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 September 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 November 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.......................................... 16
Item 6. Exhibits and Reports on Form 8-K........................... 16
Signatures........................................................... 16
2
<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)
--------------------------------------------------------------------------------------------------------------------------------
September 30, 2000 December 31, 1999
(unaudited)
-------------------- --------------------
ASSETS
INVESTMENTS:
<S> <C> <C>
Securities available for sale, at fair value:
Bonds and U.S.Treasury Notes $ 92,494 $ 90,937
Preferred stocks 5,026 4,155
-------------------- --------------------
Total securities available for sale 97,520 95,092
OTHER ASSETS:
Cash and cash equivalents 5,324 5,407
Reinsurance recoverable 25,904 26,627
Goodwill 4,733 4,928
Deferred federal income taxes 2,464 3,298
Other assets 9,373 5,595
-------------------- --------------------
TOTAL ASSETS $145,318 $140,947
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 54,729 $ 56,462
Loss adjustment expenses 26,495 27,820
-------------------- --------------------
Total losses and loss adjustment expenses 81,224 84,282
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 6,057 7,164
Unearned premiums 15,116 8,898
Other liabilities 3,790 4,808
-------------------- --------------------
TOTAL LIABILITIES 106,187 105,152
-------------------- --------------------
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized; as of
September 30, 2000, 3,725,355 shares issued and outstanding (net of
17,500 treasury shares); as of December 31, 1999, 3,742,855
shares issued and outstanding 37 37
Additional paid in capital 9,443 9,433
Unallocated common stock held by the ESOP (914) (993)
Unallocated common stock held by the stock award plan (511) (518)
Accumulated other comprehensive loss (2,066) (2,866)
Retained earnings 33,273 30,702
Treasury stock, at cost (131) -
-------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 39,131 35,795
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $145,318 $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 September 30, Nine Months Ended September 30,
2000 1999 2000 1999
--------------- --------------- -------------- --------------
REVENUES:
<S> <C> <C> <C> <C>
Net premiums earned $ 3,808 $ 3,414 $ 10,981 $ 9,989
Net investment income 1,632 1,567 4,814 4,481
Net realized investment gains (losses) - 45 - (102)
Practice management and related income 1,294 1,137 4,112 3,470
Other income 122 90 331 261
--------------- --------------- -------------- --------------
Total revenues 6,856 6,253 20,238 18,099
--------------- --------------- -------------- --------------
EXPENSES:
Losses and loss adjustment expenses 3,170 2,981 8,925 9,070
Underwriting expenses 934 603 2,955 2,184
Practice management expenses 1,296 1,176 3,767 3,465
Other 261 403 892 1,170
--------------- --------------- -------------- --------------
Total expenses 5,661 5,163 16,539 15,889
--------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES 1,195 1,090 3,699 2,210
INCOME TAX PROVISION 353 315 1,128 555
--------------- --------------- -------------- --------------
NET INCOME $ 842 $ 775 $ 2,571 $ 1,655
=============== =============== ============== ==============
OTHER COMPREHENSIVE INCOME GAIN (LOSS) 674 (719) 800 (3,723)
--------------- --------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) $ 1,516 $ 56 $ 3,371 $(2,068)
=============== =============== ============== ==============
Net income per common share:
Basic $ 0.24 $ 0.25 $ 0.73 $ 0.66
Diluted $ 0.24 $ 0.25 $ 0.73 $ 0.65
</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)
-----------------------------------------------------------------------------------------------------------
Nine Months Ended September 30,
2000 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 2,571 $ 1,655
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment losses - 102
Amortization and depreciation 509 487
Deferred federal income taxes 421 1,384
Changes in assets and liabilities:
Reinsurance recoverable 723 (2,678)
Other assets (3,508) (2,484)
Losses and loss adjustment expenses (3,058) 1,567
Retrospective premiums accrued under
reinsurance treaties (1,107) 1,737
Unearned premiums 6,218 6,316
Other liabilities (904) (629)
-------------- --------------
Net cash flows provided by operating activities 1,865 7,457
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (26,146) (67,796)
Sales, maturities and redemptions of investments 24,913 60,694
Investment in purchased business - (5,238)
Purchases of property and equipment (584) (235)
-------------- --------------
Net cash flows used in investing activities (1,817) (12,575)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock - 6,817
Payment to acquire treasury stock (131) -
Proceeds from long-term debt - 2,200
Repayment of debt - (2,200)
-------------- --------------
Net cash flows (used in) provided by financing activities (131) 6,817
-------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (83) 1,699
-------------- --------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,407 6,083
-------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,324 $ 7,782
============== ==============
SUPPLEMENTARY INFORMATION:
Interest paid $ - $ 120
============== ==============
Income taxes paid $ 1,175 $ -
============== ==============
</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 nine-month period ended September 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 nine-month periods ended September 30, 2000 and
1999 (in thousands):
<TABLE>
<CAPTION>
For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------------
2000 1999 2000 1999
------- ------- --------- ---------
<S> <C> <C> <C> <C>
Insurance
Revenues from external customers $ 3,912 $ 3,501 $ 11,258 $ 10,247
Net investment income 1,609 1,552 4,751 4,566
Depreciation and amortization 58 83 174 167
Segment profit before taxes 1,323 1,440 3,848 3,198
Expenditures for segment assets 189 136 566 186
Segment assets 138,772 141,276
Segment liabilities 105,559 111,385
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Three Months At or For the Nine Months
Ended September 30, Ended September 30,
-------------------- ------------------------
2000 1999 2000 1999
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Practice Management Services
Revenues from external customers $ 1,314 $ 1,139 $ 4,171 $ 3,474
Net investment income 23 11 56 32
Depreciation and amortization 113 151 335 320
Segment profit (loss) before taxes 36 (183) 415 (494)
Expenditures for segment assets 2 2 18 49
Segment assets 6,846 6,654
Segment liabilities 1,273 1,294
Total
Revenues from external customers $ 5,226 $ 4,640 $ 15,429 $ 13,721
Net investment income 1,632 1,563 4,807 4,598
Depreciation and amortization 171 234 509 487
Segment profit before taxes 1,359 1,257 4,263 2,704
Expenditures for segment assets 191 138 584 235
Segment assets 145,618 147,930
Segment liabilities 106,832 112,679
</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>
September 30,
----------------------------
2000 1999
------------ ------------
<S> <C> <C>
Assets:
Total assets for reportable segments $ 145,618 $ 147,930
Elimination of intersegment receivables (865) (771)
Elimination of affiliate receivables -- (659)
Other unallocated amounts 565 1,751
------------ ------------
Consolidated total $ 145,318 $ 148,251
============ ============
Liabilities:
Total liabilities for reportable segments $ 106,832 $ 112,679
Elimination of intersegment payables (874) (771)
Other liabilities 229 283
------------ ------------
Consolidated total $ 106,187 $ 112,191
============ ============
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenues from external customers:
Total revenues for reportable segments $ 5,226 $ 4,640 $ 15,429 $13,721
Elimination of intersegment revenues (2) 1 (5) (1)
-------- -------- --------- --------
Consolidated total $ 5,224 $ 4,641 $ 15,424 $13,720
======== ======== ========= ========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net investment income:
Total investment income for reportable segments $ 1,632 $ 1,563 $ 4,807 $ 4,598
Elimination of intersegment interest income - (20) - (141)
Other unallocated amounts - 24 7 24
-------- -------- -------- --------
Consolidated total $ 1,632 $ 1,567 $ 4,814 $ 4,481
======== ======== ======== ========
Profit before taxes:
Total profit for reportable segments $ 1,359 $ 1,257 $ 4,263 $ 2,704
Other expenses (164) (147) (564) (353)
Elimination of intersegment interest income - (20) - (141)
-------- -------- -------- --------
Consolidated total $ 1,195 $ 1,090 $ 3,699 $ 2,210
======== ======== ======== ========
</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 Nine Months
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Net income $ 842 $ 775 $ 2,571 $1,655
====== ====== ======= ======
Weighted average common
shares outstanding - basic 3,520 3,125 3,527 2,525
Dilutive effect of stock options
and awards 25 7 14 2
------ ------ ------- ------
Weighted average common
shares outstanding - diluted 3,545 3,132 3,541 2,527
====== ====== ======= ======
Net income per common share:
Basic $ 0.24 $ 0.25 $ 0.73 $ 0.66
====== ====== ======= ======
Diluted $ 0.24 $ 0.25 $ 0.73 $ 0.65
====== ====== ======= ======
</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 July 28, 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 entire nine-month period ending
September 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 $0.22 and $0.47 for the quarter and nine months ended
September 30, 1999, respectively.
4. Treasury Stock
On July 7, 2000, NCRIC Group repurchased 17,500 shares of its stock at a price
of $7.50 per share. The repurchased shares of Common Stock are recorded as
Treasury Stock which is reported as a reduction of Stockholders' Equity.
8
<PAGE>
5. Stock Award Plan
On September 10, 2000, NCRIC Group granted 74,000 shares of common stock to
directors and officers under its stock award plan. The compensation expense is
measured at the fair value of the stock on the grant date, $7.875 per share,
over the vesting period. For the period ending September 30, 2000, the expense
was $8,400.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivative contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. SFAS 133, as amended by SFAS 136, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
NCRIC will adopt SFAS 133, as amended, on January 1, 2001. At the time of
adoption, SFAS 133 is not expected to have a material impact on the financial
position or results of operations of NCRIC.
Consolidated net income
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Net income of $842,000 for the three months ended September 30, 2000
increased 8.6% from $775,000 for the three months ended September 30, 1999. The
improvement in the results of the Practice Management Services Segment was the
primary contributor to the increase in net income.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Net income increased to $2.6 million for the nine months ended September
30, 2000, up 55% from $1.7 million for the nine months ended September 30, 1999.
Improvement both in net underwriting results and in practice management results
contributed to the increased earnings. Practice management results for the
current nine months included improvement due to lower legal fees relating to the
litigation brought by the NCRIC Physicians Organization and settled in 1999.
9
<PAGE>
Net premiums earned
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Net premiums earned increased by 12% to $3.8 million from $3.4 million for
the three months ended September 30, 2000 and 1999, respectively. The increase
is primarily reflective of the increase in policies in force as the result of
new business written.
Gross premiums written of $8.7 million for the three months ended September
30, 2000 increased by $4.3 million from $4.4 million for the three months ended
September 30, 1999, primarily reflecting an increase in new business written
plus the $1.3 million billing of previously accrued premium for the hospital
sponsored program discussed below. The mix of business produced by NCRIC's
independent agency force has increased to 61% of new business written for the
three months ended September 30, 2000 from 45% for the three months ended
September 30, 1999.
Late in the second quarter it was determined that one of NCRIC's hospital
sponsored risk sharing programs would not be renewed at the 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 which terminated September 1 included
approximately 70 physicians insured directly with NCRIC and accounted for
approximately $2.5 million in annualized premium. The termination of the
hospital sponsored program does not impact the insurance coverage of the
physicians. However, it does increase the premium cost to the individual
physicians. There is no assurance that all of the individual physicians will
renew their coverage with NCRIC at the increased premium level. The majority of
the physicians formerly in this terminated program have renewed their coverage
and initiated participation in other hospital sponsored programs where NCRIC
provides the insurance coverage. Based on the actual accumulated loss experience
of the terminated program through September 1, 2000, NCRIC has billed the
hospital sponsor $1.3 million under terms of the contract based on actual loss
experience through the termination date. Because this bill was not paid when
due, NCRIC has initiated legal proceedings to collect. NCRIC will use all means
legally available to collect the amount it is due. The ultimate impact of the
program termination can not yet be determined.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Net premiums earned increased by 10% to $11.0 million for the nine months
ended September 30, 2000 from $10.0 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 to clients of the Practice Management Services Segment. For the nine
months ended September 30, 2000, net earned premiums from Virginia totaled
approximately $1.4 million, an increase of $0.8 million over the total of
approximately $0.6 million for the nine months ended September 30, 1999.
Gross premiums written of $21.8 million for the nine months ended September
30, 2000 are higher than the $19.6 million for the nine months ended September
30, 1999 primarily due to new business written plus the $1.3 million bill for
previously accrued premium, as discussed above, partially offset by the impact
of the staggering of policy renewal dates in 1999. Premiums written were lower
by approximately $2.1 million for the nine months ended September 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.
10
<PAGE>
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 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.
Nine months ended September 30,
-----------------------------------------
2000 1999
--------------- ----------------
Direct $ 1.3 million $1.2 million
Agent 2.3 million .7 million
In the first nine months of 2000, premium written to clients of the
Practice Management Services Segment totaled $483,000, or 13% of total new gross
written premium, compared to $56,000 in the first nine months of 1999, or 3% of
new gross written premium.
Net investment income
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Net investment income increased by $65,000 for the three months ended
September 30, 2000 compared to the third quarter of 1999 due to an increase in
yields partially offset by a decrease in invested funds. The average effective
yield was approximately 6.4% for the three months ended September 30, 2000 and
5.9% for the three months ended September 30, 1999. The tax equivalent yield was
approximately 6.9% for the third quarter of 2000 and 6.4% for the third quarter
of 1999. The increase in investment yields reflects the market increase in
interest rates in 2000 compared to 1999.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Net investment income increased by $333,000 for the nine months ended
September 30, 2000 compared to the first nine 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 nine
months of 2000 by $3.7 million due to reduced cash flows from operations. The
average effective yield was approximately 6.3% for the nine months ended
September 30, 2000 and 5.7% for the nine months ended September 30, 1999. The
tax equivalent yield was approximately 6.7% through the third quarter of 2000
and 6.2% for the nine months ended September 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.
Nine Months Ended September 30,
-------------------------------
2000 1999
------ ------
Practice management 43% 38%
Accounting 28% 30%
Tax & personal financial planning 12% 11%
Retirement plan accounting & admin 12% 13%
Other 5% 8%
------ ------
Total 100% 100%
====== ======
11
<PAGE>
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Practice management and related revenue of $1.3 million for the three
months ended September 30, 2000 is up from $1.1 million for the three months
ended September 30, 1999. The increase results from both recurring fee business
and one-time consulting assignments.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Practice management and related revenue of $4.1 million for the nine months
ended September 30, 2000 and $3.5 million for the nine months ended September
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 $250,000 of revenue
in the first nine months of 2000 results from services provided to existing
insureds of NCRIC reflecting results of the cross-selling initiative.
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 Nine Months Ended
September 30, September 30,
--------------------- --------------------
2000 1999 2000 1999
--------- --------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Incurred loss and LAE related to:
Current year - losses $ 4,044 $ 4,407 $ 13,288 $ 15,143
Prior years - development (874) (1,426) (4,363) (6,073)
--------- --------- -------- --------
Total incurred for the period $ 3,170 $ 2,981 $ 8,925 $ 9,070
========= ========= ======== ========
</TABLE>
Following is a summary of the ratios of losses and underwriting expenses
compared to net premiums:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
2000 1999
------ ------
<S> <C> <C>
GAAP Underwriting ratios:
Loss and LAE ratio 81.3% 90.8%
Underwriting expense ratio 26.9% 21.9%
Combined ratio after renewal credits 108.2% 112.7%
</TABLE>
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Total incurred loss and LAE expense of $3.2 million for the third quarter
of 2000 increased by $189,000 from the $3.0 million incurred for the third
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 $874,000 in the third quarter of 2000 and $1.4 million in the
third 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.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Total incurred loss and LAE expense of $8.9 million for the first nine
months of 2000 was essentially unchanged from the total incurred for the first
nine months of 1999. Based on the actuarial analysis prepared through June 30,
the frequency of claims reported in 2000 is lower than that experienced in 1999
while the severity has increased. NCRIC experienced favorable development on
estimated losses for prior years in the first nine months of both years.
12
<PAGE>
The GAAP combined ratio before renewal credits decreased to 108.2% for the
nine months ended September 30, 2000 from 112.7% for the nine months ended
September 30, 1999. This decrease reflects the increase in earned premiums in
the first nine months of 2000 compared to the same period in 1999.
Expenses
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Underwriting expenses increased $331,000 to $934,000 for the three months
ended September 30, 2000 from $603,000 for the three months ended September 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 61% of new business written for the
three months ended September 30, 2000 from 45% for the three months ended
September 30, 1999.
Practice management and related expenses of $1.3 million for the three
months ended September 30, 2000 and $1.2 million for the three months ended
September 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 $261,000 for the three months ended September 30, 2000 compare
to $403,000 for the three months ended September 30, 1999.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Underwriting expenses increased $771,000 to $3.0 million for the nine
months ended September 30, 2000 from $2.2 million for the nine months ended
September 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 $3.8 million for the nine
months ended September 30, 2000 and $3.5 million for the nine months ended
September 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 nine months ended September 30, 2000 expenses of $892,000 compare to
$1.2 million for the nine months ended September 30, 1999. The primary component
of the decrease was a reduction of 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>
Nine Months Ended September 30,
-------------------------------
2000 1999
---- ----
<S> <C> <C>
Federal income tax at statutory rates. . . 34% 34%
Tax exempt income. . . . . . . . . . . . . (4) (9)
Dividends received. . . . . . . . . . . . (1) (3)
Goodwill amortization. . . . . . . . . . . 1 3
Other, net. . . . . . . . . . . . . . . . 1 -
---- ----
Federal income tax at effective rates. . . 31% 25%
==== ====
</TABLE>
13
<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 nine months ended September 30, 2000, NCRIC had cash provided by
operations of $1.9 million compared to $7.5 million for the corresponding period
of 1999. The reduced level of positive cash flow in 2000 compared to 1999
resulted primarily from higher payments of losses and LAE. Because of the
long-term nature of both the payments of claims and the settlement of
swing-rated reinsurance premiums due to the reinsurers, cash from operations for
a medical professional liability insurer like NCRIC can vary substantially from
year to year.
Financial condition and capital resources. Cash flow from operations and
the proceeds of maturing investments have primarily been invested in government
and tax-exempt securities. As of September 30, 2000, the carrying value of the
securities portfolio was $97.5 million, an increase of $2.4 million from
December 31, 1999. The portfolio was invested as follows:
At September 30, At December 31,
2000 1999
---- ----
U. S. Government and agencies................ 14% 15%
Asset-backed and mortgage-backed securities.. 34 40
Tax-exempt securities........................ 15 14
Corporate bonds and equity securities........ 37 31
Over 76% 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 September 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 September 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
$148,000. 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:
14
<PAGE>
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.
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 September 30, 2000 and December 31, 1999.
Type/Ratings of Investment At September 30, At December 31,
-------------------------- 2000 1999
---- ----
Treasury/Agency................. 32% 28%
AAA............................. 37 40
AA.............................. 7 7
A............................... 19 21
BBB............................. 5 4
During the nine months ended September 30, 2000, NCRIC experienced a reduction
in the net unrealized loss on investments to an unrealized loss, net of tax, of
$2.1 million at September 30, 2000 from an unrealized loss, net of tax, of $2.9
million at December 31, 1999.
15
<PAGE>
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 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 September 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.
November 9, 2000 /s/ R. Ray Pate, Jr.
-----------------------------------------------------
R. Ray Pate, Jr., President & Chief Executive Officer
(Duly Authorized Officer)
November 9, 2000 /s/ Rebecca B. Crunk
-----------------------------------------------------
Rebecca B. Crunk, Sr. Vice President & Chief
Financial Officer
(Principal Financial Officer)
16
