.
Discounts are granted to provide incentives and rewards for policyholders
to minimize loss experience. Policyholders with favorable loss experience or
"claims free" experience, those who participate in risk-management programs and
those who wish to participate in the loss experience of a group under risk
sharing premium plans are granted discounts. The discounts for attending risk-
management programs were first implemented in 1997, and accounted for
47
<PAGE>
$843,000 of the $1.5 million increase in discounts for the year. While these
programs reduce net premiums due to the discounts granted, management believes
its risk-management programs are likely to reduce losses in the future.
In addition to the discounts granted, under some retrospective programs,
the policyholders associated with a group may initially pay reduced premiums for
that policy year. NCRIC will subsequently increase these premiums through
additional billings if the group's loss experience warrants. Under other risk
sharing programs, the policyholder group initially pays a premium for the policy
year which may later be partially refunded by NCRIC if losses for the group are
under agreed-upon limits. Consistent with NCRIC's treatment of both losses and
other reinsurance programs, premium refunds or additional billings are reflected
in premiums in the periods in which the adjustments are made. For the year
ended December 31, 1997, approximately $1.6 million of premiums earned under
retrospective programs are subject to adjustment based upon experience.
Retrospective premium refunds of $240,000 were made during 1997 compared to zero
in 1996. NCRIC also grants discounts for those policyholders in some group or
part-time practices. The premiums from excess layer coverage purchased by
policyholders decreased primarily due to premium discounts granted.
The change in unearned premiums for the period increased by $403,000 for
the year ended December 31, 1997 due to the staggering of policy renewal dates
for the first time in 1997. The amount was zero in 1996.
Reinsurance premiums ceded decreased by $2.4 million, or 56%, from $4.2
million for the year ended December 31, 1996 to $1.9 million for the year ended
December 31, 1997. Reinsurance premiums ceded are affected by current year
premiums due to the reinsurers, as well as by retrospective adjustments to prior
year premiums ceded. Due to favorable loss development of reinsured losses
compared to prior estimates by NCRIC, the swing rated reinsurance premiums
related to prior years produced an additional $547,000 benefit, increasing from
$3.1 million for the year ended December 31, 1996 to $3.6 million for the year
ended December 31, 1997.
Current year reinsurance premiums ceded decreased $1.8 million, or 25%,
from $7.3 million for the year ended December 31, 1996 to $5.5 million for the
year ended December 31, 1997. The maximum premium due under the swing rated
program was decreased from 30% of net policyholder premiums, as defined under
the reinsurance treaty, in 1996 to 22.5% in 1997 to reflect NCRIC's favorable
loss experience. Reinsurance coverages were unaffected. The favorable loss
experience produced a reduction in the costs of the swing rated reinsurance
program. Current year ceded premiums decreased by $1.4 million, or 27%, from
$5.2 million in 1996 to $3.8 million in 1997. The reinsurance premium due for
excess layer coverage decreased by $415,000 or 20% for the year ended December
31, 1997 compared to the year ended December 31, 1996 as previously described.
These factors caused a decrease in the cost of NCRIC's reinsurance program in
1997 and 1996. The liability "retrospective premiums accrued under reinsurance
treaties" decreased from $14.8 million at December 31, 1996 to $13.8 million at
December 31, 1997.
48
<PAGE>
Renewal credits increased $653,000, or 46%, from $1.4 million for the
year ended December 31, 1996 to $2.1 million for the year ended December 31,
1997 due to an increase in the renewal credit percentage from 10% to 16%,
partially offset by a decrease in the premium base. This increase was intended
to offset a 6% premium rate increase for 1998 for those qualifying for the
renewal credit, as well as to respond to the competitive pressures in the
marketplace. Because NCRIC accrues renewal credits in the period declared, the
renewal credit is reflected as a reduction in premiums earned in 1997 while the
6% premium rate increase was not realized until 1998.
Net premiums earned before renewal credits increased by $834,000, or 6%,
from $14.8 million for the year ended December 31, 1996 to $15.6 million for the
year ended December 31, 1997. Net premiums earned after renewal credits
increased by $181,000, or 1%, from $13.4 million for the year ended December 31,
1996 to $13.5 million for the year ended December 31, 1997.
-------------------------
Net investment income
-------------------------
Year ended December 31, 1998 compared to year ended December 31, 1997
Net investment income decreased by $49,000, or 1%, for the year ended
December 31, 1998 compared to 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. Net investment income for both years was approximately
$6.0 million. Average invested assets, which includes cash equivalents but
excludes real estate held, increased by $5.6 million, or 6%, from $100.0 million
at December 31, 1997 to $105.6 million at December 31, 1998 due to a change in
unrealized gains and additional invested funds. Positive cash flow and maturing
investments were primarily invested in U. S. Government/Agency and corporate
bonds for both periods. In order to increase yield and to better utilize
NCRIC's positive cash flow position, the duration of the portfolio was increased
from 4.0 years to 5.7 years. The average effective yield was approximately
5.68% for the year ended December 31, 1998 and 6.05% for the year ended December
31, 1997. The tax equivalent yield was approximately 6.24% at December 31,
1998 and 6.69% at December 31, 1997. The decrease in investment yields is
reflective of the market decrease in interest rates in 1998 compared to 1997.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net investment income increased by $389,000, or 7%, from $5.7 million
for the year ended December 31, 1996 to $6.0 million for the year ended December
31, 1997 due to both an increase in the invested assets in the securities
portfolio and an increase in the yield rate. Average invested assets, which
includes cash equivalents but excludes real estate held, increased by $2.5
million, or 3%, from $97.5 million at December 31, 1996 to $100.0 million at
December 31, 1997 due to unrealized gains and additional invested funds.
Positive cash flow and maturing investments were primarily invested in U. S.
Government/Agency and corporate bonds
49
<PAGE>
for 1997 and in tax-advantaged securities for 1996. In 1997, NCRIC sold its
building and invested the $1.2 million net proceeds in fixed maturity
securities. In late 1996, in accordance with the after-tax income optimization
program, NCRIC sold approximately $10 million of existing taxable securities and
re-invested the proceeds in tax-advantaged municipals and preferred stock. The
average effective yield was approximately 6.05% for 1997 and 5.80% for 1996. The
tax equivalent yield was 6.69% for 1997 and 5.99% for 1996. The increase in
investment yields is reflective of the market increase in interest rates in 1997
over 1996.
-------------------------
Net realized investment gains
-------------------------
Year ended December 31, 1998 compared to year ended December 31, 1997
Net realized investment gains were $159,000 for the year ended December
31, 1998 and $90,000 for the year ended December 31. 1997. Net realized gains
for both periods were primarily from the sale of corporate bonds.
Year ended December 31, 1997 compared to year ended December 31, 1996
Net realized investment gains were $90,000 for the year ended December
31, 1997 and $229,000 for the year ended December 31, 1996. Net realized gains
for 1997 and 1996 were primarily from the sale of corporate bonds.
-------------------------
Other income
-------------------------
Other income includes revenues from insurance brokerage, insurance agency and
physician services; as well as finance and service charge income from NCRIC's
financing of physician premiums.
Year ended December 31, 1998 compared to year ended December 31, 1997
Other income increased $80,000, or 23%, from $355,000 for the year ended
December 31, 1997 to $435,000 for the year ended December 31, 1998. This
increase in income is primarily due to revenues from the beginning of
substantive operations in 1998 of the management services organization.
Year ended December 31, 1997 compared to year ended December 31, 1996
Other income decreased $305,000, or 46%, from $660,000 for the year ended
December 31, 1996 to $355,000 for the year ended December 31, 1997. Prior to
1997 NCRIC provided premium financing to its member physicians. During 1997
NCRIC arranged a
50
<PAGE>
premium financing facility to be provided by an independent party. This caused a
$252,000 decrease in finance and service charge income and an increase in net
investment income as a result of improved cash flow. The remainder of the
reduction in other income was due to decreased insurance brokerage and insurance
agency commissions and income.
-------------------------
Loss and loss adjustment expenses
incurred and combined ratio results
-------------------------
The expense for incurred losses and LAE for each year net of reinsurance can be
summarized as follows. All loss expense amounts incurred are reported net of
reinsurance amounts recoverable.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
----------------------- ---------------------- ----------------------
<S> <C> <C> <C>
(in thousands)
Incurred losses and LAE related to:
Current year losses....................... $19,140 $19,444 $16,775
Prior years development................... (3,463) (3,853) (1,539)
------- ------- -------
Total incurred for the year.................. $15,677 $15,591 $15,236
======= ======= =======
</TABLE>
Traditionally, property and casualty insurer results are judged using ratios of
losses and underwriting expenses compared to net premiums earned. Following is
a summary of these ratios for each period:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
1998 1997 1996
------------------- ------------------- -------------------
<S> <C> <C> <C>
Before Renewal Credits:
Loss and LAE ratio:
Current year losses............. 94.0% 124.5% 113.5%
Prior year losses............... (17.0) (24.6) (10.4)
----- ----- -----
Total Loss and LAE ratio........... 77.0 99.9 103.1
Underwriting expense ratio......... 19.0 18.7 16.5
----- ----- -----
Combined ratio before Renewal
Credits......................... 96.0% 118.6% 119.6%
===== ===== =====
- -------------------------------------
After Renewal Credits:
Loss and LAE ratio:
Current year losses............. 103.7% 143.7% 125.6%
Prior year losses............... (18.8) (28.5) (11.5)
----- ----- -----
Total Loss and LAE ratio........... 84.9 115.2 114.1
Underwriting expense ratio......... 20.9 21.6 18.3
----- ----- -----
Combined ratio after Renewal
Credits......................... 105.8% 136.8% 132.4%
===== ===== =====
</TABLE>
51
<PAGE>
Year ended December 31, 1998 compared to year ended December 31, 1997
Total incurred loss and LAE expense of $15.7 million for year ended
December 31, 1998 represented an increase of $86,000, or 1%, compared to $15.6
million incurred for the year ended December 31, 1997. Although NCRIC has
noticed a higher severity--reported average claim cost--compared to earlier
coverage years, this has been more than offset by a substantially lower
frequency--number of claims. The increase in severity noted in 1998 has
continued a trend first noted in 1996. According to the August, 1998 Best's
Review, this increase in severity has also been observed in other medical
professional liability insurers. Consistent with its historical practice, NCRIC
has taken a conservative posture in establishing reserves related to the higher
severity indications. NCRIC cannot predict the ultimate outcome of these
uncertainties.
The total incurred losses are broken into two components--incurred losses
related to the current coverage year and development on prior coverage year
losses. Current year incurred losses decreased by $304,000, or 2%, from $19.4
million for the year ended December 31, 1997 to $19.1 million for the year ended
December 31, 1998 due to the lower frequency of claims previously described. At
the same time, net premiums before renewal credits increased by 30% as also
previously described. The loss and LAE ratio reflected these changes,
decreasing from 124.5% for the year ended December 31, 1997 to 94.0% for the
year ended December 31, 1998.
NCRIC experienced favorable development on estimated losses for prior
years' claims for both years. The favorable loss development related to prior
years claims was $3.5 million for the year ended December 31, 1998, and $3.9
million for the year ended December 31, 1997. The total loss and LAE ratio was
reduced by 17 points for the year ended December 31, 1998 and 25 points for the
year ended December 31, 1997, as a result of this favorable development. For
both periods, this favorable development related to the 1993 through 1995 loss
years, substantially reduced losses. Prior year development results from the
re-estimation and settlement of individual losses not covered by reinsurance,
which are generally losses under $500,000.
The underwriting expense ratio before renewal credits increased from 18.7%
for the year ended December 31, 1997 to 19.0% for the year ended December 31,
1998. This increase is reflective of the 32% increase in underwriting expenses
offset by a 30% increase in net premiums before renewal credits due to the
substantial decrease in reinsurance premiums previously described. Underwriting
expenses increased $940,000 from $2.9 million for the year ended December 31,
1997 to $3.9 million for the year ended December 31, 1998. See "Underwriting
expenses."
The combined ratio before renewal credits decreased from 118.6% for the
year ended December 31, 1997 to 96.0% for the year ended December 31, 1998. The
30% increase in net premiums before renewal credits previously described,
combined with stable incurred losses helped to drive the combined ratio to its
lowest level for the 1995 through 1998 period. The GAAP combined ratio before
renewal credits for the year ended December 31, 1998 was 96.0% while the
statutory combined ratio was 97.7%. Likewise, for the year ended December 31,
1997, the GAAP combined ratio before renewal credits was 118.6% compared to the
statutory combined ratio of 119.6%.
52
<PAGE>
The GAAP combined ratio after renewal credits for the year ended December
31, 1998 of 105.8% improved by 31 points from the combined ratio for the year
ended December 31, 1997 of 136.8% due to a 9% decrease in renewal credits as
well as the net premium changes already described.
Year ended December 31, 1997 compared to year ended December 31, 1996
Total incurred loss and LAE expense of $15.6 million for the year ended
December 31, 1997 represented an increase of $355,000, or 2%, compared to $15.2
million incurred for the year ended December 31, 1996. The total incurred is
broken into two components--incurred losses related to the current coverage year
and development on prior coverage year losses.
Current year incurred losses increased by $2.7 million, or 16%, from $16.8
million for the year ended December 31, 1996 to $19.4 million for the year ended
December 31, 1997. This increase was due to a 12% increase in the number of
claims reported or "opened" for 1997 as compared to 1996 and due to indications
of a higher average claim cost relative to earlier coverage years. The loss and
LAE ratio reflected this increase, changing from 113.5% for the year ended
December 31, 1996 to 124.5% for the year ended December 31, 1997.
NCRIC experienced favorable development on expected losses for prior year
claims compared to previous estimates in both 1997 and 1996 based on updated
loss experience for those prior coverage periods. The favorable loss
development related to prior years' claims was $3.9 million for the year ended
December 31, 1997 and $1.5 million for the year ended December 31, 1996. The
1997 favorable development was primarily related to the 1993 through 1995 loss
years. For the year 1996, favorable development primarily related to the 1994
and 1995 loss years. The total loss and LAE ratio was reduced by 25 points for
the year ended December 31, 1997, and 10 points for the year ended December 31,
1996 as a result of this favorable development.
NCRIC believes that its favorable development has resulted for the most
part from the comparatively low number of claims reported for the 1995 through
1996 period, as well as its conservative reserving practice. For 1996, the
favorable development related to the immediately preceding coverage years was
relatively low by historical standards. In addition, this favorable development
was offset by upward adjustment on the claim severities for earlier years and an
upward adjustment for tail coverage issued in 1992.
The underwriting expense ratio before renewal credits increased from 16.5%
in 1996 to 18.7% in 1997. The 20% increase in underwriting expenses was only
partially offset by the 6% increase in net premiums before renewal credits.
Underwriting expenses increased $480,000 from $2.4 million for the year ended
December 31, 1996 to $2.9 million for the year ended December 31, 1997. See
"Underwriting Expenses."
The combined ratio before renewal credits decreased from 119.6% for the
year ended December 31, 1996 to 118.6% for the year ended December 31, 1997.
The 2% increase in incurred loss and LAE expense was more than offset by the 6%
increase in net premiums before
53
<PAGE>
renewal credits previously described. The GAAP combined ratio before renewal
credits for 1997 was 118.6% while the statutory combined ratio was 119.6%.
Likewise for 1996, the GAAP combined ratio before renewal credits was 119.6%
while the statutory combined ratio was 121.6%.
The GAAP combined ratio for the year ended December 31, 1997 of 136.8%
worsened by 4 points from the combined ratio for the year ended December 31,
1996 of 132.4% primarily due to the 46% increase in renewal credits previously
described.
-------------------------
Loss and loss adjustment expenses
liability
-------------------------
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ------------------
<S> <C> <C> <C>
(in thousands)
Liability for:
Losses................................ $ 60,127 $ 53,661 $ 51,035
Loss adjustment expenses.............. 27,573 21,475 20,171
-------- -------- --------
$ 87,700 $ 75,136 $ 71,206
======== ======== ========
Reinsurance recoverable on losses....... $(24,944) $(17,077) $(14,679)
======== ======== ========
</TABLE>
Losses in the medical professional liability industry can take up to eight to
ten years, or occasionally more, to fully settle. Actual amounts are not due
from the reinsurers until NCRIC settles a claim.
NCRIC believes that all of its reinsurance recoverables are collectible. See
"Business --Reinsurance" for a discussion of the reinsurance program.
-------------------------
Underwriting expenses
-------------------------
Salaries and benefits accounted for approximately 20 to 30% of other
underwriting expenses; with professional fees, including legal, auditing and
directors' fees, accounting for approximately another 30% of the underwriting
expenditures. Premium taxes remained level from year to year at approximately
2% of gross premiums written. Starting in 1998, premium taxes related to the
change in unearned premiums due to the staggering of renewal dates have been
treated as deferred acquisition costs. Guaranty fund assessments are based on
industry loss experience, which is not entirely predictable. In 1998, NCRIC
began to accrue future guaranty
54
<PAGE>
fund assessments related to the current year based on recent years' experience.
Prior to 1998, guaranty fund assessments were expensed when paid.
Year ended December 31, 1998 compared to year ended December 31, 1997
Underwriting expenses increased $940,000, or 32%, from $2.9 million for the
year ended December 31, 1997 to $3.9 million for the year ended December 31,
1998. The increase in expenditures was due to a variety of factors, including
increases in salary and employee relations costs of $423,000; rent costs of
$263,000; and premium taxes of $109,000. Salary and employee relations costs
increased due to the continued upgrading of management positions in anticipation
of the reorganization. Building rent costs have increased due to the sale of
NCRIC's building in 1997. Premium taxes increased due to an increase in written
premiums.
Year ended December 31, 1997 compared to year ended December 31, 1996
Underwriting expenses increased $480,000, or 20%, from $2.4 million for the
year ended December 31, 1996 to $2.9 million for the year ended December 31,
1997. The increase in expenditures was due primarily to increases in salary and
employee relations costs of $207,000; guaranty fund assessments of $145,000; and
legal and auditing fees of $87,000. The increase in salary and employee
relations costs is attributable to the upgrading of staff and management
positions by NCRIC in marketing, underwriting and accounting. Guaranty fund
assessments increased substantially due to payments in 1997 compared to refunds
received in 1996.
-------------------------
Other expenses
-------------------------
Other expenses include expenditures for subsidiary operations which are not
directly related to the issuance of medical professional liability insurance,
including insurance brokerage, insurance agency and physician services; as well
as costs associated with unrelated one-time events like the reorganization.
Year ended December 31, 1998 compared to year ended December 31, 1997
Other expenses increased $1.2 million, or 179%, from $676,000 for the year
ended December 31, 1997 to $1.9 million for the year ended December 31, 1998.
The substantial increase was due to $649,000 of legal, accounting and
professional fees associated with the reorganization; and $378,000 in
expenditures for the management services organization. The management services
organization was established in 1997 to provide physicians with a variety of
administrative support and other services, but did not have substantive
operations until 1998.
Year ended December 31, 1997 compared to year ended December 31, 1996
Other expenses decreased $252,000, or 27%, from $928,000 for the year ended
December 31, 1996 to $676,000 for the year ended December 31, 1997. This
decrease is
55
<PAGE>
reflective of reduced salary and other operating expenditures in both the
insurance brokerage and insurance agency subsidiaries.
-------------------------
Federal income taxes
-------------------------
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
<S> <C> <C> <C>
Federal income tax at statutory
rates.......................... 34% 34% 34%
Tax exempt income, net........... (9) (42) (4)
Dividends received, net.......... (2) (8) (6)
Reorganization costs............. 6 -- --
Other, net....................... 1 1 (1)
---- ---- ----
Federal income tax at effective
===================== =================== ===================
rates.......................... 30% (15)% 23%
==== ==== ====
</TABLE>
NCRIC's net deferred tax assets are created by temporary differences that will
result in tax benefits in future years due to the differing treatment of items
for tax and financial statement purposes. The primary difference is the
requirement to discount or reduce loss reserves for tax purposes because of
their long-term nature.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997 1996
------------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Deferred federal income tax
asset................................ $2,742,000 $2,793,000 $3,495,000
========== ========== ==========
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
Tax expense for the year ended December 31, 1998 was $1.1 million
compared to a $122,000 tax benefit for the year ended December 31, 1997. The
Federal corporate income tax rate of 34% was reduced to an effective tax benefit
rate of 15% for the year ended December 31, 1997 due to tax-exempt income and
nontaxable dividends received. The effective rate was 30% for the year ended
December 31, 1998. This increase in federal income tax is reflective of the
increased income before income tax for the period.
Year ended December 31, 1997 compared to year ended December 31, 1996
The tax benefit for the year ended December 31, 1997 was $122,000,
compared to a tax expense of $303,000 for the year ended December 31, 1996. The
Federal corporate income tax rate of 34% was reduced to an effective rate of 23%
for 1996 due to tax-exempt income and
56
<PAGE>
nontaxable dividends received. The 15% tax benefit rate for 1997 was achieved
primarily due to a 42 point reduction to the 34% Federal tax income tax rate due
to the exclusion of tax-exempt income, as well as an 8 point reduction due to
nontaxable dividends received.
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 other subsidiaries. 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 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. and
HCI Ventures, LLC and the assets of Employee Benefits Services, Inc.. The loan
is secured by all of the stock of HealthCare Consulting, Inc., 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 will consist of dividends from subsidiaries,
if declared and paid, and other permissible payments from its subsidiaries,
offset by fees paid to NCRIC, Inc., for management services and other expenses.
NCRIC Group intends to rely primarily on this cash flow from NCRIC, Inc. 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.
The payment of dividends to NCRIC Group by NCRIC, Inc. is subject to
limitations imposed by the District of Columbia Holding Company System Act of
1993. Under the DC Holding Company Act, NCRIC, Inc. must seek prior approval
from the Commissioner to pay any dividend which, combined with other dividends
made within the preceding 12 months, exceeds the lesser of (A) 10% of the
surplus at the end of the prior year or (B) the prior year's net income
excluding realized capital gains. Net income, excluding realized capital gains,
for the 2 years preceding the current year is carried forward for purposes of
the calculation to the extent not paid in dividends. The law also requires that
an insurer's statutory surplus following a dividend or other distribution be
reasonable in relation to the insurer's outstanding liabilities and adequate to
meet its financial needs. The District of Columbia permits the payment of
dividends only out of unassigned statutory surplus. Using these criteria, as of
the date of reorganization NCRIC, Inc. would have had available approximately
$2.4 million of unassigned statutory surplus available for dividends.
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Subsidiaries of NCRIC Group
Liquidity. The primary sources of NCRIC subsidiaries' liquidity are
insurance premiums, net investment income, 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 years
ended December 31, 1998, 1997 and 1996. Cash provided by operating activities
of NCRIC subsidiaries was $3.0 million in 1998, $1.6 million in 1997 and $5.3
million in 1996. The $1.4 million of increased cash flow in 1998 compared to
1997 resulted from $1.1 million of additional premiums collected and a $3.5
million reduction in losses and LAE paid; reduced by $2.8 million of increased
underwriting and other expenses and $700,000 of Federal income taxes paid. The
$3.7 million decrease in cash flow in 1997 compared to 1996 was primarily due to
$2.1 million of additional discounts given to renewing policyholders, a $1.4
million increase in the swing-rated deposit premium advanced to the reinsurers,
and a $653,000 increase in renewal credit dividends to policyholders; net of a
$1.1 million increase in premiums collected. Because of the long-term nature of
both the payment of claims and the settlement of swing-rated reinsurance
premiums due to the reinsurers, cash from operations for a medical professional
liability insurer like NCRIC, Inc. can vary substantially from year to year.
In addition to the positive cash generated from operations, NCRIC,
Inc. sold its building in 1997. The $1.2 million net proceeds were invested in
the securities portfolio.
Financial condition and capital resources. NCRIC subsidiaries invest
their positive
cash flow from operations primarily in investment grade, fixed maturity
securities. As of December 31, 1998, the carrying value of NCRIC subsidiaries'
securities portfolio was $96.3 million, compared to a carrying value of $94.4
million at December 31, 1997, and $89.6 million at December 31, 1996. The
portfolios were invested as follows:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- --------------------
<S> <C> <C> <C>
U.S. Government and agencies........ 25% 30% 22%
Mortgage-backed securities.......... 28 25 35
Tax-exempt securities............... 21 22 22
Corporate bonds and preferred
stocks............................ 26 23 21
</TABLE>
Over 76% of the portfolio at December 31, 1998 was invested in US
Government/agency securities or has a rating of AAA or AA. For regulatory
purposes, 99% of the securities portfolio is rated "Class 1" 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
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operational and maturing liability needs. Asset and liability modeling,
including sensitivity analyses and cash flow testing, are performed on a regular
basis.
NCRIC subsidiaries have no corporate debt. The $2.5 million line of
credit available as of December 31, 1998 is restricted to working capital for
claim settlements. The line of credit is unsecured and renewable annually.
NCRIC subsidiaries have not drawn down on this facility. As of December 31,
1998, NCRIC subsidiaries have no material commitments for capital expenditures.
NCRIC Group and its subsidiaries are required to pay aggregate salaries in the
amount of $975,000 to six persons under employment agreements.
The equity of NCRIC subsidiaries was $31.0 million at December 31, 1998,
$27.5 million at December 31, 1997, and $25.4 million at December 31, 1996. The
$3.5 million increase for the year ended December 31, 1998 was due to $2.5
million of net income and $1.2 million of unrealized appreciation net of tax in
the investment portfolio, net of a $250,000 dividend. The $2.1 million increase
for the year ended December 31, 1997 was due to $959,000 of net income in 1997,
as well as an unrealized appreciation net of tax in the investment portfolio of
$1.1 million. The decrease in equity for the year ended December 31, 1996
resulted from $991,000 of net income in 1996, offset by unrealized investment
losses of $1.4 million.
Effects of inflation and interest rate changes
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that loss and LAE reserve levels and NCRIC's ratemaking
process adequately 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 systems 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 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
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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 of 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 the 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 are Year 2000 compliant.
Office automation software programs that are not Year 2000 compliant will be
replaced during 1999.
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 mid 1999.
NCRIC estimates that it has incurred internal and external costs
associated with the Year 2000 effort of approximately $15,000 and $36,000 for
the years ended December 31, 1998 and December 31, 1997. No expenditures were
incurred for the year ended December 31, 1996. NCRIC anticipates incurring
internal and external costs of approximately $15,000 during 1999.
Although there can be no assurances, 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.
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Federal income tax matters
For tax years prior to the subscription, community and syndicated
community offerings, National Capital Reciprocal Insurance Company filed a
consolidated United States Federal income tax return with its subsidiaries. For
tax years after the subscription, community and syndicated community offerings,
NCRIC will not file as part of a consolidated United States Federal income tax
return with NCRIC, A Mutual Holding Company or NCRIC Holdings because NCRIC, A
Mutual Holding Company and NCRIC Holdings will own directly and indirectly less
than 80% of the outstanding shares of NCRIC Group. Tax years 1995, 1996 and
1997 are open but not currently under audit.
Regulatory matters
NAIC statutory accounting codification. The National Association of
Insurance Commissioners or NAIC is an association of the insurance regulators of
all 50 states and the District of Columbia. The NAIC is currently in the
process of codifying statutory accounting practices, which are the accounting
rules and guidelines prescribed or permitted by the state insurance regulators.
Prescribed statutory accounting practices include state laws, regulations and
NAIC guidelines. Permitted statutory accounting practices encompass all
accounting practices that are not prescribed; permitted statutory accounting
practices may differ from state to state and company to company. This project
is intended to re-examine current statutory accounting practices and to ensure
uniform accounting treatment from a regulatory standpoint. The accounting
mandated by the codification is expected to apply commencing January 1, 2001,
and is likely to result in changes to current accounting treatments permitted by
state regulators. Any statutory accounting changes mandated as a result of this
codification will not have an effect on the financial statements prepared in
accordance with GAAP, which have been included in this document and filed with
the Securities and Exchange Commission.
NAIC IRIS ratios. The NAIC Insurance Regulatory Information System or
"IRIS," is an early warning system that is primarily intended to be utilized by
the state and District of Columbia insurance department regulators to assist in
their review and oversight of the financial condition and results of operations
of insurance companies operating in their respective jurisdictions. IRIS is a
ratio analysis system that is administered by the NAIC. The NAIC provides the
state and District of Columbia insurance department regulators with ratio
reports for each insurer within their jurisdiction based on standardized annual
financial statements submitted by the insurers. IRIS identifies 12 ratios to be
analyzed for a property-casualty insurer, and specifies a range of values for
each of these ratios. The ratios address various aspects of each insurer's
financial condition and stability including profitability, liquidity, reserve
adequacy and overall analytical ratios. Departure from the "usual range" of a
ratio may require the submission of an explanation to the state or District of
Columbia insurance regulator. Departure from the usual range on four or more
ratios may lead to increased regulatory oversight.
For 1996, 1997 and 1998, National Capital Reciprocal Insurance Company was
outside the usual range on the ratio of estimated current reserve deficiency to
surplus. This ratio provides an estimate of the adequacy of loss reserves
maintained based on the change in net premiums from year to year. This ratio
fell outside the usual range for both years due to a change
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in National Capital Reciprocal Insurance Company's net premiums written, which
takes into account premiums ceded under the reinsurance program. Due to
favorable loss development, the previously estimated swing rated reinsurance
premium due from prior years was reduced. In addition, the maximum premium rate
due under the reinsurance program was reduced in 1997 and again in 1998. This
premium ceded reduction resulted in an inappropriate indication of inadequate
reserves. In addition, for 1996 and 1998, the change in net writings or net
premiums written, ratio was out of the usual range of values. This again was due
to the reduction in reinsurance premiums. National Capital Reciprocal Insurance
Company was within or favorably exceeded the usual range for the remainder of
the IRIS ratios.
NAIC risk-based capital. The NAIC has established a methodology for
assessing the adequacy of each insurer's capital position based on the level of
statutory surplus and an evaluation of the risks in the insurer's product mix
and investment portfolio profile. This risk-based capital or "RBC" formula is
designed to allow state and District of Columbia insurance regulators to
identify potentially under-capitalized companies. For property-casualty
insurers, the formula takes into account risks related to the insurer's assets--
including risks related to its investment portfolio--and the insurer's
liabilities--including risks related to the adverse development of coverages
underwritten. The RBC rules provide for different levels of regulatory
attention depending on the ratio of the insurer's total adjusted capital to the
"authorized control level" of RBC. For all periods presented, NCRIC's and
Commonwealth Medical Liability Insurance Company's total adjusted capital levels
were significantly in excess of the authorized control level of RBC. Management
believes that the RBC levels will be significantly in excess of the authorized
control level of RBC as of the closing of the subscription, community and
syndicated community offerings. As a result, the RBC requirements are not
expected to have an impact upon NCRIC's operations. Following is a presentation
of the total adjusted capital for NCRIC and Commonwealth Medical Liability
Insurance Company compared to the authorized control level of RBC:
<TABLE>
<CAPTION>
Authorized Control Level
Risk-based Capital Total Adjusted Capital
-------------------------------- --------------------------------
NCRIC CML NCRIC CML
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(in millions)
December 31, 1998............ $4.5 $0.15 $24.1 $5.0
1997............ 3.7 0.14 23.2 4.9
1996............ 3.8 0.12 22.4 5.3
</TABLE>
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BUSINESS
NCRIC Group
NCRIC Group is a holding company which owns NCRIC, Inc., a medical
professional liability insurance company, and NCRIC MSO, Inc., a physician
practice management and financial services company. NCRIC, Inc.'s and NCRIC
MSO's principal operations are in the District of Columbia, Maryland and
Virginia.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company
servicing healthcare providers in the District of Columbia and Maryland. NCRIC,
Inc.'s wholly-owned subsidiary, Commonwealth Medical Liability Insurance
Company, sells medical professional liability insurance to healthcare providers
in Virginia. Commonwealth has recently been licensed to sell medical
professional liability insurance in West Virginia and Delaware, but to date no
sales have occurred in either jurisdiction. Created by District of Columbia
physicians in 1980 when medical professional liability insurance was either
unavailable or prohibitively expensive, NCRIC has provided high quality
insurance products to its insureds in the District of Columbia metropolitan
area, a legal jurisdiction which has rejected tort reform and has the highest
cumulative average medical professional liability jury awards of any
jurisdiction in the United States. NCRIC, Inc.'s success rests, among other
factors, on its ability to successfully litigate claims, reduce its insured's
loss exposure through effective risk management and provide its insureds with
individualized service. Recognizing the value of NCRIC's insurance products, 98%
of NCRIC's insureds renewed their policies in 1998. NCRIC believes that it
successfully managed the medical professional liability insurance crisis of the
early 1980's and has prospered since through a combination of physician
governance and professional management expertise.
Over the past three years, NCRIC has distributed a customer satisfaction
survey. In 1998, 62% of NCRIC's insureds responded to the survey and 92% of
those who responded indicated that they were "always pleased" or "almost always
pleased" with NCRIC's service. Comparable ratings for 1998 and 1997 were 92% and
91%.
According to A.M. Best, in 1997 44% of the direct premiums written for
physician and hospital professional liability insurance in the District of
Columbia were written by NCRIC. In addition, during the year ended December 31,
1998, NCRIC generated 10% of its premiums in Maryland and Virginia. NCRIC's
market share is less than 2% in each of these markets. As of December 31, 1998,
NCRIC had approximately 1,200 medical professional liability policies
outstanding in all of its markets. The majority of NCRIC's premiums are
generated from individual and small-group practices, but it also has risk
sharing programs with groups of physicians sponsored by metropolitan Washington,
D.C. area hospitals. NCRIC primarily markets its products directly to its
physician clients. NCRIC also markets its products through independent brokers
and agents who currently produce less than 2% of its direct premiums written.
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Medical professional liability insurance insures the physician or other
healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
Our direct insurance premiums written and net income were $17.9 million
and $959,000 for the year ended December 31, 1997 and were $19.2 million and
$2.5 million for the year ended December 31, 1998. As of December 31, 1998,
NCRIC Group had $134.3 million in total assets and $31.0 million of total
equity. Our historic results of operations may not be indicative of future
operations. The operating results of medical professional liability insurers are
subject to significant fluctuation which can result in net losses due to a
number of factors, including:
. adverse claims experience;
. judicial trends;
. changes in the investment and interest rate environment; and
. general economic conditions.
NCRIC believes it can best leverage its strengths and appeal to customers
by maintaining conservatism in its financial accounts. In line with this
philosophy, as of December 31, 1998, NCRIC has established, on a gross basis,
$87.7 million in loss reserves. NCRIC believes that its loss reserves are
adequate to meet losses. NCRIC's conservative estimation of loss reserves is
demonstrated by its favorable loss developments in each year since 1990. These
favorable loss developments have contributed significantly to NCRIC's reported
earnings.
Practice management and financial services
We believe that by developing a practice management and financial services
business we will be able to diversify our operations while solidifying the
already strong relationship NCRIC has with its existing insureds. If we
successfully diversify into practice management and financial services, we will
both increase our profits and provide NCRIC with an additional market for its
core insurance products. NCRIC MSO was established in 1997 as our vehicle to
provide practice management and financial services to physicians. NCRIC MSO's
business strategy is to develop a range of practice management services which
will give physicians the management expertise they need to conduct their
practices without requiring them to relinquish ownership or control of their
practices. NCRIC MSO intends to be a partner whom physicians can rely on to
understand their problems and who has the foresight to develop services to fit
their needs. In order to substantially accelerate its entry into the practice
management, financial services and employee benefits markets, NCRIC MSO acquired
HealthCare Consulting, HCI Ventures and Employee Benefits Services. Since the
acquisition, NCRIC MSO has been doing business as HealthCare Consulting. On
March 31, 1999, HealthCare Consulting merged into NCRIC MSO.
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Other NCRIC Group subsidiaries
In addition to our medical professional liability insurance and practice
management and financial services operations, we have a Virginia insurance
subsidiary, a reinsurance brokerage operation, an insurance agency, and a
physicians organization.
Commonwealth Medical Insurance Liability Company, a wholly-owned
subsidiary of NCRIC, Inc., provides medical professional liability insurance in
Virginia and other jurisdictions. Commonwealth Medical Insurance Liability
Company was formed in 1989 and started writing policies in Virginia in 1991.
Currently, Commonwealth Medical Insurance Liability Company is licensed to write
policies in the District of Columbia, Virginia, Maryland, Delaware and West
Virginia. Commonwealth Medical Insurance Liability Company's policies closely
resemble NCRIC's policies except that insureds of Commonwealth Medical Insurance
Liability Company do not become members of NCRIC, A Mutual Holding Company.
National Capital Insurance Brokerage, Inc., a wholly-owned subsidiary of
NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance broker.
National Capital Insurance Brokerage, Inc. has retained commission income which
would otherwise have been paid to outside reinsurance brokers. This income has
been used by NCRIC to offset other operating expenses. National Capital
Insurance Brokerage, Inc. has also played a critical role in restructuring
NCRIC's reinsurance program to provide effective and comprehensive reinsurance
coverage without reducing NCRIC's profitability. In 1996, National Capital
Insurance Brokerage, Inc. conducted a thorough analysis of NCRIC's reinsurance
program. As a result of this review and internal efforts undertaken by NCRIC,
NCRIC significantly reduced its current and future reinsurance costs.
In 1989, NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC, Inc.,
acquired the life, health and disability insurance businesses of Medical Society
Services, Inc. In 1992, NCRIC Insurance Agency also began offering property and
casualty products. NCRIC Insurance Agency had commission income of $88,268 in
1998 compared to $106,529 in 1997. NCRIC Insurance Agency's reduced income
resulted from its limited success in developing new commission income and costs
associated with a health insurance program it established in 1989. NCRIC
Insurance Agency offers its products in the same markets as NCRIC. As an
insurance agent, NCRIC Insurance Agency receives commissions for business it
places for sponsored insurance companies. NCRIC Insurance Agency markets
insurance products not underwritten by NCRIC. This permits NCRIC's core insureds
to obtain a wider range of insurance products through NCRIC. NCRIC Insurance
Agency's success to date has been modest.
NCRIC Physicians Organization, Inc., a wholly-owned subsidiary of NCRIC
MSO, manages a coalition of physicians working with hospitals and ancillary
healthcare providers which contract with managed care payers as an exclusive
healthcare provider network. NCRIC Physicians Organization began with
approximately 600 physicians in 1994 and currently is, we believe, the only
physician-governed healthcare provider network in the Washington, D.C.
metropolitan area, with 1,800 physicians. Approximately 600 of NCRIC Physicians
Organization's members are insureds of NCRIC. NCRIC Physicians Organization
achieved its 1998 growth through alliances with two major area networks,
Suburban Hospital PHO and
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Dimensions Health Network, which added 600 new physicians. NCRIC Physicians
Organization has established two fee-for-service contracts with area payers, has
formed alliances with other provider networks which have added seven additional
fee-for-service contracts in 1998 and continues to work on achieving the goals
it set for itself when it was organized. NCRIC Physicians Organization also has
a contract with NYLCare of the Mid Atlantic Region which resulted in its
physicians becoming NYLCare providers entitled to receive a fee-for-service
payment for treating insureds of NYLCare's preferred provider organization. A
preferred provider organization is an affiliation of healthcare providers who
deliver services only through fee-for-service arrangements. This contract
resulted in more than 2,000 patient encounters and $550,000 in provider billing
to physicians within NCRIC Physicians Organization in 1997. NCRIC Physicians
Organization does not derive any revenues from the NYLCare contract.
Current healthcare environment
The greatest challenge to physicians in the current healthcare marketplace
is that physician revenues are declining, while the cost of delivery of medical
services is rising. Since the early 1990's, health insurance companies and other
third party payers, including the federal and state governments through Medicare
and Medicaid, have increasingly favored a "managed care" form of reimbursement.
Third party payers believe that managed care plans will result in lower
healthcare costs because the managed care plan, rather than physicians, manage
the delivery of healthcare services. Instead of a traditional fee-for-service
payment structure, managed care generally requires the physician to provide
medical services to potential clients at a significantly reduced reimbursement
rate or for a fixed capitation payment, with the physician bearing the risk that
the actual costs of medical services to individual groups of patients will
exceed the capitation payment.
An early response to managed care was the decision of national physician
practice management companies or PPMCs, local hospital systems and health
management organizations or HMOs to acquire numerous independent physician
practices and form one large group under common ownership. Management believes
that many PPMC and HMO acquisitions have failed due to the unwillingness of
physicians to remain employees of practices they no longer controlled.
Unsuccessful corporate restructuring by local hospital systems has resulted in
additional failures. Many local hospital systems are currently attempting to
control losses by divesting themselves of unprofitable physician practices.
We believe that acquisitions of physicians' practices across divergent
marketplaces prevented the larger groups from being closely integrated in any
local market, an essential component of a successful medical practice. In
addition, significant administrative fees and other costs were often imposed on
acquired practices which were already facing revenue and expense constraints
prior to being acquired. Conflicting goals on how physician services should be
delivered frequently caused physicians to terminate their employment with the
PPMC.
Despite the inability of some PPMCs, local hospital systems and HMOs to
operate profitably, managed care will continue to profoundly affect the practice
of medicine. Solo and small group practitioners, in particular, may have
difficulty surviving in the managed care healthcare environment, unless they can
pool their resources to economically obtain the
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management expertise and resources necessary to reduce costs and remain
profitable. Medical professional liability insurance costs are among the costs
that physicians will seek to reduce. We anticipate that the stronger bargaining
power of a group of physicians will enable these physicians to negotiate lower
premium rates, thus reducing NCRIC's premium income. NCRIC intends to offset
potential lower premium income from its traditional professional medical
liability insurance products by providing products and services that appeal to
the larger groups including:
. creating new risk sharing structures for larger groups;
. managing the risks of the larger groups as one risk versus separate
risks;
. providing claims and risk management services independently of its
core insurance products on a fee basis; and
. offering insurance-related products for managed care exposure.
We have already begun implementing this strategy by entering into risk sharing
arrangements with and providing risk management services to large groups of
physicians sponsored by metropolitan Washington, D.C. hospitals. We wish to
assist independent physicians to remain independent and financially successful.
We do not intend to adopt the PPMC model of purchasing physician practices.
Our vision
We intend to become a healthcare financial services organization which
provides individual physicians and groups of physicians with economical high
quality medical professional liability insurance and the practice management and
financial services necessary for them to succeed in the managed care healthcare
environment. We believe that we are well positioned to accomplish these goals
because we have a loyal policyholder base to build upon and anticipate raising
new capital in the subscription, community and syndicated community offerings.
The HealthCare Consulting acquisition substantially enhances our ability to
provide independent physicians with essential practice management expertise.
The current direct channels of distribution and the strong retention of
clients by NCRIC and HealthCare Consulting will assist us in cross-selling our
expanded range of services and products. NCRIC will sell its medical
professional liability products and services to some of HealthCare Consulting's
and its affiliates' approximately 1,100 physician clients which will expand
NCRIC's geographic coverage area. Since the HealthCare Consulting acquisition
closed on January 4, 1999, NCRIC has sold 8 medical malpractice insurance
policies to clients of HealthCare Consulting and has provided quotes for an
additional 33 policies. The HealthCare Consulting acquisition will also permit
NCRIC to provide practice management and employee benefit services to its
approximately 1,200 physician insureds. Together with the approximately 1,200
members of NCRIC Physicians Organization who are not insured by NCRIC since the
completion of the HealthCare Consulting acquisition, we provide products and
services to approximately 3,000 physicians.
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Core insurance products
NCRIC underwrites medical professional and office premises liability
policy coverages for physicians, physician medical groups and clinics, managed
care organizations and other providers in the healthcare industry. NCRIC
currently issues policies on a claims-made basis. Claims-made policies provide
coverage to the policyholder for claims occurring and reported during the period
of coverage. NCRIC also offers prior acts insurance coverage to new insureds,
subject to the new insureds' meeting NCRIC's underwriting criteria. This
coverage extends the effective date of claims-made policies to designated
periods prior to the physician's becoming an insured of NCRIC. Insureds are
insured continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy forms
for physicians who are solo practitioners and for those who practice as part of
a medical group or clinic. The policy issued to solo practitioners includes
coverage for professional liability that arises in the medical practice and also
for a number of "premises" liabilities that may arise in the non-professional
operations of the medical practice, like slip and fall accidents. The
professional liability insurance for solo practitioners and for medical groups
provides protection against the legal liability of the insureds for injury
caused by or as a result of the performance of patient treatment, failure to
treat and failure to diagnose and related types of malpractice.
Policy limits. NCRIC offers limits of insurance up to $5 million per
claim, with up to a $7 million aggregate policy limit for all claims reported
for each calendar year or other 12-month policy period. The most common limit is
$1 million per claim, subject to a $3 million aggregate policy limit. Higher
limits and excess coverage can also be written in conjunction with special
reinsurance arrangements.
Reporting endorsements. Reporting endorsements are offered for physicians
terminating their policies with NCRIC. This coverage extends the period
indefinitely for reporting future claims resulting from incidents occurring
while a claims-made policy was in effect. The price of the reporting endorsement
coverage is based on the length of time the insured has been covered by NCRIC.
NCRIC provides free reporting endorsement coverage for insured physicians who
die or become disabled so that they cannot practice their specialty during the
coverage period of the policy and those who have been insured by NCRIC for at
least five consecutive years, attain the age of 55 and retire completely from
the practice of medicine.
PracticeGuard. NCRIC has established a limited defense reimbursement
benefit for proceedings by governmental disciplinary boards. NCRIC provides this
coverage to its insureds automatically without a surcharge. PracticeGuard
provides legal counsel to defend licensure actions brought by the District of
Columbia or a State Medical Licensing Board, actions involving medical staff
credentialing committees, actions to remove physicians from participation in a
managed care plan and actions to limit participation in government programs like
Medicare and Medicaid.
Managed care organization errors and omissions. NCRIC has recently
introduced a policy for managed care organizations that provides coverage for
liability arising from the errors
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and omissions in managed care operations, for the vicarious liability of a
managed care organization for the acts or omissions of non-employed physician
providers and for liability of directors and officers of a managed care
organization. These policies are issued on a claims-made basis. The annual
aggregate limits of coverage under the current managed care organization
policies issued by NCRIC are currently $2 million. Through NCRIC's reinsurance
arrangements, it has the capacity to write managed care organization policies
with aggregate limits of up to $10 million. Managed care organization policies
were not a significant source of revenue in 1998.
Program for physicians who do not meet usual underwriting standards. NCRIC
also has a program for physicians who do not meet some of NCRIC's usual
underwriting standards. NCRIC carefully evaluates the additional risk it assumes
when it insures these physicians. A surcharge is applied to the premiums of
these physicians to compensate NCRIC for the higher level of risk NCRIC is
assuming. NCRIC monitors the activities of these insureds more closely than
those of its other insureds and attempts to rehabilitate these insureds through
risk management training. This program was not a significant source of revenue
in 1998.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of April 7, 1999.
<TABLE>
<CAPTION>
Direct Premiums Percentage of
Group Size Written Total
- ---------- --------------- -------------
(in thousands)
<S> <C> <C>
Solo practitioner physicians ................. $ 7,676 40.2%
Groups with two physicians ................... 1,194 6.2
Groups with three or more physicians ......... 5,108 26.7
Sponsored Programs, including risk sharing ... 5,132 26.9
------- -----
Total ................................ $19,110 100.0%
======= =====
</TABLE>
Occurrence basis policies. Until July 1, 1986, NCRIC issued policies on an
occurrence basis. Occurrence policies provide coverage to the policyholder for
all losses incurred during the policy year regardless of when the claims are
reported. As of December 31, 1998, NCRIC has loss and LAE reserves in the amount
of $7.7 million in connection with its potential liability under occurrence
policies.
Maintenance and expansion of core insurance products
NCRIC's future success rests on its ability to ensure that its core
insurance products continue to meet the needs of existing insureds and other
healthcare providers. Growth and retention of NCRIC's core insurance business in
a managed care environment will be sought through expanding NCRIC's relationship
with larger groups of physicians and developing appropriate risk financing
vehicles for larger groups. The key elements of NCRIC's strategy to compete
effectively and create profitable long-term growth for its core insurance
products are the following:
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Maintain its strong franchise or close relationship with the District of
Columbia metropolitan area medical community. National Capital Reciprocal
Insurance Company was founded in 1980 with the strong support of the Medical
Society of the District of Columbia and the District of Columbia's physicians.
NCRIC maintains the exclusive endorsement of the Medical Society of the District
of Columbia, as well as that of the Virginia-based Arlington County Medical
Society. NCRIC's endorsement agreement with the Medical Society of the District
of Columbia requires NCRIC, A Mutual Holding Company to reserve a seat on its
board of directors for an individual nominated by the Medical Society of the
District of Columbia. NCRIC plans to increase its direct business activity in
its core markets by implementing a joint marketing plan with the Medical Society
of the District of Columbia and other metropolitan area medical societies.
NCRIC has set a target of at least a 95% annual retention rate for its
core insurance business in the future. The articles of incorporation of NCRIC, A
Mutual Holding Company and NCRIC, Inc. require that at least two-thirds of the
members of their respective boards of directors be physicians. This direct
involvement of physicians enables NCRIC to better understand medical practice
patterns, claims, customer needs and other relevant matters. It also strengthens
NCRIC's ties with the physician community.
Enhance insurance product offerings to increase sales and strengthen ties
with physicians. NCRIC has developed other insurance products in addition to its
core medical professional liability insurance offerings. These products include
comprehensive premises liability coverage for medical offices and NCRIC
PracticeGuard.
New products. NCRIC's current new product initiatives include expanding
its dental professional liability offerings and providing claims and risk
management services independently of its core insurance on an "unbundled" basis.
Dental professional liability insurance policies will insure the dentist against
liabilities arising from the rendering of, or failure to render, professional
dental services. Policies will also include coverage for a dentist's office and
equipment. NCRIC's goal is to provide dentists with comprehensive insurance
coverage for their practices. NCRIC's dental policies will be offered through
direct selling by NCRIC and through brokers and agents. If NCRIC expands into
areas where it is inexperienced, NCRIC will have to attract and retain qualified
personnel. Competition for qualified personnel may be intense, and NCRIC may be
unable to attract and retain qualified persons.
Expand geographically. NCRIC intends to leverage off of its strong
franchise in the District of Columbia area and its extensive claims and risk
management expertise to expand into nearby states. It has recently expanded into
Virginia and Maryland. According to A.M. Best, in 1997, these states, together
with West Virginia and Delaware where NCRIC has recently been licensed, produced
$275 million in medical professional liability direct premiums written. NCRIC is
also pursuing potential expansion opportunities in other Mid-Atlantic states.
Grow through strategic acquisitions. NCRIC believes that consolidation
will continue in the medical professional liability insurance industry. This may
give rise to opportunities for NCRIC to make strategic acquisitions to expand
its business, product offerings and geographic scope. As a result of the
reorganization, NCRIC is better positioned to make acquisitions, since it has
greater access to capital and can issue stock in connection with an acquisition.
In addition,
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NCRIC intends to diversify into other healthcare-related enterprises through
strategic acquisitions like the HealthCare Consulting acquisition. NCRIC may be
unable to acquire other medical professional liability insurers or other
physician practice management companies. An unsuccessful or poorly performing
acquisition could have a material adverse effect on NCRIC's business or
financial results. NCRIC has no current acquisition plans.
Brokers and agents. NCRIC must develop distribution channels in its new
markets and for its new products. This will increase NCRIC's dependence on
insurance brokers and other intermediaries. There is also a possibility that
brokers and other intermediaries will be unwilling to offer NCRIC's products or
that they will only do so if NCRIC contractually agrees not to directly market
NCRIC's policies to clients of the insurance broker.
Maintain conservative balance sheet and strong ratings. Management
believes that existing and prospective clients evaluate, among other factors,
the financial strength of NCRIC in any decision regarding the purchase of
medical liability coverage.
Use legal and risk management expertise to vigorously reduce loss costs.
NCRIC's experience with, commitment to and focus on medical professional
liability insurance for 18 years has allowed it to develop strong knowledge of
the local healthcare and legal environments and to build an extensive database
of medical professional liability claims experience. NCRIC uses this expertise
to select and price risks, to provide risk management services to prevent or
reduce the severity of losses and to aggressively defend against unjustified
claims or excessive settlement demands.
Build on direct distribution by adding sales from broker/agent channel.
NCRIC's traditional direct distribution in the District of Columbia has held
down expenses and provided closer ties to its insureds than is usually obtained
through an intermediary. Direct distribution provided 98% of NCRIC's renewal
premiums in 1998. Of premiums received from new insureds, 85% were obtained
through direct distribution and 15% through brokers and independent agents.
NCRIC believes it can further improve new business through greater use of
brokers and independent agents, both in connection with geographic expansion and
in marketing to larger healthcare providers. To this end, NCRIC intends to
develop relationships with selected brokers who have demonstrated expertise in
the medical professional liability insurance market.
HealthCare Consulting acquisition
After a lengthy search for a partner who shared its vision, on December 1,
1997 NCRIC MSO entered into a joint venture with HealthCare Consulting to
provide practice management services to its insureds. Critical to the selection
of HealthCare Consulting was its long history of working with physicians and its
advocacy of the independent success of physicians. HealthCare Consulting had
also developed successful independent group practice models which fit NCRIC
MSO's business plan. Independent Group Practice models integrate groups of
physicians with shared practice management services and common information
systems, while permitting the physicians to maintain individual ownership of
their practices. The joint venture between NCRIC MSO and HealthCare Consulting
began providing services to NCRIC's insureds in early 1998.
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As the joint venture progressed, NCRIC began discussions regarding the
HealthCare Consulting acquisition. On January 4, 1999, NCRIC Group acquired all
of the outstanding shares of HealthCare Consulting and all of the outstanding
membership interests of HealthCare Consulting's affiliate, HCI Ventures. NCRIC
Group also purchased all of the assets of Employee Benefits Services, an
employee benefits company formed by the three stockholders of HealthCare
Consulting. NCRIC Group assumed all of the liabilities of HealthCare Consulting,
HCI Ventures and those relating to the assets of Employee Benefits Services.
HealthCare Consulting has been merged into NCRIC MSO, and HCI Ventures has
become a wholly-owned subsidiary of NCRIC MSO. The HealthCare Consulting
acquisition will greatly enhance NCRIC's ability to provide practice management
services, employee benefit services and financial services to physicians in the
Washington, D.C. metropolitan area and throughout the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its
predecessor has provided practice management services, accounting and tax
services and personal financial planning services to medical and dental
practices throughout the Mid-Atlantic region. HealthCare Consulting offers its
clients extensive experience and expertise in:
. practice management;
. managed care contracting;
. information systems implementation;
. practice evaluations;
. billing and collections;
. personnel;
. practice structure; and
. management and market recognition among key players in the
healthcare industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; Washington, D.C.; and Greensboro, North Carolina.
HealthCare Consulting has been doing business in Greensboro, North Carolina
since September 1, 1993. It offers the same services in Greensboro as in its
other locations. HealthCare Consulting's Greensboro operations accounted for
approximately 18% of its 1998 revenues. On January 4, 1999, HealthCare
Consulting had approximately 50 employees, of whom 12 served as practice
management consultants.
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The following table indicates the sources of HealthCare Consulting's
revenues during the past three calendar years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Practice Management .............. 48.9% 46.1% 46.0%
Accounting and Tax ............... 32.1 32.4 30.6
Personal Financial Planning ...... 13.2 10.3 11.0
Other ............................ 5.8 11.2 12.4
---- ---- ----
Total ....................... 100% 100% 100%
==== ==== ====
</TABLE>
HCI Ventures. HCI Ventures provides start-up capital to newly-formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for whom HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
Employee Benefits Services. Employee Benefits Services provides employee
benefits services, plan design, plan administration and plan asset accounting to
approximately 300 clients in the Mid-Atlantic region. The principal assets that
NCRIC MSO acquired from Employee Benefits Services were its established client
base and the systems it had developed to service its clients. Employee Benefits
Services also manages documentation and required forms filings. Over 80% of
HealthCare Consulting's physician practice clients who qualify for plan
administration services utilize Employee Benefits Services as their employee
benefit plan administrator. While Employee Benefits Services initially provided
services only to healthcare businesses, currently over 45% of its clients are
non-healthcare related. On January 4, 1999, Employee Benefits Services had nine
employees.
The following table indicates the sources of Employee Benefits Services'
revenues during the past three years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Retirement Plan Accounting and
Administration ..................... 90% 89% 94%
Employee Benefit ................... 10 11 6
---- ---- ----
Total ......................... 100% 100% 100%
==== ==== ====
</TABLE>
Senior executive experience. The former three owners of HealthCare
Consulting, HCI Ventures and Employee Benefits Services, all of whom have
entered into five-year employment
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<PAGE>
contracts with HealthCare Consulting to continue in their current positions,
have the experience indicated in the following table:
<TABLE>
<CAPTION>
Years with Acquired Total Years in
Companies Healthcare Consulting
------------------- ---------------------
<S> <C> <C>
L.E. Shepherd ........... 20 26
William A. Hunter ....... 17 17
Barry S. Pillow ......... 13 19
</TABLE>
HealthCare Consulting, HCI Ventures and Employee Benefits Services
purchase price. In accordance with the HealthCare Consulting acquisition
purchase agreements, NCRIC Group paid $5.1 million in cash, subject to
adjustments, and delivered three mandatorily convertible notes in the aggregate
principal amount of $300,000. On the completion of the subscription offering the
notes will automatically convert into 42,857 shares of NCRIC Group's common
stock. NCRIC Group will pay an additional $3.1 million if HealthCare Consulting,
HCI Ventures and Employee Benefits Services achieve earnings targets in 2000,
2001 and 2002.
Sequoia National Bank loaned to NCRIC Group $2.2 million to finance a
portion of the HealthCare Consulting acquisition 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 being payable on 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. NCRIC Group granted as security for the loan
(1) an assignment of all of the capital stock of HealthCare Consulting and the
membership interests of HCI Ventures and (2) a blanket lien on all of the
receivables of HealthCare Consulting and Employee Benefits Services. There is no
penalty for prepayment by NCRIC Group. NCRIC, Inc. loaned to NCRIC Group the
balance of the purchase price of the HealthCare Consulting acquisition that was
payable at closing. The terms of the loan from NCRIC, Inc. to NCRIC Group are
the same as the terms of the Sequoia loan except that the loan from NCRIC, Inc.
to NCRIC Group is unsecured and there was no obligation to pay a one-half point
on closing.
NCRIC Group, NCRIC MSO, HealthCare Consulting, HCI Ventures, and L.E.
Shepherd, Jr., William A. Hunter, Jr. and Barry S. Pillow entered into an
operating agreement dated January 4, 1999. Messrs. Shepherd, Hunter and Pillow
are entitled to manage the operations of HealthCare Consulting, HCI Ventures and
Employee Benefits Services, subject to the board of directors' approval of
specified transactions and of provisions in the operating agreement which
provide for minimum earnings targets. The term of the operating agreement
expires December 31, 2003.
The employment agreements of Messrs. Shepherd, Hunter and Pillow provide
that each of them will not compete with NCRIC, NCRIC MSO, HealthCare Consulting
or HCI Ventures for a period of two years after the termination of his
employment with HealthCare Consulting and HCI Ventures.
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The reorganization
On April 20, 1998, the board of governors of National Capital Reciprocal
Insurance Company adopted the plan of reorganization, which authorized the
reorganization. The Commissioner of Insurance and Securities held a public
hearing on the reorganization on September 9 and 10, 1998. The plan of
reorganization was approved by National Capital Reciprocal Insurance Company's
members on September 16, 1998. The Commissioner of Insurance and Securities
approved the plan of reorganization on November 25, 1998, and the plan of
reorganization became effective on December 31, 1998.
The reorganization authorized National Capital Reciprocal Insurance
Company to form NCRIC, A Mutual Holding Company as a mutual insurance holding
company and to convert into NCRIC, Inc., a stock medical professional liability
insurance company. Through a series of stock transfers effected in connection
with the reorganization, NCRIC, A Mutual Holding Company owns all of the
outstanding shares of NCRIC Holdings, Inc., which owns all of the outstanding
shares of NCRIC Group, which owns all of the outstanding shares of NCRIC, Inc.
and NCRIC MSO. District of Columbia law provides that NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC, Inc.
In his order approving the reorganization, the Commissioner of Insurance
and Securities imposed various conditions including the following:
. At least two-thirds of the members of the boards of directors of
NCRIC, A Mutual Holding Company and NCRIC, Inc. must at all times be
policyholders of NCRIC.
. NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group
and NCRIC are prohibited from pledging assets having an aggregate
value in excess of 49% of the equity of NCRIC, based on the most
recent financial statements prepared and calculated in accordance
with statutory accounting principles, without the prior approval of
the Commissioner of Insurance and Securities.
. NCRIC Group must first utilize funds raised from capital sources, if
needed in the best judgment of the board of directors of NCRIC, A
Mutual Holding Company, to improve the quality of NCRIC, Inc.'s
medical professional liability insurance product, maintain its
competitive pricing structure and ensure the stability and longevity
of NCRIC, Inc.
. The Department of Insurance and Securities Regulation retains
regulatory authority over NCRIC Group, NCRIC Holdings, Inc. and any
other intermediate holding companies that may in the future be
inserted between NCRIC, A Mutual Holding Company and NCRIC.
. NCRIC may not, without approval of the Commissioner of Insurance and
Securities, by way of an acquisition or investment in a subsidiary,
or otherwise, diversify out of the healthcare and insurance fields.
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. In the event that NCRIC Group makes an initial public offering, the
terms of the proposed offering must be submitted to the Department
of Insurance and Securities Regulation for its prior approval in the
form of an order from the Commissioner of Insurance and Securities.
On January 27, 1999, the Commissioner of Insurance and Securities
issued an order approving the subscription, community and syndicated
community offerings subject to NCRIC Group's registration statement
being declared effective by the Securities and Exchange Commission.
Reasons for the reorganization
As a reciprocal insurance company, National Capital Reciprocal Insurance
Company had no ability to issue shares of capital stock and consequently had no
access to market sources of equity capital and limited ability to increase its
surplus and fund future growth while maintaining the financial strength
necessary to assure policyholders that their obligations would be met. In view
of the changing climate affecting the practice of medicine, physicians require
assistance in addition to insurance. The reorganization enables NCRIC to raise
funds to use in providing the additional assistance.
Regulation of NCRIC, A Mutual Holding Company after the reorganization
NCRIC, A Mutual Holding Company, as a mutual insurance holding company
organized in the District of Columbia, is subject to regulation at a level
substantially equal to that of a District of Columbia domestic insurance
company. The Commissioner of Insurance and Securities retains jurisdiction over
NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC Group and NCRIC to
assure that policyholders' interests are protected.
Conversion of NCRIC, A Mutual Holding Company to the stock form of organization
District of Columbia law provides that NCRIC, A Mutual Holding Company may
fully demutualize, which is a conversion from a mutual holding company form of
organization to a stock form of organization. NCRIC, A Mutual Holding Company's
Board of Directors has no current intention or plan to undertake a full
demutalization. If a full demutualization does not occur, then NCRIC Group will
always be controlled by NCRIC, A Mutual Holding Company, its majority
stockholder.
Under District of Columbia law, if a full demutalization occurs, eligible
policyholders would receive the right to subscribe for additional shares of the
new stock holding company that would be formed in the full demutualization. By
order dated January 27, 1999, the Commissioner of Insurance and Securities
stated that in a full demutualization, each share of common stock outstanding
and held by persons other than NCRIC, A Mutual Holding Company would be
converted automatically into shares of common stock of the new stock holding
company. Specifically, the number of shares that each stockholder would receive
would be determined under an exchange ratio that ensures that after the
transaction, the percentage of the to-be outstanding shares of the new stock
holding company received by a stockholder in exchange for his or her common
stock equals the percentage of the outstanding shares of
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common stock owned by the stockholder immediately prior to the full
demutualization. To date, the Commissioner of Insurance and Securities has not
issued regulations regarding the conversion of a District of Columbia mutual
holding company to stock form, and there is a risk that any regulations will not
be effective when NCRIC, A Mutual Holding Company may wish to undertake a full
demutualization. Moreover, there is a risk as to what form any regulations may
take and what conditions the Commissioner of Insurance and Securities may impose
on a full demutualization of NCRIC, A Mutual Holding Company.
Under legislation recently approved by the Council of the District of
Columbia, prior to the implementation of a proposed full demutualization, a
tender offer for more than 50% of the outstanding shares of the corporation is
prohibited unless approved by the Commissioner of Insurance and Securities.
Governance of NCRIC
An order of the District of Columbia Commissioner of Insurance and
Securities requires that at least two-thirds of the members of NCRIC, A Mutual
Holding Company's board of directors be NCRIC policyholders. Currently, there
are three non-policyholders on NCRIC, A Mutual Holding Company's 18-member board
of directors. In addition, 7 of 10 members of NCRIC Group's and NCRIC Holdings'
boards of directors and 6 of 8 members of NCRIC, Inc.'s board of directors are
currently policyholders of NCRIC, Inc. As the number of non-policyholders on
NCRIC's various boards of directors is limited, there is a risk that if the
interests of policyholders and stockholders conflict, the interests of
policyholders will prevail to the detriment of stockholders.
Marketing and policyholder services
NCRIC markets directly to its insureds through eight employees providing
sales solicitation and communications services. NCRIC markets directly to solo
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians
through special rates for medical residents and discounts for physicians just
entering medical practice. In addition, NCRIC participates as a sponsor and
participant in various medical group and hospital administrators' programs,
medical association and specialty society conventions and similar programs.
NCRIC believes that this personal, comprehensive approach to marketing is
essential to providing medical professional liability insurance, where special
knowledge and experience are a prerequisite.
In addition to these direct marketing channels, NCRIC sells its products
through independent brokers and agents who currently produce less than 2% of
NCRIC's direct premiums written in NCRIC's market areas. Healthcare institutions
frequently prefer brokers over direct solicitation when they purchase medical
professional liability insurance. Therefore, NCRIC believes that developing its
broker relationships in Virginia, Maryland, West Virginia and Delaware is
important to grow its market share. NCRIC selects brokers and agents that it
believes have demonstrated growth and stability in the medical professional
liability insurance
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<PAGE>
industry, strong sales and marketing capabilities, and expertise in selling
medical professional liability insurance. Brokers and agents receive market rate
commissions and other incentives averaging 7% based on the business they
produce. NCRIC strives to maintain relationships with those brokers and agents
who are committed to promoting NCRIC's products and are successful in producing
business for NCRIC.
NCRIC also has a policyholder services department that provides account
information to all insureds and maintains relationships with the small medical
groups and solo practitioners insured by NCRIC. Each of these smaller insureds
has a designated client service representative who can answer most inquiries
and, in other instances, can provide the insured with immediate access to the
person with expertise in a particular department. For hospitals and large and
midsize medical groups, NCRIC has an account manager assigned to each group who
heads a service team comprised of underwriting, risk management and claims
management representatives, each of whom may be contacted directly by the
policyholder for prompt response.
Risk management
NCRIC provides risk management services that are designed to reduce
potential loss exposures by informing insureds about methods of implementing
risk reduction measures to improve their medical practices. The risk management
committee assists the risk management department to identify loss trends in the
local as well as national market. The risk management committee is comprised of
physicians representing various medical specialties. Through these efforts,
NCRIC can identify and present topical loss prevention programs.
The majority of NCRIC's claims result, in part, from a physician's failure
to adequately communicate or document his or her activities. NCRIC addressed
these topics as well as others in its 1998 Risk Management Seminar Educational
Program. Seminars on "Constructing an Operative or Procedure Note" and "Medicare
Documentation Guidelines" highlighted the documentation needs of physicians.
Communication issues were the focal point in "Communication in the Medical
Practice" and "Basic Risk Management Principles." In addition, the Risk
Management Program also advises physicians of medical topics which give rise to
malpractice claims. An example of this was NCRIC's seminar on "Chest Pain
Diagnosis and Treatment." In 1998, 66% of NCRIC's insureds attended risk
management seminars, earning continuing medical education credits.
NCRIC also produces a quarterly newsletter to present additional topics of
interest to physicians. When immediate dissemination of information is
warranted, a risk management alert is distributed. NCRIC's risk management staff
are also available for consultation with insureds on an individual basis to
review issues which may arise in the insured's practice.
Risk management services supplement NCRIC's marketing efforts. The risk
management department conducts physician office visits on both a voluntary and
involuntary basis to review practice procedures and focus on specific areas in
which concerns arise. NCRIC provides office assessments for physicians on a
voluntary basis, consisting of an on-site visit with review of medical records
and office practices. Feedback is given to the physicians in the form of
suggestions made to reduce risk factors in their office.
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Risk management reviews are also performed at the request of the
underwriting and claims committees. Once the reviews have been completed, a
report is provided to the requesting committee.
NCRIC intends to begin offering its risk management services independently
of its core insurance products. Healthcare providers, like hospitals and large
clinics, who self insure will be able to purchase risk management services
directly from NCRIC. The risk management services will be offered through direct
marketing efforts and by agents and brokers to their larger self-insured
accounts.
Claims and litigation experience
The claims department of NCRIC is responsible for claims investigation,
establishment of appropriate case reserves for loss and LAE, defense planning
and coordination, control of attorneys engaged by NCRIC to defend a claim and
negotiation of the settlement or other disposition of a claim. NCRIC's policies
obligate it to provide a defense for its insureds in any suit involving a
medical incident covered by its policy, which is in addition to the limit of
liability under the policy. The cost of this defense is in addition to any
payments made by NCRIC in connection with the claim. Medical professional
liability claims often involve the evaluation of highly technical medical
issues, severe injuries and conflicting expert opinions. In almost all cases,
the person bringing the claim against the physician is already represented by
legal counsel when NCRIC learns of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of claims.
When a claim is reported, claims department professionals complete an initial
evaluation and set the initial reserve. After a full evaluation of the claim has
been completed, which generally occurs within seven months, the initial reserve
may be adjusted. NCRIC has established different levels of authority within the
claims department for settlement of claims.
As of December 1, 1998, NCRIC had approximately 280 open cases with an
average of 65 cases being handled by each claims representative. The claims
representatives at NCRIC are all certified paralegals who have on average over
11 years of experience with NCRIC and an average of 12 years of prior experience
handling medical professional liability cases. NCRIC limits the number of claims
handled by each representative to approximately 70 cases. Management believes
that by limiting the case loads of its claims representatives, all of its
insureds who face claims will receive personalized, professional service, thus
enabling claims to be thoroughly investigated, well-managed and, if they have
merit, quickly resolved.
NCRIC retains locally-based attorneys specializing in medical professional
liability defense to defend claims. NCRIC also obtains the services of medical
experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery and neurosurgery,
obstetrics, internal medicine and radiology. The claims committee meets monthly
to provide evaluation and guidance on claims. The multi-specialty approach of
these physicians adds a unique perspective to the claims
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handling process in that there is an opportunity to obtain the opinions of
several different specialists meeting to share their expertise and experience in
the area of liability evaluation and general peer review. This service is
invaluable to the claims representatives and insureds as it provides in-depth
analysis of claims.
Federal law requires that any claim payment, regardless of amount, be
reported to a national practitioner data bank which can be accessed by various
state licensing and disciplinary boards, hospitals, other healthcare entities
and professional societies. Thus, the physician is often placed in a difficult
position of knowing that a settlement may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to communicate effectively NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
expedient. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
District of Columbia Superior Court rules impact NCRIC's claims handling,
particularly in the area of claims handling expenses. The discovery period,
during which the plaintiff's case must be discerned and, in conjunction with an
attorney, the defense developed, generally takes place over a six- to
eight-month period of intense activity, which increases claims handling
expenses. The court-imposed mediation process has not proven to successfully
resolve NCRIC's cases in part because the volunteer mediators are frequently
plaintiffs' attorneys. Trials are being set about one to one and a half years
from the date of service of the complaint. Despite obstacles presented by the
legal environment, management believes its aggressive claims handling procedures
effectively assist NCRIC to reduce losses and obtain favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include the annual claims/legal seminar at which defense
attorneys retained by NCRIC are present for coordination, discussion and
presentations on all aspects of claims handling.
Claims closed in the 36-month period from January 1996 through December
1998 resulted in 13% of cases closed with payment and 87% of cases closed with
no payment. Indemnity payments during this three-year period totaled $25.2
million, with an average payment per paid claim of $257,544.
Trial results for the 36-month period from January 1996 through December
1998 reveal that of the 70 cases tried, 53, or 76%, were won by NCRIC, 11 trials
resulted in verdicts for the plaintiff, 5 ended in hung juries, and one was
settled. Of the 11 plaintiff verdicts, 3 awarded amounts in excess of NCRIC's
$500,000 retention. Trial results for 1998 reveal that of the 21 cases tried,
18, or 86%, were won by NCRIC, one trial resulted in a verdict for the
plaintiff, and two ended in mistrials or hung juries. Trial results for the
first four months of 1999 reveal that of the 10 cases completed, 3 were won by
NCRIC, 3 trials resulted in verdicts for the plaintiff and 4 ended in mistrials
or hung juries. Of the 3 plaintiff verdicts, 2 awarded amounts in excess of
NCRIC's $500,000 retention.
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<PAGE>
Underwriting
NCRIC's underwriting committee consists of 12 physicians, all of whom are
insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has an underwriting department consisting of three
underwriters and two technical and administrative assistants. NCRIC believes
that this combination of medical professionals and insurance industry
professionals gives NCRIC a competitive advantage in underwriting services. The
physicians on the underwriting committee are able to assist the underwriting
department's insurance professionals by applying their medical knowledge to
better assess risk.
NCRIC's underwriting department is responsible for the evaluation of
applicants for medical professional liability coverage, the issuance of policies
and the establishment and implementation of underwriting standards for all of
the coverages underwritten by NCRIC. The underwriting department provides
information to the underwriting committee to assist the physicians on the
committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative
procedures with respect to the issuance of all physician professional liability
policies. Each applicant or member of an applicant medical group is required to
complete a detailed application that provides a personal and professional
history, the type and nature of the applicant's professional practice,
information relating to specific practice procedures, hospital and professional
affiliations and a complete history of any prior claims and incidents. NCRIC
performs its own independent verification of these matters and conducts an
investigation to determine if there are any lawsuits that may not have been
disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims and risk management reports. Each year,
NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The underwriting department submits all recommendations for premium
surcharges or non-renewal to the underwriting committee for a final decision.
Physicians have the right to seek reconsideration of surcharges by NCRIC's board
of directors, although to date, every request for reconsideration has resulted
in the underwriting committee's decision being upheld. As insureds are often
more comfortable discussing claims and practice issues with their peers, NCRIC
has found that physician interchange with the committee is a strength of NCRIC.
Rates
NCRIC establishes, through its management and independent actuaries, rates
and rating classifications for its physician and medical group insureds based on
the loss and LAE
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<PAGE>
experience it has developed over the past 18 years and the loss and LAE
experience for the entire medical professional liability market. NCRIC has
various rating classifications based on practice location, medical specialty and
other factors. NCRIC utilizes various discounts, including discounts for
part-time practice, physicians just entering medical practice, claim-free
insureds and risk management participation. Most discounts are designed to
encourage lower risk physicians to insure with NCRIC. Total discounts granted to
a policyholder cannot exceed 25% of the policyholder's premium. Effective rates
equal NCRIC's base rate, less any discounts and renewal credits provided to the
insured. NCRIC utilizes national data in developing rates for managed care,
since the data for managed care organization errors and omissions liability is
extremely limited, as tort exposures for these organizations are only recently
beginning to develop.
NCRIC's base rates increased 6% in 1998, were unchanged in 1997 and
increased 5.6% in 1996. NCRIC raised its rates in 1998 because of an increase in
the average severity of claims. NCRIC established its rates based on its
previous loss experience, loss expense adjustments, anticipated policyholder
discounts and NCRIC's fixed and variable expenses.
Since 1993, National Capital Reciprocal Insurance Company has authorized
renewal premium dividend credits to insureds who renew their policies. Renewal
credits are a premium credit on the renewal policy's premium. Renewal credits
stabilize policyholder premiums and improve NCRIC's competitive position
relative to other insurers by encouraging policyholder renewals. For accounting
purposes, renewal credits are accrued for the period declared as a reduction of
premium income. NCRIC's insureds are not automatically entitled to renewal
credits and only renewing insureds receive renewal credits. National Capital
Reciprocal Insurance Company has in the past, and NCRIC will in the future,
consider general insurance market conditions as well as the previous years' loss
and loss adjustment expenses in determining whether or not to authorize renewal
credits and the amounts of any renewal credits. Since 1993, National Capital
Reciprocal Insurance Company authorized renewal credits in the following
amounts:
Percentage of
Earned
Year Amount Renewal Premiums
---- ----------- ----------------
1998 $1,762,976 12.5%
1997 2,245,918 16
1996 1,452,308 10
1995 1,560,907 10
1994 1,806,450 10
1993 1,829,078 10
Actual renewal credits issued by NCRIC will generally be lower than
declared renewal credits because some policyholders do not renew their policies
each year and, as a result, do not receive renewal credits. In 1997, the actual
renewal credits issued to policyholders exceeded renewal credits declared
because NCRIC began to stagger policy renewal dates in 1997.
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<PAGE>
Risk sharing arrangements
Since its inception, NCRIC has maintained good relationships with various
hospitals in the Washington, D.C. metropolitan area which has led to the
creation of integrated risk sharing programs for groups of physicians practicing
at these hospitals. By entering into a risk sharing arrangement, physicians
practicing at a hospital will pay lower individual premiums if the physicians in
their hospital group, taken as a whole, have favorable loss experience and
comply with risk management protocols. Under a risk sharing arrangement,
physicians receive an initial premium reduction or credit. At the end of the
calendar year covered by the premium, a review of the actual loss experience of
the physician group is completed. Should the group's loss experience be
unfavorable, NCRIC will require additional premium payments to offset the
unfavorable losses.
Another type of risk sharing arrangement offered by NCRIC involves the
initial funding of a portion of a premium being held by NCRIC to pay losses. In
this type of arrangement, NCRIC receives its full gross premium, less applicable
credits otherwise granted, and pays losses from the amount being held;
thereafter, any remaining funds are returned to the insured should a review of
actual loss experience show favorable loss experience.
Risk sharing arrangements help lower NCRIC's risk associated with medical
care provided by the hospital's attending physicians. The arrangements also
establish a cost-effective source of professional liability coverage for
physicians participating in the program.
Loss and LAE reserves
The determination of loss and LAE reserves involves projection of ultimate
losses through an actuarial analysis of the claims history of NCRIC and other
medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's claims department as claims are reported and
investigated. Actuaries rely primarily on historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss trends and the delays in reporting and settling claims. As additional
information becomes available, the estimates reflected in earlier loss reserves
may be revised. Any increase or decrease in the amount of reserves, including
reserves for insured events of prior years, would have a corresponding adverse
or beneficial effect on NCRIC's results of operations for the period in which
the adjustments are made.
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<PAGE>
NCRIC, Inc.'s estimates of the ultimate cost of settling the claims are
based on:
. information then known;
. predictions of future events;
. estimates of future trends in claims frequency and severity;
. predictions of future inflation rates;
. judicial theories of liability;
. judicial interpretations of insurance contracts;
. legislative activity; and
. other factors.
The inherent uncertainty of establishing reserves is greater for medical
professional liability insurance because lengthy periods may elapse before
notice of a claim or a determination of liability. Medical professional
liability insurance policies are "long tail" policies which means that claims
and expenses may be paid over a period of 10 or more years. This is longer than
most property and casualty claims. As a result of these long payment periods,
trends in medical professional liability policies may be slow to emerge, and
NCRIC, Inc. may not promptly modify its underwriting practices and change its
premium rates to reflect underlying loss trends. Finally, changes in the
practice of medicine and healthcare delivery, like the emergence of new, larger
medical groups that do not have an established claims history, and additional
claims resulting from restrictions on treatment by managed care organizations,
may not be fully reflected in NCRIC, Inc.'s underwriting and reserving
practices.
NCRIC's independent actuaries review NCRIC's reserves for losses and LAE
periodically and prepare semi-annual reports that include a recommended level of
reserves. NCRIC considers this recommendation as well as other factors, like
loss retention levels and anticipated or estimated changes in frequency and
severity of claims, in establishing the amount of its reserves for losses and
LAE. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
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<PAGE>
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(in thousands)
Balance, beginning of period ............... $ 75,136 $ 71,206 $ 72,033
Less reinsurance recoverable on
unpaid claims ........................ 17,077 14,679 16,182
-------- -------- --------
Net balance ................................ 58,059 56,527 55,851
-------- -------- --------
Incurred related to:
Current year ................ 19,140 19,444 16,775
Prior years ................. (3,463) (3,853) (1,539)
-------- -------- --------
Total incurred ..... 15,677 15,591 15,236
-------- -------- --------
Paid related to:
Current year ................ 1,247 1,867 2,145
Prior years ................. 9,335 12,192 12,415
-------- -------- --------
Total paid ......... 10,582 14,059 14,560
-------- -------- --------
Net balance ................................ 63,154 58,059 56,527
Plus reinsurance recoverable on
unpaid claims ........................ 24,546 17,077 14,679
-------- -------- --------
Balance, end of period ..................... $ 87,700 $ 75,136 $ 71,206
======== ======== ========
The amounts shown above and the reserve for unpaid losses and LAE on the chart
located on the next page are presented in conformity with generally accepted
accounting principles.
The following table reflects the development of reserves for unpaid losses
and LAE for the years indicated, at the end of that year and each subsequent
year. The first line shows the reserves, as originally reported at the end of
the stated year. Each calendar year-end reserve includes the estimated unpaid
liabilities for that coverage year and for all prior coverage years. The section
under the caption "Cumulative Liability Paid Through End of Year" shows the
cumulative amounts paid through each subsequent year on those claims for which
reserves were carried as of each specific year end. The section under the
caption "Re-estimated Liability" shows the original recorded reserve as adjusted
as of the end of each subsequent year to reflect the cumulative amounts paid and
any other facts and circumstances discovered during each year. The line
"Redundancy (deficiency)" sets forth the difference between the latest
re-estimated liability and the liability as originally established. The years
1991 through 1997 are presented on a direct basis consistent with Statement of
Financial Accounting Standards No. 113. The years prior to 1991 are presented
net of reinsurance. We are unable to generate the table on a direct basis for
those years because NCRIC's records were maintained on a net basis.
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<PAGE>
The table reflects the effects of all changes in amounts of prior periods.
For example, if a loss determined in 1995 to be $100,000 was first reserved in
1988 at $150,000, the $50,000 favorable loss development, being the original
estimate minus the actual loss, would be included in the cumulative redundancy
in each of the years 1988 through 1997 shown below. This table presents
development data by calendar year and does not relate the data to the year in
which the claim was reported or the incident actually occurred. Conditions and
trends that have affected the development of these reserves in the past will not
necessarily recur in the future.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid Losses
and LAE ...................... $ 24,463 $ 26,098 $ 32,151 $ 64,333 $ 88,125 $ 91,587 $ 80,564 $ 72,033 $ 71,206 $ 75,136
Cumulative Liability Paid
Through End of Year:
One year later .......... 8,977 6,836 12,561 13,094 18,103 19,786 21,667 16,084 14,916 9,667
Two years later ......... 13,130 16,479 18,552 27,889 35,861 39,293 34,829 27,634 22,237
Three years later ....... 17,143 19,949 21,605 37,247 51,163 47,348 43,237 32,409
Four years later ........ 19,188 22,191 25,891 47,633 56,648 51,845 45,219
Five years later ........ 20,603 25,307 28,387 51,482 59,473 52,984
Six years later ......... 23,234 26,335 29,115 52,276 60,335
Seven years later ....... 24,242 27,057 29,595 53,098
Eight years later ....... 24,632 27,252 29,939
Nine years later ........ 24,829 27,597
Ten years later ......... 25,173
Re-estimated Liability:
One year later .......... 25,020 27,326 35,942 69,522 80,572 73,336 71,808 65,133 64,226 74,524
Two years later ......... 22,967 30,014 29,123 61,090 66,572 65,944 69,356 56,534 65,202
Three years later ....... 24,599 26,603 28,085 54,208 63,919 68,118 63,775 58,988
Four years later ........ 23,348 26,135 30,692 54,215 66,623 67,156 65,542
Five years later ........ 23,493 27,898 30,136 55,221 69,079 68,971
Six years later ......... 25,368 27,602 30,311 58,324 71,163
Seven years later ....... 25,016 27,997 30,999 60,908
Eight years later ....... 25,541 28,493 31,461
Nine years later ........ 26,025 29,010
Ten years later ......... 26,475
Redundancy (deficiency) ...... (2,012) (2,912) 690 3,425 16,962 22,616 15,022 13,045 6,004 612
</TABLE>
General office premises liability incurred losses have been less than 1%
of medical professional liability incurred losses in the last five years. NCRIC
does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
Reinsurance
NCRIC follows customary industry practice by reinsuring a portion of its
risks and paying a reinsurance premium based upon the premiums received on all
policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks, reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- an amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary liability
for the full amount of its insurance policies, it contractually obligates the
reinsurer to pay successful claims against NCRIC to the extent of risk ceded.
NCRIC's current reinsurance program consists of three separate reinsurance
treaties:
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<PAGE>
(1) Swing rated treaty. NCRIC's first treaty is a swing rated treaty which
reinsures NCRIC for losses in excess of $500,000 per claim, subject to an inner
aggregate deductible of 5% of gross net earned premium income, up to $1,000,000.
Gross net earned premium income is NCRIC's gross premium earned less reinsurance
premiums, discounts and renewal credits. The ultimate reinsurance premium is
subject to incurred losses and ranges between a minimum premium of 4% of gross
net earned premium income and a maximum premium of 22.5% of gross net earned
premium income. The inner aggregate deductible means that NCRIC must pay losses
within the reinsurance layer until the inner aggregate deductible is satisfied.
NCRIC pays a deposit premium equal to 14% of gross net earned premium income
that is ultimately increased or decreased based on actual losses, subject to the
minimum and maximum premium. Following are the reinsurance premium terms for the
swing rated treaty for calendar years 1999, 1998, 1997, 1996 and 1995.
Percentage of Gross Net
Earned Premium Income
----------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Deposit premium ................... 14.0% 14.0% 14.0% 14.0% 14.0%
Maximum premium ................... 22.5 22.5 22.5 30.0 40.0
Minimum premium ................... 4.0 4.0 4.0 4.0 4.0
Inner aggregate deductible ........ 5.0 5.0 5.0 10.0 10.0
NCRIC has recorded, based on management's best estimate, its maximum
premium expense under the terms of the swing rated treaty in the current and the
preceding treaty years and will adjust the liability and expense as losses
develop in subsequent years.
(2) First excess layer treaty. This treaty covers losses up to $1,000,000
in excess of $1,000,000 per claim. NCRIC cedes 91% of its risks to the
$1,000,000 excess layer treaty program and retains 9% of the risks. The premium
payable by NCRIC for the $1,000,000 excess layer treaty is 91% of the premium
collected from insureds for this coverage. NCRIC receives a ceding commission
from the reinsurers to cover the cost associated with issuing this coverage to
its insureds.
(3) Second excess layer treaty. This treaty covers losses up to $3,000,000
in excess of $2,000,000 per claim. NCRIC cedes 100% of its risks to the
$2,000,000 excess layer treaty program and retains none of the risks. The
premium for the $2,000,000 excess layer treaty is 100% of the premium collected
from insureds for this coverage. NCRIC receives a ceding commission from the
reinsurers to cover the cost associated with issuing this coverage to its
insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the $1,000,000 excess layer treaty and $2,000,000 excess layer treaty, are
deducted from other underwriting expenses. Ceding commissions were $300,000,
$223,000 and $235,000 in 1998, 1997 and 1996.
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<PAGE>
Ninety percent of Commonwealth Medical Insurance Liability Company's risks
are reinsured by NCRIC. Commonwealth Medical Insurance Liability Company's risks
are in turn reinsured by NCRIC's reinsurance treaties.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
Total Amount of Individual Loss Company Reinsurers
------------------------------- ------- ----------
$0 - $500,000 ............................. 100% 0%
$500,000 - $1,000,000 ..................... 4 96
$1,000,000 - $2,000,000 ................... 9 91
$2,000,000 - $5,000,000 ................... 0 100
The table does not reflect the effect of the inner aggregate deductible.
NCRIC may provide policy limits in excess of $5,000,000 which are
reinsured through facultative reinsurance programs. Facultative reinsurance
programs are reinsurance programs which are specifically designed for a
particular risk not covered by NCRIC's existing reinsurance arrangements. NCRIC
currently has facultative reinsurance in connection with a group of physicians
who desire policy limits greater than $5,000,000.
NCRIC determines the amount and scope of reinsurance coverage to purchase
each year based upon its evaluation of the risks accepted, consultations with
reinsurance consultants and a review of market conditions, including the
availability and pricing of reinsurance. NCRIC's reinsurance treaties are placed
with non-affiliated reinsurers for three-year terms with annual renegotiations.
NCRIC's current three-year treaty expires January 1, 2000.
The reinsurance program is placed with a number of individual reinsurance
companies and Lloyds' syndicates to mitigate the concentrations of reinsurance
credit risk. Most of the reinsurers are London companies or Lloyds' syndicates;
there is a small percentage placed with a domestic reinsurer. NCRIC relies on
its wholly-owned brokerage firm, National Capital Brokerage, Inc., Willis Faber
North America and a London-based intermediary to assist it in the analysis of
the credit quality of its reinsurers. NCRIC also requires reinsurers that are
not authorized to do business in the District of Columbia to post a letter of
credit to secure reinsurance recoverable on paid losses.
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<PAGE>
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 1998 by reinsurer:
Reinsurance
Reinsurer Recoverable
--------- -----------
(in thousands)
Lloyd's of London syndicates ............. $14,098
Hannover Reinsurance ..................... 2,147
CNA Reinsurance of London Limited ........ 2,908
Unionamerica Insurance ................... 2,785
Zurich Reinsurance ....................... 1,410
5 other reinsurers ....................... 1,596
-------
Total............................... $24,944
=======
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1998, 1997 and 1996 is as follows:
Year Ended December 31,
------------------------------------------------------------------
1998 1997 1996
------------------- -------------------- --------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(in thousands)
Direct ... $ 19,214 $ 16,270 $ 17,869 $ 17,466 $ 19,017 $ 19,017
Ceded .... 3,699 4,089 (1,854) (1,854) (4,239) (4,239)
-------- -------- -------- -------- -------- --------
Net ...... $ 22,913 $ 20,359 $ 16,015 $ 15,612 $ 14,778 $ 14,778
======== ======== ======== ======== ======== ========
In 1997, NCRIC introduced an errors and omissions policy for managed care
organizations and a provider stop loss coverage for health care providers
accepting financial risk associated with providing health care services on a
fixed or capitated reimbursement rate. Provider stop loss coverage allows
healthcare providers to insure against a portion of their cost of rendering care
in excess of a predetermined amount up to a set maximum. NCRIC pays the
healthcare providers' costs in excess of this predetermined amount up to the
maximum. NCRIC's limited knowledge regarding both of these exposures led NCRIC
to structure a reinsurance program unique to these exposures. NCRIC does not
have underwriting authority and only retains 5% of the premiums and losses under
each of these policies. Individual risks are submitted to the reinsurer for
underwriting and pricing. NCRIC receives a ceding commission of 15% in
connection with provider stop loss coverage but does not receive ceding
commissions in connection with errors and omissions policies. NCRIC intends to
accept higher levels of risk as it learns the characteristics of these risk
exposures and begins to generate profitable revenue volume.
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<PAGE>
Investment portfolio
Investment income is an important component of the operating results of
NCRIC. Investments of NCRIC are made by investment managers and internal
management under policies established and supervised by the Investment Committee
of the board of directors of NCRIC, Inc. NCRIC's current investment policy has
placed primary emphasis on investment grade, fixed maturity securities and seeks
to maximize after-tax yields and minimize credit risk of the portfolio. However,
NCRIC's investment guidelines which set the parameters for NCRIC's investment
policy permit NCRIC to invest up to 10% of its investments in tax-advantaged
preferred stocks. Currently, NCRIC's investments in equity securities consist
exclusively of investments in preferred stock. NCRIC, Inc.'s investment
committee is currently considering investing up to 10% of its investment assets
in common stocks, which will require an amendment to NCRIC's investment
guidelines.
Since 1996, NCRIC has conducted a DYCARR analysis of its investment
portfolio on an annual basis. DYCARR is a proprietary financial model of Prime
Advisors, Inc. designed specifically for property and casualty insurance
companies to maximize after-tax investment income while simultaneously managing
interest rate risk. DYCARR measures the amount and probability of operational
cash flow stress and defines maturity schedules which will produce the selected
confidence level that all resulting negative operating cash flows will be
covered by maturing assets. The new schedule of maturities increased the
portfolio's duration from a target of 4.8 years to 5.7 years with a +/- 0.5-year
band. In addition, DYCARR estimates the amount of income gained or lost from
changes in the selected confidence level and identifies the impact each variable
has on negative operating cash flows. As a result of the 1996 DYCARR analysis,
25% of National Capital Reciprocal Insurance Company's investment portfolio was
shifted to tax-advantaged securities like municipals and preferred stocks. NCRIC
now conducts a DYCARR analysis annually.
NCRIC currently uses Brown Brothers Harriman & Co. and Prime Advisors as
outside investment managers for fixed income maturity securities. NCRIC also
uses Brown Brothers Harriman & Co. as an outside investment manager for equity
securities.
NCRIC has classified its investments, which are fixed-income securities,
as available for sale and reports them at fair value, with unrealized gains and
losses excluded from net income and reported, net of deferred taxes, as a
component of stockholders' equity. During periods of rising interest rates, as
recently experienced, the fair value of NCRIC's investment portfolio will
generally decline resulting in decreases in NCRIC's stockholders' equity.
Conversely, during periods of falling interest rates, the fair value of NCRIC's
investment portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity.
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<PAGE>
The following table sets forth the fair value and the amortized cost of
the investment portfolio of NCRIC at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- --------- --------- --------
As of December 31, 1998 (in thousands)
U.S. Government and agencies ..... $ 23,728 $ 1,032 $ (16) $ 24,744
Corporate ........................ 18,823 704 (40) 19,487
Tax-exempt obligations ........... 19,329 1,045 -- 20,374
Mortgage-backed securities ....... 26,218 381 (69) 26,530
-------- -------- -------- --------
88,098 3,162 (125) 91,135
Preferred stocks ................. 5,195 88 (70) 5,213
-------- -------- -------- --------
Total ............................ $ 93,293 $ 3,250 $ (195) $ 96,348
======== ======== ======== ========
As of December 31, 1997
U.S. Government and agencies ..... $ 28,293 $ 115 $ (7) $ 28,401
Corporate ........................ 16,168 394 (28) 16,534
Tax-exempt obligations ........... 20,811 383 (11) 21,183
Mortgage-backed securities ....... 23,683 241 (6) 23,918
-------- -------- -------- --------
88,955 1,133 (52) 90,036
Preferred stocks ................. 4,208 136 (18) 4,326
-------- -------- -------- --------
Total ............................ $ 93,163 $ 1,269 $ (70) $ 94,362
======== ======== ======== ========
As of December 31, 1996
U.S. Government and agencies ..... $ 20,182 $ 29 $ (429) $ 19,782
Corporate ........................ 13,371 70 (53) 13,388
Tax-exempt obligations ........... 20,116 18 (7) 20,127
Mortgage-backed securities ....... 31,513 -- (80) 31,433
-------- -------- -------- --------
85,182 117 (569) 84,730
Preferred stocks ................. 4,877 27 (48) 4,856
-------- -------- -------- --------
Total ............................ $ 90,059 $ 144 $ (617) $ 89,586
======== ======== ======== ========
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 1998, NCRIC held 50 mortgage-related
securities most of which had a quality of Agency/AAA. Collectively, NCRIC's
mortgage-related securities had an average yield-to-maturity of approximately
6.6%.
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<PAGE>
Approximately 46% of the mortgage-related securities are pass-thru securities.
NCRIC does not have any interest only or principal only pass-thru securities.
The following table contains the investment quality distribution of NCRIC,
Inc.'s fixed maturity investments at December 31, 1998.
Type/Ratings of Investment Percentage
-------------------------- ----------
Treasury/Agency .................................. 53%
AAA .............................................. 26
AA ............................................... 4
A ................................................ 13
BBB .............................................. 3
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc.
The following table sets forth information concerning the maturities of
fixed maturity securities in NCRIC's investment portfolio as of December 31,
1998, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
At December 31, 1998
----------------------------------
Amortized Percentage of
Cost Fair Value Fair Value
---------- ---------- ----------
(in thousands)
Due in one year or less .................. $ 1,611 $ 1,619 1.7%
Due after one year through five years .... 9,552 9,767 10.2
Due after five years through ten years ... 20,275 21,028 21.8
Due after ten years ...................... 30,442 32,191 33.4
------- ------- -----
61,880 64,605 67.1
Preferred stocks ......................... 5,195 5,213 5.4
Mortgage-backed securities ............... 26,218 26,530 27.5
------- ------- -----
Total .......................... $93,293 $96,348 100.0%
======= ======= =====
Proceeds from bond maturities and redemptions of available for sale investments
during the years 1998, 1997 and 1996 were $58,811,000, $35,475,000 and
$59,577,000. Gross gains of $521,000, $300,000 and $451,000 and gross losses of
$362,000, $210,000 and $221,000 were realized on available for sale investment
redemptions during 1998, 1997 and 1996.
The average effective maturity and the average modified duration of the
securities in NCRIC's fixed maturity portfolio as of December 31, 1998, was
13.56 years and 5.75 years.
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Competition
The physician medical professional liability insurance market in the
District of Columbia is highly competitive. Competition is based on many
factors, including the following:
. perceived financial strength of the insurer;
. A.M. Best ratings;
. premiums charged;
. dividend policy;
. policy terms and conditions; and
. service, reputation and experience.
NCRIC competes principally with two commercial companies, CNA Insurance Group,
Inc. and American International Group, Inc. Each of these companies is actively
engaged in soliciting insureds in NCRIC's markets. According to A.M. Best, NCRIC
has 44% of the District of Columbia physician and hospital professional
liability market and these two companies have a combined market share of 30%.
However, the A.M. Best data includes all medical professional liability
insurance sold in the District of Columbia including insurance purchased by
institutions like hospitals, which NCRIC does not insure, but which are insured
by its principal competitors. Thus, the A.M. Best data does not accurately
reflect NCRIC's share of the medical professional liability insurance markets in
which it participates. Several medical professional liability insurers in
NCRIC's markets, including its two principal competitors, offer products at
lower premium rates than NCRIC. A.M. Best calculates that at least 25 other
companies offer some type of medical professional liability insurance in each of
NCRIC's markets, and more companies may enter NCRIC's markets in the future. In
addition, NCRIC believes that the number of healthcare entities that insure
their affiliated physicians through self-insurance may increase.
In addition, as NCRIC expands into new states, it may face strong
competition from carriers that are closely focused on narrow geographic markets.
In particular, NCRIC expects to encounter strong competition from
well-established insurance companies as it carries out its expansion plans in
Maryland, Virginia, West Virginia and Delaware. Many of NCRIC's current and
potential competitors have greater financial resources than NCRIC and may seek
to acquire market share by decreasing pricing for their products below
prevailing market rates. If this occurs, NCRIC's profitability will be reduced.
In particular, NCRIC, Inc. may be forced by competitive pressures to accept
unprofitable premium rates and underwriting terms and conditions. NCRIC's
competitors may also have existing relationships with insurance brokers or other
distribution channels which NCRIC may be unable to supplant.
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NCRIC believes that its principal strengths are:
. its claims management and underwriting expertise;
. its ability to successfully litigate claims;
. its risk management; and
. its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
18-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to its District of Columbia physicians.
Regulation
NCRIC, A Mutual Holding Company and NCRIC, Inc. are domiciled in the
District of Columbia, and Commonwealth Medical Liability Insurance Company is
domiciled in Virginia. Therefore, the laws and regulations of these
jurisdictions, including the tort liability laws and the laws relating to
medical professional liability exposures and reports, have the most significant
impact on the operations of NCRIC.
Holding company regulation. A mutual insurance holding company is subject
to regulation at a level substantially equal to that of a District of Columbia
domestic insurance company. The Commissioner of Insurance and Securities has
jurisdiction over an intermediate holding company, like NCRIC Group. In
addition, District of Columbia law provides that the assets of NCRIC, A Mutual
Holding Company are available to satisfy claims of NCRIC's policyholders in the
event that the Commissioner of Insurance and Securities initiates a liquidation
proceeding.
As part of a holding company system, NCRIC, A Mutual Holding Company,
NCRIC Holdings, Inc., NCRIC Group and NCRIC, Inc. are subject to the DC Holding
Company System Act of 1933, D.C. Law 10-44. NCRIC, Inc., as the parent of
Commonwealth Medical Insurance Liability Company, is also subject to Title 38 of
the Virginia Code which includes in Chapter 13 provisions regarding insurance
holding companies. The Holding Company Acts require NCRIC, A Mutual Holding
Company to file information periodically with the Department of Insurance and
Securities Regulation and Virginia regulatory authorities, including information
relating to its capital structure, ownership, financial condition and general
business operations. Some transactions between an insurance company and its
affiliates, including sales, loans or investments that are deemed "material"
require prior approval by the District of Columbia or Virginia insurance
regulators, as applicable. In the District of Columbia, transactions by an
insurance company with affiliates involving loans, sales, purchases, exchanges,
extensions of credit, investments, guarantees or other contingent obligations,
which within any 12-month period aggregate at least 3% of the insurance
company's admitted assets or 25% of its surplus, whichever is greater, require
prior approval. Prior approval is also required for all management
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agreements, service contracts and cost-sharing arrangements between an insurance
company and its affiliates. Some reinsurance agreements or modifications also
require prior approval.
The Holding Company Acts also provide that the acquisition or change of
"control" of a domestic insurance company or of any person or entity that
controls an insurance company cannot be consummated without prior regulatory
approval. The Holding Company Acts also effectively restrict NCRIC from
consummating significant reorganizations or mergers without prior regulatory
approval.
Regulation of dividends from insurance subsidiaries. The DC Holding
Company Act limits the ability of NCRIC, Inc. to pay dividends. Without prior
notice to and approval of the Commissioner of Insurance and Securities, NCRIC
may not declare or pay an extraordinary dividend, which is defined as any
dividend or distribution of cash or other property whose fair market value,
together with other dividends or distributions made, within the preceding 12
months exceeds the lesser of (1) 10% of NCRIC's statutory surplus as of the
preceding December 31, or (2) NCRIC's statutory net income excluding realized
capital gains, for the 12-month period ending the preceding December 31, but
does not include pro rata distributions of any class of NCRIC's own securities.
In calculating net income under the test, NCRIC may carry forward net income,
excluding realized capital gains, from the previous two calendar years that has
not been paid out as dividends. District of Columbia law gives the Commissioner
of Insurance and Securities broad discretion to disapprove dividends even if the
dividends are within the above-described limits. Based on this limitation and
1998 results, NCRIC would be able to pay approximately $2.4 million in dividends
to NCRIC Group in 1998 under the stated formula. Commonwealth Medical Insurance
Liability Company's dividend restrictions are similar to NCRIC's. Based on its
1998 results, under Virginia insurance law, Commonwealth Medical Insurance
Liability Company would be able to pay approximately $500,000 in dividends to
NCRIC.
Insurance company regulation. NCRIC, Inc. is subject to supervision and
regulation by the District of Columbia Department of Insurance and Securities
Regulation and insurance authorities in Maryland. Commonwealth Medical Liability
Insurance Company is subject to supervision and regulation by the Virginia State
Corporation Commission Bureau of Insurance and insurance authorities in West
Virginia and Delaware. This regulation is concerned primarily with the
protection of policyholders' interests rather than stockholders' interests.
Accordingly, decisions of insurance authorities made with a view to protecting
the interests of policyholders may reduce NCRIC Inc.'s profitability. The extent
of regulation varies by jurisdiction, but this regulation usually includes:
. regulating premium rates and policy forms;
. setting minimum capital and surplus requirements;
. regulating guaranty fund assessments;
. licensing of insurers and agents;
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. approving accounting methods and methods of setting statutory loss
and expense reserves;
. underwriting limitations;
. the terms upon which a full demutualization transaction can occur;
. restrictions on transactions with affiliates;
. setting requirements for and limiting the types and amounts of
investments;
. establishing requirements for the filing of annual statements and
other financial reports;
. conducting periodic statutory examinations of the affairs of
insurance companies;
. approving proposed changes of control; and
. limiting the amounts of dividends that may be paid without prior
regulatory approval.
Without the approval of the District of Columbia Commissioner of Insurance
and Securities, NCRIC, Inc. may not diversify out of the healthcare and
insurance fields through an acquisition or otherwise.
Guaranty fund laws. Each of the jurisdictions in which NCRIC does business
has guaranty fund laws under which insurers doing business in those
jurisdictions can be assessed on the basis of premiums written by the insurer in
that jurisdiction in order to fund policyholder liabilities of insolvent
insurance companies. Under these laws in general, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers. NCRIC
makes accruals for its portion of assessments related to any insolvencies
considered to be probable of assessment by the guaranty associations. In the
District of Columbia, insurance companies are assessed in three categories:
automobile, workers' compensation and all other. An insurance company licensed
to do business in the District of Columbia is only liable to pay an assessment
if another insurance company within its category becomes insolvent. NCRIC is in
the "all other" category.
Significant assessments could have a material adverse effect on NCRIC,
Inc.'s financial condition or results of operations. While NCRIC, Inc. will not
necessarily be liable to pay assessments each year, the insolvency of another
insurance company within its category of insurance could result in the maximum
assessment being imposed on NCRIC, Inc. over several years. NCRIC, Inc. cannot
predict the amount of future assessments. In each of the jurisdictions in which
NCRIC, Inc. carries on business, the amount of the assessment cannot exceed 2%
of the direct premiums written per year by NCRIC, Inc. in that jurisdiction.
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Examination of insurance companies. Every insurance company is subject to
a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other jurisdiction interested
in participating in a periodic examination may do so. The last completed
periodic financial examination of National Capital Reciprocal Insurance Company,
based on December 31, 1996 financial statements, was completed on October 29,
1997, and a final report was issued on February 9, 1999. The final report
positively assessed NCRIC's financial stability and operating procedures. The
last final periodic financial examination of Commonwealth Medical Insurance
Liability Company, based on December 31, 1995 financial statements, was issued
on May 1, 1996. While the periodic financial examination positively assessed
Commonwealth Medical Insurance Liability Company's financial stability, the
Virginia regulators raised a number of issues in connection with Commonwealth
Medical Insurance Liability Company's administrative procedures which have now
been corrected.
Approval of rates and policies. The District of Columbia, Virginia and
Delaware require NCRIC to submit rates to regulators on a file and use basis.
Under a file and use system, an insurer is permitted to bring new rates and
policies into effect on filing them with the appropriate regulator, subject to
the right of the regulator to object within a fixed period of days. In Maryland,
rates must be submitted to regulators 30 days prior to their effectiveness. West
Virginia is also a prior approval jurisdiction. In each of the District of
Columbia, Maryland and Virginia, rating plans, policies and endorsements must be
submitted to the regulators 30 days prior to their effectiveness. If these items
are not filed correctly, the possibility exists that NCRIC may be unable to
implement desired rates, policies, endorsements, forms or manuals if these items
are not approved by an insurance commissioner.
Medical professional liability reports. NCRIC, Inc. principally writes
medical professional liability insurance, and additional requirements are placed
upon it to report detailed information with regard to settlements or judgments
against its insureds. In addition, NCRIC, Inc. is required to report to the D.C.
Department of Insurance and Securities Regulation or state regulatory agencies
or the National Practitioners Data Bank payments, claims closed without payments
and actions by NCRIC, Inc. like terminations or surcharges, with respect to its
insureds. Penalties may attach if NCRIC, Inc. fails to report to either the
Department of Insurance and Securities Regulation or an applicable state
insurance regulator or the National Practitioners Data Bank.
Changes in government regulation of the healthcare system. Federal and
state governments recently have considered reforming the healthcare system.
While some of the proposals could be beneficial to NCRIC, Inc., the adoption of
others could adversely affect NCRIC, Inc. Public discussion of a broad range of
healthcare reform measures will likely continue in the future. These measures
include:
. spending limits;
. price controls;
. limits on increases in insurance premiums;
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. limits on the liability of doctors and hospitals for tort claims;
and
. changes in the healthcare insurance system.
A.M. Best ratings
In 1997, A.M. Best, which rates insurance companies based on factors of
concern to policyholders, rated NCRIC, Inc. and Commonwealth Medical Insurance
Liability Company "A- (Excellent)." This is the fourth highest rating of the 15
ratings that A.M. Best assigns. NCRIC, Inc. received its initial rating of "B"
in 1988, was upgraded to "B+" in 1989, to "B++" in 1996 and was upgraded to "A-"
in 1997. NCRIC, Inc. has received written confirmation from A.M. Best that A.M.
Best intends to retain the "A-" ratings of NCRIC, Inc. and Commonwealth Medical
Insurance Liability Company when A.M. Best publishes its next set of ratings.
A.M. Best reviews its ratings periodically. If A.M. Best reduces NCRIC, Inc.'s
and Commonwealth Medical Liability Insurance Company's ratings from their
current "A- (Excellent)" level, it may be more difficult for them to attract
insureds and to develop a network of insurance brokers and agents.
A.M. Best's "A-" rating is assigned to those companies that in A.M. Best's
opinion have a strong ability to meet their obligations to policyholders over a
long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews:
. the company's profitability, leverage and liquidity;
. its book of business;
. the adequacy and soundness of its reinsurance;
. the quality and estimated market value of its assets;
. the adequacy of its reserves and surplus;
. its capital structure;
. the experience and competence of its management; and
. its market presence.
Employees
As of February 1, 1998, NCRIC employed approximately 150 persons. None of
NCRIC's employees is covered by a collective bargaining agreement. NCRIC
believes that its relations with its employees are good.
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Litigation
NCRIC is from time to time named as a defendant in various lawsuits
incidental to its insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. NCRIC vigorously defends these
actions, unless a reasonable settlement appears appropriate. NCRIC believes that
adverse results, if any, in the actions currently pending should not have a
material adverse effect on NCRIC's consolidated financial condition.
On February 9, 1998, an amended complaint was filed in the United States
District Court for the Western District of Virginia, Roanoke Division by Mrs.
Eunice Marshall against Obstetrics & Gynecology Ltd. of Radford and HealthCare
Consulting. Mrs. Marshall alleges that she was wrongfully discriminated against
and discharged on the basis of her age. Mrs. Marshall seeks to be reinstated as
office manager of Obstetrics & Gynecology Ltd. of Radford, compensatory damages
in an unspecified amount and punitive damages in the amount of $350,000. The
management of NCRIC Group believes that Mrs. Marshall's suit is without merit
and is causing it to be vigorously defended. The former stockholders of
HealthCare Consulting have agreed to indemnify NCRIC Group against any loss or
expenses it incurs in connection with this litigation.
On March 5, 1999, Mrs. Marshall filed an amended motion for judgment for
defamation in the Circuit Court for the City of Radford, Virginia against
Obstetrics & Gynecology Ltd. of Radford, David Dobyns and HealthCare Consulting.
Mrs. Marshall alleges that Mr. Dobyns, an employee of HealthCare Consulting,
knowingly made false statements about her. Mrs. Marshall seeks compensatory
damages of $1 million and punitive damages of $350,000. HealthCare Consulting
and Mr. Dobyns have filed a demurrer and special plea to dismiss Mrs. Marshall's
action against them. The management of NCRIC Group believes that this suit is
without merit and is causing it to be vigorously defended.
Properties
NCRIC's principal business operations are conducted from its leased
executive offices, which consist of approximately 18,156 square feet located at
1115 30th Street, N.W., Washington, D.C. 20007. The term of the lease is for ten
years, commencing April 15, 1998 and expiring April 30, 2008. Annual rental is
$421,476 with 2% annual increases for the first five years of the term. NCRIC's
rent is partially offset by payments from a subtenant equal to $36,816 per year.
In the sixth year of the term, the rent increases by $2.00 per rentable square
foot and remains at that level for the balance of the term. NCRIC has the option
to renew the lease for one additional term of five years. NCRIC believes that
its office space is adequate for its present needs.
MANAGEMENT
Board of directors of NCRIC, A Mutual Holding Company
The board of directors is divided into three classes. Drs. Ammerman,
Coleman, Gutierrez, Hafter-Gray, Unger and Mr. Burke will stand for election at
the annual meeting of
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members to be held in 1999. Drs. Becker, Gladden, Gray, Patterson, Zimmerman and
Mr. McNamara will stand for election at the annual meeting of stockholders to be
held in 2000. Drs. Trujillo, Calhoun, Fischer, Hirsch, Taubin, and Mr. Pate will
stand for election at the annual meeting of stockholders to be held in 2001.
NCRIC, A Mutual Holding Company's board of directors has established an
executive committee consisting of six directors which is chaired by Dr.
Trujillo. The executive committee exercises the power and authority of the
directors in all matters that do not require action by the entire board.
Board of directors of NCRIC Group
The board of directors is divided into three classes. Dr. Coleman and
Messrs. McNamara and Burke will stand for election at the annual meeting of
stockholders to be held in 1999. Drs. Glassman, Scalettar and Seitzman and Mr.
Pate will stand for election at the annual meeting of stockholders to be held in
2000. Drs. Trujillo and Parver will stand for election at the annual meeting of
stockholders to be held in 2001. Dr. Epps intends to retire from the board of
directors in 2001. NCRIC Group intends to reduce the size of the board of
directors to nine directors at that time.
Directors and executive officers
The following table sets forth information concerning the current
directors and executive officers of NCRIC Group and NCRIC, A Mutual Holding
Company. Each of the officers of NCRIC Group holds the same position with NCRIC,
Inc.
Name Age Position
- ---- --- --------
Nelson P. Trujillo, M.D. .... 61 Chair of the Board of NCRIC, A Mutual
Holding Company and NCRIC Group
R. Ray Pate, Jr. ............ 39 Director, President and Chief Executive
Officer of NCRIC, A Mutual Holding
Company and NCRIC Group
Bruce J. Ammerman, M.D. ..... 51 Director of NCRIC, A Mutual Holding
Company
Arthur A. Becker, M.D. ...... 62 Director of NCRIC, A Mutual Holding
Company
Vincent C. Burke, III........ 47 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Thomas Calhoun, M.D. ........ 66 Director and Secretary of NCRIC, A Mutual
Holding Company
Pamela W. Coleman, M.D. ..... 42 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Charles H. Epps, Jr., M.D. .. 68 Director of NCRIC Group
Robert A. Fischer, M.D. ..... 66 Vice Chair of the Board of NCRIC, A Mutual
Holding Company
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Name Age Position
- ---- --- --------
Major P. Gladden, M.D. ........ 63 Director of NCRIC, A Mutual Holding
Company
Leonard M. Glassman, M.D. ..... 52 Director of NCRIC Group
Luther W. Gray, Jr., M.D. ..... 59 Director and Assistant Secretary of NCRIC,
A Mutual Holding Company
Joseph E. Gutierrez, M.D. ..... 64 Director of NCRIC, A Mutual Holding
Company
Sheila Hafter-Gray, M.D. ...... 68 Director of NCRIC, A Mutual Holding
Company
Florie Hirsch, M.D. ........... 50 Director of NCRIC, A Mutual Holding
Company
J. Paul McNamara............... 50 Director of NCRIC, A Mutual Holding
Company and NCRIC Group
Leonard Parver, M.D. .......... 54 Director of NCRIC Group
David W. Patterson, M.D. ...... 40 Director of NCRIC, A Mutual Holding
Company
Raymond Scalettar, M.D. ....... 70 Director of NCRIC Group
David M. Seitzman, M.D. ....... 69 Director of NCRIC Group
Joel M. Taubin, M.D. .......... 57 Director of NCRIC, A Mutual Holding
Company
Anthony S. Unger, M.D. ........ 43 Director of NCRIC, A Mutual Holding
Company
Mervin H. Zimmerman, M.D. ..... 64 Director of NCRIC, A Mutual Holding
Company
Stephen S. Fargis.............. 39 Chief Operating Officer and Senior Vice
President of NCRIC Group and NCRIC, A
Mutual Holding Company
William E. Burgess............. 43 Senior Vice President - Claims and Risk
Management and Secretary of NCRIC Group
and NCRIC, A Mutual Holding Company
Rebecca B. Crunk............... 47 Chief Financial Officer and Senior Vice
President of NCRIC Group and NCRIC, A
Mutual Holding Company
NCRIC Group's board of directors has established an audit committee. The
audit committee recommends the firm to be appointed as independent accountants
to audit financial statements, reviews the scope and results of the audit with
the independent accountants, reviews with management and the independent
accountants NCRIC's year-end audit and considers the adequacy of NCRIC's
internal accounting controls. The audit committee consists of Drs. Seitzman and
Coleman and Mr. Burke.
The positions listed above commenced upon the reorganization. Set forth
below with respect to each of the directors and executive officers of NCRIC, A
Mutual Holding Company
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and NCRIC Group is a description of the director's or officer's business
experience, principal occupation and employment during at least the last five
years.
Nelson P. Trujillo, M.D. was a Governor and Chair of the Board of National
Capital Reciprocal Insurance Company from 1980 until the reorganization. Dr.
Trujillo is currently President of Metropolitan Gastroenterology Group where he
is a physician.
R. Ray Pate, Jr. was the Treasurer of National Capital Reciprocal
Insurance Company and President and Chief Executive Officer of National Capital
Underwriters, Inc. from 1996 until the reorganization. From 1993 to 1995, Mr.
Pate was Vice President, Hospital Division of FPIC, Inc., a medical professional
liability insurance company.
Bruce J. Ammerman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1986 until the reorganization. Dr. Ammerman is a
neurological surgeon with Washington Neurosurgical Associates.
Arthur A. Becker, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1982 until the reorganization. Dr. Becker is President of
the Obstetrical and Gynecological Group, P.A. where he practices as an
obstetrician/gynecologist. He is a former Chair of the Medical Economics and
Ob-Gyn Peer Review Committees of the Medical Society of the District of
Columbia.
Vincent C. Burke, III has been a partner with the firm of Furey, Doolan &
Abell, LLP since June 1, 1998. From April 1992 to May 1998, he was counsel to
the law firm of Reed Smith Shaw & McClay. Mr. Burke's practice is in the areas
of corporate, business, real estate and closely-held businesses. He practices in
the District of Columbia and Maryland.
Thomas Calhoun, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1980 until the reorganization. Dr. Calhoun is also a
consultant for Birch & Davis Associates, Inc., specializing in the utilization
and quality review of Veterans Administration hospitals. He is a member of the
Expert Peer Review Panel - Surgery whose responsibility is to review surgical
cases for utilization and quality assurance. He is a past President of the
medical staff at Providence Hospital and the Washington Academy of Surgery and
is a past Regional Medical Director of the Delmarva Professional Organization.
Pamela W. Coleman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1989 until the reorganization. Dr. Coleman is a urologist
in private practice.
Charles H. Epps, Jr., M.D. was the Chair of the board of directors of
National Capital Underwriters, Inc. from 1980 until the reorganization. Dr. Epps
is also a director of National Capital Insurance Brokerage, Ltd. and
Commonwealth Medical Liability Insurance Company. Currently, he is Special
Assistant to the President for Health Affairs and Professor Emeritus,
Orthopaedic Surgery at Howard University. Dr. Epps is past Vice President for
Health Affairs and Dean Emeritus of Howard University College of Medicine. He
has served as a delegate to the American Medical Association House of Delegates
and a member of the AMA Council on Ethical and Judicial Affairs. In addition, he
has been President of the American Orthopaedic
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Association, a Governor of the American College of Surgeons and a member of the
American Board of Orthopaedic Surgery.
Robert A. Fischer, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1980 until the reorganization. Dr. Fischer is a clinical
physician and part owner of Washington Internal Medicine Group. He was Vice
Chair of the NCRIC Board of Governors and a member of the Executive Committee of
the NCRIC Board of Governors. He is also a member of the Board of Directors of
NCRIC MSO, Inc. Dr. Fischer is a past member of the Executive Board of Medical
Society of the District of Columbia and a past member of the Board of Trustees
of Blue Cross/Blue Shield of the National Capital Area. He is a past member of
the Executive Committee of the George Washington University Hospital and Chair
of the Clinical Faculty Advisory Committee to the Chair of the Department of
Medicine, George Washington University School of Health Sciences.
Major P. Gladden, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1982 until the reorganization. Dr. Gladden is an
orthopedic surgeon and Chief of Orthopedics at DC General Hospital.
Leonard M. Glassman, M.D. was a Director of National Capital Underwriters,
Inc. from 1993 until the reorganization. Dr. Glassman is a physician with
Washington Radiology Associates, P.C. He is a past member of the Finance
Committee of the Medical Society of the District of Columbia and has been Chief
of Radiology of Columbia Hospital for Women Medical Center since 1984.
Luther W. Gray, Jr., M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1984 until the reorganization. He was a member of the
executive committee of the board and is Chair of the underwriting committee. Dr.
Gray is a physician and general surgeon with Luther W. Gray, Jr., M.D., P.C. and
is Chair of the Department of Surgery at Sibley Memorial Hospital.
Joseph E. Gutierrez, M.D. was a Governor of National Capital Reciprocal
Insurance Company from November 1995 until the reorganization. Dr. Gutierrez is
the President of Joseph E. Gutierrez, M.D., P.C., where he is a general and
vascular surgeon. He is the President-Elect of the Medical Society of the
District of Columbia and serves on the Medical Society of the District of
Columbia board of directors. He serves as delegate to the AMA House of Delegates
and is chair of the District of Columbia Delegation. In addition, Dr. Gutierrez
serves on the Board of Columbia Hospital for Women Medical Center where he is
Secretary of the board and chairs the Performance Improvement Committee.
Sheila Hafter-Gray, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1981 until the reorganization. Dr. Hafter-Gray is a
physician in private practice and is a Trustee of the American Academy of
Psychoanalysis and Clinical Professor of Psychiatry at the Uniformed Services
University of the Health Sciences in Bethesda, Maryland. Dr. Hafter-Gray
recently retired as a member of the Commission on Mental Health of the Superior
Court of the District of Columbia.
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Florie Hirsch, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1987 until the reorganization. Dr. Hirsch is an
obstetrician/gynecologist with Florie Hirsch, M.D., P.C.
J. Paul McNamara has been President and Chief Operating Officer of Sequoia
National Bank/Sequoia BancShares, Inc. since 1988. From 1976 to 1988, Mr.
McNamara was employed by the National Bank of Washington in several senior
management positions.
Leonard Parver, M.D. is the Chair of the Board of NCRIC MSO, Inc. and has
practiced medicine in Washington, D.C. for the past 22 years. Dr. Parver served
previously on the board of directors of NCRIC Physicians Organization.
David W. Patterson, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1992 until the reorganization. Dr. Patterson is a
physician with Drs. Arling & Patterson, P.C.
Raymond Scalettar, M.D. was a Vice Chair of the board of directors of
National Capital Underwriters, Inc. from 1980 until the reorganization. He has
also been Chair of National Capital Insurance Brokerage, Inc. since its
inception. He is affiliated with and is a founder of the Washington Internal
Medicine Group, a Health Policy Consultant, a past trustee and Chair of the
Board of the AMA, and past Commissioner and Senior Consultant to the Joint
Commission on Accreditation of Healthcare Organizations.
David M. Seitzman, M.D. was a member of the board of directors of National
Capital Underwriters, Inc. from 1980 until the reorganization. Dr. Seitzman is
now retired from the practice of medicine. He has served on the boards of Blue
Cross and Blue Shield of the National Capital Area, the Medical Society of the
District of Columbia and National Capital Underwriters, Inc., and has served as
President and co-founder of the Center for Ambulatory Surgery, Inc. Since 1993,
Dr. Seitzman has been a trustee of portfolios of The 59 Wall Street Fund, Inc.,
which is advised by Brown Brothers Harriman & Co., one of NCRIC's investment
advisors.
Joel M. Taubin, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1994 until the reorganization. Dr. Taubin is a physician
with Joel M. Taubin, M.D., P.C.
Anthony S. Unger, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1997 until the reorganization. Dr. Unger is a physician.
Dr. Unger serves on the board of directors of NCRIC, A Mutual Holding Company
under an agreement between NCRIC and the Medical Society for the District of
Columbia.
Mervin H. Zimmerman, M.D. was a Governor of National Capital Reciprocal
Insurance Company from 1995 until the reorganization. Dr. Zimmerman is an
ophthalmologist with Mervin H. Zimmerman, M.D., F.A.C.S., P.C. and is a member
of the American Board of Ophthalmology and the American College of Surgeons.
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Stephen S. Fargis was Senior Vice President - Business Development of
National Capital Reciprocal Insurance Company from November 1995 until the
reorganization. He is also Chief Operating Officer of NCRIC, Inc. From 1990 to
1995, he was Vice President of The Virginia Insurance Reciprocal.
William E. Burgess was Senior Vice President - Claims and Risk Management
of National Capital Reciprocal Insurance Company from August 1997 until the
reorganization. From April 1997 to August 1997, he was Vice President - Claims,
Risk Management of NCRIC, and from 1993 to April 1997, he was Vice President -
Claims, Risk Management and Underwriting of NCRIC.
Rebecca B. Crunk was Chief Financial Officer of National Capital
Reciprocal Insurance Company from April 1998 until the reorganization. Ms. Crunk
is a certified public accountant and is a member of the American Institute of
Certified Public Accountants. From 1995 to 1998, she was Vice President,
Treasurer and Controller of ReliaStar United Services Life Insurance Company.
From 1985 to 1995, she was Senior Vice President and Controller of United
Services Life Insurance Company.
Loss of the services of members of the management team
NCRIC believes that its ability to successfully implement its business
strategy and to operate profitably depends on the continued employment of its
senior management team led by R. Ray Pate, Jr. If Mr. Pate or other members of
the management team become unable or unwilling to continue in their present
positions, NCRIC's business and financial results could be materially adversely
affected. NCRIC has entered into employment agreements with Mr. Pate, Stephen S.
Fargis, Rebecca B. Crunk, L.E. Shepherd, Jr., William A. Hunter, Jr. and Barry
S. Pillow. NCRIC does not have key man life insurance on any employee.
Compensation of directors
NCRIC Group will pay cash compensation to each of its non-employee
directors, other than the Chair, of $25,000 per year and will pay its Chair
$30,000 per year. Directors who are officers or employees of NCRIC Group receive
no compensation for serving as directors. All directors are reimbursed for
out-of-pocket expenses incurred in connection with attendance at any meeting of
any of NCRIC Group's boards of directors or any committee of any board of
directors.
MANAGEMENT COMPENSATION
The following summary compensation table sets forth information concerning
compensation for 1998 for services rendered in all capacities awarded or paid by
NCRIC, or prior to the reorganization, by the attorney-in-fact of National
Capital Reciprocal Insurance Company to its Chief Executive Officer, the other
named executive officers whose total salary and bonus
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equaled or exceeded $100,000 during the year ended December 31, 1998 and Ms.
Crunk whose employment by NCRIC commenced in April 1998:
Summary Compensation Table
Annual Compensation
---------------------- All Other
Name and Principal Position Salary Bonus Compensation
- --------------------------- -------- -------- ------------
R. Ray Pate, Jr ...................... $240,010 $ 75,000 $ 17,432
President and Chief Executive
Officer and Director
Stephen F. Fargis .................... 151,440 37,500 14,716
Chief Operating Officer
Rebecca B. Crunk ..................... 84,135 31,250 406
Chief Financial Officer
William E. Burgess ................... 109,981 27,500 11,082
Senior Vice President
The bonus column consists of payments made under a board of
directors-approved management incentive compensation plan. Incentive awards are
determined based on NCRIC's meeting various performance targets set by the board
of directors. The incentive awards were earned for 1998 and paid in January
1999.
The all other compensation column consists of, in the case of Mr. Pate, a
contribution of $14,400 by National Capital Reciprocal Insurance Company to Mr.
Pate's Section 401(k) profit sharing plan account and a $3,032 premium payment
for individual and group term life insurance policies; in the case of Mr. Fargis
a $14,386 contribution by National Capital Reciprocal Insurance Company to Mr.
Fargis' Section 401(k) profit sharing plan account and a $330 premium payment
for a group term life insurance policy; in the case of Mr. Burgess a $10,654
contribution by National Capital Reciprocal Insurance Company to Mr. Burgess'
Section 401(k) profit sharing plan account and a $428 premium payment for a
group term life insurance policy; and in the case of Ms. Crunk, a premium
payment for a group term life insurance policy.
Employment agreements
R. Ray Pate, Jr. serves as the President and Chief Executive Officer of
NCRIC under an employment agreement dated October 1, 1997 among National Capital
Reciprocal Insurance Company, National Capital Underwriters, Inc. and Mr. Pate.
Mr. Pate's employment agreement became the obligation of NCRIC, Inc. upon the
merger of National Capital Underwriters, Inc. into NCRIC, Inc. in connection
with the reorganization. Under the terms of his employment agreement, Mr. Pate
is entitled to basic compensation of $240,000 per year and is reimbursed for
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all reasonable and proper business expenses incurred by him in the performance
of his duties. The terms of the employment agreement also provide that Mr. Pate
is entitled to:
. participate in any retirement and/or pension plans or health and
medical insurance plans offered to NCRIC, Inc.'s senior executives;
. receive an automobile allowance of $700 per month; and
. be covered by both term life insurance and disability insurance.
The term of the employment agreement is five years commencing October 1,
1997. NCRIC may terminate the employment agreement for cause or without cause,
at any time. Any dispute as to whether NCRIC, Inc. had cause will be determined
by arbitration. If NCRIC, Inc. terminates Mr. Pate's employment agreement
without cause, Mr. Pate is entitled to receive, as severance pay, an amount
equal to two years' basic compensation at the base compensation in effect on the
date of the termination. The Commissioner of Insurance and Securities' order
approving the reorganization required Mr. Pate's employment agreement to be
amended to eliminate, for a two-year period, a provision which deemed a change
of control to be a termination without cause. Mr. Pate may voluntarily terminate
his employment with NCRIC provided that he gives NCRIC twelve months' prior
notice of his voluntary termination or pays NCRIC, Inc. liquidated damages equal
to the amount of twelve months' basic compensation.
National Capital Underwriters, Inc. also entered into an employment
agreement commencing December 1, 1997 with Stephen S. Fargis on substantially
similar terms except that Mr. Fargis' employment agreement terminates November
30, 2000, provides for basic compensation of $150,000 per year and enables him
to voluntarily terminate his employment on three months' prior notice. Mr.
Fargis' employment agreement also became the obligation of NCRIC, Inc. upon the
merger of National Capital Underwriters, Inc. into NCRIC, Inc. in connection
with the reorganization.
NCRIC, Inc. has also entered into an employment agreement commencing
January 1, 1999 with Rebecca B. Crunk on substantially similar terms to Mr.
Pate's, except that Ms. Crunk's agreement terminates December 31, 2001, provides
for basic compensation of $135,000 per year and enables her to voluntarily
terminate her employment on three months' prior notice.
Employee stock ownership plan
NCRIC Group has established an ESOP for eligible employees of NCRIC, Inc.,
subject to the completion of the subscription offering. Employees age 21 or
older who have worked for NCRIC, Inc. or its predecessor, National Capital
Reciprocal Insurance Company, for a period of one year and have been credited
with 1,000 or more hours of service during the year are eligible to participate.
At NCRIC Group's option, employees of other affiliates of NCRIC Group may be
entitled to participate in the ESOP. As part of the subscription offering, the
ESOP intends to borrow funds from NCRIC Group and to use those funds to purchase
a number of shares equal to 10% of the shares sold in the subscription,
community and syndicated community offerings.
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Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the principal of the ESOP loan will
be allocated among ESOP participants on the basis of compensation in the year of
allocation. For purposes of vesting and eligibility, participants in the ESOP
will receive credit for service prior to the effective date of the ESOP. A
participant will vest in increments of 20% per year of credited service and will
be fully vested in his or her account balance after five years of credited
service. A participant who terminates employment for reasons other than death,
retirement or disability prior to five years of credited service will forfeit
the nonvested portion of his or her benefits under the ESOP. Benefits will be
payable in the form of common stock upon death, retirement, disability or
separation from service. Contributions by NCRIC Group to the ESOP are
discretionary, subject to the loan terms and tax law limits, and, therefore,
benefits payable under the ESOP cannot be estimated.
On February 25, 1999, NCRIC Group established an administrative board to
administer the ESOP. The ESOP trustees, Mr. Pate and Dr. Trujillo, must vote all
allocated shares held in the ESOP in accordance with the instructions of
participating employees. Under the ESOP, nondirected shares, and shares held in
the suspense account, will be voted in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock so long as the vote is in accordance with the provisions of the
Employee Retirement Income Security Act.
Stock option plan
NCRIC Group has established a stock option plan for directors and officers
of NCRIC, A Mutual Holding Company and its subsidiaries. Common stock in an
aggregate amount equal to 5% of the shares of common stock offered in the
subscription, community and syndicated community offerings, may be acquired by
those officers, directors and employees upon the exercise of the options granted
under the stock option plan. Shares issued on the exercise of options granted
under the stock option plan will not form part of the subscription, community or
syndicated community offerings. If the subscription offering does not close, no
options to purchase shares will be granted. It is anticipated that the stock to
be transferred in connection with the exercise of the option may be newly issued
by NCRIC Group or may be acquired by NCRIC Group through purchase on the open
market.
The options have terms of 10 years and an option price per share equal to
the fair market value of the shares on the date of grant of the stock options.
The options will become first exercisable at a rate of 33-1/3% at the end of
each 12 months of service with NCRIC Group or its subsidiaries after the date of
grant, subject to early exercisability in the event of death or disability.
Options which have been granted but have not yet been exercised will become
immediately exercisable upon a change of control of NCRIC Group; for this
purpose, a full demutualization will not be treated as a change of control.
Options granted under the stock option plan would be adjusted for capital
changes like stock splits and stock dividends.
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The stock option plan will be administered by a committee of non-employee
members of NCRIC Group's board of directors. Options granted under the stock
option plan to employees may be treated as "incentive" stock options which offer
beneficial tax treatment to the employee but no tax deduction to NCRIC except in
the event of the sale of the stock acquired on the exercise of an option within
a time period of one year from the date of exercise or two years from the date
of the grant of the option. Non-qualified stock options under the stock option
plan may be granted to non-employee directors. In the event an option recipient
terminates his or her employment or service as an employee or director, the
options would terminate during specified periods.
On March 4, 1999, NCRIC Group's board of directors authorized the granting
of options to purchase up to 92,000 shares of common stock with an exercise
price of $7.00 per share to the following officers and directors of NCRIC Group
and NCRIC, A Mutual Holding Company:
Up to
Name Number of Shares
---- ----------------
R. Ray Pate, Jr ............... 16,560
Stephen S. Fargis ............. 11,500
Nelson P. Trujillo, M.D ....... 11,040
Rebecca B. Crunk .............. 9,200
William E. Burgess ............ 9,200
Leonard M. Glassman, M.D ...... 6,900
Leonard Parver, M.D ........... 6,900
Vincent C. Burke, III ......... 2,300
Thomas Calhoun, M.D ........... 2,300
Pamela W. Coleman, M.D ........ 2,300
Charles H. Epps, Jr., M.D ..... 2,300
Robert A. Fischer, M.D ........ 2,300
Luther W. Gray, Jr., M.D ...... 2,300
J. Paul McNamara .............. 2,300
Raymond Scalettar, M.D ........ 2,300
David M. Seitzman, M.D ........ 2,300
------
Total ................... 92,000
======
The options will all be exercisable for a period of 10 years from the date
of grant. If more than the minimum but less than the maximum number of shares
are sold in the subscription, community and syndicated community offerings, then
the number of shares subject to options granted to each of the above-named
persons will be prorated so that the total number of shares subject to options
equals 5% of the total number of shares sold in the offerings.
Stock award plan
NCRIC Group has also established a stock award plan for directors,
officers and employees of NCRIC, A Mutual Holding Company and its subsidiaries
under which directors, officers and employees would be awarded common stock. The
plan is subject to the completion
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of the subscription offering. Shares of common stock to be awarded under the
program will be purchased in the subscription, community and syndicated
community offerings by a trust established by NCRIC Group for this purpose.
NCRIC Group will loan to the trust the funds necessary to purchase a number of
shares equal to 5% of the shares sold in the subscription, community and
syndicated community offerings. NCRIC Group anticipates that the loan to the
trust will be repaid by periodic cash contributions to be made to the trust by
NCRIC Group. The trust will award shares of common stock to participants in a
manner designed to encourage participants' continued service.
Awards will be nontransferable. The shares which are subject to an award
from the trust will vest and be earned by the recipient at a rate of 20% of the
shares awarded at the end of each full 12 months of service after the date of
grant of the award. Any common stock acquired under the stock award plan will
represent unearned compensation and, accordingly, will be reflected on NCRIC
Group's financial statements as a reduction to stockholders' equity. As shares
of common stock awarded under the stock award plan vest, NCRIC Group will
recognize a proportionate amount of compensation expense with a corresponding
reduction in the charge to stockholders' equity. Awards would be adjusted for
capital changes like stock dividends and stock splits.
NCRIC Group has not determined the number of shares to be awarded to any
director, officer or employee under the stock award plan.
Expenses associated with ESOP, stock option plan and stock award plan
NCRIC may recognize material amounts of compensation expense associated
with stock issued to employees and directors under the ESOP, stock option plan
and stock award plan. NCRIC generally cannot predict the aggregate amount of
this compensation expense because GAAP sometimes requires that compensation
expense be measured based on the fair market value of the shares of common stock
on the date the expense is recognized. NCRIC intends to record compensation
expense as follows:
. For shares committed-to-be-released from the ESOP suspense account
and allocated to the accounts of the ESOP participants as the result
of payments made to reduce the ESOP loan, the compensation charge
will be based upon the then-current fair values of the shares.
. For shares awarded to employees under the stock option plan, NCRIC
intends to account for compensation cost using the intrinsic value
based method prescribed by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees. Accordingly,
compensation will be measured as the difference, if any, between the
fair market value of the shares and the option strike price at the
time both measurement date factors, i.e., the number of shares and
the strike price, are known. Generally, NCRIC expects to grant fixed
awards where both measurement date factors are known on the date of
grant. Moreover, NCRIC expects the option strike price to equal the
fair market value on the date of grant. Compensation cost measured
in this fashion, if any, will be recognized over the employees'
applicable service periods. NCRIC may also make variable awards
where the measurement date factors will not be known until some time
after the
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date of grant. As required by GAAP, NCRIC will disclose pro forma
information regarding net income and earnings per share as though
NCRIC had used the fair value method of accounting for employee
stock options defined in Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation.
. For shares awarded to non-employee directors under the stock option
plan, NCRIC intends to account for compensation cost using the fair
value method of accounting for stock options defined in SFAS No.
123.
. For shares awarded under the stock award plan, NCRIC intends to
measure compensation cost based upon the fair values of the shares
on the date of award except in the case of awards which involve a
performance condition, in which case the cost may have to be
measured by reference to the fair values of the shares on the date
they vest under the plan. Compensation cost measured in this fashion
will be recognized over the applicable service periods.
These expenses have been reflected in the pro forma information under "Pro
Forma Data" assuming that a purchase price of $7.00 per share represents the
fair market value for accounting purposes. Under some circumstances, however,
actual expenses will be based on the fair market value of the common stock at
future dates, which may be higher or lower than the purchase price.
Reduction in 401(k) and management incentive compensation plan contributions
It is anticipated that the discretionary employer contribution which has
historically been made by National Capital Reciprocal Insurance Company to its
tax-qualified Section 401(k) profit-sharing plan in the approximate amount of 9%
of covered payroll will be reduced to an amount equivalent to approximately 3%
of NCRIC, Inc.'s covered payroll so as to reduce the net contribution
requirements associated with the establishment of the ESOP. Expenses associated
with the stock award plan will be completely offset by a reduction in NCRIC's
contributions to its existing management incentive compensation plan.
Limitation of liability and indemnification matters
NCRIC Group's articles of incorporation provide that no past, present or
future director of NCRIC Group shall be liable to NCRIC Group or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability:
. for breach of the director's duty of loyalty to the corporation or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
. for a transaction from which the director derives an improper
personal benefit; and
. to the extent that Section 29-342 of the District of Columbia Code
may apply.
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This provision does not prevent stockholders from obtaining injunctive or other
equitable relief against directors. NCRIC Group's bylaws require it to indemnify
the past, present and future members of its board of directors and duly
appointed committees and its officers, and their executors, administrators, or
other legal representatives, to the fullest extent permitted by law, as now in
effect and as these laws may be amended in the future. NCRIC Group shall advance
expenses incurred by indemnified individuals as a result of any proceeding
against them as to which they are entitled to be indemnified. NCRIC, A Mutual
Holding Company, NCRIC Holdings, Inc. and NCRIC, Inc. have similar provisions in
their articles of incorporation and bylaws.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors or officers, NCRIC has been advised that in
the opinion of the Securities and Exchange Commission, this indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
At present, there is no pending material litigation or proceeding
involving any director, officer, employee or agent of NCRIC where
indemnification will be required or permitted.
AGREEMENTS
Administrative services agreement
NCRIC Group has entered into an administrative services agreement with
some of its subsidiaries and parents. Under the agreement, any affiliate of
NCRIC may provide to any other affiliate administrative and clerical services,
financial and accounting services, computer services, support services and
assistance in the acquisition of furniture and equipment. The service provider
is paid a quarterly service fee by each affiliate receiving services, in
arrears, equal to the costs and expenses it incurred in providing services to
the affiliate during the preceding quarter. The administrative services
agreement may be terminated by all parties by written agreement or by any
affiliate, with respect to itself, on sixty days' prior written notice to the
other affiliates.
Tax sharing agreement
NCRIC Group and its subsidiaries, which pay federal income tax as a
consolidated group, have entered into a tax sharing agreement. The tax sharing
agreement provides for the allocation of NCRIC Group's consolidated income tax
liability to each member of NCRIC Group. Consolidated tax liability is allocated
among group members as if each group member had filed a separate tax return.
Loan for HealthCare Consulting acquisition
Sequoia National Bank loaned $2.2 million to NCRIC Group to partially
finance the HealthCare Consulting acquisition. J. Paul McNamara is a Director of
NCRIC, A Mutual Holding Company and NCRIC Group and is President of Sequoia
National Bank.
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OWNERSHIP OF COMMON STOCK
Immediately prior to the subscription, community and syndicated community
offerings, there are 1,000 issued and outstanding shares of NCRIC Group's common
stock, all of which are owned by NCRIC Holdings. Other than these shares, as of
the date of this prospectus, no shares of common stock were beneficially owned
by any person, including any director or officer of NCRIC.
Upon completion of the subscription, community and syndicated community
offerings, NCRIC Holdings' 1,000 issued and outstanding shares of NCRIC Group's
common stock will be canceled and approximately 59% of NCRIC Group's outstanding
common stock will be issued to NCRIC Holdings and approximately 40% of NCRIC
Group's outstanding common stock will be issued to subscribers or purchasers in
the subscription, community and syndicated community offerings. If the minimum
number of shares is sold in the offerings, NCRIC Holdings will be issued
2,040,000 shares. If the maximum number of shares is sold in the offerings,
NCRIC Holdings will be issued 2,760,000 shares. NCRIC Holdings' address is 1115
30th Street, N.W., Washington, D.C. 20007.
DESCRIPTION OF COMMON STOCK
General
The following description does not purport to be complete and is qualified
in its entirety by reference to NCRIC Group's articles of incorporation, a copy
of which is filed as an exhibit to the registration statement of which this
prospectus is a part.
Common stock
NCRIC Group is authorized to issue 10,000,000 shares of common stock, par
value $.01 per share. Each share of common stock entitles its holder to one vote
per share on all matters upon which stockholders are entitled to vote, including
election of directors, mergers, sales of assets, dissolution and amendments to
the articles of incorporation. Because holders of common stock do not have
cumulative voting rights, the holder of a majority of the shares of common stock
can elect all of the members of the board of directors standing for election.
Subject to preferences of any preferred stock that may be issued in the future,
the holders of common stock are entitled to receive dividends as may be declared
by the board of directors. Each holder of shares of NCRIC Group's common stock
is entitled to receive pro rata all of the assets of NCRIC Group available for
distribution its stockholders. There are no redemption or sinking fund
provisions applicable to common stock. All outstanding shares of common stock
are fully paid and non-assessable.
Transfer agent and registrar
The transfer agent and registrar for the common stock is Registrar and
Transfer Company.
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LEGAL OPINIONS
The validity of the shares of common stock will be passed upon for NCRIC
by Arent Fox Kintner Plotkin & Kahn, PLLC and for the placement agent by Luse
Lehman Gorman Pomerenk & Schick, P.C.
EXPERTS
The consolidated financial statements of NCRIC as of December 31, 1998 and
1997 and for each of the three years in the period ended December 31, 1998 and
the combined financial statements of the management services of HealthCare
Consulting, HCI Ventures and Employee Benefit Services, Inc. as of December 31,
1998 and 1997 and for each of the two years in the period ended December 31,
1998 included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and have been
so included in reliance upon the reports of such firm given upon their authority
as experts in accounting and auditing.
AVAILABLE INFORMATION
NCRIC has filed with the Securities and Exchange Commission, a
registration statement on Form SB-2 under the Securities Act with respect to the
common stock. As permitted by the rules and regulations of the Securities and
Exchange Commission, this prospectus omits some of the information contained in
the registration statement. For further information with respect to NCRIC and
the common stock, reference is made to the registration statement including its
exhibits and schedules. Statements contained in this prospectus regarding the
contents of any agreement or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of the agreement filed as an exhibit to the
registration statement, each statement being qualified in all respects by the
reference to the agreement. The registration statement, including its exhibits
and schedules, may be inspected at the public reference facilities maintained by
the Securities and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549; Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and Seven World Trade Center, New York, New York 10048;
and copies of all or any part of the registration statement may be obtained from
these offices upon payment of the prescribed fees. The public may obtain
information on the operation of the Public Reference Room by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission maintains an Internet site, http://www.sec.gov, that
contains information regarding registrants who file electronically with the
Securities and Exchange Commission.
As a result of the subscription, community and syndicated community
offerings, NCRIC will be subject to the informational requirements of the
Securities Exchange Act. So long as NCRIC is subject to the periodic reporting
requirements of the Securities Exchange Act, it will furnish various required
reports and other information to the Securities and Exchange Commission. NCRIC
intends to furnish to holders of common stock annual reports containing, among
other information, consolidated financial statements audited by an independent
public accounting firm and quarterly reports containing unaudited condensed
consolidated financial
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information for the first three quarters of each fiscal year. NCRIC also intends
to furnish any other reports as it may determine or as may be required by law.
NCRIC, Inc. is domiciled in the District of Columbia. As a result, it is
subject to the laws and regulations of the District of Columbia applicable to
insurance companies and files financial reports and other information with the
Department of Insurance and Securities Regulation. NCRIC has submitted a Form A
Statement Regarding the reorganization of a District of Columbia Insurer which
contains the information required by National Capital Reciprocal Insurance
Company Insurance Company Conversion Act of 1998, D.C. Act 12-301, as enacted by
the Council of the District of Columbia. These publicly available financial
reports, the statement of reorganization, and other information can be inspected
and copies can be made at the office of the Department of Insurance and
Securities Regulation, 810 First Street, N.E., Room 701, Washington, D.C. 20002.
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INDEX TO FINANCIAL STATEMENTS
Page
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT F-1
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997, and 1996 F-3
Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1998, 1997, and 1996 F-4
Consolidated Statements of Stockholder's Equity for the Years Ended
December 31, 1998, 1997, and 1996 F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, 1997, and 1996 F-6
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998, 1997, and 1996 F-7
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
INDEPENDENT AUDITORS' REPORT F-18
COMBINED FINANCIAL STATEMENTS AS OF AND FOR
THE YEARS ENDED DECEMBER 31, 1998 AND 1997:
Balance Sheets F-19
Statements of Income and Comprehensive Income F-20
Statements of Owners' Equity F-21
Statements of Cash Flows F-22
Notes to Financial Statements F-23
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INDEPENDENT AUDITORS' REPORT
To the Board of Governors of
NCRIC Group, Inc. and Subsidiaries
Washington, D.C.
We have audited the accompanying consolidated balance sheets of NCRIC Group,
Inc. and Subsidiaries (the Company) as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive income,
stockholder's equity, and cash flows for the years ended December 31, 1998,
1997, and 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of NCRIC Group, Inc. and Subsidiaries
as of December 31, 1998 and 1997, and the results of their operations, and their
cash flows for the years ended December 31, 1998, 1997, and 1996, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
February 4, 1999
Washington, D.C.
F-1
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
SECURITIES AVAILABLE FOR SALE, AT FAIR VALUE:
Bonds and U.S. Treasury Notes $ 91,135 $ 90,036
Preferred stocks 5,213 4,326
--------- ---------
Total securities available for sale 96,348 94,362
OTHER ASSETS:
Cash and cash equivalents 6,083 4,065
Reinsurance recoverable 24,944 17,077
Deferred federal income taxes 2,742 2,793
Other assets 4,209 3,544
--------- ---------
TOTAL ASSETS $ 134,326 $ 121,841
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Loss $ 60,127 $ 53,661
Loss adjustment expenses 27,573 21,475
--------- ---------
Total losses and loss adjustment expenses 87,700 75,136
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 6,492 13,762
Unearned premiums 3,348 403
Other liabilities 5,775 5,054
--------- ---------
TOTAL LIABILITIES 103,315 94,355
--------- ---------
COMMITMENTS AND CONTINGENCIES (Notes 3, 5 and 8)
STOCKHOLDER'S EQUITY:
Common stock $.01 par value - 10,000,000 shares
authorized; 1,000 shares issued and outstanding - -
Additional paid in capital 798 797
Accumulated other comprehensive income 2,016 789
Retained earnings 28,197 25,900
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 31,011 27,486
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 134,326 $ 121,841
========= =========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
REVENUES:
Premium income:
Premiums written $ 19,214 $ 17,869 $ 19,017
Premiums ceded 4,089 (1,854) (4,239)
Change in unearned premiums (2,945) (403) -
Renewal credit dividends to policyholders (1,899) (2,080) (1,427)
--------- --------- ---------
Net premiums earned 18,459 13,532 13,351
--------- --------- ---------
Investment income 6,360 6,585 6,207
Investment expenses (364) (540) (551)
--------- --------- ---------
Net investment income 5,996 6,045 5,656
--------- --------- ---------
Net realized investment gains 159 90 229
Other income 435 355 660
--------- --------- ---------
Total revenues 25,049 20,022 19,896
--------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses 15,677 15,591 15,236
Underwriting expenses 3,858 2,918 2,438
Other 1,888 676 928
--------- --------- ---------
Total expenses 21,423 19,185 18,602
--------- --------- ---------
INCOME BEFORE INCOME TAXES 3,626 837 1,294
--------- --------- ---------
INCOME TAX (BENEFIT) PROVISION:
Current 1,658 (255) 102
Deferred (579) 133 201
--------- --------- ---------
Total income tax (benefit) provision 1,079 (122) 303
--------- --------- ---------
NET INCOME $ 2,547 $ 959 $ 991
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
NET INCOME $2,547 $ 959 $ 991
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on
investments during the period 2,016 1,762 (1,817)
(Taxes) or benefit associated with
unrealized holding gains or losses (684) (599) 620
Less: reclassification adjustment
for gains included in net income (159) (90) (229)
Taxes associated with reclassification
adjustment 54 30 77
--------- --------- --------
OTHER COMPREHENSIVE INCOME (LOSS) 1,227 1,103 (1,349)
--------- --------- --------
COMPREHENSIVE INCOME (LOSS) $3,774 $2,062 $ (358)
========= ========= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
Additional COMPREHENSIVE TOTAL
COMMON PAID IN INCOME RETAINED STOCKHOLDER'S
STOCK CAPITAL (LOSSES) EARNINGS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 $ - $ 797 $ 1,035 $ 23,950 $ 25,782
Net unrealized investment losses,
net of deferred income taxes - - (1,349) - (1,349)
Net income - - - 991 991
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1996 - 797 (314) 24,941 25,424
Net unrealized investment gains,
net of deferred income taxes - - 1,103 - 1,103
Net income - - - 959 959
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1997 - 797 789 25,900 27,486
Capital contribution from
NCRIC Holdings, Inc. - 1 - - 1
Cash dividend to stockholder - - - (250) (250)
Net unrealized investment gains,
net of deferred income taxes - - 1,227 - 1,227
Net income - - - 2,547 2,547
------ ------- ------- -------- --------
BALANCE, DECEMBER 31, 1998 - $ 798 $ 2,016 $ 28,197 $ 31,011
====== ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,547 $ 959 $ 991
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment gains (159) (90) (229)
Amortization and depreciation 235 486 809
Loss on sale of building - 197 -
Deferred federal income taxes (579) 133 201
Changes in assets and liabilities:
Reinsurance recoverable (7,867) (2,398) 1,504
Other assets (252) (773) (840)
Losses and loss adjustment expenses 12,565 3,930 (827)
Retrospective premiums accrued under
reinsurance treaties (7,270) (1,043) 2,776
Unearned premiums 2,945 403 -
Other liabilities 838 (176) 952
-------- -------- --------
Net cash flows from operating activities 3,003 1,628 5,337
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (58,781) (64,363) (72,427)
Sales, maturities and redemptions of investments 58,811 61,122 63,971
Purchases of property and equipment (766) (516) -
Proceeds from sale of building - 1,178 -
-------- -------- --------
Net cash flows from investing activities (736) (2,579) (8,456)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1 - -
Dividends paid (250) - -
-------- -------- --------
(249) - -
-------- -------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS 2,018 (951) (3,119)
-------- -------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,065 5,016 8,135
-------- -------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 6,083 $ 4,065 $ 5,016
======== ======== ========
SUPPLEMENTARY INFORMATION:
Cash paid for income taxes $ 700 $ - $ 645
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting On April 20, 1998, the Board of
Governors of National Capital Reciprocal Insurance Company adopted a plan of
reorganization which authorized the formation of NCRIC, A Mutual Holding
Company (Mutual Holding Company) and to convert into NCRIC, Inc. (NCRIC), a
stock medical professional liability insurance company. The reorganization
became effective on December 31, 1998.
Through a series of stock transfers effected in connection with the
reorganization, Mutual Holding Company owns all of the outstanding shares of
NCRIC Holdings, Inc., which owns all of the outstanding shares of NCRIC
Group, Inc. (Company), which owns all of the outstanding shares of NCRIC.
District of Columbia law provides that Mutual Holding Company must at all
times own, directly or indirectly, a majority of the outstanding voting stock
of NCRIC.
The reorganization separated the contract rights and membership interests of
the policyholders so that their contract rights remain with NCRIC while their
membership interests are in the Mutual Holding Company. Each policyholder of
a policy that was in force as of December 31, 1998, and who was a member of
National Capital Reciprocal Insurance Company, pursuant to the
reorganization, became a member of the Mutual Holding Company.
The accompanying financial statements present the consolidated financial
position and results of operations of NCRIC Group, Inc. and subsidiaries and
their predecessors.
Together with its subsidiaries, the Company provides comprehensive
professional liability and office premises liability insurance under
nonassessable policies to physicians having their principal practice in the
District of Columbia, Maryland or Virginia. A majority of the Company's
business is written in the District of Columbia.
The Company has issued policies on both an occurrence and a claims-made
basis. However, subsequent to June 1, 1986, substantially all policies were
issued on the claims-made basis. Occurrence-basis policies provide coverage
to the policyholder for all losses incurred during the policy year regardless
of when the related claims are reported. Claims-made basis policies provide
coverage to the policyholder for covered claims reported during the current
policy year provided the related losses were incurred while claims-made basis
policies were in effect.
Tail coverage is offered for doctors terminating their insurance policies.
This coverage extends the reporting period ad infinitum in which to report
future claims resulting from incidents occurring while a claims-made policy
was in effect. Beginning in 1988, prior acts insurance coverage was first
issued, subject to underwriting criteria for new insureds. Such coverage
extends the effective date of claims-made policies to designated periods
prior to initial coverage.
F-7
<PAGE>
Principles of Consolidation - The consolidated financial statements include
the accounts of the Company. All significant intercompany transactions have
been eliminated in the consolidation. The Company includes the following
entities:
. NCRIC Group, Inc.
. NCRIC, Inc.
. Commonwealth Medical Liability Insurance Company
. National Capital Insurance Brokerage, Ltd.
. NCRIC Insurance Agency, Inc.
. NCRIC Physicians Organization, Inc.
. NCRIC MSO, Inc.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP), which differ from statutory
accounting practices prescribed or permitted for insurance companies by
regulatory authorities.
Cash Equivalents - For purposes of reporting cash flows, the Company
considers short-term investments purchased with an initial maturity of three
months or less to be cash equivalents.
Investments - The Company has classified its investments as available for
sale and has reported them at fair value, with unrealized gains and losses
excluded from earnings and reported, net of deferred taxes, as a component of
equity and other comprehensive income. Realized gains and losses are
determined using the specific identification method.
Property and Equipment - Fixed assets are recorded at cost and reported as a
component of other assets. Depreciation is recorded using the straight-line
method over estimated useful lives of three to five years. The balance of
fixed assets at December 31, 1998 and 1997 of $1,010,000 and $509,000,
respectively, are net of accumulated depreciation of $766,000 and $339,000.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for losses
and loss adjustment expenses are established on the basis of reported losses
and a provision for losses incurred but not reported and related loss
adjustment expenses. These amounts are based on the estimates of management
and are subject to risks and uncertainties. As facts become known,
adjustments to these estimates are reflected in earnings. The Company
protects itself from excessive losses by reinsuring certain levels of risk in
various areas of exposure with reinsurers. Amounts recoverable from
reinsurers are estimated in a manner consistent with the loss and loss
adjustment expense reserve associated with the reinsured policy.
Recognition of Premiums Revenue - Premiums are earned pro rata over the terms
of the policies. During 1997 the Company began to stagger the effective
dates of premium renewals, which resulted in unearned premium income for
premiums collected prior to year-end but unearned until the following year.
Policyholder dividend credits are accrued as reductions to premium income in
the year declared.
Income Taxes - The Company uses the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are recognized
for tax consequences of temporary differences by applying enacted statutory
tax rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities.
F-8
<PAGE>
Reclassifications - In order to conform to the current presentation, certain
prior year balances, relating to losses and loss adjustment expenses,
retrospective premiums accrued under reinsurance treaties, and other items
have been reclassified.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant accounts subject to management estimates are
reinsurance recoverable, liabilities for losses and loss adjustment expenses,
and retrospective premiums accrued under reinsurance treaties.
2. INVESTMENTS
The following tables show the amortized cost and fair value of investments
(in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
As of December 31, 1998
U.S. Government and agencies $23,728 $1,032 $ (16) $24,744
Corporate 18,823 704 (40) 19,487
Tax-exempt obligations 19,329 1,045 - 20,374
Mortgage-backed securities 26,218 381 (69) 26,530
------- ------ ----- -------
88,098 3,162 (125) 91,135
Preferred stocks 5,195 88 (70) 5,213
------- ------ ----- -------
Total $93,293 $3,250 $(195) $96,348
======= ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
As of December 31, 1997
U.S. Government and agencies $28,293 $ 115 $ (7) $28,401
Corporate 16,168 394 (28) 16,534
Tax-exempt obligations 20,811 383 (11) 21,183
Mortgage-backed securities 23,683 241 (6) 23,918
------- ------ ---- -------
88,955 1,133 (52) 90,036
Preferred stocks 4,208 136 (18) 4,326
------- ------ ---- -------
Total $93,163 $1,269 $(70) $94,362
======= ====== ==== =======
</TABLE>
F-9
<PAGE>
The amortized cost and fair value of debt securities and preferred stocks at
December 31, 1998 and 1997, are shown by maturity. Actual maturities will
differ from contractual maturities because borrowers may have the right to
prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
IN THOUSANDS
-----------------------------------------------------------
DECEMBER 31, 1998 DECEMBER 31, 1997
---------------------------- ---------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 1,611 $ 1,619 $ 5,971 $ 6,054
Due after one year through five years 9,552 9,767 17,027 16,976
Due after five years through ten years 20,275 21,028 12,962 13,184
Due after ten years 30,442 32,191 29,312 29,904
------- ------- ------- -------
61,880 64,605 65,272 66,118
Preferred stocks 5,195 5,213 4,208 4,326
Mortgage-backed securities 26,218 26,530 23,683 23,918
------- ------- ------- -------
Total $93,293 $96,348 $93,163 $94,362
======= ======= ======= =======
</TABLE>
Proceeds from bond maturities and redemptions of fixed maturity investments
during the years ended December 31, 1998, 1997 and 1996, were $58,811,000,
$35,475,000, and $59,577,000, respectively. Gross gains of $521,000,
$300,000, and $451,000, and gross losses of $362,000, $210,000, and $221,000,
were realized on bond redemptions during years December 31, 1998, 1997, and
1996, respectively.
3. LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid losses and loss adjustment expenses represent an
estimate of the ultimate net cost of all losses that are unpaid at the
balance sheet date, and are based on the loss and loss adjustment expense
factors inherent in the Company's experience and expectations. Estimation
factors used by the Company reflect current case-basis estimates
(supplemented by industry statistical data) and give effect to estimates of
trends in claim severity and frequency. These estimates are continually
reviewed, and adjustments, reflected in current operations are made thereto
as deemed necessary.
Although the Company believes the liabilities for losses and loss adjustment
expenses are reasonable and adequate for the circumstances, it is possible
that the Company's actual incurred losses and loss adjustment expenses will
not conform to the assumptions inherent in the determination of the
liabilities. Accordingly, the ultimate settlement of losses and the related
loss adjustment expenses may vary from the amounts included in the financial
statements.
F-10
<PAGE>
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
BALANCE, Beginning
of period $75,136 $71,206 $72,033
Less reinsurance recoverable
on unpaid claims 17,077 14,679 16,182
------- ------- -------
NET BALANCE 58,059 56,527 55,851
------- ------- -------
Incurred related to:
Current year 19,140 19,444 16,775
Prior years (3,463) (3,853) (1,539)
------- ------- -------
Total incurred 15,677 15,591 15,236
------- ------- -------
Paid related to:
Current year 1,247 1,867 2,145
Prior years 9,335 12,192 12,415
------- ------- -------
Total paid 10,582 14,059 14,560
------- ------- -------
NET BALANCE 63,154 58,059 56,527
Plus reinsurance recoverable
on unpaid claims 24,546 17,077 14,679
------- ------- -------
BALANCE, End of period $87,700 $75,136 $71,206
======= ======= =======
</TABLE>
4. RENEWAL CREDIT DIVIDENDS TO POLICYHOLDERS
In 1998, 1997, and 1996, the Company declared renewal credit dividends to its
policyholders, which are payable in the form of a premium credit on the
succeeding year's policy premiums. The Company accrues policyholders'
dividend credits in the year declared as a reduction of premium income.
5. REINSURANCE AGREEMENTS
The Company has reinsurance agreements that allow the Company to write
policies with higher coverage limits than it is individually capable or
desirous of retaining by reinsuring the amount in excess thereof. The
Company has both excess of loss treaties and quota share treaties.
F-11
<PAGE>
The Company is contingently liable in the event the reinsurers are unable to
meet their obligations under these contracts. There were unused letters of
credit executed by reinsurers in favor of the Company of $166,000, $169,000,
and $2,852,000 at December 31, 1998, 1997, and 1996, respectively. Such
letters of credits are issued as security against ceded losses recoverable in
the future.
The effect of reinsurance on premiums written and earned for the periods
ended are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997 1996
----------------------- ------------------------ ------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
<S> <C> <C> <C> <C> <C> <C>
Direct $19,214 $16,270 $17,869 $17,466 $19,017 $19,017
Ceded
Current year (6,013) (5,623) (5,474) (5,474) (7,312) (7,312)
Prior 9,712 9,712 3,620 3,620 3,073 3,073
year ------- ------- ------- ------- -------
Total ceded 3,699 4,089 (1,854) (1,854) (4,239) (4,239)
------- ------- ------- ------- ------- -------
Net $22,913 $20,359 $16,015 $16,015 $14,778 $14,778
======= ======= ======= ======= ======= =======
</TABLE>
6. TRANSACTIONS WITH AFFILIATES
Prior to the reorganization, National Capital Underwriters, Inc. (NCUI) was
the designated attorney-in-fact for each policyholder physician under an
Application for Membership/Power of Attorney, which each physician signed
when applying for insurance coverage. Pursuant to the reorganization, NCUI
was merged into NCRIC. Duties and responsibilities at NCUI are detailed in
an attorney-in-fact agreement. Under such agreement, NCUI managed NCRIC and
performed all operating functions. NCUI was reimbursed by NCRIC for all
expenses incurred in this capacity, limited to 18% of net billed premiums.
Payments made to NCUI based on budgeted expenses were subject to
retrospective adjustment with amounts in excess of allowable expenses
returnable to NCRIC after the end of NCUI's fiscal year. Such payments
totaled $2,728,000 (15.3% of net billed premiums), and $2,657,000 (14.5% of
net billed premiums), for the years ended December 31, 1997 and 1996,
respectively.
Effective June 30, 1997, NCRIC purchased 100% of NCUI's issued and
outstanding stock, and NCUI was consolidated on the effective date.
7. INCOME TAXES
The Company files a consolidated Federal income tax return.
Deferred federal income tax is created by temporary differences that will
result in net taxable amounts in future years due to the differing treatment
of certain items for tax and financial statement purposes.
F-12
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities consist of
the following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Unearned premiums $ 431 $ 271 $ 273
Discounted losses reserves 3,174 2,482 2,715
Fair valuation of investments - - 160
Depreciation and amortization 51 71 -
Minimum tax credit carryforward - 213 188
Other 125 165 172
------- ------ ------
3,781 3,202 3,508
------- ------ ------
Deferred tax liabilities:
Fair valuation of investments (1,039) (409) -
Depreciation and amortization - - (13)
------- ------ ------
(1,039) (409) (13)
------- ------ ------
Net deferred tax assets $ 2,742 $2,793 $3,495
======= ====== ======
</TABLE>
Federal income tax expense differs from that calculated using established
corporate rates primarily due to nontaxable investment income as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------- ---------------------
% OF % OF % OF
PRETAX PRETAX PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
<S> <C> <C> <C> <C> <C> <C>
Federal income tax
at statutory rates $1,233 34% $ 285 34% $ 440 34%
Tax-exempt income (321) (9) (355) (42) (47) (4)
Dividends received (69) (2) (66) (8) (74) (6)
Reorganization costs 221 6 - - - -
Other 15 1 14 1 (16) (1)
------ --- ----- ---- ----- ---
Federal income tax
at effective rates $1,079 30% $(122) (15)% $ 303 23%
====== === ===== ==== ===== ===
</TABLE>
F-13
<PAGE>
8. SALE OF BUILDING AND COMMITMENTS
On November 7, 1997, NCRIC sold its office building to an unrelated party.
The transaction resulted in a loss of $197,000, which was recognized in 1997.
According to the terms of a post-sale lease between the new owner and NCRIC,
NCRIC remained in the office space until the end of April 1998.
NCRIC entered into an operating lease for new office space located in
Washington, D.C., effective on April 15, 1998. The lease terms are for 10
years with a monthly base rent of $35,000 and a 2.0% "annual escalator." As
of December 31, 1998, future minimum commitments under this noncancelable
lease, which began on April 15, 1998, are as follows (in thousands):
1999 $ 427
2000 436
2001 444
2002 453
2003 479
Thereafter 2,227
------
Total $4,466
======
Rent expense during the year ended December 31, 1998 was $301,000.
On December 22, 1997, NCRIC entered into a line-of-credit agreement with a
bank for $2,500,000. This line of credit is unsecured and is renewable
annually. As of December 31, 1998, NCRIC had not drawn down on this
facility.
NCRIC was required to establish a letter of credit to secure an appellate
bond for a case which is in the District of Columbia appellate process. As
of December 31, 1998 the letter of credit totaled $1.65 million.
9. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
The effects on these GAAP financial statements of the differences between the
statutory basis of accounting prescribed or permitted by the District of
Columbia Department of Insurance and Securities Regulation (DISR) and GAAP
are summarized below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $24,116 $23,258 $22,365
Effects of fair valuation of investments 2,016 789 (314)
Effects of deferred taxes 3,781 3,202 3,335
Effects of nonadmitted assets and other 1,098 237 38
------- ------- -------
STOCKHOLDER'S EQUITY - GAAP BASIS $31,011 $27,486 $25,424
======= ======= =======
NET INCOME - STATUTORY BASIS $ 2,577 $ 1,726 $ 814
Effects of deferred taxes 579 (133) (201)
Effects of consolidation versus equity
method of accounting for subsidiaries (609) (634) 378
------- ------- -------
NET INCOME - GAAP BASIS $ 2,547 $ 959 $ 991
======= ======= =======
</TABLE>
F-14
<PAGE>
As of December 31, 1998, 1997 and 1996, statutory capital for NCRIC was
sufficient to satisfy regulatory requirements. Each insurance company is
restricted under the applicable Insurance Code as to the amount of dividends
it may pay without regulatory consent.
During 1997, NCRIC received permission from DISR to account for certain
receivable balances due, pursuant to an executed retrospective rating plan
agreement, as direct accrued retrospective premiums receivable. The balance
was established in accordance with the NAIC Annual Statement instructions
manual, which requires 10% of the balance to be included as nonadmitted.
This permitted practice had a positive $900,000 monetary effect on the
statutory surplus for the year ended December 31, 1997.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles (Codification). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be
established by individual state laws and permitted practices. The Company
has not finalized the quantification of the effects of the Codification on
its statutory financial statements.
10. COMPREHENSIVE INCOME
The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, during 1998. Prior financial statements have
been restated to conform to the requirements of this Standard. Accumulated
Other Comprehensive Income balances represent net unrealized investment
gains or losses net of deferred income taxes.
11. REPORTABLE SEGMENT INFORMATION
The Company 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 to
physicians. The Company expects the acquisitions of HealthCare Consulting,
Inc., HCI Ventures, LLC and Employee Benefit Services (see Note 12) to
expand the practice management and financial services business segment.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profit or loss from operations before income taxes.
The Company's reportable segments are strategic business units that offer
different products and services, and therefore are managed separately.
F-15
<PAGE>
Selected financial data is presented below for each business segment for the
year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
(IN THOUSANDS)
INSURANCE
<S> <C> <C> <C>
Revenues from external customers $ 18,806 $ 13,884 $ 14,008
Net investment income 5,996 6,044 5,652
Net realized investment gains 159 90 229
Depreciation and amortization 209 366 626
Segment profit (loss) before taxes 4,316 1,150 1,766
Segment assets 133,780 121,854 116,389
Segment liabilities 102,748 94,350 91,011
Expenditures for segment assets 540 516 -
PRACTICE MANAGEMENT AND FINANCIAL SERVICES
Revenues from external customers $ 88 $ 3 $ 3
Net investment income - 1 4
Net realized investment gains - - -
Depreciation and amortization 26 120 183
Segment profit (loss) before taxes (690) (313) (472)
Segment assets 439 47 299
Segment liabilities 281 65 254
Expenditures for segment assets 226 - -
TOTAL
Revenues from external customers $ 18,894 $ 13,887 $14,011
Net investment income 5,996 6,045 5,656
Net realized investment gains 159 90 229
Depreciation and amortization 235 486 809
Segment profit (loss) before taxes 3,626 837 1,294
Segment assets 134,219 121,901 116,688
Segment liabilities 103,029 94,415 91,265
Expenditures for segment assets 766 516 -
</TABLE>
F-16
<PAGE>
The following are reconciliations of reportable segment assets and
liabilities to the Company's consolidated totals (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Assets:
Total assets for reportable segments $ 134,219 $ 121,901
Elimination of intersegment receivables (218) (60)
Elimination of affiliate receivables (443) -
Other unallocated amounts 768 -
--------- ---------
Consolidated total $ 134,326 $ 121,841
========= =========
Liabilities:
Total liabilities for reportable segments $ 103,029 $ 94,415
Elimination of intersegment payables (218) (60)
Other liabilities 504 -
--------- --------
Consolidated total $ 103,315 $ 94,355
========= ========
</TABLE>
12. SUBSEQUENT EVENTS
On January 4, 1999, the Company acquired all of the outstanding shares of
HealthCare Consulting, Inc., all of the outstanding interests of HCI
Ventures, LLC, and all the assets of Employee Benefit Services, Inc. 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 will be accounted for using the purchase method. Goodwill
will be 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, the Company 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 being payable at closing. Monthly
payments will be 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 HealthCare Consulting and
a blanket lien of all of the receivables of HealthCare Consulting and
Employee Benefit Services. There is no penalty for prepayment of the loan.
The President of Sequoia National Bank serves on the Company's Board of
Directors.
The following pro forma information presents the results of operations as
though the acquisition had occurred at January 1, 1998 (in thousands):
NCRIC ACQUIRED PRO FORMA
Group COMPANIES COMBINED
Revenue $25,049 $ 4,975 $30,024
Net Income 2,547 436 2,983
* * * * *
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Owners of
HealthCare Consulting, Inc., HCI
Ventures, LLC, and Employee
Benefits Services, Inc.
Lynchburg, Virginia
We have audited the accompanying combined balance sheets of the management
services of HealthCare Consulting, Inc. (HCI), HCI Ventures, LLC (HCIV), and
Employee Benefits Services, Inc. (EBSI) (collectively, the Companies) as of
December 31, 1998 and 1997, and the related combined statements of income and
comprehensive income, owners' equity, and cash flows for the years then ended.
These combined financial statements are the responsibility of the Companies'
management. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the combined financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying combined financial statements were prepared to present the
financial position, results of operations and cash flows of HCI, HCIV, and EBSI
that relate to the delivery of professional practice management services to
physicians and dentists and to the administration of retirement and other
employee benefits plans. Because they exclude HCIV's investment in Cornerstone
Capital Management, LLC, such financial statements are not intended to be a
complete presentation of the financial position, results of operations and cash
flows of the Companies.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the management services of the
Companies as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
January 22, 1999
F-18
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
<TABLE>
<CAPTION>
COMBINED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- ----------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S>
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 48,070 $ 97,273
Accounts receivable (net of allowance for
doubtful accounts of $135,000 and $130,000) 703,499 859,354
Other receivables 4,529 10,487
---------- ----------
Total current assets 756,098 967,114
PROPERTY AND EQUIPMENT - Net 209,801 219,822
ADVANCES TO AFFILIATES - 173,088
INVESTMENTS IN MANAGEMENT SERVICE
ORGANIZATIONS 17,750 22,246
OTHER ASSETS 77,423 69,727
---------- ----------
TOTAL ASSETS $1,061,072 $1,451,997
========== ==========
LIABILITIES AND OWNERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 86,071 $ 160,210
Obligations under line of credit - 239,000
Notes payable to owners 99,000 -
Deferred income taxes 225,000 304,000
---------- ----------
Total current liabilities 410,071 703,210
LONG-TERM LIABILITY 90,000 90,000
---------- ----------
Total liabilities 500,071 793,210
---------- ----------
OWNERS' EQUITY:
Common stock (HCI) ($1 par value - 1,500 shares
authorized, issued 377 and 344) 377 344
Common stock (EBSI) ($1 par value - 1,500 shares
authorized, issued 377 and 353) 377 353
Limited liability company capital (HCIV) 2,388 20,502
Additional paid-in capital (HCI) 8,319 4,491
Retained earnings 549,740 633,297
Less treasury stock (200 shares at cost) (200) (200)
---------- ----------
Total owners' equity 561,001 658,787
---------- ----------
TOTAL LIABILITIES AND OWNERS' EQUITY $1,061,072 $1,451,997
========== ==========
</TABLE>
See notes to combined financial statements.
F-19
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
REVENUES $4,916,209 $3,927,524
---------- ----------
COSTS AND EXPENSES:
Administrative and consulting salaries 1,992,337 1,616,960
Owners' compensation 1,589,000 983,805
Rent 182,534 143,897
Office supplies 115,018 94,201
Travel 90,670 80,009
Telephone 81,521 70,905
Other administrative expenses 921,967 750,002
---------- ----------
Total costs and expenses 4,973,047 3,739,779
---------- ----------
OPERATING (LOSS) INCOME (56,838) 187,745
---------- ----------
Interest and dividend income 59,227 69,180
Interest expense (9,061) (13,476)
---------- ----------
Other income - net 50,166 55,704
---------- ----------
(LOSS) INCOME BEFORE INCOME TAXES (6,672) 243,449
INCOME TAX BENEFIT (PROVISION) 76,000 (74,000)
---------- ----------
NET INCOME AND COMPREHENSIVE INCOME $ 69,328 $ 169,449
========== ==========
</TABLE>
See notes to combined financial statements.
F-20
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
COMBINED STATEMENTS OF OWNERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
LIMITED
LIABILITY ADDITIONAL
COMPANY PAID-IN
COMMON STOCK (HCI) COMMON STOCK (EBSI) CAPITAL CAPITAL RETAINED
-------------------- -------------------
SHARES AMOUNT SHARES AMOUNT (HCIV) (HCI) EARNINGS
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 337 $337 353 $353 $ - $4,491 $ 463,848
Sale of common stock 7 7 - - - - -
Capital contributions - - - - 20,758 - -
Distributions to owners - - - - (256) - -
Net income - - - - - - 169,449
--- ---- ----- ----- -------- ------- ---------
BALANCE, DECEMBER 31, 1997 344 344 353 353 20,502 4,491 633,297
Sale of common stock 33 33 24 24 - - -
Capital contributions - - - - - 3,828 -
Distributions to owners - - - - (18,114) - (152,885)
Net income - - - - - - 69,328
--- ---- ----- ----- -------- ------- ---------
BALANCE, DECEMBER 31, 1998 377 $377 377 $377 $ 2,388 $8,319 $ 549,740
=== ==== ===== ===== ======== ======= =========
<CAPTION>
TOTAL
TREASURY OWNERS'
STOCK EQUITY
<S> <C> <C>
BALANCE, JANUARY 1, 1997 $(200) $ 468,829
Sale of common stock - 7
Capital contributions - 20,758
Distributions to owners - (256)
Net income - 169,449
------- ---------
BALANCE, DECEMBER 31, 1997 (200) 658,787
Sale of common stock - 57
Capital contributions - 3,828
Distributions to owners - (170,999)
Net income - 69,328
------- ---------
BALANCE, DECEMBER 31, 1998 $(200) $ 561,001
======= =========
</TABLE>
See notes to combined financial statements.
F-21
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFIT SERVICES, INC.
<TABLE>
<CAPTION>
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- ---------------------------------------------------------------------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 69,328 $ 169,449
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 85,014 58,779
Deferred income taxes (76,000) 74,000
Changes in assets and liabilities:
Accounts receivable, net 155,855 (208,956)
Accounts payable and accrued liabilities (74,139) 59,749
Other assets (10,696) 267
---------- ---------
Net cash provided by operating activities 149,362 153,288
---------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment (74,993) (100,281)
Repayment of advances from affiliates and notes receivable 182,620 8,412
Investment in management service organizations - (22,246)
Sale of portion of interest in management service organization 4,750 -
---------- ---------
Net cash provided by (used in) investing activities 112,377 (114,115)
---------- ---------
FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 57 7
Loans from owners 99,000 -
Partnership capital contributions - 20,758
Distributions to owners (170,999) (256)
Repayments of borrowings under line of credit (239,000) (11,000)
---------- ---------
Net cash (used in) provided by
financing activities (310,942) 9,509
---------- ---------
(DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (49,203) 48,682
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 97,273 48,591
---------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 48,070 $ 97,273
========== =========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Interest paid $ 9,061 $ 13,476
========== =========
</TABLE>
See notes to combined financial statements.
F-22
<PAGE>
THE MANAGEMENT SERVICES OF HEALTHCARE
CONSULTING, INC., HCI VENTURES, LLC, AND
EMPLOYEE BENEFITS SERVICES, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Organization and Basis of Reporting - HealthCare Consulting, Inc. (HCI), HCI
Ventures, LLC (HCIV), and Employee Benefits Services, Inc. (EBSI)
(collectively, the Companies) are engaged in the businesses of providing (i)
practice management services, accounting and tax services, and personal
financial planning services to medical and dental practices and (ii)
retirement planning services and administration to medical and dental
practices and certain other businesses throughout the Mid-Atlantic Region.
HCI was formed in 1978 as Professional Consultants, Inc. and changed its name
to HCI in 1992. HCIV was formed in 1997 to own equity interests in certain
management service organizations for which HCI provides services. EBSI was
formed in 1989 to provide administrative services to retirement and other
benefit plans.
The combined financial statements reflect the accounts and activities of HCI
and EBSI, and the investments in management service organizations by HCIV.
They exclude accounts and activities related to HCIV's investment in
Cornerstone Capital Management, LLC (Cornerstone). Combined financial
statements are presented based on the common ownership and management of the
entities. Significant transactions between the entities have been
eliminated.
On January 4, 1999, the Companies' assets, exclusive of HCIV's investment in
Cornerstone, were sold to NCRIC Group, Inc. (NCRIC). The Companies now
operate as a wholly-owned subsidiary of NCRIC. The accompanying combined
financial statements do not reflect the effects of any adjustments arising
from this transaction.
Cash and Cash Equivalents - For purposes of reporting cash flows, the
Companies consider short-term investments purchased with an initial maturity
of three months or less to be cash equivalents.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation is recorded using the straight-line method over estimated useful
lives of 10 years for furniture and fixtures and generally three to five
years for other fixed assets.
Investments in Management Service Organizations - Investments in management
service organizations represent equity interests ranging from five percent to
20 percent and are carried at cost.
Intangible Assets - Goodwill of $55,000, arising from HCI's acquisition of a
professional services consulting firm in 1997, is amortized on a straight-
line basis over twenty years. Goodwill is included in other assets and is
shown net of accumulated amortization of $3,667 and $917 as of December 31,
1998 and 1997.
Revenue Recognition - Revenue is recognized as services are performed under
terms of management and other contracts. Revenue is generally billed in the
month following the performance of related services.
F-23
<PAGE>
Income Taxes - HCI uses the asset and liability method of accounting for
income taxes. Under this method, deferred income taxes are recognized for
tax consequences of temporary differences by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of assets and liabilities. HCI
files its income tax returns on a modified cash basis. HCIV is treated as a
flow-through entity for tax purposes and, as such, no provision for income
taxes has been recorded for its operations. EBSI has elected to be taxed
under Subchapter S of the Internal Revenue Code and is, therefore, also
treated as a flow-through entity for tax purposes.
New Accounting Standard - The Companies have adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 130, Reporting
Comprehensive Income, and have presented statements of income and
comprehensive income for the years ended December 31, 1998 and 1997. As the
Companies have not engaged in transactions resulting in other comprehensive
income, the adoption of this statement did not have a material effect on the
financial statements.
Impairment of Long-Lived Assets - The Companies review long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During the years ended
December 31, 1998 and 1997, the Companies did not find it necessary to record
a provision for impairment of such assets.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates
of the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Concentrations of Credit Risk - Financial instruments that potentially
subject the Companies to concentrations of credit risk are principally
accounts receivable. The Companies perform credit evaluations and generally
do not require collateral to support receivables.
Litigation - The Companies are subject to claims arising in the normal course
of its business. Management does not believe that any such claims or
assessments will have a material effect on the Companies' financial position,
results of operations or cash flows.
2. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Computer and other equipment $ 656,089 $ 588,115
Furniture, fixtures, and leasehold improvements 120,046 113,027
--------- ---------
776,135 701,142
Less accumulated depreciation
and amortization (566,334) (481,320)
--------- ---------
Property and equipment - net $ 209,801 $ 219,822
========= =========
</TABLE>
Included in property and equipment are approximately $370,000 of fully
depreciated assets.
F-24
<PAGE>
3. OBLIGATIONS UNDER LINE OF CREDIT
Indebtedness at December 31, 1997, is attributable to a $250,000 bank credit
facility which is collateralized by HCI's receivables. Interest charged on
the outstanding balance is equal to the bank's prime rate plus 1% per annum.
The weighted average interest rate charged on the credit facility was 8.97%
for the year ended December 31, 1997. The facility was paid in full in
December, 1998.
4. COMMITMENTS AND CONTINGENCIES
Leases - The Companies have entered into operating leases for office space
and equipment. Future minimum lease payments under noncancelable operating
leases at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
OFFICE OFFICE
SPACE EQUIPMENT TOTAL
<S> <C> <C> <C>
1999 $179,000 $3,000 $182,000
2000 161,000 3,000 164,000
2001 93,000 1,000 94,000
2002 67,000 1,000 68,000
2003 16,000 16,000
-------- ------ --------
Total minimum lease payments $516,000 $8,000 $524,000
======== ====== ========
</TABLE>
The above future lease payments contain related party rents of approximately
$60,000 for the years ending December 31, 1999 and 2000 (see Note 6).
Employment Agreements - HCI has entered into employment agreements with its
owners and certain other key employees. These agreements include covenants
not to compete and, in one case, will provide the employee with severance
pay based on his final 12-month's compensation. The Companies' estimated
obligation for such severance of $90,000 is reflected as a long-term
liability as of December 31, 1998 and 1997.
5. INCOME TAXES
Deferred tax assets and liabilities are comprised principally of the
following components:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax liabilities:
Receivables $243,000 $311,000
Depreciation 26,000 27,000
-------- --------
Total deferred tax liabilities 269,000 338,000
-------- --------
Deferred tax assets:
Accounts payable and accrued liabilities (16,000) (7,000)
Accrued severance (35,000) (35,000)
Net operating loss carryforwards (1,000) (3,000)
-------- --------
Total deferred tax assets (52,000) (45,000)
-------- --------
Net deferred tax liability $217,000 $293,000
======== ========
</TABLE>
F-25
<PAGE>
The deferred tax assets and liabilities have been classified in the
accompanying balance sheets as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
Current liabilities $225,000 $304,000
Other assets (8,000) (11,000)
-------- --------
$217,000 $293,000
======== ========
</TABLE>
The income tax benefit (provision) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
<S> <C> <C>
Federal:
Current $ - $ -
Deferred 71,000 (69,000)
------- --------
71,000 (69,000)
------- --------
State:
Current - -
Deferred 5,000 (5,000)
------- --------
5,000 (5,000)
------- --------
$76,000 $(74,000)
======= ========
</TABLE>
The Companies' effective income tax rate is comprised principally of the
statutory Federal income tax rate of 34% plus state income taxes, net of
Federal benefit, applied to HCI's operating results.
6. RELATED PARTY TRANSACTIONS
The total revenues reported in the combined statements of income and
comprehensive income for the years ended December 31, 1998 and 1997, include
approximately $197,000 and $80,000 earned by HCI from management service
organizations in which HCIV has an equity investment.
Advances to affiliates as of December 31, 1997 include working capital
advances to Cornerstone Capital Management, LLC, an investment management
company that was 75% owned by HCIV, and other working capital advances to
management service organizations in which HCIV has an equity investment. All
such working capital advances had been repaid as of December 31, 1998.
HCI rents an office building from a partnership whose partners are HCI
owners. For this property, HCI paid approximately $62,000 in rent for each
of the years ended December 31, 1998 and 1997.
During 1998, NCRIC MSO, a subsidiary of NCRIC, paid HCI approximately
$150,000 for services performed by HCI.
F-26
<PAGE>
Included in other receivables as of December 31, 1998 are $3,828 of owners'
capital contributions.
As of December 31, 1998, HCI owed an aggregate of $99,000 to its owners under
the terms of notes payable. Such notes bear interest at 6.35% and are
payable on April 30, 1999.
7. EMPLOYEE BENEFIT PLANS
The Companies sponsor a defined contribution money purchase pension plan.
Employees who are 21 years or older and have 2 years of service are eligible
for participation in the plan. Under the plan, the Companies contribute 5%
of each participant's total annual compensation. All contributions are 100%
vested. The contributions for the years ended December 31, 1998 and 1997
were approximately $92,000 and $128,000, respectively.
The Companies also sponsor a defined contribution 401(k) profit-sharing plan.
Employees who are 21 years or older and have one year of service are eligible
for participation in the plan. Employees may elect to contribute 1-15% of
total compensation. All contributions are 100% vested. The Companies are
not required to make matching contributions to the plan, but may make
discretionary contributions. Total contributions to the plan by the
Companies for the years ended December 31, 1998 and 1997, were approximately
$66,000 and $79,000, respectively.
* * * * * *
F-27
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
prospectus in connection with these offerings, and, if given or made, the other
information or representation must not be relied upon as having been authorized
by NCRIC Group, Inc. or Sandler O'Neill & Partners, L.P. This prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any of the
offered securities to any person in any jurisdiction in which the offer or
solicitation is not authorized or in which the person making the offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make an offer or solicitation in the jurisdiction. Neither the delivery of
this prospectus nor any sale of shares shall under any circumstances create any
implication that there has been no change in the affairs of NCRIC Group, Inc.
since the date of this prospectus or any of the dates as of which information
is furnished in this prospectus.
[LOGO OF NCRIC APPEARS HERE]
1,840,000 Shares
NCRIC Group, Inc.
Holding company for NCRIC, Inc. and NCRIC MSO, Inc.
COMMON STOCK
----------------
PROSPECTUS
----------------
May 10, 1999
Sandler O'Neill & Partners, L.P.
Until June 4, 1999 or 25 days after commencement of the syndicated community
offering, if any, whichever is later, all dealers effecting transactions in
these securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
