Under our current primary reinsurance contract, the premium ceded to the reinsurers is based on a fixed rate applied to policy premium for that coverage layer. During the year, estimated payments are made to the reinsurers, and a final adjustment is made at the end of the year to reflect actual premium earned in accordance with the treaty. For the years through 2002, we retained risk exposure up to $500,000 for each and every claim. Beginning January 1, 2003, the retention level increased to $1,000,000 for each and every claim.
While financial results for 2003 were disappointing, we achieved significant accomplishments in 2003. We successfully deployed a significant amount of capital in our growth territories of Delaware and Virginia, with written premium increasing 38%. Cash flow from operations was $20.6 million in 2003, a record level for NCRIC. Our business model is intact and we anticipate continued progress in 2004 and 2005 toward achieving our return on equity target. The insurance premium rate structure for policies with 2004 effective dates is designed to produce a combined ratio of 96.5% and a 10% return on equity of deployed capital. We restructured our investment portfolio to strengthen the overall credit quality of the fixed income portfolio and we diversified the portfolio to add a common stock equity component. We merged the two companies writing insurance into one to achieve efficiencies within administrative operations.
Premium collection litigation. During 2000, it was determined that one of our hospital-sponsored retrospective programs would not be renewed. This is the only retrospective program in which the full policy premium was not billed at the beginning of the policy period. Rather, and in accordance with the terms of the contract, in 2000 we billed the hospital sponsor $1.3 million, and an additional $700,000 was billed during 2002 based on the actual accumulated loss experience of the terminated program. As a result of the amount billed in 2002, written premium for the year 2002 increased by a net amount of $372,000 over the same period in 2001 while net earned premium was unaffected by the billing.
o upward development on claims, primarily in Virginia and Maryland in 2001 and 2002; and
Year Ended December 31, ------------------------ 2003 2002 2001 ---- ---- ----
Authorized control level risk-based capital Total adjusted capital ------------------ ---------------------- NCRIC, NCRIC, Inc. CML Inc. CML ------ ----- ------ ----- (in millions) December 31, 2003 .... $10.5 -- $70.4 -- December 31, 2002 .... $ 6.7 $0.49 $44.3 $ 4.7 December 31, 2001 .... $ 4.7 $0.17 $32.8 $ 4.3
The Company writes policies under certain retrospectively rated programs. Premium revenue related to these contracts is earned based on the contractual terms and estimated losses under those contracts. Earned premiums are premiums written reduced by premium refunds accrued. Premium refunds are accrued to reflect the risk-sharing program results on a basis consistent with the underlying loss experience.
On June 24, 2003, a plan of conversion and reorganization was approved by the members of NCRIC, A Mutual Holding Company and by the shareholders of NCRIC Group, Inc. In the conversion and related stock offering, the Mutual Holding Company offered for sale its 60% ownership interest in NCRIC Group. As a result of the conversion and stock offering, the Mutual Holding Company ceased to exist, and NCRIC Group, Inc. became a fully public company.
ESOP loan shares (270) Stock Award Plan loan shares (179) ------ Net shares outstanding as of June 25, 2003 6,473 ======
The Company's reportable segments are strategic business units that offer different products and services and therefore are managed separately.
NCRIC MSO rented an office building for one of its divisions from a partnership whose partners are HealthCare Consulting senior executives. The lease terminated October 31, 2002. For this property, NCRIC MSO paid approximately $57,000 in rent for the year ended December 31, 2002 and $62,000 for the year ended December 31, 2001.
During 2003, 2002, and 2001, members of the Company's Board of Directors paid NCRIC MSO approximately $176,000, $163,000 and $183,000, respectively, for practice management related services.
2003 2002 2001 REVENUES: Net investment income $ 272 $ 16 $ -- Dividends from subsidiaries* 1,000 1,750 1,500 Other income 15 7 12 ------- ------- ------