Medical professional liability losses and LAE reserves are established based on an estimate of these future payments as reflected in our 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 is a complex and uncertain process, requiring the use of informed estimates and judgments. Although we intend to estimate conservatively our future payments relating to losses incurred, there can be no assurance that currently established reserves will prove adequate in light of subsequent actual experience.
The estimation process is an extensive effort. It begins in our claims department with the initial report of a claim. For each claim reported, a case reserve is established by the claims department based on analysis of the facts of the particular case and the judgment of claims management. This estimation process is not by formula but is driven by the investigation of facts combined with the experience and insight of claims management applied to each individual case. The timing of establishing case reserves follows established protocols based on the underlying facts and circumstances on a case by case basis. Specific factors considered include: the claimant's assertion of loss; the amount of documented damages asserted; an expert medical assessment; the jurisdiction where the incident occurred; our experience with any similar cases in the past; and any other factors pertinent to the specific case.
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R.) This statement replaces Statement No. 123, Accounting for Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The statement requires the adoption of a fair-value-based method of accounting for share-based transactions with employees. Adoption is required by the first interim or annual period after June 15, 2005. The Company is in the process of evaluating the requirements of SFAS 123R to comply with the new pronouncement by the third quarter of 2005.
Year Ended December 31, ----------------------- 2004 2003 2002 ---- ---- ---- Plaintiff verdicts ............ 7 11 5 Defense verdicts .............. 38 22 13 Mistrials or hung juries ...... 2 0 4 ---- ---- ---- Total trials .................. 47 33 22 ==== ==== ====
The underwriting expense ratio decreased to 21.2% for the year ended December 31, 2003 from 27.2% for the year ended December 31, 2002. In 2002 underwriting expenses included $1.2 million for a reserve against the hospital-sponsored program receivable, as previously discussed. A similar charge was unnecessary in 2003, contributing 4.1 points of improvement to the underwriting expense ratio. Underwriting expenses increased $1.8 million to $10.0 million for the year ended December 31, 2003 from $8.2 million for the year ended December 31, 2002. The 22% increase in underwriting expenses was primarily attributable to the growth in expenses, consisting primarily of commissions, directly related to the expansion in business, consistent with the growth in premium.
Practice management and related expenses consist primarily of expenses, such as salaries, general office expenses and interest on debt, related to ConsiCare 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.
The Company's pro forma net income per share information using the fair value method and the Black-Scholes valuation model follows (in thousands):
In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R.) This statement replaces Statement No. 123, Accounting for Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. The statement requires the adoption of a fair-value-based method of accounting for share-based transactions with employees. Adoption is required by the first interim or annual period after June 15, 2005. The Company is in the process of evaluating
Gross offering proceeds $ 41,437 Less: Offering expenses (1,924) -------- Net proceeds 39,513 ESOP loan (2,072) Stock Award Plan loan (1,657) -------- Net proceeds as adjusted $ 35,784 ========
For the Year Ended December 31, 2004 2003 2002 ------- ------- ------- U. S Government and agencies $ 1,072 $ 654 $ 255 Corporate 2,329 1,794 3,038 Tax-exempt obligations 1,628 1,462 1,290 Asset and mortgage-backed securities 2,229 2,313 1,178 Equity securities 479 124 431 Short-term investments 30 91 103 ------- ------- -------
Liabilities for unpaid losses and loss adjustment expenses (LAE) 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
Deferred tax liabilities Unrealized gain on investments (1,087) (753) Deferred policy acquisition costs (924) (802) Depreciation and amortization (296) (64) Other -- (96) -------- -------- (2,307) (1,715) -------- --------
Stock Option Plan - NCRIC Group, Inc. has a stock option plan for directors and officers of the Company and its subsidiaries. The options have terms of ten years and an exercise price equal to the fair market value of the common stock at the date of grant. For the stock options granted in 2003, on July 7, 2004, the Board of Directors accelerated the vesting of the stock options to that date. The options were originally scheduled to vest during the period from August, 2004 to August, 2008. On the accelerated vesting date, the $10.00 per share market value of NCRIC stock was less than the strike price of the options, which ranges from $10.86 to $11.00 per share.
Vested -- -- 365,681 $ 10.90 Exercised (16,574) $ 3.75 (16,574) $ 3.75 Forfeited (72,514) $ 10.90 (45,580) $ 11.00 -------- -------- -------- --------