U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
Commission File Number: 0-25505
NCRIC Group, Inc.
District of Columbia 52-2134774
-------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
-------------------------------------- -----
(Address of principal executive offices) (Zip Code)
202-969-1866
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of August 1, 2000, there
were 3,725,355 shares of NCRIC Group, Inc. common stock outstanding.
<PAGE>
Table of Contents
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
NCRIC Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets.......................... 3
Condensed Consolidated Statements of Operations................ 4
Condensed Consolidated Statements of Cash Flows................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis............................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 15
Part II - Other Information
Item 1. Legal Proceedings................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders............... 15
Item 6. Exhibits and Reports on Form 8-K.................................. 16
Signatures.................................................................. 16
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
----------------------------------------------------------------------------------------------------
June 30, 2000 December 31, 1999
(unaudited)
ASSETS
<S> <C> <C>
INVESTMENTS:
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 93,069 $ 90,937
Preferred stocks 4,999 4,155
--------- ---------
Total securities available for sale 98,068 95,092
OTHER ASSETS:
Cash and cash equivalents 4,056 5,407
Reinsurance recoverable 24,845 26,627
Goodwill 4,798 4,928
Deferred federal income taxes 2,808 3,298
Other assets 6,843 5,595
--------- ---------
TOTAL ASSETS $ 141,418 $ 140,947
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 54,057 $ 56,462
Loss adjustment expenses 26,612 27,820
--------- ---------
Total losses and loss adjustment expenses 80,669 84,282
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 6,568 7,164
Unearned premiums 11,778 8,898
Other liabilities 4,695 4,808
--------- ---------
TOTAL LIABILITIES 103,710 105,152
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized;
3,742,855 shares issued and outstanding 37 37
Additional paid in capital 9,439 9,433
Unallocated common stock held by the ESOP (941) (993)
Unallocated common stock held by the stock award plan (518) (518)
Accumulated other comprehensive loss (2,740) (2,866)
Retained earnings 32,431 30,702
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 37,708 35,795
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,418 $ 140,947
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------------------------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $3,544 $ 2,970 $ 7,173 $6,575
Net investment income 1,588 1,496 3,182 2,914
Net realized investment losses - (199) - (147)
Practice management and related income 1,443 1,090 2,818 2,333
Other income 107 80 209 171
------------- ------------- --------------- -------------
Total revenues 6,682 5,437 13,382 11,846
------------- ------------- --------------- -------------
EXPENSES:
Losses and loss adjustment expenses 2,766 2,525 5,755 6,089
Underwriting expenses 1,081 654 2,021 1,581
Practice management expenses 1,257 1,173 2,471 2,289
Other 345 294 631 767
------------- ------------- --------------- -------------
Total expenses 5,449 4,646 10,878 10,726
------------- ------------- --------------- -------------
INCOME BEFORE INCOME TAXES 1,233 791 2,504 1,120
INCOME TAX PROVISION 382 210 775 240
------------- ------------- --------------- -------------
NET INCOME $ 851 $ 581 $ 1,729 $ 880
============= ============= =============== =============
Net income per common share:
Basic $ 0.24 $ 0.27 $ 0.49 $ 0.40
Diluted $ 0.24 $ 0.27 $ 0.49 $ 0.40
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (IN THOUSANDS)
--------------------------------------------------------------------------------------
Six Months Ended June 30,
2000 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,729 $ 880
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses -- 147
Amortization and depreciation 338 253
Deferred federal income taxes 423 (87)
Changes in assets and liabilities:
Reinsurance recoverable 1,782 (1,896)
Other assets (1,063) (3,041)
Losses and loss adjustment expenses (3,613) 1,416
Retrospective premiums accrued under
reinsurance treaties (596) 2,374
Unearned premiums 2,880 6,582
Other liabilities (858) 174
-------- --------
Net cash flows from operating activities 1,022 6,802
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (18,221) (38,647)
Sales, maturities and redemptions of investments 16,241 32,184
Investment in purchased business -- (5,238)
Purchases of property and equipment (393) (97)
-------- --------
Net cash flows provided by investing activities (2,373) (11,798)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 2,200
-------- --------
NET CHANGE IN CASH AND CASH
EQUIVALENTS (1,351) (2,796)
-------- --------
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 5,407 6,083
-------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 4,056 $ 3,287
======== ========
SUPPLEMENTARY INFORMATION:
Interest paid $ -- $ 92
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - unaudited
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions to Form 10-Q and therefore do not
include all disclosures necessary for a complete presentation under
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 six-month period ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2000. These condensed consolidated financial statements
and notes should be read in conjunction with the financial statements and
notes included in the audited consolidated financial statements of NCRIC
Group, Inc. (NCRIC Group) for the year ended December 31, 1999, which were
filed with the Securities and Exchange Commission on Form 10-KSB.
2. Reportable Segment Information
NCRIC Group has two reportable segments: Insurance and Practice Management
Services. The insurance segment provides medical professional liability and
other insurance. The practice management services segment provides medical
practice management services primarily to private practicing physicians.
NCRIC Group evaluates performance based on profit or loss from operations
before income taxes. The reportable segments are strategic business units
that offer different products and services and therefore are managed
separately.
Selected financial data is presented below for each business segment at or
for the three-month and six-month periods ended June 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
For the Three Months At or For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------------
2000 1999 2000 1999
------- ------- --------- ----------
<S> <C> <C> <C> <C>
Insurance
Revenues from external customers $ 3,632 $ 3,050 $ 7,345 $ 6,746
Net investment income 1,571 1,539 3,142 3,014
Depreciation and amortization 58 49 116 84
Segment profit before taxes 1,260 1,151 2,525 1,758
Expenditures for segment assets 233 29 377 50
Segment assets 134,672 142,674
Segment liabilities 102,874 113,176
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Three Months At or For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------------
2000 1999 2000 1999
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Practice Management Services
Revenues from external customers $ 1,465 $ 1,092 $ 2,858 $ 2,335
Net investment income 17 18 33 21
Depreciation and amortization 125 85 222 169
Segment profit (loss) before taxes 192 (200) 379 (311)
Expenditures for segment assets 2 31 16 47
Segment assets 6,833 6,508
Segment liabilities 1,247 991
Total
Revenues from external customers $ 5,097 $ 4,142 $ 10,203 $ 9,081
Net investment income 1,588 1,557 3,175 3,035
Depreciation and amortization 183 134 338 253
Segment profit before taxes 1,452 951 2,904 1,447
Expenditures for segment assets 235 60 393 97
Segment assets 141,505 149,182
Segment liabilities 104,121 114,167
</TABLE>
The following are reconciliations of reportable segment revenues, net investment
income, assets, liabilities, and profit to the Company's consolidated totals (in
thousands):
<TABLE>
<CAPTION>
June 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Total assets for reportable segments $ 141,505 $ 149,182
Elimination of intersegment receivables (802) (631)
Elimination of affiliate receivables -- (4,933)
Other unallocated amounts 715 1,606
------------ ------------
Consolidated total $ 141,418 $ 145,224
============ ============
Liabilities:
Total liabilities for reportable segments $ 104,121 $ 114,167
Elimination of intersegment payables 392 (631)
Other liabilities (803) 2,801
------------ ------------
Consolidated total $ 103,710 $ 116,337
============ ============
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues from external customers:
Total revenues for reportable segments $ 5,097 $ 4,142 $ 10,203 $ 9,081
Elimination of intersegment revenues (3) (2) (3) (2)
-------- -------- --------- --------
Consolidated total $ 5,094 $ 4,140 $ 10,200 $ 9,079
======== ======== ========= ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Net Investment Income:
Total investment income for reportable segments $ 1,588 $ 1,557 $ 3,175 $ 3,035
Elimination of intersegment interest income - (61) - (121)
Other unallocated amounts - - 7 -
-------- -------- --------- --------
Consolidated total $ 1,588 $ 1,496 $ 3,182 $ 2,914
======== ======== ========= ========
Profit before taxes:
Total profit for reportable segments $ 1,452 $ 951 $ 2,904 $ 1,447
Other expenses (219) (99) (400) (206)
Elimination of intersegment interest income - (61) - (121)
-------- -------- --------- --------
Consolidated total $ 1,233 $ 791 $ 2,504 $ 1,120
======== ======== ========= ========
</TABLE>
3. Earnings per Share
The following table sets forth the computation of basic and diluted
earnings per share (in thousands except per share data):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net income $ 851 $ 581 $ 1,729 $ 880
====== ====== ======= ======
Weighted average common
shares outstanding - basic 3,533 2,220 3,531 2,220
Dilutive effect of stock options 6 - 8 -
------ ------ ------- ------
Weighted average common
shares outstanding - diluted 3,539 2,220 3,539 2,220
====== ====== ======= ======
Net income per common share:
Basic $ 0.24 $ 0.27 $ 0.49 $ 0.40
------ ------ ------- ------
Diluted $ 0.24 $ 0.27 $ 0.49 $ 0.40
------ ------ ------- ------
</TABLE>
Earnings per share is calculated by dividing the net income by the weighted
average shares outstanding for the period. For the period from January 1,
1999 through June 30, 1999, the calculation of weighted average shares
outstanding includes 2,220,000 shares. Had the calculation been made using
3,520,855 as the weighted average outstanding shares for the period ending
June 30, 1999, that is as if the stock offered in the July 1999 initial
public offering had been outstanding on January 1, 1999, basic earnings per
share would have been $0.17 and $0.25 for the quarter and six months ended
June 30, 1999, respectively.
4. Subsequent Event - Stock Repurchase
On July 7, 2000, NCRIC Group purchased 17,500 shares of its stock at a
price of $7 1/2 per share. The shares will be held as treasury shares.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following analysis of the consolidated results of operations and financial
condition of NCRIC Group should be read in conjunction with the condensed
consolidated financial statements and related notes included in this Form 10-Q .
References to "NCRIC" mean NCRIC Group and its subsidiaries, including their
predecessors.
General
The financial statements and data presented in the Form 10-Q have been
prepared in accordance with 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.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, SAB No. 101, summarizing certain of the
staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. NCRIC has not yet completed its analysis of
the impact of SAB No. 101; however, on a preliminary basis, it does not believe
that the impact, if any, of adopting SAB No. 101 will be material to its
financial statements.
Consolidated net income
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Net income of $851,000 for the three months ended June 30, 2000 increased 46%
from $581,000 for the three months ended June 30, 1999. The improvements both in
net underwriting results and in practice management results contributed to the
increase in net income.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Net income increased to $1,729,000 for the six months ended June 30, 2000,
up 96% from $880,000 for the six months ended June 30, 1999. Improvement both in
net underwriting results and in practice management results contributed to the
increased earnings. Earnings for the current six months were also improved due
to lower legal fees relating to the litigation brought by the NCRIC Physicians
Organization and settled in 1999.
Net premiums earned
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Gross premiums written of $2.0 million for the three months ended June 30,
2000 increased by $900,000 from $1.1 million for the three months ended June 30,
1999 primarily reflecting an increase in new business written. The mix of
business produced by NCRIC's independent agency force has increased to 82% of
new business written for the three months ended June 30, 2000 from 29% for the
three months ended June 30, 1999.
Net premiums earned increased by 16.7% to $3.5 million from $3.0 million
for the three months ended June 30, 2000 and 1999, respectively. The increase is
primarily reflective of the increase in policies in force as the result of new
business written in addition to the benefit from reduced reinsurance costs under
the new reinsurance program.
9
<PAGE>
Late in the second quarter it was determined that one of NCRIC's hospital
sponsored risk sharing programs would not be renewed at the upcoming September 1
renewal. Under this type of risk sharing program, physicians are underwritten
directly by NCRIC and pay lower individual premiums than if not part of the risk
sharing program. At the end of the policy 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 from the sponsoring hospital to offset the unfavorable losses.
This hospital sponsored program to be terminated September 1 currently
includes approximately 70 physicians insured directly with NCRIC which account
for approximately $2.5 million in annualized premium. The termination of the
hospital sponsored program will not impact the insurance coverage of the
physicians. However, it will increase the premium cost to the individual
physicians. There is no assurance that the individual physicians will renew
their coverage with NCRIC at the increased premium level. Based on the actual
accumulated loss experience of the program through June 30, 2000, NCRIC has
accrued approximately $1.2 million of premium. A final bill will be presented to
the hospital sponsor under terms of the contract following the termination date
based on actual loss experience through the termination date.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Gross premiums written of $13.1 million for the six months ended June 30,
2000 are lower than the $15.2 million for the six months ended June 30, 1999
primarily due to the staggering of policy renewal dates largely offset by new
business written, as displayed in the table below. Premiums written were lower
by approximately $3.1 million for the six months ended June 30, 2000 due to the
staggering of premium writing dates in 1999. Starting in the fourth quarter of
1997 and continuing through 1999, NCRIC began to stagger policy renewal dates.
While premiums written in the period of the new renewal date increase and
premiums written in the subsequent period corresponding to the original renewal
date decrease, the staggering has no net effect on premiums written from period
to period. In addition, the staggering of renewal dates does not affect earned
premiums.
The mix of business produced directly by NCRIC versus by agents has changed
between reporting periods as shown on the following chart of new gross written
premium (in thousands).
Six months ended June 30,
-------------------------
2000 1999
------ ------
Direct $ 634 $ 589
Agent 1,175 181
In the first six months of 2000, premium written to clients of the Practice
Management Segment totals $264,000 or 15% of total new gross written premium,
compared to $29,000 in the first six months of 1999, or 4% of new gross written
premium.
Net premiums earned increased by 9% to $7.2 million for the six months
ended June 30, 2000 from $6.6 million for the corresponding 1999 period. The
increase is primarily attributable to the increase in business in force
resulting from new business production plus the reduction in reinsurance ceded
premium resulting from the new reinsurance program effective for 2000.
While insurance in force continues to follow the historic pattern of
insuring risks concentrated in the District of Columbia, there has been notable
growth in net earned premium in Virginia, largely as the result of sales by
agents and sales to clients of the Practice Management Segment. For the six
months ended June 30, 2000, net earned premium from Virginia totaled
approximately $650,000, an increase of approximately $370,000 over the total of
approximately $280,000 for the six months ended June 30, 1999.
10
<PAGE>
Net investment income
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Net investment income increased by $92,000 for the three months ended June
30, 2000 compared to the second quarter of 1999 due to an increase in yields
partially offset by a decrease in invested funds. The average effective yield
was approximately 6.25% for the three months ended June 30, 2000 and 5.68% for
the three months ended June 30, 1999. The tax equivalent yield was approximately
6.67% for the second quarter of 2000 and 6.15% for the second quarter of 1999.
The increase in investment yields reflects the market increase in interest rates
in 2000 compared to 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Net investment income increased by $268,000 for the six months ended June
30, 2000 compared to the first six months of the prior year due to an increase
in yields partially offset by a decrease in invested funds. Average invested
assets, which include cash equivalents, were lower in the first six months of
2000 by $3.3 million due to reduced cash flows from operations. The average
effective yield was approximately 6.25% for the six months ended June 30, 2000
and 5.54% for the six months ended June 30, 1999. The tax equivalent yield was
approximately 6.63% through the second quarter of 2000 and 6.07% for the six
months ended June 30, 1999. The increase in investment yields reflects the
market increase in interest rates in 2000 compared to 1999.
Practice management and related revenue
Revenue for practice management and related services is comprised of fees
for the services shown in the following chart.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Practice management 41% 35% 42% 38%
Accounting 26% 37% 27% 31%
Tax & personal financial planning 19% 6% 15% 11%
Retirement plan accounting & admin 12% 14% 13% 13%
Other 2% 8% 3% 7%
---- ---- ---- ----
Total 100% 100% 100% 100%
</TABLE>
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Practice management and related revenue of $1.4 million for the three
months ended June 30, 2000 is up from $1.1 million for the three months ended
June 30, 1999. The increase results from both recurring fee business and
one-time consulting assignments.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Practice management and related revenue of $2.8 million for the six months
ended June 30, 2000 and $2.3 million for the six months ended June 30, 1999
consisted of fees generated by NCRIC MSO through HealthCare Consulting and
Employee Benefits Services. The increase results from both recurring fee
business and one-time consulting assignments. Approximately $150,000 of revenue
in the first half of 2000 results from services provided to existing insureds of
NCRIC reflecting results of the cross-selling initiative.
11
<PAGE>
Loss and loss adjustment expenses and combined ratio results
While NCRIC continues to experience pressure from the rise in severity of
losses, it continues to take a cautious approach in establishing and evaluating
reserves. The expense for incurred losses and LAE net of reinsurance is
summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------- --------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Incurred loss and LAE related to:
Current year - losses $ 5,458 $ 6,286 $ 9,244 $ 10,736
Prior years - development (2,692) (3,761) (3,489) (4,647)
--------- --------- -------- --------
Total incurred for the period $ 2,766 $ 2,525 $ 5,755 $ 6,089
========= ========= ======== ========
</TABLE>
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------
2000 1999
------ ------
<S> <C> <C>
GAAP Underwriting ratios:
Loss and LAE ratio 80.2% 92.6%
Underwriting expense ratio 28.2% 24.1%
Combined ratio after renewal credits 108.4% 116.7%
</TABLE>
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Total incurred loss and LAE expense of $2.8 million for the second quarter
of 2000 increased by $241,000 from the $2.5 million incurred for the second
quarter of 1999. NCRIC experienced favorable development on estimated losses for
prior years' claims in both 2000 and 1999. The loss development related to prior
years claims was $2.7 million in the second quarter of 2000 and $3.8 million in
the second quarter of 1999. Prior year development results from the
re-estimation and settlement of individual losses not covered by reinsurance,
which generally are losses under $500,000.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Total incurred loss and LAE expense of $5.8 million for the first six
months of 2000 decreased by $334,000 from the $6.1 million incurred for the
first six months of 1999. The number of claims reported in the first six months
of 2000 were lower than in the first six months of 1999. NCRIC experienced
favorable development on estimated losses for prior years in the first six
months of both years.
The GAAP combined ratio before renewal credits decreased to 108.4% for the
six months ended June 30, 2000 from 116.7% for the six months ended June 30,
1999. This decrease reflects both the increase in earned premiums and the
decrease in incurred losses and LAE in the first six months of 2000 compared to
the same period in 1999.
Expenses
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Underwriting expenses increased $427,000, to $1.1 million for the three
months ended June 30, 2000 from $654,000 for the three months ended June 30,
1999. The increase in expenses primarily stems from the increase in new
business, particularly agent produced business, through increases in commissions
and other underwriting costs. The mix of business produced by NCRIC's
independent agency force has increased to 82% of new business written for the
three months ended June 30, 2000 from 29% for the three months ended June 30,
1999.
12
<PAGE>
Practice management and related expenses of $1.3 million for the three
months ended June 30, 2000 and $1.2 million for the three months ended June 30,
1999 consisted primarily of salaries and benefits, other general office expenses
and goodwill amortization.
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.
Other expenses of $345,000 for the three months ended June 30, 2000 compare to
$294,000 for the three months ended June 30, 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Underwriting expenses increased $440,000 to $2.0 million for the six months
ended June 30, 2000 from $1.6 million for the six months ended June 30, 1999.
The increase in expenses primarily stems from the increase in new business,
particularly agent produced business, through increases in commissions and other
underwriting costs.
Practice management and related expenses of $2.5 million for the six months
ended June 30, 2000 and $2.3 million for the six months ended June 30, 1999
consisted primarily of salaries and benefits, other general office expenses and
goodwill amortization.
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.
For the six months ended June 30, 2000 expenses of $631,000 compare to $767,000
for the six months ended June 30, 1999. The primary component of the decrease
was a reduction of approximately $290,000 in legal expenses incurred in
connection with litigation brought by NCRIC Physicians Organization and settled
in 1999, partially offset by an increase in expenses due to meeting the various
requirements associated with having common stock traded in the public market.
Federal income taxes
The effective tax rate for NCRIC is lower than the federal statutory rate
principally due to nontaxable investment income.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Federal income tax at statutory rates. . . . . 34% 34% 34% 34%
Tax exempt income. . . . . . . . . . . . . . . (4) (8) (4) (13)
Dividends received. . . . . . . . . . . . . . (1) (3) (1) (3)
Goodwill amortization. . . . . . . . . . . . . 1 3 1 3
Other, net. . . . . . . . . . . . . . . . . . 1 1 1 -
---- ---- ---- ----
Federal income tax at effective rates. . . . . 31% 27% 31% 21%
==== ==== ==== ====
</TABLE>
<PAGE>
Financial condition, liquidity and capital resources
Liquidity. The primary sources of liquidity are insurance premiums, net
investment income, practice management and financial services fees, recoveries
from reinsurers and proceeds from the maturity or sale of invested assets. Funds
are used to pay claims, LAE, operating expenses, reinsurance premiums and taxes,
and to purchase investments.
For the six months ended June 30, 2000, NCRIC had cash provided by
operations of $1.0 million compared to $6.8 million for the corresponding period
of 1999. The decreased cash flow in 2000 compared to 1999 resulted primarily
from higher payments of losses and LAE. Additionally, due to the staggering of
policy renewals away from the previous January 1 renewal date, premiums received
in the first half of 2000 were lower than in the first half of 1999. Because of
the long-term nature of both the payments of claims and the settlement of
swing-rated reinsurance premiums due to the reinsurers, cash from operations for
a medical professional liability insurer like NCRIC can vary substantially from
year to year.
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<PAGE>
Financial condition and capital resources. Cash flow from operations has
primarily been invested in investment grade, fixed maturity securities. Maturing
investments were primarily invested in corporate bonds and asset-backed
securities. As of June 30, 2000, the carrying value of the securities portfolio
was $98.1 million, an increase of $3.0 million from December 31, 1999. The
portfolio was invested as follows:
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999
----------- ---------------
<S> <C> <C>
U.S. Government and agencies. . . . . . . . . . . . . 14% 15%
Asset-backed and mortgage-backed securities . . . . . 38 40
Tax-exempt securities. . . . . . . . . . . . . . . . 15 14
Corporate bonds and preferred stocks. . . . . . . . . 33 31
</TABLE>
Over 72% of the portfolio was invested in U.S. Government/agency securities
or had a rating of AAA or AA. For regulatory purposes, 95% 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 has no corporate debt. The $2.5 million line of credit available as
of June 30, 2000 is restricted to working capital for claims settlements. The
line of credit is unsecured and renewable annually. NCRIC has not drawn down on
this facility. As of June 30, 2000, NCRIC had entered into a contract to
purchase new policy administration system software; future payments under the
contract are required as services are completed by the vendor and total
$326,000. NCRIC has no other material commitments for capital expenditures.
Effects of inflation
The primary effect of inflation on NCRIC is in estimating reserves for
unpaid losses and LAE for medical professional liability claims in which there
is a long period between reporting and settlement. The rate of inflation for
malpractice claim settlements can substantially exceed the general rate of
inflation. The actual effect of inflation on NCRIC's results cannot be
conclusively known until claims are ultimately settled. Based on actual results
to date, NCRIC believes that losses and LAE reserve levels and NCRIC's
ratemaking process adequately incorporate the effects of inflation.
Forward-Looking Information
A number of statements made by NCRIC in this document are forward-looking
statements which involve known and unknown risks and uncertainties which may
cause NCRIC's actual results to be materially different from historical results
or from the results expressed or implied by the forward-looking statements.
These risks and uncertainties include:
o general economic conditions including changes in interest rates and the
performance of financial markets;
o NCRIC, Inc.'s concentration in a single line of business primarily in the
District of Columbia;
o the impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment expense
reserves and reinsurance;
o price competition;
o uncertainties associated with expanding business in new market areas,
including uncertainties associated with claims adjudication experience;
o regulatory changes;
o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance;
o the mutual insurance holding company structure; and
o uncertainties associated with NCRIC Group's acquisition strategy.
14
<PAGE>
Other factors not currently anticipated by management may also materially
and adversely affect NCRIC's results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate changes expose NCRIC to 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 reinvested from maturing securities and investments of positive cash flow
from operating activities.
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, 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.
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.
The following table contains the investment quality distribution of NCRIC's
fixed maturity investments at June 30, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
At June 30, At December
Type/Ratings of Investment 2000 31, 1999
-------------------------- ----------- -----------
<S> <C> <C>
Treasury/Agency . . . . . . . . . . . . . 31% 28%
AAA . . . . . . . . . . . . . . . . . . . 35 40
AA . . . . . . . . . . . . . . . . . . . 6 7
A . . . . . . . . . . . . . . . . . . . . 23 21
BBB . . . . . . . . . . . . . . . . . . . 5 4
</TABLE>
During the six months ended June 30, 2000, NCRIC experienced a reduction in
the net unrealized loss on investments to an unrealized loss, net of tax, of
$2.7 million at June 30, 2000 from an unrealized loss, net of tax, of $2.9
million at December 31, 1999.
PART II OTHER INFORMATION
Item 1. Legal proceedings.
See the Form 10-KSB for the fiscal year ended December 31, 1999 for
information on pending litigation.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of NCRIC Group, Inc. took place on May
9, 2000.
(b) The following directors were elected and received the following votes:
15
<PAGE>
Number of Votes
---------------
Name For Withheld
---- --- --------
R. Ray Pate, Jr. 3,452,877 32,772
Leonard M. Glassman 3,452,877 32,772
Prudence P. Kline 3,452,877 32,772
Edward G. Koch 3,452,877 32,772
Raymond Scalettar 3,452,877 32,772
David M. Seitzman 3,452,877 32,772
Robert L. Simmons 3,452,877 32,772
The following directors continued in office:
Vincent C. Burke, III Pamela W. Coleman
Luther W. Gray J. Paul McNamara
Leonard Parver Nelson P. Trujillo
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27........ Financial Data Schedule
(b) Reports on Form 8-K
NCRIC Group, Inc. did not file any reports on Form 8-K during the
quarter ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NCRIC Group, Inc.
August 10, 2000 /s/ R. Ray Pate, Jr.
-----------------------------------------------------
R. Ray Pate, Jr., President & Chief Executive Officer
(Duly Authorized Officer)
August 10, 2000 /s/ Rebecca B. Crunk
-----------------------------------------------------
Rebecca B. Crunk, Sr. Vice President & Chief Financial
Officer
(Principal Financial Officer)
16
