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.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. SFAS 133, as amended by SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. NCRIC will adopt SFAS 133, as amended, on January 1, 2001. NCRIC believes that the impact of adopting SFAS 133 will not be material to its financial statements.
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, ------------------------------------------ 2000 1999 -------------- ------------- Direct $ 1.8 million $ 1.4 million Agent 2.6 million 1.0 million
compared to $6.1 million for the year ended December 31, 1999. Average invested assets, which include cash equivalents, decreased by $4.2 million, or 4%, to $101.6 million at December 31, 2000. Maturing investments were primarily reinvested in corporate and tax-exempt securities. The average effective yield was approximately 6.31% for the year ended December 31, 2000 and 5.74% for the year ended December 31, 1999. The tax equivalent yield was approximately 6.72% at December 31, 2000 and 6.18% at December 31, 1999. The change in investment yields is reflective of the market change in interest rates in 2000 compared to 1999.
Tax expense for the year ended December 31, 2000 was $1.6 million compared to $1.0 million for the year ended December 31, 1999. The Federal corporate income tax rate of 34% was reduced to an effective tax rate of 31% for the year ended December 31, 2000 due to tax-exempt income and nontaxable dividends received, partially offset by non-deductible goodwill amortization. The effective rate of 28% for the year ended December 31, 1999 was lower than the 2000 effective rate primarily due to a lower level of tax exempt income in 2000. The increase in the provision for income tax is reflective of the increased income before tax combined with the increase in the effective tax rate.
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.
NAIC risk-based capital. The NAIC has established a methodology for assessing the adequacy of each insurer's capital position based on the level of statutory surplus and an evaluation of the risks in the insurer's product mix and investment portfolio profile. This risk-based capital or "RBC" formula is designed to allow state and District of Columbia insurance regulators to identify potentially under-capitalized companies. For property-casualty insurers, the formula takes into account risks related to the insurer's assets - including risks related to its investment portfolio and the insurer's liabilities - including risks related to the adverse development of coverages underwritten. The RBC rules provide for different levels of regulatory attention depending on the ratio of the insurer's total adjusted capital to the "authorized control level" of RBC. For all periods presented, NCRIC's and Commonwealth Medical Liability Insurance Company's total adjusted capital levels were significantly in excess of the authorized control level of RBC. As a result, the RBC requirements are not expected to have an impact upon NCRIC's operations. Following is a presentation of the total adjusted capital for NCRIC and Commonwealth Medical Liability Insurance Company compared to the authorized control level of RBC:
NCRIC Acquired Pro forma Group Companies Combined -------- --------- -------- Revenue. . . . . . . . . . . $ 25,049 $ 4,975 $ 30,024 Net Income . . . . . . . . . 2,547 436 2,983
ESOP loan shares (148) Stock Award Plan loan shares (74) ----- Net shares outstanding as of July 29, 1999 3,521 =====
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, 2000, NCRIC had not drawn on this facility.
For further information on income taxes, see Income Taxes in Note 7 of the Notes to the Consolidated Financial Statements.