SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
Commission file number: 0-25505
NCRIC Group, Inc.
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(Name of Small Business Issuer in Its Charter)
District of Columbia 52-2134774
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(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
1115 30th Street, N.W. Washington, D.C. 20007
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(Address of Principal Executive Offices) (Zip Code)
Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock par value $.01 per share
(Title of Class)
(202) 969-1866
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [_]
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The Issuer's revenues for the fiscal year ended December 31, 1999 were
$25.6 million.
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the Nasdaq SmallCap Market on February 29, 2000 was
approximately $9.7 million.
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The number of shares outstanding of the Issuer's Common Stock, the
issuer's only class of outstanding capital stock, as of January 31, 2000 was
3,528,276.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically
incorporated by reference in the indicated Part of this Annual Report on Form
10-KSB:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2000 Annual
Meeting of Shareholders are incorporated by reference into certain items of Part
III.
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PART I
Item 1. Business of the Company
Background
NCRIC Group, Inc., a District of Columbia corporation, is a holding company
that owns NCRIC, Inc., a medical professional liability insurance company, and
NCRIC MSO, Inc., a physician practice management and financial services company.
The principal operations of NCRIC, Inc. and NCRIC MSO are conducted in the
District of Columbia, Maryland, Virginia, and North Carolina. References to
"NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
NCRIC Group was organized in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into a mutual
holding company structure (the "Reorganization"). NCRIC, A Mutual Holding
Company owns all of the outstanding shares of NCRIC Holdings, Inc., which prior
to July 29, 1999, owned all of the outstanding shares of NCRIC Group. Effective
July 29, 1999, NCRIC Group completed a public offering (the "Stock Offering")
and issued 2,220,000 shares of the common stock to NCRIC Holdings, Inc. and
1,480,000 shares of the common stock in subscription and community offerings at
a price of $7.00 per share.
NCRIC Group owns all of the outstanding shares of NCRIC, Inc. and NCRIC
MSO. The following chart illustrates the organizational structure pursuant to
which the Company operates.
[ORGANIZATION CHART APPEARS HERE]
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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.
NCRIC is the leading provider of medical professional liability
insurance in the District of Columbia, based on direct premiums written in 1998.
Medical professional liability insurance insures the physician against
liabilities arising from the rendering of, or failure to render, professional
medical services. NCRIC MSO provides practice management and financial services
to physicians in the Mid-Atlantic region. In January 1999, NCRIC MSO expanded
its operations through the acquisition of HealthCare Consulting, Inc. ("HCI"), 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.
Net proceeds received by the Company in the Stock Offering were $8.4
million. In connection with the Stock Offering, NCRIC Group loaned $1,036,000 to
the Employee Stock Ownership Plan ("ESOP") and $518,000 to the stock award plan.
The loans from NCRIC Group enabled the ESOP to purchase 148,000 shares of
NCRIC's common stock, and the stock award plan to purchase 74,000 shares of
NCRIC's common stock. Of the net proceeds, $5.1 million were used to repay
indebtedness incurred through the acquisition of HealthCare Consulting.
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 and West Virginia. Commonwealth has recently been licensed to sell
medical professional liability insurance in Delaware, but to date no sales have
occurred in this 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'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 1999. 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.
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Over the past four years, NCRIC has distributed a customer satisfaction
survey. In 1999, 94% of those responding indicated that they were "always
pleased" or "almost always pleased" with NCRIC's service. This measure increased
in 1999 as comparable ratings for 1999 and 1998 were 94% and 92%, respectively.
According to A.M. Best, in 1998 50% 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,
1999, NCRIC generated 12% of its premiums in Maryland and Virginia. NCRIC's
market share is less than 2% in each of these markets. As of December 31, 1999,
NCRIC had approximately 1,530 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 produced 43% of new premiums in 1999 as compared to 2% in 1998.
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 $21.4 million
and $2.5 million for the year ended December 31, 1999 and were $19.2 million and
$2.5 million for the year ended December 31, 1998. As of December 31, 1999,
NCRIC Group had $140.9 million in total assets and $35.8 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:
o adverse claims experience;
o judicial trends;
o changes in the investment and interest rate environment; and
o 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, 1999, NCRIC has established, on a gross
basis, $84.3 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.
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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 in whom physicians can rely 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, Inc. merged into NCRIC MSO.
Other NCRIC Group subsidiaries
In addition to NCRIC, Inc. and NCRIC MSO operations, we have a Virginia
insurance subsidiary, a reinsurance brokerage operation, an insurance agency,
and a physicians organization.
Commonwealth Medical Liability Insurance Company, a wholly-owned
subsidiary of NCRIC, provides medical professional liability insurance in
Virginia and other jurisdictions. Commonwealth Medical Liability Insurance
Company was formed in 1989 and started writing policies in Virginia in 1991.
Currently, Commonwealth Medical Liability Insurance Company is licensed to write
policies in the District of Columbia, Virginia, Maryland, Delaware and West
Virginia. Commonwealth Medical Liability Insurance Company's policies closely
resemble NCRIC's policies except that insureds of Commonwealth Medical Liability
Insurance Company do not become members of NCRIC, A Mutual Holding Company.
National Capital Insurance Brokerage, Ltd., a wholly-owned subsidiary of
NCRIC, was formed in 1984 to serve as NCRIC's domestic reinsurance broker.
National Capital Insurance Brokerage, Ltd. 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, Ltd. 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 1989, NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC,
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 $71,051 in
1999 compared to $81,573 in 1998. NCRIC Insurance
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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 980 physicians. Approximately 600 of NCRIC Physicians
Organization's members are insureds of NCRIC. NCRIC Physicians Organization
ended all of its contracts in 1999 and formed an agreement with American Medical
Security to provide its network to a developing PPO health plan by AMS for the
Washington, D.C. metropolitan area. NCRIC Physicians Organization also reached a
settlement with AMS, effective October 1, 1999, that, in addition to the network
agreement, will provide NCRIC Physicians Organization with $6,000 per month over
the next 60 months. The fee of $6,000 is reduced by $0.75 for each subscriber
who enrolls in the network plan.
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.
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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. We believe that we can take advantage of the changes in the physician
marketplace as physicians unwind their PPMC and hospital-owned contracts and
seek independent professional management and services without being in an
employed situation. Our array of products and services allow groups to seek
within their own cost constraints the level of needed services that add the most
value and benefit to their income.
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 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:
o creating new risk sharing structures for larger groups;
o managing the risks of the larger groups as one risk versus separate
risks;
o providing claims and risk management services independently of its core
insurance products on a fee basis;
o offering insurance-related products for managed care exposure; and
o offering new liability products to address increasing governmental
reform in areas of employment liability and compliance.
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.
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Our vision
We intend to become a healthcare financial services organization which
provides individual physicians and groups of physicians and other healthcare
providers 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 and
management client base to build upon. 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 NCRIC MSO 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 NCRIC MSO'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 15 medical malpractice insurance policies to clients of
HealthCare Consulting and has provided quotes for an additional 46 policies.
NCRIC MSO has provided services to 26 NCRIC physicians through its Washington,
D.C. operations and is currently provided billing, practice surveys, practice
administration and personnel recruitment to 17 physicians in the Washington,
D.C. market. In addition, a full range of services offered by NCRIC MSO is being
marketed to the community at large and a dedicated marketing team has been
deployed in the Washington, D.C. market.
The HealthCare Consulting acquisition will also permit NCRIC to provide
practice management and employee benefit services to its approximately 1,500
insureds. Together with the approximately 400 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.
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 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
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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, 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 and 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.
NCRIC expanded PracticeGuard in 1999 to offer coverage for Medicare and
Medicaid fraud and abuse liability to physicians and hospitals. This coverage
provides up to $1 million in coverage, inclusive of the cost of civil defense,
penalties and fines, but provides no coverage should a physician or hospital be
found criminally liable. This coverage was not a significant source of revenue
in 1999.
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 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
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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 1999.
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 1999.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of February 9, 2000.
Direct Premiums Percentage of
Group Size Written Total
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(in thousands)
Solo practitioner physicians ................ $ 8,340 40%
Groups with two physicians .................. 1,172 6
Groups with three or more physicians ........ 5,748 28
Sponsored Programs, including risk sharing .. 5,560 26
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Total ............................... $20,820 100%
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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, 1999, NCRIC has loss and LAE reserves in the amount
of $8.3 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 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 1998, these states, together
with West Virginia and Delaware, where NCRIC has recently been licensed,
produced $300 million in medical professional liability direct premiums written.
NCRIC is also pursuing potential expansion opportunities in other Mid-Atlantic
states.
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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, 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 20 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 93% of NCRIC's renewal
premiums in 1999. Of premiums received from new insureds, 57% were obtained
through direct distribution and 43% 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
On January 4, 1999, NCRIC Group acquired all of the outstanding shares
of HealthCare Consulting, Inc. and all of the outstanding membership interests
of HealthCare Consulting's
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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.
HealthCare Consulting and Employee Benefits Services continue to operate as
divisions 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:
o practice management;
o managed care contracting;
o information systems implementation;
o practice evaluations;
o billing and collections;
o personnel;
o practice structure; and
o 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 19% of its 1999 revenues. As of December 31, 1999, HealthCare
Consulting had approximately 46 employees, of whom 19 served as practice
management consultants.
The following table indicates the sources of HealthCare Consulting's revenues
during the past three calendar years:
12
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ -----
<S> <C> <C> <C>
Practice Management............................ 46.2% 48.9% 46.1%
Accounting and Tax............................. 35.8 32.1 32.4
Personal Financial Planning.................... 13.0 13.2 10.3
Other.......................................... 5.0 5.8 11.2
----- ----- -----
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. As of December 31, 1999, Employee
Benefits Services had thirteen employees.
The following table indicates the sources of Employee Benefits
Services' revenues during the past three years:
1999 1998 1997
---- ---- ----
Retirement Plan Accounting and
Administration.......................... 91% 90% 89%
Employee Benefit........................ 9 10 11
---- ---- ----
Total.............................. 100% 100% 100%
==== ==== ====
13
<PAGE>
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, 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:
o At least two-thirds of the members of the boards of directors
of NCRIC, A Mutual Holding Company and NCRIC must at all times
be policyholders of NCRIC, Inc.
o NCRIC, A Mutual Holding Company, NCRIC Holdings, Inc., NCRIC
Group and NCRIC, Inc. are prohibited from pledging assets
having an aggregate value in excess of 49% of the equity of
NCRIC, Inc., 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.
o 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.
o 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, Inc.
14
<PAGE>
o 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.
o 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.
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,
Inc. 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 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
15
<PAGE>
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, Inc. 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 produced 3% of NCRIC's
renewing premiums in 1999; however, of new business written in 1999, this
marketing channel produced 43% of new premiums. 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
16
<PAGE>
market share. NCRIC selects brokers and agents that it believes have
demonstrated growth and stability in the medical professional liability
insurance 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
mid-size 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. Information about methods of implementing risk
reduction measures is disseminated to insureds to both reduce potential loss
exposures and improve medical practice. The Risk Management Committee, comprised
of physicians representing various medical specialties, assists the risk
management department to identify loss trends in the local and national markets.
Through these efforts, NCRIC is able to present topical loss prevention
programs.
The majority of NCRIC's claims result, in part, from a physician's
failure to adequately communicate or document their medical care. NCRIC
addressed these topics as well as others in its 1999 Risk Management Seminar
Educational Program. The "Basic Risk Management Principles" and "Continuing Risk
Management Principles" seminars both highlighted the topics of documentation and
communication. Emerging risks arising from medical topics were addressed in
"Minimally Invasive Surgery: Clinical and Risk Issues" and "Medication Issues:
The Impact of New Alternative Medications."
Recognizing that the risks of some specialties are quite different from
others, specialty specific seminars were presented for physicians in OB/GYN,
Radiology, Pathology and Ophthalmology. In addition, seminars were also
presented for the physician's office staffs, as they can play a large part in
helping to reduce risk and improve care rendered in the office.
In 1999, 62% of NCRIC's insureds attended risk management seminars,
earning continuing medical education credits.
NCRIC also produces a quarterly newsletter to advise insureds of
emerging risks and additional topics of interest. When immediate dissemination
of information is warranted, a risk
17
<PAGE>
management alert is distributed. NCRIC's risk management staff is also available
for consultation with insureds on an individual basis to review issues which may
arise in the insured's practice.
The risk management department conducts physician office visits on both
a voluntary and involuntary basis. 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 also 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 at a meeting with them where
suggestions are made to reduce risk factors in their office.
Risk management services also supplement NCRIC's marketing efforts. The
value added services that are provided augment the claims and policyholder
services NCRIC maintains.
NCRIC also 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, monitoring of attorneys engaged by NCRIC to defend a claim and
negotiation of the settlement or other disposition of a claim. NCRIC's policy
obligates 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. Medical professional liability claims often involve
the evaluation of highly technical medical issues, significant injuries and
conflicting expert opinions. In most 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.
As of December 31, 1999, NCRIC had approximately 274 open cases with an
average of 61 cases being handled by each claims representative. The claims
representatives at NCRIC are all certified paralegals who have on average
approximately 12 years of experience with NCRIC
18
<PAGE>
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, 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 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 effectively communicate 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.
19
<PAGE>
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 1997 through December
1999 resulted in 13% of cases closed with indemnity payment and 87% of cases
closed with no payment. Indemnity payments during this three-year period totaled
$22.7 million, with an average payment per paid claim of $246,786.
Trial results for the 36-month period from January 1997 through
December 1999 reveal that of the 66 cases tried, 45, or 68%, were won by NCRIC,
12 trials resulted in verdicts for the plaintiff, 8 ended in hung juries, and
one was settled. Of the 12 plaintiff verdicts, 6 awarded amounts in excess of
NCRIC's $500,000 retention. Trial results for 1999 reveal that of the 26 cases
tried, 7, or 27%, resulted in plaintiff verdicts, 12 cases in defense verdicts,
and 5 ended in mistrials or hung juries which will need to be retried, and two
cases were settled.
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.
20
<PAGE>
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 experience it has developed over the past 19 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 remained unchanged in 1999, increased 6% in 1998 and
were unchanged in 1997. NCRIC did not raise rates for renewals in 2000 due to
the favorable terms of the new reinsurance program. NCRIC established its rates
based on its previous loss experience, loss expense adjustments, anticipated
policyholder discounts and NCRIC's fixed and variable expenses.
21
<PAGE>
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, NCRIC authorized renewal credits of the following amounts:
Percentage of Earned
Year Renewal Premiums Amount
---- ---------------- ------
1999 10% $1,068,940
1998 12.5 1,888,794
1997 16 2,245,918
1996 10 1,452,308
1995 10 1,560,907
1994 10 1,806,405
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.
22
<PAGE>
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.
NCRIC's estimates of the ultimate cost of settling the claims are based
on:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and severity;
o predictions of future inflation rates;
o judicial theories of liability;
o judicial interpretations of insurance contracts;
o legislative activity; and
o 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 may not promptly recognize
23
<PAGE>
underlying loss trends to modify its underwriting practices and change its
premium rates to reflect changed 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'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.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
------------------------------------------
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year ..................... $ 84,595 $ 72,031 $ 68,101
Less reinsurance recoverable on unpaid claims 24,546 17,077 14,679
-------- -------- --------
Net balance .................................... 60,049 54,954 53,422
-------- -------- --------
Incurred related to:
Current year ........................... 20,795 19,140 19,444
Prior years ............................ (7,928) (3,463) (3,853)
-------- -------- --------
Total incurred ..................... 12,867 15,677 15,591
-------- -------- --------
Paid related to:
Current year ........................... 817 1,247 1,867
Prior years ............................ 13,632 9,335 12,192
-------- -------- --------
Total paid .......... 14,449 10,582 14,059
-------- -------- --------
Net balance ................................. 58,467 60,049 54,954
Plus reinsurance recoverable on unpaid
claims ...................................... 25,815 24,546 17,077
-------- -------- --------
Balance, end of year ........................... $ 84,282 $ 84,595 $ 72,031
======== ======== ========
</TABLE>
24
<PAGE>
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 1998 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.
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 1989 through 1998 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.
25
<PAGE>
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Losses and LAE...... $26,098 $32,151 $64,333 $86,727 $88,891 $77,647 $68,928 $68,101 $72,031 $84,595
Cumulative Liability
Paid Through End of
Year:
One year later. 6,836 12,561 13,094 18,103 19,786 21,667 16,084 14,916 9,667 13,865
Two years later 16,479 18,552 27,889 35,861 39,293 34,829 27,634 22,237 21,810
Three years later 19,949 21,605 37,247 51,163 47,348 43,237 32,409 29,135
Four years later 22,191 25,891 47,633 56,648 51,845 45,219 34,657
Five years later 25,307 28,387 51,482 59,473 52,984 45,682
Six years later 26,335 29,115 52,276 60,335 53,208
Seven years later 27,057 29,595 53,098 60,440
Eight years later 27,252 29,939 53,193
Nine years later 27,597 29,973
Ten years later 27,631
</TABLE>
<TABLE>
<CAPTION>
Re-estimated
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability:
One year later. 27,326 35,942 69,522 79,174 70,640 68,891 62,028 61,121 71,419 72,575
Two years later 30,014 29,123 61,090 65,174 63,248 66,439 53,429 62,097 64,980
Three years later 26,603 28,085 54,208 62,521 65,422 60,858 55,883 58,169
Four years later 26,135 30,692 54,215 65,225 64,460 62,625 53,400
Five years later 27,898 30,136 55,221 67,681 66,275 61,077
Six years later 27,602 30,311 58,324 69,765 64,877
Seven years later 27,997 30,999 60,908 68,415
Eight years later 28,493 31,461 60,218
Nine years later 29,010 31,878
Ten years later 29,501
Redundancy
(deficiency)........ (3,403) 273 4,115 18,312 24,014 16,570 15,528 9,932 7,051 12,020
</TABLE>
26
<PAGE>
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:
(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
discounts. 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.
27
<PAGE>
Following are the reinsurance premium terms for the swing rated treaty for
calendar years 1999, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Percentage of Gross Net Earned
Premium Income
---------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Deposit premium.......................... 14.0% 14.0% 14.0% 14.0%
Maximum premium.......................... 22.5 22.5 22.5 30.0
Minimum premium.......................... 4.0 4.0 4.0 4.0
Inner aggregate deductible............... 5.0 5.0 5.0 10.0
</TABLE>
NCRIC has recorded, based on actuarial analysis, management's
best estimate of premium expense under the terms of the swing treaty. Each year,
for the most recent treaty year, the premium has been capped at the maximum
rate. NCRIC then adjusts the liability and expense as losses develop in
subsequent years.
Effective January 1, 2000, the treaty which reinsures NCRIC
for losses in excess of $500,000 up to $1,000,000 carries a fixed rate rather
than a swing rate and does not have an inner aggregate deductible.
(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. Effective January 1, 2000, NCRIC cedes 100% of its
risks under this treaty.
(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
$322,000, $300,000 and $223,000 in 1999, 1998 and 1997.
28
<PAGE>
Ninety percent of Commonwealth Medical Liability Insurance
Company's risks are reinsured by NCRIC, Inc. Commonwealth Medical Liability
Insurance Company's risks are in turn reinsured by NCRIC, Inc.'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:
<TABLE>
<CAPTION>
Through December 31, 1999 Effective January 1, 2000
---------------------------------- ------------------------------------
Total Amount of Individual Loss Company Reinsurers Company Reinsurers
- ------------------------------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
$0 - $500,000.......................... 100% 0% 100% 0%
$500,000 - $1,000,000.................. 4 96 0 100
$1,000,000 - $2,000,000................ 9 91 0 100
$2,000,000 - $5,000,000................ 0 100 0 100
</TABLE>
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. NCRIC has entered into another three-year treaty effective 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 Insurance Brokerage,
Ltd., Willis Re, Inc. 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.
29
<PAGE>
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 1999 by reinsurer:
<TABLE>
<CAPTION>
Reinsurance
Reinsurer Recoverable
--------- -----------
(in thousands)
<S> <C>
Lloyd's of London syndicates................ $ 14,714
Hannover Reinsurance........................ 2,249
CNA Reinsurance of London Limited........... 3,217
Unionamerica Insurance...................... 3,009
Zurich Reinsurance.......................... 1,519
5 other reinsurers.......................... 1,919
--------
Total........................... $ 26,627
========
</TABLE>
The effect of reinsurance on premiums written and earned for the years
ended December 31, 1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1999 1998 1997
---- ---- ----
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct............ $ 21,353 $ 18,832 $ 19,214 $ 16,270 $ 17,869 $ 17,466
Ceded............. (3,976) (2,977) 3,699 4,089 (1,854) (1,854)
--------- --------- ---------- ---------- ---------- ----------
Net............... $ 17,377 $ 15,855 $ 22,913 $ 20,359 $ 16,015 $ 15,612
========= ======== ======== ======== ======== ========
</TABLE>
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
30
<PAGE>
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.
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 20% 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 20% of its investment assets
in common stocks.
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. 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.
Through 1999 NCRIC used Brown Brothers Harriman & Co. and Prime
Advisors as external investment managers for fixed income maturity securities.
NCRIC also used Brown Brothers Harriman & Co. as an external investment manager
for equity securities. Effective January 1, 2000 Scudder Insurance Asset
Management ("SIAM") became the external investment manager for the entire
portfolio.
SIAM is utilizing a number of proprietary and third party analytical
tools in developing a tailored investment strategy for NCRIC. Analysis of
NCRIC's capital structure and risk-bearing ability, peer comparisons, as well as
modeling that determines the optimal level of tax advantaged investments will
form the foundation of the investment strategy. In addition, SIAM is performing
stochastic modeling, also known as dynamic financial analysis ("DFA") for NCRIC.
DFA is a total company model that tests the company's capital structure and
business plan under numerous potential future economic scenarios. The results of
DFA, in the form of probability distributions on key financial statistics, will
allow NCRIC to make risk informed decisions on the structure of its investment
portfolio as it relates to its business profile.
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
31
<PAGE>
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.
32
<PAGE>
<TABLE>
<CAPTION>
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, 1999 (in thousands)
<S> <C> <C> <C> <C>
U.S. Government and agencies ....... $ 13,937 $ -- $ (716) $ 13,221
Corporate .......................... 27,842 25 (1,605) 26,262
Tax-exempt obligations ............. 14,058 22 (289) 13,791
Asset and mortgage-backed securities
38,907 2 (1,246) 37,663
-------- -------- -------- --------
94,744 49 (3,856) 90,937
Preferred stocks ................... 4,691 -- (536) 4,155
-------- -------- -------- --------
Total .............................. $ 99,435 $ 49 $ (4,392) $ 95,092
======== ======== ======== ========
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
Asset and 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
Asset and 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>
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, 1999, NCRIC held 52
33
<PAGE>
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 6.3%. Approximately 61% 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's fixed maturity investments at December 31, 1999.
<TABLE>
<CAPTION>
Type/Ratings of Investment Percentage
<S> <C>
Treasury/Agency................................. 54%
AAA............................................. 14%
AA.............................................. 7%
A............................................... 21%
BBB............................................. 4%
</TABLE>
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,
1999, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
<TABLE>
<CAPTION>
At December 31, 1999
-------------------------------------------------------------
Amortized Percentage of
Cost Fair Value Fair Value
---- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Due in one year or less .............. $ 846 $ 846 0.9%
Due after one year through five years 13,029 12,730 13.4
Due after five years through ten years 19,457 18,705 19.6
Due after ten years .................. 22,505 20,993 22.1
------- ------- -----
55,837 53,274 56.0
Preferred stocks ..................... 4,691 4,155 4.4
Asset and mortgage-backed securities . 38,907 37,663 39.6
------- ------- -----
Total ...................... $99,435 $95,092 100.0%
======= ======= =====
</TABLE>
Proceeds from bond maturities and redemptions of available for sale investments
during the years 1999, 1998 and 1997 were $66,129,000, $58,811,000 and
$35,475,000. Gross gains of
34
<PAGE>
$260,000, $521,000 and $300,000 and gross losses of $331,000, $362,000 and
$210,000 were realized on available for sale investment redemptions during 1999,
1998 and 1997.
The average effective maturity and the average modified duration of the
securities in NCRIC's fixed maturity portfolio as of December 31, 1999, was 9.92
years and 5.3 years.
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:
o perceived financial strength of the insurer;
o A.M. Best ratings;
o premiums charged;
o dividend policy;
o policy terms and conditions; and
o service, reputation and experience.
NCRIC competes principally with two commercial companies, CNA Insurance Group,
Inc. and St. Paul Companies. Each of these companies is actively engaged in
soliciting insureds in NCRIC's markets. According to A.M. Best, NCRIC has 50% of
the District of Columbia physician and hospital professional liability market
and these two companies have a combined market share of 25%. 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
35
<PAGE>
market share by decreasing pricing for their products below prevailing market
rates. If this occurs, NCRIC's profitability will be reduced. In particular,
NCRIC 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.
NCRIC believes that its principal strengths are:
o its claims management and underwriting expertise;
o its ability to successfully litigate claims;
o its risk management; and
o its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
20-year presence in the metropolitan Washington, D.C. medical professional
liability market and its commitment to its District of Columbia physicians.
Risk Factors
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 1999, District of Columbia physicians accounted for approximately
88% 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.
36
<PAGE>
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,
1998, the District of Columbia had the highest cumulative mean medical liability
payment average in the United States at $318,233. The next closest jurisdiction
is Alabama with a cumulative mean medical liability payment of $266,030 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. The impact of managed care and tightened
Medicare/Medicaid reimbursement may impact a physicians decision to continue
purchasing consulting and practice management services, shifting a purchase
decision from quality and value to price only. 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. In 1999, 46% of NCRIC'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.
37
<PAGE>
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 has recently obtained licenses to sell medical professional
liability insurance in West Virginia and Delaware. There is a risk that NCRIC
will be unable to penetrate the West Virginia and Delaware markets.
There is also a risk that the cross selling activity of our practice
management and insurance services by non-traditional channels of distribution
(i.e. practice management consultants marketing medical malpractice insurance
and malpractice underwriters marketing practice management services) will be
thwarted by the incumbent underwriters and management service company.
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.
38
<PAGE>
Public stockholders 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. 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.
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 D.C.
Holding Company System Act of 1933, D.C. Law 10-44. NCRIC, Inc., as the parent
of Commonwealth Medical Liability Insurance 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 agreements,
service contracts and cost-sharing arrangements between an insurance company and
its affiliates. Some reinsurance agreements or modifications also require prior
approval.
39
<PAGE>
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 D.C. 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,
Inc. 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, Inc.'s statutory surplus as of
the preceding December 31, or (2) NCRIC, Inc.'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, Inc.'s
own securities. In calculating net income under the test, NCRIC, Inc. 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 1999 results, NCRIC, Inc. would be able to
pay approximately $2.9 million in dividends to NCRIC Group in 1999 under the
stated formula. Commonwealth Medical Liability Insurance Company's dividend
restrictions are similar to NCRIC, Inc.'s. Based on its 1999 results, under
Virginia insurance law, Commonwealth Medical Liability Insurance Company would
be able to pay approximately $17,000 in dividends to NCRIC, Inc.
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:
o regulating premium rates and policy forms;
o setting minimum capital and surplus requirements;
o regulating guaranty fund assessments;
o licensing of insurers and agents;
40
<PAGE>
o approving accounting methods and methods of setting statutory
loss and expense reserves;
o underwriting limitations;
o the terms upon which a full demutualization transaction can
occur;
o restrictions on transactions with affiliates;
o setting requirements for and limiting the types and amounts of
investments;
o establishing requirements for the filing of annual statements
and other financial reports;
o conducting periodic statutory examinations of the affairs of
insurance companies;
o approving proposed changes of control; and
o 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's
financial condition or results of operations. While NCRIC 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 over several years. NCRIC cannot predict the amount of
future assessments. In each of the jurisdictions in which
41
<PAGE>
NCRIC carries on business, the amount of the assessment cannot exceed 2% of the
direct premiums written per year by NCRIC in that jurisdiction.
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, Inc.'s financial stability and operating procedures.
The last final periodic financial examination of Commonwealth Medical Liability
Insurance Company, based on December 31, 1998 financial statements, was issued
on May 12, 1999. The periodic financial examination positively assessed
Commonwealth Medical Liability Insurance Company's financial stability and
operating procedures.
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 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 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 like terminations or surcharges, with respect to its
insureds. Penalties may attach if NCRIC 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, the adoption of others
could adversely affect NCRIC. Public discussion of a broad range of healthcare
reform measures will likely continue in the future. These measures that would
affect our medical malpractice business and our practice management products and
services include:
0 spending limits;
42
<PAGE>
0 price controls;
0 limits on increases in insurance premiums;
0 limits on the liability of doctors and hospitals for tort
claims; and
0 changes in the healthcare insurance system.
A.M. Best ratings
In 1998, A.M. Best, which rates insurance companies based on factors of
concern to policyholders, rated NCRIC, Inc. and Commonwealth Medical Liability
Insurance 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. A.M. Best reaffirmed the "A-" ratings of NCRIC, Inc. and Commonwealth
Medical Liability Insurance Company in 1999. 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:
0 the company's profitability, leverage and liquidity;
0 its book of business;
0 the adequacy and soundness of its reinsurance;
0 the quality and estimated market value of its assets;
0 the adequacy of its reserves and surplus;
0 its capital structure;
0 the experience and competence of its management; and
o its market presence.
43
<PAGE>
Item 2. 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 also has
business operations located in Lynchburg, Virginia. Annual rental is $61,692
with the lease term expiring in December, 2001. NCRIC and its subsidiaries lease
additional office space that management believes is adequate for its present
needs.
Item 3. Legal Proceedings
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 filed a demurrer and special plea to dismiss Mrs. Marshall's
action against them.
On November 5, 1999, the judge for the Circuit Court for the City of
Radford, Virginia dismissed the tortious interference state law claim that had
been pending in this court.
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<PAGE>
On November 22, 1999, Mrs. Marshall voluntarily dismissed the wrongful
discharge and age discrimination suit that had been pending in the federal court
of the Western District of Virginia. Mrs. Marshall still has a defamation claim
pending in the City of Radford Circuit Court. The management of NCRIC Group
believes that this suit is without merit and is causing it to be vigorously
defended.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of NCRIC Group,
Inc. took place on December 14, 1999.
(c) The following directors were elected to a three-year
term and received the following vote:
Expiration Number of Votes
Name of Term For Withheld
---- ------- --- --------
Vincent C. Burke, III 2002 3,524,278 0
Pamela W. Coleman 2002 3,524,278 0
J. Paul McNamara 2002 3,524,278 0
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
NCRIC's Common Stock has been publicly traded on the Nasdaq SmallCap
Market since July 29, 1999 under the symbol "NCRI". At March 2, 2000, NCRIC had
320 stockholders of record. The following table sets forth for the periods
indicated the price ranges per share in each quarter.
High Low
---- ---
1999
- ----
Third quarter 9.25 7.50
Fourth quarter 9.125 8.50
45
<PAGE>
<TABLE>
<CAPTION>
Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations
- ------- -------------------------------------------------------------------------------------
SELECTED FINANCIAL AND OPERATING DATA
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", which are included elsewhere in this Form 10-KSB.
Year Ended December 31,
--------------------------------------------
1999 1998 1997
---- ---- ----
(dollars in thousands)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Gross premiums written................................ $ 21,353 $ 19,214 $ 17,869
=========== =========== ===========
Net premiums written after renewal credits............ $ 16,188 $ 21,014 $ 13,935
=========== =========== ===========
Net premiums earned................................... $ 14,666 $ 18,459 $ 13,532
Net investment income................................. 6,089 5,996 6,045
Net realized investment gains (losses)................ (71) 159 90
Practice management and related income................ 4,576 78 -
Other income.......................................... 373 357 355
----------- ----------- -----------
Total revenues............. 25,633 25,049 20,022
Losses and LAE........................................ 12,867 15,677 15,591
Other underwriting expenses........................... 3,010 3,858 2,918
Practice management and related expenses.............. 4,845 378 -
Other expenses........................................ 1,439 1,510 676
----------- ----------- -----------
Total expenses............. 22,161 21,423 19,185
Income before income taxes............................ 3,472 3,626 837
Income tax provision (benefit)....................... 967 1,079 (122)
----------- ----------- -----------
Net income............................................ $ 2,505 $ 2,547 $ 959
=========== =========== ===========
BALANCE SHEET DATA:
Invested assets....................................... $ 95,092 $ 96,348 $ 94,362
Total assets.......................................... 140,947 134,326 121,841
Total liabilities..................................... 105,152 103,315 94,355
Total stockholders' equity............................ 35,795 31,011 27,486
GAAP UNDERWRITING RATIOS:
Loss and LAE ratio.................................... 87.7% 84.9% 115.2%
Underwriting expense ratio............................ 20.5% 20.9% 21.6%
Combined ratio after renewal credits.................. 108.2% 105.8% 136.8%
Combined ratio before renewal credits................. 100.1% 96.0% 118.6%
SELECTED STATUTORY DATA:
Loss and LAE ratio.................................... 80.8% 82.5% 99.9%
Underwriting expense ratio............................ 16.6% 15.2% 19.7%
Combined ratio........................................ 97.4% 97.7% 119.6%
Policyholders' surplus................................ $ 29,212 $ 24,116 $ 23,258
</TABLE>
46
<PAGE>
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 11 to the consolidated financial statements.
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 Form 10-KSB.
General
The financial statements and data presented in the Form 10-KSB have
been prepared in accordance with generally accepted accounting principles, GAAP,
unless otherwise noted. GAAP differs from statutory accounting practices used by
regulatory authorities in their oversight responsibilities of insurance
companies.
On January 4, 1999 NCRIC Group acquired all the outstanding shares of
HealthCare Consulting, Inc., the interests of HCI Ventures, LLC, and the assets
of Employee Benefits Services, Inc. The acquisition was recorded as a purchase
with goodwill of $5.2 million to be amortized over 20 years. The results of
operations for the year ended December 31, 1999 include the results of the
acquired businesses for that period.
See Note 11 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
47
<PAGE>
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. Beginning in 1997 and continuing in 1998 and 1999, NCRIC began staggering
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.
"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 resolving 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 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 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 judgements.
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 established 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;
48
<PAGE>
inflation associated with medical costs; 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, additional claims are reported
and 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 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 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 is subject to being capped at 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
49
<PAGE>
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.
Effective January 1, 2000, NCRIC restructured its reinsurance program.
The primary layer of coverage, which comprises the majority of its premiums,
will change from a swing rated policy to a fixed-rate policy, with a reduction
in the maximum premium rate.
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 - Years ended December 31, 1999, 1998 and 1997
Year ended December 31, 1999 compared to year ended December 31, 1998
Net income totaled $2,505,000 for the year ended December 31, 1999
compared to $2,547,000 for the year ended December 31, 1998. The primary
contributor to the decreased earnings was increased reinsurance costs of $7.1
million due to the reduction in favorable prior years development under the
swing rated treaty. Largely offsetting this increased cost was an increase of
$3.3 million in gross earned premiums after renewal credits and a reduction of
$2.8 million in incurred losses and LAE.
Year ended December 31, 1998 compared to year ended December 31, 1997
Net income for NCRIC increased $1.6 million to $2.5 million for the
year ended December 31, 1998 from $959,000 for the year ended December 31, 1997.
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 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
50
<PAGE>
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 treated 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.
-------------------------------
Net premiums earned
-------------------------------
Following is a summary of NCRIC's net premiums earned:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross premiums written* .............. $ 21,353 $19,214 $17,869
Change in unearned premiums .......... (2,521) (2,945) (403)
-------- -------- --------
Gross premiums earned before renewal
credits .......................... 18,832 16,269 17,466
Reinsurance premiums ceded related to:
current year ..................... (6,395) (5,623) (5,474)
prior years ...................... 3,418 9,712 3,620
-------- -------- --------
Total reinsurance premiums ceded . (2,977) 4,089 (1,854)
-------- -------- --------
Net premiums earned before renewal
credits .......................... 15,855 20,358 15,612
Renewal credits ...................... (1,189) (1,899) (2,080)
-------- -------- --------
Net premiums earned .................. $ 14,666 $18,459 $13,532
======== ======== ========
*Net premiums written after renewal
credits .......................... $16,188 $21,014 $ 13,935
======== ======== ========
</TABLE>
Year ended December 31, 1999 compared to year ended December 31, 1998
51
<PAGE>
Gross premiums written increased by $2.1 million, or 11%, to $21.3
million for the year ended December 31, 1999 from $19.2 for the year ended
December 31, 1998. Starting in the fourth quarter of 1997 and continuing through
1999, NCRIC began staggering policy renewal dates. Premiums written for the year
ended December 31, 1999 increased approximately $400,000 over the premiums
written for the year ended December 31, 1998 due to the 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.
Gross premiums written, adjusted for the staggering of renewal dates,
increased $1.8 million for the year ended December 31, 1999 over the year ended
December 31, 1998 due to net new business written in 1999 increasing the number
of policyholders by 13%. Gross premiums written on excess layer coverage
increased $500,000 to $2.5 million for the year ended December 31, 1999 from
$2.0 million for the year ended December 31, 1998.
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. 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.
Discounts under policyholder programs increased by approximately $500,000, or
14% for the year ended December 31, 1999 compared to the year ended December 31,
1998.
The change in unearned premiums for the period decreased by $424,000 to
$2.5 million for the year ended December 31, 1999 from $2.9 million for the year
ended December 31, 1998. This decrease resulted from a $1.9 million increase due
to the staggering of renewal dates, new business written and extended reporting
endorsement coverage offset by a $2.3 million decrease in retrospectively
determined policyholder refunds for 1999 due to higher loss experience in the
experience-rated programs.
Gross premiums earned before renewal credits increased $2.5 million, or
15%, to $18.8 million for the year ended December 31, 1999 from $16.3 million
for the year ended December 31, 1998. The increase was primarily due to $2.4
million of additional premiums earned under experience-rated programs.
Reinsurance premiums ceded increased by $7.1 million to $3.0 million
for the year ended December 31, 1999 from 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
52
<PAGE>
accruals for prior year premiums. The increase was the result of a decrease in
the credit from prior years premiums under the swing rated insurance treaty due
to favorable loss experience.
Current year reinsurance premiums ceded increased by $772,000, or 14%,
to $6.4 million for the year ended December 31, 1999 from $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 plus an increase in the swing
rated premium on the primary layer. The reinsurance premium due for excess layer
coverage increased by $408,000, or 22%, to $2.3 million for the year ended
December 31, 1999 from $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 increased
by $364,000, or 10%. The liability "retrospective premiums accrued under
reinsurance treaties" increased to $7.2 million at December 31, 1999 from $6.5
million at December 31, 1998.
Reinsurance premiums related to prior years under the swing rated
treaty were reduced by $3.4 million in 1999 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 1999 change is primarily reflective of the
favorable loss development in the 1992 though 1996 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.
Renewal credits decreased $710,000 to $1.2 million for the year ended
December 31, 1999 from $1.9 million for the year ended December 31, 1998
reflecting a decrease in the credit rate to 10% from 12.5%.
Net premiums earned before renewal credits decreased by $4.5 million,
or 22%, to $15.9 million for the year ended December 31, 1999 from $20.4 million
for the year ended December 31, 1998. Net premiums earned after renewal credits
decreased by $3.8 million, or 21%, to $14.7 million for the year ended December
31, 1999 from $18.5 million for the year ended December 31, 1998. The decreases
reflect the lower reinsurance ceded favorable prior year development in 1999
compared to 1998 partially offset by the increase in gross earned premiums.
Year ended December 1998 compared to year ended December 31, 1997
Gross premiums written increased by $1.3 million, or 8%, to $19.2
million for the year ended December 31, 1998 from $17.9 million for the year
ended December 31, 1997. 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
53
<PAGE>
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%, to $17.7 million for
the year ended December 31, 1998 from $15.9 million for the year ended December
31, 1997. 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. Discounts under policyholder programs 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 to $2.0 million for the year ended December 31, 1998 from $1.7 million
for the year ended December 31, 1997.
The change in unearned premiums for the period increased by $2.5
million to $2.9 million for the year ended December 31, 1998 from $403,000 for
the year ended December 31, 1997. 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%, to $16.3 million for the year ended December 31, 1998 from $17.5 million for
the year ended December 31, 1997. 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 to a credit of
$4.1 million for the year ended December 31, 1998 from $1.9 million for the year
ended December 31, 1997. 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%,
to $5.6 million for the year ended December 31, 1998 from $5.5 million for the
year ended December 31, 1997. 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%, to $1.9 million for the year ended
December 31, 1998 from $1.7 million for the year ended December 31, 1997,
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 to $6.5 million at December 31, 1998 from $13.8
million at December 31, 1997.
54
<PAGE>
Reinsurance premiums related to prior years under the swing rated
treaty were reduced by approximately $9.7 million in 1998 and $3.6 million in
1997 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 1998 change is primarily
reflective of the favorable loss development for the 1993 through 1995 loss
years. The 1997 change in estimate relates primarily to the favorable loss
development in the 1989 and 1992 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 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% 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 resulted in reinsurance ceded premium income.
Renewal credits decreased $181,000, or 9%, to $1.9 million for the year
ended December 31, 1998 from $2.1 million for the year ended December 31, 1997
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%, to $20.4 million for the year ended December 31, 1998 from $15.6 million
for the year ended December 31, 1997. 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%, to $18.5 million for the year ended December 31, 1998 from $13.5 million
for the year ended December 31, 1997.
55
<PAGE>
-------------------------------
Net investment income
-------------------------------
Year ended December 31, 1999 compared to year ended December 31, 1998
Net investment income increased by $93,000, or 1.6%, for the year ended
December 31, 1999 compared to the prior year reflecting a slight increase in
yields. Net investment income for both years was approximately $6.0 million.
Average invested assets, which includes cash equivalents, were maintained at
essentially the same level in both periods. Maturing investments were primarily
invested in asset and mortgaged backed securities. $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 5.74% for the year ended December 31, 1999 and 5.68% for
the year ended December 31, 1998. The tax equivalent yield was approximately
6.18% at December 31, 1999 and 6.24% at December 31, 1998. The change in
investment yields is reflective of the market change in interest rates in 1999
compared to 1998.
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%, to $105.6 million at
December 31, 1998 from $100.0 million at December 31, 1997 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.
56
<PAGE>
------------------------------------------
Net realized investment gains (losses)
------------------------------------------
Year ended December 31, 1999 compared to year ended December 31, 1998
Net realized investment losses were $71,000 for the year ended December
31, 1999 compared to net realized gains of $159,000 for the year ended December
31, 1998. Realized losses in 1999 were primarily from the sale of
mortgage-backed securities and US government and agencies.
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.
-------------------------------
Practice management and related
income
-------------------------------
Year ended December 31, 1999 compared to year ended December 31, 1998
Practice management and related revenues of $4.6 million and $78,000
for the years ended December 31, 1999 and 1998, consisted of fees generated by
NCRIC MSO primarily through the businesses acquired on January 4, 1999,
HealthCare Consulting, HCI Ventures and Employee Benefits Services. HealthCare
Consulting serves more than 1,100 physician clients in Virginia, North Carolina,
South Carolina, Tennessee, and the District of Columbia. The fees for 1999 are
for practice management services (40%), accounting services (31%), tax and
personal financial planning (11%), retirement plan accounting and administration
(13%), and other services (5%).
-------------------------------
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.
57
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Other income increased $16,000, or 4%, to $373,000 for the year ended
December 31, 1999 from $357,000 for the year ended December 31, 1998. The
primary source of the increase was in brokerage commission income as the result
of increased excess layer reinsurance ceded.
Year ended December 31, 1998 compared to year ended December 31, 1997
Other income remained relatively consistent from 1998 to 1997,
increasing to $357,000 from $355,000.
----------------------------------------
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,
----------------------------------------
1999 1998 1997
---- ---- ----
(in thousands)
Incurred losses and LAE related to:
<S> <C> <C> <C>
Current year - losses ................................. $20,795 $19,140 $19,444
Prior years - development ......................... (7,928) (3,463) (3,853)
------- ------- -------
Total incurred for the year ............................ $12,867 $15,677 $15,591
======= ======= =======
</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,
--------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Loss and LAE ratio:
Current year losses ........................... 141.8% 103.7% 143.7%
Prior year losses ............................. (54.1) (18.8) (28.5)
------ ------ ------
Total Loss and LAE ratio .......................... 87.7 84.9 115.2
Underwriting expense ratio ........................ 20.5 20.9 21.6
------ ------ ------
Combined ratio..................................... . 108.2% 105.8% 136.8%
===== ====== ======
</TABLE>
58
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Total incurred loss and LAE expense of $12.9 million for the year ended
December 31, 1999 represented a decrease of $2.8 million, or 18%, compared to
$15.7 million incurred for the year ended December 31, 1998.
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 increased by $1.7 million, or 9%, to
$20.8 million for the year ended December 31, 1999 from $19.1 million for the
year ended December 31,1998. The frequency, number of new claims reported, in
1999 was greater than in 1998 but remained less than the 1997 level. An increase
in severity was first noted in 1996, as described in the comments on 1998
results below, and continued through 1999. The increase in frequency combined
with the continuing heightened level of severity resulted in an increase in the
current year loss and LAE ratio to 141.8% for the year ended December 31, 1999
from 103.7% for the year ended December 31, 1998.
NCRIC experienced favorable development on estimated losses for prior
year's claims for both years. The favorable loss development related to prior
years claims was $7.9 million for the year ended December 31, 1999, and $3.5
million for the year ended December 31, 1998. The total loss and LAE ratio was
reduced by 54 points for the year ended December 31, 1999 and 19 points for the
year ended December 31, 1998, as a result of this favorable development. The
1999 change is primarily reflective of the favorable loss development for the
1992 through 1996 loss years; whereas, the 1998 change is primarily reflective
of the favorable loss development for the 1993 through 1995 loss years. 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 decreased to 20.5% for the year ended
December 31, 1999 from 20.9% for the year ended December 31, 1998. This decrease
is reflective of the 22% decrease in underwriting expenses partially offset by
the decrease in net premiums earned due to the substantial decrease in
reinsurance premiums previously described. Underwriting expenses decreased
$848,000 to $3.0 million for the year ended December 31, 1999 from $3.9 million
for the year ended December 31, 1998. See "Underwriting expenses."
The combined ratio increased to 108.2% for the year ended December 31,
1999 from 105.8% for the year ended December 31, 1998. The decrease in net
premiums earned previously described, combined with lower incurred losses
resulted in a combined ratio at the second lowest level for the 1995 through
1999 period.
59
<PAGE>
The statutory combined ratio was 97.4% for the year ended December 31,
1999 compared to 97.7% for the year ended December 31, 1998. This decrease
reflects the same premium and loss level factors noted previously.
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%, to $19.1
million for the year ended December 31, 1998 from $19.4 million for the year
ended December 31,1997 due to the lower frequency of claims previously
described. At the same time, net premiums earned increased by 36% as also
previously described. The loss and LAE ratio reflected these changes, decreasing
to 103.7% for the year ended December 31, 1998 from 143.7% for the year ended
December 31, 1997.
NCRIC experienced favorable development on estimated losses for prior
year's 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 19 points for the year ended December 31, 1998 and 29 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 decreased to 20.9% for the year ended
December 31, 1998 from 21.6% for the year ended December 31, 1997. This increase
is reflective of the 32% increase in underwriting expenses offset by a 36%
increase in net premiums earned due to the substantial decrease in reinsurance
premiums previously described. Underwriting expenses increased $940,000 to $3.9
million for the year ended December 31, 1998 from $2.9 million for the year
ended December 31, 1997. See "Underwriting expenses."
The combined ratio decreased to 105.8% for the year ended December 31,
1998 from 136.8% for the year ended December 31, 1997. The 36% increase in net
premiums earned
60
<PAGE>
previously described, combined with stable incurred losses helped to drive the
combined ratio to its lowest level for the 1995 through 1998 period.
The statutory combined ratio was 97.7% for the year ended December 31,
1998 compared to 119.6% for the year ended December 31, 1997. The improved ratio
resulted from the increase in net premiums and stable incurred losses as
previously noted.
-------------------------------
Loss and loss adjustment
expenses liability
-------------------------------
The loss and LAE reserve liabilities for unpaid claims as of each period are as
follows:
At December 31,
---------------------------
1999 1998
---- ----
(in thousands)
Liability for:
Losses ................. $56,462 $57,022
Loss adjustment expenses 27,820 27,573
------- -------
$84,282 $84,595
======= =======
Reinsurance recoverable on losses $26,627 $24,944
======= =======
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 on the reinsurance
program.
------------------------------
Underwriting expenses
-------------------------------
Salaries and benefits accounted for approximately 30% of other
underwriting expenses; with professional fees, including legal, auditing and
director's fees, accounting for approximately another 30% of the underwriting
expenditures. 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.
61
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Underwriting expenses decreased $848,000, or 22%, to $3.0 million for
the year ended December 31, 1999 from $3.9 million for the year ended December
31, 1998. The decrease in expense was due primarily to a decrease of $128,000 in
premium taxes related to the reduction in the premium tax rate, a decrease of
$149,000 in guaranty fund assessments and a decrease of $464,000 in directors'
fees and salaries as a result of the reorganization.
Year ended December 31, 1998 compared to year ended December 31, 1997
Underwriting expenses increased $940,000, or 32%, to $3.9 million for
the year ended December 31, 1998 from $2.9 million for the year ended December
31, 1997. 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.
-------------------------------
Practice management and related
expenses
-------------------------------
Year ended December 31, 1999 compared to year ended December 31, 1998
Practice management and related expenses of $4.8 million December 31,
1999 consisted primarily of expenses, such as salaries, general office expenses,
and goodwill amortization related to NCRIC MSO operations of the businesses
acquired January 4, 1999. 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.
-------------------------------
Other expenses
-------------------------------
Other expenses include expenditures for holding company and 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.
62
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Other expenses decreased $71,000 to $1.4 million for the year ended
December 31, 1999 from $1.5 million for the year ended December 31, 1998. The
change resulted primarily from the decrease of $649,000 in expenses in
connection with the 1998 reorganization and $50,000 in expenses for National
Capital Insurance Brokerage related to an insurance contract that was
transferred to NCRIC during 1999 offset largely by an increase of $307,000 in
legal fees incurred in connection with litigation brought by NCRIC Physicians
Organization, interest on acquisition debt of $120,000 and parent company
expenses for directors fees of $230,000. The litigation was settled in 1999 with
terms including a guarantee of a minimum payment to the NCRIC Physicians
Organization of $6,000 per month for 60 months.
Year ended December 31, 1998 compared to year ended December 31, 1997
Other expenses increased $834,000, or 123%, to $1.5 million for the
year ended December 31, 1998 from $676,000 for the year ended December 31, 1997.
The substantial increase was primarily due to $649,000 of legal, accounting and
professional fees associated with the reorganization.
-------------------------------
Federal income taxes
-------------------------------
The effective tax rate for NCRIC is lower than the federal statutory
rate principally due to nontaxable investment income.
Year Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
Federal income tax at statutory rates 34% 34% 34%
Tax exempt income ................... (7) (9) (42)
Dividends received .................. (2) (2) (8)
Goodwill amortization ............... 2 -- --
Reorganization costs ................ -- 6 --
Other, net .......................... 1 1 1
--- --- ---
Federal income tax at effective rates 28% 30% (15)%
=== === ===
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.
At December 31,
-----------------------
1999 1998
---- ----
Deferred federal income tax asset ............. $3,298,000 $2,742,000
========== ==========
63
<PAGE>
Year ended December 31, 1999 compared to year ended December 31, 1998
Tax expense for the year ended December 31, 1999 was $1.0 million
compared to $1.1 million for the year ended December 31, 1998. The Federal
corporate income tax rate of 34% was reduced to an effective tax rate of 28% for
the year ended December 31, 1999 due to tax-exempt income and nontaxable
dividends received. The effective rate was 30% for the year ended December 31,
1998, higher than the 1999 effective rate primarily due to 1998 reorganization
costs. The decrease in federal income tax is reflective of the decreased income
before tax for the period combined with the reduction in the effective tax rate.
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
effective rate was 30% for the year ended December 31, 1998. 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. This increase in federal income tax is reflective of the
increased income before tax for the period.
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 and NCRIC MSO, Inc. As a result of the 1998 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 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. On July 29,
1999, the loan was repaid from the proceeds of the issuance of common stock.
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, for management services and other expenses. NCRIC
Group intends to rely primarily on this cash flow from NCRIC, Inc. and NCRIC
MSO, Inc. to pay dividends on its common stock, if any. The amount of the 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.
64
<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 D.C. 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
December 31, 1999, NCRIC, Inc. would have had available approximately $2.9
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 years
ended December 31, 1999, 1998 and 1997. Cash provided by operating activities of
NCRIC subsidiaries was $5.1 million in 1999, $3.0 million in 1998, and $1.6
million in 1997. The $2.1 million of increased cash flow in 1999 compared to
1998 results primarily from $2.8 million of additional premiums collected, an
increase of $1.3 million in receipts from reinsurers, a decrease of $700,000 in
income and premium taxes paid, and net cash inflows of $400,000 from the
operations of the practice management and financial services companies acquired
January, 1999, partially offset by a $3.1 million increase in payments for
losses and LAE. 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.
Because of the long-term nature of both payment of claims and the settlement of
swing rated reinsurance premiums due to the reinsurers, cash from operations for
medical professional liability insurer like NCRIC can vary substantially from
year to year.
Comprehensive income was a loss of $2.4 million for the year ended
December 31, 1999 compared to gains of $3.8 million and $2.1 million for the
years ended December 31, 1998 and 1997. The decrease in comprehensive income
primarily results from the decline in unrealized investment gains, net of
deferred income taxes.
65
<PAGE>
In addition to the positive cash generated from operations, NCRIC 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, 1999, the carrying value of NCRIC
subsidiaries securities portfolio was $94.3 million, compared to a carrying
value of $96.3 million at December 31, 1998. The portfolios were invested as
follows:
At December 31,
---------------------------
1999 1998
---- ----
U.S. Government and agencies .............. 15% 25%
Asset-backed and mortgage-backed securities 40 28
Tax-exempt securities ..................... 14 21
Corporate bonds and preferred stocks ...... 31 26
Over 74% of the portfolio at December 31, 1999 was invested in US
Government/agency securities or has a rating of AAA or AA. For regulatory
purposes, as of December 31, 1999 and December 31, 1998, respectively, 96% and
99% of the securities portfolio is rated "Class 1", 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 December 31, 1999 is restricted to working capital for
claim settlements. The line of credit is unsecured and renewable. NCRIC
subsidiaries have not drawn down on this facility. As of December 31, 1999, a
NCRIC subsidiary had entered into a contract to purchase new policy
administration software; future payments under the contract are required as
services are completed by the vendor and total $650,000. NCRIC subsidiaries have
no other 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 $29.1 million at December 31, 1999
and $31.0 million at December 31, 1998. The $1.9 million decrease for the year
ended December 31, 1999 was due to $3.0 million of net income offset by $4.9
million of unrealized investment losses net of tax. 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.
66
<PAGE>
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
The Year 2000 issues have not caused any disruption in NCRIC's
business. Despite this, there can be no guarantee that there will not be a
failure detected in the future. While NCRIC believes that the Year 2000 issues
will not cause an adverse effect on its ability to conduct its operations, any
failure associated with Year 2000 compliance could have a material effect on
NCRIC.
NCRIC estimates that it incurred internal and external costs associated
with the Year 2000 readiness effort of approximately $28,000, $15,000 and
$36,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Federal income tax matters
For tax years prior to the stock offering, NCRIC filed a consolidated
United States Federal income tax return with its parent and subsidiaries. For
tax years after the stock offering, 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 1996, 1997 and 1998 are open but not currently
under audit.
67
<PAGE>
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 has codified the 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. The project was 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 1998 and 1999, NCRIC, Inc. was outside the usual range on the ratio
of estimated current reserve deficiency to surplus. This ratio provides an
estimate of 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 in NCRIC, Inc.'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 1998 and 1999, 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. NCRIC was within or favorably exceeded the usual range
for the remainder of the IRIS ratios.
68
<PAGE>
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, Inc.'s and
Commonwealth Medical Liability Insurance Company's total adjusted capital levels
were significantly in excess of the authorized control level of RBC. 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,
Inc. 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, Inc. CML NCRIC, Inc. CML
----------- --- ----------- ----
(in millions)
<S> <C> <C> <C> <C>
December 31, 1999 ..... $ 4.1 $ 0.17 $ 29.2 $ 5.0
1998 ..... 4.5 0.15 24.1 5.0
1997 ..... 3.7 0.14 23.2 4.9
</TABLE>
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'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 regulatory changes;
o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance;
o NCRIC, A Mutual Holding Company's 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 Group's results of operations.
69
<PAGE>
Item 7. Financial Statements
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
NCRIC GROUP, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT 71
Consolidated Balance Sheets as of December 31, 1999 and 1998 72
Consolidated Statements of Operations for the Years Ended 73
December 31, 1999, 1998, and 1997
Consolidated Statements of Stockholders' Equity for the Years Ended 74
December 31, 1999, 1998, and 1997
Consolidated Statements of Cash Flows for the Years Ended 75
December 31, 1999, 1998, and 1997
Notes to Consolidated Financial Statements for the Years Ended 76
December 31, 1999, 1998, and 1997
70
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors 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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years ended December 31, 1999. 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, 1999 and 1998, and the results of their operations, and their
cash flows for each of the three years ended December 31, 1999, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
February 7, 2000
McLean, Virginia
71
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 (IN THOUSANDS, EXCEPT FOR SHARE DATA)
- --------------------------------------------------------------------------------------------------------------
1999 1998
ASSETS
INVESTMENTS:
Securities available for sale, at fair value:
<S> <C> <C>
Bonds and U.S.Treasury Notes $ 90,937 $ 91,135
Preferred stocks 4,155 5,213
------------- -------------
Total securities available for sale 95,092 96,348
OTHER ASSETS:
Cash and cash equivalents 5,407 6,083
Reinsurance recoverable 26,627 24,944
Goodwill 4,928 -
Deferred income taxes 3,298 2,742
Other assets 5,595 4,209
------------- -------------
TOTAL ASSETS $140,947 $134,326
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Losses and loss adjustment expenses:
Losses $ 56,462 $ 57,022
Loss adjustment expenses 27,820 27,573
------------- -------------
Total losses and loss adjustment expenses 84,282 84,595
Other liabilities:
Retrospective premiums accrued under
reinsurance treaties 7,164 6,492
Unearned premiums 8,898 6,453
Other liabilities 4,808 5,775
------------- -------------
TOTAL LIABILITIES 105,152 103,315
------------- -------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, and 9)
STOCKHOLDERS' EQUITY:
Common stock $0.01 par value - 10,000,000 shares authorized; as of
December 31, 1999, 3,742,855 shares issued and outstanding; as of
December 31, 1998, 2,220,000 shares issued and outstanding 37 22
Additional paid in capital 9,433 776
Unallocated common stock held by the ESOP (993) -
Unallocated common stock held by the stock award plan (518) -
Accumulated other comprehensive (loss) income (2,866) 2,016
Retained earnings 30,702 28,197
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 35,795 31,011
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $140,947 $134,326
============= =============
</TABLE>
See notes to consolidated financial statements.
72
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
REVENUES:
Premium income:
<S> <C> <C> <C>
Premiums written $ 21,353 $ 19,214 $17,869
Premiums ceded (2,977) 4,089 (1,854)
Change in unearned premiums (2,521) (2,945) (403)
Renewal credit dividends to policyholders (1,189) (1,899) (2,080)
------- ------- -------
Net premiums earned 14,666 18,459 13,532
Investment income 6,420 6,360 6,585
Investment expenses (331) (364) (540)
------------- ------------- ------------
Net investment income 6,089 5,996 6,045
Net realized investment gains (losses) (71) 159 90
Practice management and related income 4,576 78 -
Other income 373 357 355
------------- ------------- ------------
Total revenues 25,633 25,049 20,022
------------- ------------- ------------
EXPENSES:
Losses and loss adjustment expenses 12,867 15,677 15,591
Underwriting expenses 3,010 3,858 2,918
Practice management and related expenses 4,845 378 -
Other 1,439 1,510 676
------------- ------------- ------------
Total expenses 22,161 21,423 19,185
------------- ------------- ------------
INCOME BEFORE INCOME TAXES 3,472 3,626 837
------------- ------------- ------------
INCOME TAX PROVISION (BENEFIT)
Current (767) 1,658 (255)
Deferred 1,734 (579) 133
------------- ------------- ------------
Total income tax provision (benefit) 967 1,079 (122)
------------- ------------- ------------
NET INCOME $ 2,505 $ 2,547 $ 959
============= ============= ============
Net income per common share:
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Basic $ 0.90 N/A N/A
============= ============= ============
Diluted $ 0.90 N/A N/A
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
73
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated Accumulated
Additional Unallocated Stock Other Total
Common Paid In ESOP Award Comprehensive Retained Stockholders'
Stock Capital Shares Shares Income (Loss) Earnings Equity
----- ------- ------ ------ ------------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1997 $ -- $ 797 $ -- $ -- $ (314) $ 24,941 $ 25,424
Net income -- -- -- -- -- 959 959
Comprehensive income for unrealized
holding gains on securities, net of
reclassification adjustments of $60 for
for losses included in net income and
deferred income taxes of $599. 1,103 1,103
------
Total Comprehensive Income -- -- -- -- -- -- 2,062
------ ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1997 -- 797 -- -- 789 25,900 27,486
Net income -- -- -- -- -- 2,547 2,547
Comprehensive income for unrealized
holding gains on securities, net of
reclassification adjustments of $105
losses included in net income and
deferred income taxes of $684. 1,227 1,227
------
Total Comprehensive Income 3,774
Capital contribution from parent -- 1 -- -- -- -- 1
Stock split 22 (22) --
Cash dividend to stockholder -- -- -- -- -- (250) (250)
------ ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1998 22 776 -- -- 2,016 28,197 31,011
Net income 2,505 2,505
Comprehensive loss for unrealized
holding losses on securities, net of
reclassification adjustments of $47 for
losses included in net income and
deferred income taxes of $2,515. (4,882) (4,882)
------
Total Comprehensive Loss (2,377)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock 15 8,647 (1,036) (518) -- -- 7,108
ESOP shares released -- 10 43 -- -- -- 53
------ ------ ------ ------ ------ ------ ------
BALANCE, DECEMBER 31, 1999 $ 37 $ 9,433 $ (993) $ (518) $ (2,866) $ 30,702 $ 35,795
====== ======= ====== ====== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
74
<PAGE>
<TABLE>
<CAPTION>
NCRIC GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 2,505 $ 2,547 $ 959
Adjustments to reconcile net income
to net cash flows from operating activities:
Net realized investment (gains) loss 71 (159) (90)
Amortization and depreciation 651 235 486
Loss on sale of building - - 197
Deferred income taxes 1,734 (579) 133
Changes in assets and liabilities:
Reinsurance recoverable (1,683) (7,867) (2,398)
Other assets (491) (252) (773)
Losses and loss adjustment expenses (313) 12,565 3,930
Retrospective premiums accrued under
reinsurance treaties 672 (7,270) (1,043)
Unearned premiums 2,445 2,945 403
Other liabilities (1,242) 838 (176)
------------- ------------- ------------
Net cash flows from operating activities 4,349 3,003 1,628
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (72,341) (58,781) (64,363)
Sales, maturities and redemptions of investments 66,129 58,811 61,122
Investment in purchased business, net of cash acquired (5,238) -- --
Purchases of property and equipment (383) (766) (516)
Proceeds from sale of building -- -- 1,178
------------- ------------- ------------
Net cash flows from investing activities (11,833) (736) (2,579)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the issuance of common stock 6,808 1 --
Dividend to stockholder -- (250) --
------------- ------------- ------------
Net cash flows from financing activities 6,808 (249) --
------------- ------------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (676) 2,018 (951)
------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 6,083 4,065 5,016
------------- ------------- ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 5,407 $ 6,083 $ 4,065
============= ============= ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPPLEMENTARY INFORMATION:
<S> <C> <C> <C>
Cash paid for income taxes $ 100 $ 700 $ --
============= ============= ============
Interest paid $ 120 $ -- $ --
============= ============= ============
</TABLE>
See notes to consolidated financial statements.
75
<PAGE>
NCRIC GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
- --------------------------------------------------------------------------------
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 the conversion into
NCRIC, Inc. (NCRIC), a stock medical professional liability insurance
company. The reorganization became effective on December 31, 1998.
The reorganization separated the contract rights and the 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.
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 the Mutual
Holding Company must at all times own, directly or indirectly, a
majority of the outstanding voting stock of NCRIC.
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.
(See Note 2.)
On July 29, 1999, the Company completed an initial public offering of
1,480,000 shares, which generated net proceeds of $8.4 million. The
proceeds were used to repay the indebtedness incurred in connection
with the HealthCare Consulting acquisition, to establish an employee
stock ownership plan and a stock award plan, and to expand current
corporate operations. The reconciliation of gross to net proceeds is as
follows (in thousands):
Gross offering proceeds ... $ 10,360
Less offering expenses .... (1,998)
--------
Net proceeds ........ 8,362
Less: ESOP loan ........... (1,036)
Stock Award Plan loan (518)
--------
Net proceeds, as adjusted . $ 6,808
========
The accompanying financial statements present the consolidated
financial position and
76
<PAGE>
results of operations of NCRIC Group, Inc. and 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,
Virginia, West Virginia, or Delaware. A majority of the Company's
insurance business is written in the District of Columbia.
The Company also provides (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.
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 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.
Principles of Consolidation - The consolidated financial statements
include the accounts of the Company and its subsidiaries. All
significant intercompany transactions have been eliminated in the
consolidation.
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.
Goodwill - Goodwill arising from the Company's acquisition of the
outstanding shares of
77
<PAGE>
HealthCare Consulting, Inc., all of the outstanding interests of HCI
Ventures, LLC, and all the assets of Employee Benefit Services is
amortized on a straight-line basis over 20 years. Goodwill is shown net
of accumulated amortization of $259,000 as of December 31, 1999.
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 ranging from three to
five years for computer equipment and furniture and fixtures and ten
years for leasehold improvements. The balance of fixed assets at
December 31, 1999 and 1998 of $1,219,000 and $1,010,000, respectively,
are net of accumulated depreciation of $1,066,000 and $766,000.
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 reinsurance are estimated in a
manner consistent with the loss and loss adjustment expense reserve
associated with the reinsured policy.
Revenue Recognition - Premiums revenue is 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. In 1999, 1998, and 1997, 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. Policyholder
renewal credit dividends are accrued as reductions to premium income in
the policy year declared.
Practice management 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.
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 of
differences between the financial statement carrying amounts and the
tax bases of existing assets and liabilities. The Company files a
consolidated Federal income tax return.
Impairment of Long-Lived Assets - The Company reviews 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, 1999 and 1998, the Company did not find it
necessary to record a provision for impairment of assets.
78
<PAGE>
Reclassifications - In order to conform to the current presentation,
certain prior year balances 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.
Concentrations of Credit Risk - Financial instruments which potentially
expose the Company to concentrations of risk consist principally of
cash equivalent investments, investments in securities and reinsurance
recoverables. Concentrations of credit risk for investments are limited
due to the large number of such investments and their distributions
across many different industries and geographical areas. Concentrations
of credit risk for reinsurance recoverables are limited due to the
large number of reinsurers participating in the program.
Litigation - The Company is 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 Company's
financial position, results of operations, or cash flows.
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. The notes were converted to
42,855 shares of common stock upon completion of the initial public
offering described in Note 3. 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 loan was repaid in full on July 29, 1999 from proceeds of the stock
offering, and $107,000 in interest was paid for the period of time that
the loan was outstanding. The President of Sequoia National Bank serves
on NCRIC Group's Board of Directors.
79
<PAGE>
The following pro forma information presents the results of operations
for the year ended December 31, 1998 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
3. INITIAL PUBLIC OFFERING
Sales of the stock concluded on July 29, 1999 for a total offering of
1,480,000 shares with net proceeds of $8.4 million.
The composition of outstanding shares is as follows (in thousands):
Issued in initial public offering 1,480
Issued to NCRIC Holdings 2,220
------
3,700
Issued in exchange of convertible notes 43
------
Total shares issued July 29, 1999 3,743
ESOP loan shares (148)
Stock Award Plan loan shares (74)
------
Net shares outstanding 3,521
======
The 2,220,000 shares issued to NCRIC Holdings has been recognized as a
stock split in which the 1,000 shares of outstanding stock were
replaced by 2,220,000 shares effective with the conclusion of the IPO
retroactive to December 31, 1998.
4. INVESTMENTS
The following tables show the amortized cost and fair value of
investments (in thousands):
80
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
As of December 31, 1999
U.S. Government and agencies $ 13,937 $ -- $ (716) $ 13,221
Corporate 27,842 25 (1,605) 26,262
Tax-exempt obligations 14,058 22 (289) 13,791
Asset and mortgage-backed
securities 38,907 2 (1,246) 37,663
-------- -------- -------- --------
94,744 49 (3,856) 90,937
Preferred stocks 4,691 -- (536) 4,155
-------- -------- -------- --------
Total $ 99,435 $ 49 $ (4,392) $ 95,092
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
As of December 31, 1998
<S> <C> <C> <C> <C>
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
Asset and 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>
The amortized cost and fair value of debt securities at December 31,
1999 and 1998, 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.
(in thousands)
81
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- -------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C> <C> <C>
Due in one year or less $ 846 $ 846 $ 1,611 $ 1,619
Due after one year through five
years 13,029 12,730 9,552 9,767
Due after five years through ten 19,457 18,705 20,275 21,028
Due after ten years 22,505 20,993 30,442 32,191
------ ------ ------ ------
55,837 53,274 61,880 64,605
Preferred stocks 4,691 4,155 5,195 5,213
Asset and mortgage-backed
securities 38,907 37,663 26,218 26,530
------ ------ ------ ------
Total $99,435 $95,092 $93,293 $96,348
======= ======= ======= =======
</TABLE>
Proceeds from bond maturities and redemptions of available for sale
investments during the years ended December 31, 1999, 1998, and 1997,
were $66,129,000, $58,811,000, and $35,475,000, respectively. Gross
gains of $260,000, $521,000, and $300,000, and gross losses of
$331,000, $362,000, and $210,000, were realized on bond redemptions and
available for sale investments during years December 31, 1999, 1998,
and 1997, respectively.
5. 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 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.
Activity in the liabilities for losses and loss adjustment expenses is
summarized as follows (in thousands):
82
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
BALANCE, Beginning of year $ 84,595 $ 72,031 $ 68,101
Less reinsurance recoverable on
unpaid claims 24,546 17,077 14,679
-------- -------- --------
NET BALANCE 60,049 54,954 53,422
-------- -------- --------
Incurred related to:
Current year 20,795 19,140 19,444
Prior years (7,928) (3,463) (3,853)
-------- -------- --------
Total incurred 12,867 15,677 15,591
-------- -------- --------
Paid related to:
Current year 817 1,247 1,867
Prior years 13,632 9,335 12,192
-------- -------- --------
Total paid 14,449 10,582 14,059
-------- -------- --------
NET BALANCE 58,467 60,049 54,954
Plus reinsurance recoverable on
unpaid claims 25,815 24,546 17,077
-------- -------- --------
BALANCE, End of year $ 84,282 $ 84,595 $ 72,031
======== ======== ========
</TABLE>
6. 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 of its
retention. The Company has both excess of loss treaties and quota share
treaties.
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 $170,000 and $166,000 at December 31, 1999 and 1998, respectively.
Such letters of credit 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):
83
<PAGE>
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
-------------------------------- ---------------------------------- --------------------------------
Written Earned Written Earned Written Earned
<S> <C> <C> <C> <C> <C> <C>
Direct $ 21,353 $ 18,832 $ 19,214 $ 16,270 $ 17,869 $ 17,466
Ceded
Current year (7,394) (6,395) (6,013) (5,623) (5,474) (5,474)
Prior year 3,418 3,418 9,712 9,712 3,620 3,620
-------- -------- -------- -------- -------- --------
Total ceded (3,976) (2,977) 3,699 4,089 (1,854) (1,854)
-------- -------- -------- -------- -------- --------
Net $ 17,377 $ 15,855 $ 22,913 $ 20,359 $ 16,015 $ 15,612
======== ======== ======== ======== ======== ========
</TABLE>
7. INCOME TAXES
Deferred 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.
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>
As of December 31,
------------------------
1999 1998
Deferred tax assets:
<S> <C> <C>
Unearned premiums $ 647 $ 431
Discounted loss reserves 2,891 3,174
Fair valuation of investments 1,477 --
Depreciation and amortization 17 51
Minimum tax credit carryforward 219 --
Other -- 125
------- -------
5,251 3,781
Deferred tax liabilities:
Change in method (1,852) --
Fair valuation of investments -- (1,039)
Other (101) --
------- -------
Net deferred tax assets
$ 3,298 $ 2,742
======= =======
</TABLE>
Federal income tax expense differs from that calculated using
established corporate rate primarily due to nontaxable investment
income as follows (in thousands):
84
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 1997
--------------------------- ---------------------------- -------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
Federal income tax at
<S> <C> <C> <C> <C> <C> <C>
statutory rates $ 1,180 34 % $ 1,233 34 % $ 285 34 %
Tax-exempt income (250) (7) (321) (9) (355) (42)
Dividends received (59) (2) (69) (2) (66) (8)
Reorganization costs -- -- 221 6 -- --
Goodwill 74 2 -- -- -- --
Other 22 1 15 1 14 1
------- -- ------- -- ------- --
Federal income tax
at effective rates $ 967 28 % $ 1,079 30 % $ (122) (15)%
======= == ======= == ======= ===
</TABLE>
8. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the year ended December 31, 1999. Earnings per
share data is not presented for prior years because there were no
shares outstanding until December 31, 1998. (in thousands, except per
share data)
Net income $2,505
------
Weighted average common shares outstanding - basic 2,777
Dilutive effect of stock options 6
------
Weighted average common shares outstanding - diluted 2,783
------
Net income per common share:
Basic $ 0.90
------
Diluted $ 0.90
------
Earnings per share is calculated by dividing the net income by the
weighted average shares outstanding for the period. The calculation of
weighted average shares outstanding includes 2,220,000 shares for the
period from January 1, 1999 through July 28, 1999 and the total of
3,520,855 outstanding shares, as described in Note 3 above, plus shares
released for the ESOP, as described in Note 10, for the period from
July 29, 1999 through December 31, 1999. Had the calculation been made
using 3,520,855 as the weighted average outstanding shares for both
periods, that is as if the stock offered in the initial public offering
had been outstanding on January 1, 1999, basic earnings per share would
85
<PAGE>
have been $0.71 for the year ended December 31, 1999.
9. 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. The Company also maintains office space in Lynchburg,
Richmond, and Fredericksburg, Virginia as well as in Greensboro, North
Carolina.
As of December 31, 1999, the future minimum annual commitments under
noncancellable leases are as follows (in thousands):
2000 $ 617
2001 605
2002 520
2003 495
2004 497
Thereafter 1,729
------
Total $4,463
======
Rent expense during the years ended December 31, 1999 and 1998 was
$676,000 and $301,000, respectively.
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
renewable. As of December 31, 1999, NCRIC had not drawn on this
facility.
NCRIC has established three letters of credits to secure specified
amounts of appellate bonds, for cases which are in the District of
Columbia appellate process. As of December 31, 1999, these letters of
credit totaled $10.3 million.
The Company and its subsidiaries have entered into six employment
agreements with certain key employees. These agreements include
covenants not to compete and provide for aggregate annual compensation
of $975,000. Another provides an employee with severance based on his
final 12 month's compensation. The Company's estimated obligation for
such severance of $90,000 is reflected as an other liability as of
December 31, 1999 and 1998, respectively.
86
<PAGE>
One of the Company's subsidiaries has entered into a contract to
purchase new policy administration software; future payment under the
contract are required as services are completed by the vendor and total
$650,000.
10. BENEFIT PLANS
Defined Contribution Plans - NCRIC sponsors a defined contribution
401(k) profit- sharing plan. Employees who are 21 years or older and
have completed 90 days of service are eligible for participation in the
plan. Employees may elect to contribute 1- 15% of total compensation,
and all contributions are 100% vested. NCRIC is not required to make
matching contributions to the plan, but may make discretionary
contributions. Total contributions to the plan by NCRIC for the years
ended December 31, 1999, 1998, and 1997, were $171,000, $140,000, and
$128,000.
NCRIC MSO sponsors two plans for its employees. The first plan is a
defined contribution money purchase plan in which employees who are 21
years or older and have two years of service are eligible to
participate. Under the plan, NCRIC MSO contributes 5% of each
participant's total annual compensation. All contributions are 100%
vested. The contributions from NCRIC MSO for the year ended December
31, 1999, were $97,000.
The second plan is 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 to 15% of total compensation. All contributions are 100%
vested. NCRIC MSO is not required to make matching contributions to the
plan, but may make discretionary contributions. Total contributions to
the plan by NCRIC MSO for the year ended December 31, 1999, were
$56,000.
Stock Option Plan - NCRIC Group has a stock option plan for directors
and officers of Mutual Holding Company and its subsidiaries. Options
for common stock in an aggregate amount of 74,000 shares were granted
at July 29, 1999. The options have terms of ten years and an exercise
price of $7 per share, the fair market value of the common stock at the
date of grant. 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.
NCRIC Group accounts for compensation cost using the intrinsic value
based method prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees". Accordingly, no compensation expense was
recognized since the stock options granted were at an exercise price
equal to the fair market value of the common stock on the date the
options were granted. Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation", requires disclosure of
the pro forma net income and earnings per share as if the Company had
accounted for its stock options under the fair value method defined in
that Statement.
Exercise price for options outstanding at December 31, 1999 is $7.00.
The weighted average remaining contractual life of those options is 9.6
years. A summary of the
87
<PAGE>
Company's stock option activity and related information follows:
Number of
Options Exercise Price
------- --------------
Options outstanding at December 31, 1998 -- $ --
Granted in 1999 74,000 7.00
Exercised in 1999 -- --
Forfeited in 1999 -- --
------ -----
Options outstanding at December 31, 1999 74,000 $ 7.00
====== ========
The Company's pro forma information using the Black-Scholes valuation
model follows:
1999
----
Pro forma net income (in thousands) $ 2,479
Pro forma earnings per share - Basic $ 0.89
- Diluted $ 0.89
For pro forma disclosure purposes, the fair value of stock options was
estimated at the date of grant using a Black-Scholes option pricing
model using the following assumptions: risk free rate of return of
5.29%; no dividends granted during the life of the option; volatility
factors of the expected market price of the Company's common stock
ranging from .489 to .843; and an expected life of the option of 10
years.
Employee Stock Ownership Plan - NCRIC Group has an ESOP for employees
who have attained age 21 and completed one year of service. As part of
the stock offering, the ESOP borrowed $1.0 million from NCRIC Group to
purchase 148,000 shares which are held in a trust account for
allocation among participants as the loan is repaid. For shares
allocated to the accounts of the ESOP participants as the result of
payments made to reduce the ESOP loan, the compensation charge is based
upon the average fair value of the shares over the service period. The
first loan repayment was made December 31, 1999. As of December 31,
1999, contributions of $53,000 were made to the plan, and 6,167 shares
were allocated.
Stock Award Plan - NCRIC Group has a stock award plan under which
directors, officers and employees of Mutual Holding Company and its
subsidiaries would be awarded common stock. As a part of the stock
offering, the stock award plan borrowed $518,000 from NCRIC Group to
purchase 74,000 shares which are held in a trust account for allocation
among participants. For shares awarded, compensation cost is measured
based upon the fair value of the shares on the date of the award. The
first loan repayment was made on December 31, 1999. As of December 31,
1999, there were no shares allocated under the plan.
88
<PAGE>
11. 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,
----------------------------------------------
1999 1998 1997
<S> <C> <C> <C>
POLICYHOLDERS' SURPLUS -
STATUTORY BASIS $ 29,212 $ 24,116 $ 23,258
Fair valuation of investments (2,866) 2,016 789
Deferred taxes 1,821 3,781 3,202
Group stock issuance 7,108 -- --
Nonadmitted assets and other 520 1,098 237
-------- -------- --------
STOCKHOLDERS' EQUITY - GAAP
BASIS $ 35,795 $ 31,011 $ 27,486
======== ======== ========
NET INCOME - STATUTORY BASIS $ 5,528 $ 2,577 $ 1,726
Deferred taxes (1,734) 579 (133)
GAAP consolidation (1,289) (609) (634)
-------- -------- --------
NET INCOME - GAAP BASIS $ 2,505 $ 2,547 $ 959
======== ======== ========
</TABLE>
As of December 31, 1999, 1998, and 1997, 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.
During 1999, NCRIC received permission from DISR to include as admitted
assets its investments in asset-backed securities, which are not
specifically authorized as permitted investments under D.C. regulations
as the total investment exceeds five percent of total admitted assets.
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, will be
effective January 1, 2001. The Company has not finalized the
quantification of the effects of the Codification on its statutory
financial statements.
12. REPORTABLE SEGMENT INFORMATION
The Company 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
89
<PAGE>
management services to private practicing physicians.
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 and 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.
Selected financial data is presented below for each business segment
for the year ended December 31 (in thousands):
1999 1998 1997
Insurance
Revenues from external customers $ 15,020 $ 18,806 $ 13,884
Net investment income 6,137 5,996 6,044
Depreciation and amortization 226 209 366
Segment profit(loss) before taxes 4,880 4,316 1,150
Segment assets 134,482 133,780 121,854
Segment liabilities 104,647 102,748 94,350
Expenditures for segment assets 252 540 516
Practice Management Services
Revenues from external customers $ 4,603 $ 88 $ 3
Net investment income 53 -- 1
Depreciation and amortization 425 26 120
Segment profit(loss) before taxes (759) (690) (313)
Segment assets 6,613 439 47
Segment liabilities 1,294 281 65
Expenditures for segment assets 131 226 --
Total
Revenues from external customers $ 19,623 $ 18,894 $ 13,887
Net investment income 6,190 5,996 6,045
Depreciation and amortization 651 235 486
Segment profit(loss) before taxes 4,121 3,626 837
Segment assets 141,095 134,219 121,901
Segment liabilities 105,941 103,029 94,415
Expenditures for segment assets 383 766 516
The following are reconciliations of reportable segment revenues, net
investment income, assets, liabilities, and profit to the Company's
consolidated totals (in thousands) :
90
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
Revenues:
<S> <C> <C> <C>
Total revenues for reportable segments $ 19,623 $ 18,894 $ 13,887
Elimination of intersegment revenues (8) -- --
--------- --------- ---------
Consolidated total $ 19,615 $ 18,894 $ 13,887
========= ========= =========
Net Investment Income:
Total investment income for reportable
segments $ 6,190 $ 5,996 $ 6,045
Elimination of intersegment income (141) -- --
Other unallocated amounts 40 -- --
--------- --------- ---------
Consolidated total $ 6,089 $ 5,996 $ 6,045
========= ========= =========
Assets:
Total assets for reportable segments $ 141,095 $ 134,219 $ 121,901
Elimination of intersegment receivables (840) (218) (60)
Elimination of affiliate receivables (282) (443) --
Other unallocated amounts 974 768 --
--------- --------- ---------
Consolidated total $ 140,947 $ 134,326 $ 121,841
========= ========= =========
Liabilities:
Total liabilities for reportable segments $ 105,941 $ 103,029 $ 94,415
Elimination of intersegment payables (840) (218) (60)
Other liabilities 51 504 --
--------- --------- ---------
Consolidated total $ 105,152 $ 103,315 $ 94,355
========= ========= =========
Profit before taxes:
Total profit for reportable segments $ 4,121 $ 3,626 $ 837
Other expenses (649) -- --
--------- --------- ---------
Consolidated total $ 3,472 $ 3,626 $ 837
========= ========= =========
</TABLE>
13. 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 the 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) for the year ended December 31, 1997.
<PAGE>
Effective June 30, 1997, NCRIC purchased 100% of NCUI's issued and
outstanding stock, and NCUI was consolidated on the effective date.
91
<PAGE>
On December 31, 1998, in accordance with the Company's plan of
reorganization, NCRIC, Inc. paid a dividend of $250,000 to its ultimate
parent, Mutual Holding Company.
Prior to the acquisition of HCI, NCRIC MSO paid HealthCare Consulting
approximately $150,000 for services performed by HealthCare Consulting
during 1998.
NCRIC MSO rents an office building for one of its divisions from a
partnership whose partners are HealthCare Consulting senior executives.
For this property, NCRIC MSO paid approximately $62,000 in rent for the
year ended December 31, 1999.
During 1999, two members of the Company's Board of Directors paid NCRIC
MSO approximately $150,000 for practice management related services.
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations
for 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums earned and other revenues $ 4,939 $ 4,140 $ 4,641 $ 5,895
Net investment income 1,418 1,496 1,567 1,608
Realized investment gains (losses) 52 (199) 45 31
Net income 299 581 775 850
Basic earnings per share of common
stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
Diluted earnings per share of
common stock $ 0.14 $ 0.27 $ 0.25 $ 0.24
</TABLE>
<PAGE>
Year Ended December 31, 1998
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
----- ------ ----- ------
<S> <C> <C> <C> <C>
Premiums earned and other revenues $ 2,698 $ 4,179 $ 7,959 $ 4,058
Net investment income 1,526 1,561 1,378 1,531
Realized investment gains (losses) 28 (22) 122 31
Net income (loss) (73) (374) 2,969 25
Basic earnings per share of common
stock NA NA NA NA
Diluted earnings per share of
common stock NA NA NA NA
</TABLE>
92
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 9. Directors and Officers of the Registrant
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 10. Executive Compensation
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information included in NCRIC Group, Inc.'s Proxy Statement for its
2000 Annual Meeting of Shareholders is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this report.
3.1 Articles of Incorporation of NCRIC Group, Inc.*
3.2 Bylaws of NCRIC Group, Inc.*
4.0 Stock Certificate of NCRIC Group, Inc.*
10.3 Stock Option Plan*
10.4 Employee Stock Ownership Plan*
10.5 Stock Award Plan*
10.6 Employment Agreement between National Capital
Underwriters, Inc and R. Ray Pate, Jr.*
10.7 Amendment to Employment Agreement between NCRIC,
Inc. and R. Ray Pate, Jr.*
93
<PAGE>
10.8 Employment Agreement between National Capital
Underwriters, Inc. and Stephen S. Fargis*
10.9 Employment Agreement between NCRIC, Inc. and Rebecca
B. Crunk*
10.10 Employment Agreement between NCRIC MSO, Inc. and
L.E. Shepherd, Jr.*
10.11 Employment Agreement between NCRIC MSO, Inc. and
William A. Hunter, Jr.*
10.12 Employment Agreement between NCRIC MSO, Inc. and
Barry S. Pillow*
10.13 Administrative Services Agreement*
10.14 Tax Sharing Agreement*
10.15 Operating Agreement between NCRIC Group, Inc., NCRIC
MSO, Inc., HealthCare Consulting, HCI Ventures, L.E.
Shepard, Jr., William A. Hunter and Barry S. Pillow*
21 Subsidiaries*
23.2 Consent of Deloitte & Touche LLP
27.1 EDGAR Financial Data Schedule
(b) Reports on Form 8-K
None
* Incorporated herein by reference into this document from the Exhibits
to Form SB-2 Registration Statement, initially filed on December 23,
1998 and subsequently amended on April 15, 1999, March 12, 1999 and May
7, 1999, Registration No. 333-69537.
94
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NCRIC GROUP, INC.
Date: March 24, 2000 By: /s/ R. Ray Pate, Jr.
--------------------
R. Ray Pate, Jr.
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Nelson P. Trujillo, M.D. Chair of the Board of Directors March 24, 2000
- ------------------------------------
Nelson P. Trujillo, M.D.
/s/ R. Ray Pate, Jr. President, Chief Executive Officer March 24, 2000
- ------------------------------------ and Director (Principal Executive
R. Ray Pate, Jr. Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 24, 2000
- ------------------------------------ Financial Officer (Principal
Rebecca B. Crunk Financial and Accounting Officer)
/s/ Vincent C. Burke, III Director March 24, 2000
- ---------------------------
Vincent C. Burke, III
/s/ Pamela W. Coleman, M.D. Director March 24, 2000
- ---------------------------
Pamela W. Coleman, M.D.
/s/ Charles H. Epps, Jr., M.D. Director March 24, 2000
- ------------------------------------
Charles H. Epps, Jr., M.D.
/s/ Leonard M. Glassman, M.D. Director March 24, 2000
- ------------------------------------
Leonard M. Glassman, M.D.
/s/ J. Paul McNamara Director March 24, 2000
- ------------------------------------
J. Paul McNamara
/s/ Leonard Parver, M.D. Director March 24, 2000
- ---------------------------
Leonard Parver, M.D.
/s/ Raymond Scalettar, M.D. Director March 24, 2000
- ------------------------------------
Raymond Scalettar, M.D.
/s/ David M. Seitzman, M.D. Director March 24, 2000
- ------------------------------------
David M. Seitzman, M.D.
</TABLE>
[LETTERHEAD OF DELOITTE & TOUCHE LLP]
Independent Auditors' Consent
We consent to the incorporation by reference in the Registration
Statement of NCRIC Group, Inc. and subsidiaries on Form S-8 (No. 333-93619) of
our report dated February 7, 2000, appearing in the Annual Report on Form 10-KSB
of NCRIC Group, Inc. and subsidiaries for the years ended December 31, 1999,
1998 and 1997.
/s/ Deloitte & Touche LLP
McLean, VA
March 10, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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