Our principal business operations are conducted from our 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 10 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. 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. We have the option to renew the lease for one additional term of five years. We also maintain office space in Lynchburg and Richmond, Virginia as well as in Greensboro, North Carolina.
600 Green Valley Road, Greensboro, North Carolina 27408 March 31, 2008
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 us of reducing our 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, we have insurance programs where the premiums are retrospectively determined based on losses during the period. Under all of the current programs, the full premium level is determined and billed at the inception of the policy term. The premium level could potentially be reduced and a premium refund made if the program loss experience is favorable. Premiums billed under retrospective programs are recorded as premiums written, while premium refunds accrued under retrospective programs are recorded as unearned premiums. Under retrospective programs, premiums earned 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. The program loss experience is that which is included in the determination of our losses and loss adjustment expenses (LAE). As described more fully below, one component of the expense for losses and LAE is the estimate of future payments for claims and related expenses of adjudicating claims.
RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES. We write one line of business, medical professional liability. Losses and LAE reserves are estimates of future payments for reported claims and related expenses of adjudicating claims with respect to insured events that have occurred in the past. The change in these reserves from year to year is reflected as an increase or decrease to our losses and LAE.
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.
Our ultimate liability will be known after all claims are closed, which is likely to be several years into the future. For example, as of December 31, 2002, the oldest report date of an open claim is 1993. Incurred losses for each report year will develop with a change in estimate in each subsequent calendar year until all claims are closed for that report year. Loss development could potentially have a significant impact on our results of operations. Developments changing the ultimate liability as little as 1% could have a material impact on our reported operating results.
The inherent uncertainty in establishing reserves is relatively greater for companies writing long-tail medical professional liability business. Each claim reported has the potential to be significant in amount. For the three-year period ended December 31, 2002, the average indemnity payment per paid claim was $360,000 with total indemnity payments of $12.9 million, $14.0 million and $14.8 million for the years ended December 31, 2002, 2001 and 2000, respectively. The cost of individual indemnity payments over this three-year period ranged from $1,000 to $3 million. Due to the extended nature of the claim resolution process and the wide range of potential outcomes of professional liability claims, established reserve estimates may be adversely impacted by: judicial expansion of liability standards; unfavorable legislative actions; expansive interpretations of contracts; inflation associated with medical claims; lack of a legislated cap on non-economic damages; and the propensity of individuals to file claims. These risk factors are amplified given the increase in new business written in new markets because there is limited historical data available which can be used to estimate current loss levels. We refine reserve estimates as experience develops and additional claims are reported or 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.
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 has been increased to $1,000,000 for each and every claim.
Our practice for accounting for the liability for retrospective premiums accrued under reinsurance treaties was to record the current year swing-rated reinsurance premium at management's best estimate of the ultimate liability, which was generally the maximum rate payable under terms of the treaty. Due to the long tail nature of the medical professional liability 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 adjustments to the accrued retrospective premiums are made as considered appropriate by management.
Our goodwill asset, $7.3 million as of December 31, 2002, resulted from the 1999 acquisition of three businesses which now operate as divisions of the Practice Management Services Segment. We completed our initial goodwill impairment testing under SFAS 142 and concluded that the goodwill asset was not impaired as of the date of implementation of SFAS 142, nor was it impaired as of December 31, 2002.
According to the January 2003 Best's Review, published by A.M. Best Company, Inc. (A.M. Best), in 2002, physicians across the country were faced with higher medical professional liability insurance premiums and fewer companies offering the coverage. The escalation in premium rates in recent years is a reflection of rising frequency and severity of claims at a time when premium rates were depressed thereby exacerbating insurers' poor operating performance. The medical professional liability insurance marketplace is adjusting to the departure of The St. Paul Companies, the largest medical professional liability insurer at that time, from the sector, while other companies have scaled back their market share or left some states entirely. Of the 12 states identified by A.M. Best as having a crisis in medical care stemming from the lack of availability of medical professional liability insurance, only one - West Virginia - falls into our market territory. Two of our other market jurisdictions, Virginia and Delaware, have been significantly impacted by the changes in market profile described by Best's Review. In the January 2001 issue of Best's Review, A.M. Best predicted trends to include sustained price increases and worsening claims severity. The realization of this prediction throughout 2001 and 2002 ultimately resulted in the change in the entire medical professional liability insurance market as a number of the insurance providers experienced adverse financial results and subsequently withdrew from the market.
Medical professional liability lawsuits have been identified as a key factor in the rising cost of the U.S. tort system according to an article in the February 17, 2003, issue of BestWeek, a publication of A.M. Best. The article further states that since 1975, medical professional liability tort costs rose an average of 11.6% a year, outpacing the average overall growth in tort costs of 9.4% over the same period. The February, 2003 issue of Best's Review reports that between 1999 and 2000, median professional liability jury awards increased 43%, causing a rise in medical professional liability insurance rates. Several of the jurisdictions in which we operate have not adopted tort reform, most notably the District of Columbia which had the highest cumulative mean medical professional liability indemnity payment level for the ten year period ending December 31, 2001, according to the latest data available from the National Practitioner Data Bank.
The operating results of our insurance segment for the year ended December 31, 2002 were primarily driven by the following factors. We continued to experience a significant increase in new business written in 2002. For the year, new business written (excluding the 100% ceded HCA program) was $12.7 million, up $0.5 million or 4%, from $12.2 million for 2001. The rise in new business written coupled with the increased premium rates resulted in a 46% increase in net premiums earned. The strain on current period earnings as a result of the large increase in new business written, combined with investment yield declines, resulted in pressure on short-term profitability. While the cost for claims reported in 2002 increased due to the rise in exposure, the development of losses for claims originally reported in 2000 and 2001 reduced pre-tax earnings for 2002.
increased 25% in the fourth quarter of 2001 over 2000; the segment produced quarterly pre-tax results of a loss of $159,000 compared to pre-tax earnings of $41,000 in the fourth quarter of 2000.
Reinsurance premiums related to prior years under the swing-rated treaty were reduced by $0.4 million in 2002 and $1.7 million in 2001 due to favorable loss development of reinsured losses compared to our prior estimates. Generally, losses covered by the swing-rated treaty are in the range excess of $500,000 to $1 million. Loss development results from the re-estimation and settlement of individual losses. The 2002 change is primarily reflective of the favorable loss development in the 1995, 1997 and 1998 coverage years. The 2001 change is primarily reflective of the favorable loss development in the 1992 and 1996 coverage years. As claims are brought
American Captive Corporation (ACC), our subsidiary, developed its first protected-cell captive, the Princeton Community Hospital Cell (West Virginia), in 2002. In anticipation of the initiation of the Princeton Cell within ACC, some insurance was underwritten by us during the first nine months of 2002 for policies that will be 100% reinsured by the Princeton Cell when it becomes active. The premium amounts for these policies are separately identified in the following table to aid comparisons.
The distribution of premium written shows notable growth in our market areas outside of the District of Columbia. We continue to maintain strict underwriting standards as we expand our business.
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.
Because the original 2000 bill was not paid when due, we initiated legal proceedings to collect. We have filed a motion for summary judgment, which has not yet been decided. The hospital sponsor stopped admitting patients in May 2002 and sold its principal assets during the third quarter of 2002.
During 2000, it was determined that one of our retrospective programs would not be renewed at the September 1, 2000 renewal date. Under this type of risk sharing program, physicians are underwritten directly by us and pay lower individual premiums than if not part of the risk-sharing program. At the end of the policy year covered by the premium, a review of the actual loss experience of the physician group is completed. Should the group's loss experience be unfavorable, we will require additional premium payments from the sponsoring hospital to offset the unfavorable losses.
Renewal credits decreased to $293,000 for the year ended December 31, 2001 from $1.2 million for the year ended December 31, 2000, reflecting our decision to not provide a renewal premium credit for 2002 renewals. In general, renewal credits apply to policies written in the District of Columbia. A growing proportion of our business is written in other jurisdictions where renewal credits are not issued.
in written premium in 2001 over 2000, 26% comes from business written in Maryland, 39% from Virginia, 24% from West Virginia, and 8% from Delaware.
For securities sold during 2002 at a loss, the following is a summary of facts and circumstances related to the securities: Five securities, all corporate fixed maturities, were sold for consideration totaling $2.5 million resulting in realized pre-tax losses totaling $1.0 million. In 2002, prior to the sale, these securities experienced a decline in fair value of $1.1 million from December 31, 2001. Three additional securities, all corporate fixed maturities, were sold for consideration totaling $1 million, resulting in pre-tax realized losses of approximately $430,000. The fair value of these securities had not changed significantly in 2002 compared to December 31, 2001. All of these securities were sold upon the recommendation of the outside investment manager, based upon the desire to maintain the overall credit quality of the portfolio or in response to the underlying business fundamentals relating to the securities. Finally, upon exercise of an issuer call option, one preferred stock produced consideration of $1.1 million and a pre-tax realized loss of $113,000.
The loss realized on the Osprey bond (an Enron partnership) represents our entire exposure to Enron securities. In addition, we realized a loss from a start-up equity investment in E-Health Solutions Group, a medical information technology company that is developing software products to be used by healthcare companies. While the investment in E-Health Solutions Group may produce value in future periods, an evaluation conducted during the fourth quarter concluded that under GAAP, we needed to write off the carrying value of the investment.
Practice management and related revenues increased by $839,000, or 16%, to $6.2 million for the year ended December 31, 2001, from $5.3 million for the year ended December 31, 2000. This revenue consists of fees generated by NCRIC MSO through HealthCare Consulting and Employee Benefits Services. The increased revenue is a result of the focused efforts on new business development through the addition of new clients in both recurring business and one-time consulting assignments and the 2001 increase in consulting rates.
Other income increased $411,000, or 68%, to $1,013,000 for the year ended December 31, 2002 from $602,000 for the year ended December 31, 2001. The increased revenue resulted primarily from increased brokerage reinsurance treaty commission income generated by the increased current year reinsurance ceded premiums and from services fees generated by premium installment payments. In late 2001 we began offering an installment payment option to our insureds. As a result, the revenue generated by service fees on installment payments grew throughout 2002 compared to 2001.
YEAR ENDED DECEMBER 31, ------------------------------------ 2002 2001 2000 ---------- ---------- ---------- (IN THOUSANDS) Incurred losses and LAE related to: Current year losses................... $ 24,063 $ 23,056 $ 17,829 Prior years loss development.......... 2,766 (4,198) (5,883) ---------- ---------- ---------- Total incurred for the year ......... $ 26,829 $ 18,858 $ 11,946 ========= ========= =========
YEAR ENDED DECEMBER 31, ----------------------------------- 2002 2001 2000 ----------- ----------- ---------
Losses and LAE ratio: Current year losses.................... 79.9% 111.9% 122.0% Prior years loss development........... 9.2 (20.4) (40.3) ---------- ---------- --------- Total losses and LAE ratio ............. 89.1 91.5 81.7 Underwriting expense ratio.............. 27.2 23.7 24.6 ---------- ---------- --------- Combined ratio.......................... 116.3% 115.2% 106.3% ========== ========== =========
Prior year development results from the re-estimation and resolution of individual losses not covered by reinsurance, which are generally losses under $500,000. In 2002 we experienced unfavorable development of $2.8 million on estimated losses for prior years' claims. The re-estimation of loss cost takes into consideration a variety of factors including recent claims settlement experience, new information on open claims, and changes in the judicial environment. The primary factors driving our 2002 development, which is comprised of favorable development in the 1999 report year offset by adverse development in the 1998, 2000 and 2001 report years, include additional information on claims originally reported in prior years and interpretation of emerging settlement trends in our expansion market areas.
An increase in severity was first noted in 1996 and continued through 2002 for claims reported in the District of Columbia. The increase in severity reflects the growing size of plaintiff verdicts and settlements. Our escalation in this adverse claims trend is similar to the conditions faced by many medical professional liability
The underwriting expense ratio increased to 27.2% for the year ended December 31, 2002 from 23.7% for the year ended December 31, 2001. This increase is reflective of the reserve against the hospital-sponsored program receivable of $1.2 million, as previously discussed. Underwriting expenses increased $3.3 million to $8.2 million for the year ended December 31, 2002 from $4.9 million for the year ended December 31, 2001. Of the 67% increase in underwriting expenses, 25% was attributed to the receivable allowance; this translates into an addition of 4.1% to the underwriting expense ratio. See "Underwriting Expenses."
Total incurred losses and LAE expense of $18.9 million for year ended December 31, 2001 represented an increase of $7.0 million, or 59%, compared to $11.9 million incurred for the year ended December 31, 2000.
We experienced favorable development on estimated losses for prior year's claims for both 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 favorable loss development related to prior years' claims was $4.2 million for the year ended December 31, 2001, and $5.9 million for the year ended December 31, 2000. The total losses and LAE ratio was reduced by 20 points for the year ended December 31, 2001 and 40 points for the year ended December 31, 2000, as a result of this favorable development. The 2001 change is primarily reflective of the favorable loss development for the 1992, 1996, 1997 and 1998 loss years, partially offset by adverse development in the 1995 loss year; whereas, the 2000 change is primarily reflective of the favorable loss development for the 1994, 1996, 1998 and 1999 loss years, partially offset by adverse development in the 1995 loss year. The reduced level of favorable development in 2001 compared to 2000 reflects claims closed as well as the continuing upward pressure of severity of losses noted above.
The underwriting expense ratio decreased to 23.7% for the year ended December 31, 2001 from 24.6% for the year ended December 31, 2000. This decrease is reflective of the 31% increase in net earned premiums partially offset by the 36% increase in underwriting expenses. Underwriting expenses increased $1.3 million to $4.9 million for the year ended December 31, 2001 from $3.6 million for the year ended December 31, 2000. Of the 36% increase in underwriting expenses, 19% was attributed to a guaranty fund assessment of $243,000; this translates into an addition of 1.2% to the underwriting expense ratio. See "Underwriting Expenses."
YEAR ENDED DECEMBER 31, ----------------------- 2001 2000 ---------- ---------- (IN THOUSANDS) Incurred losses and LAE related to: Current year-losses.............................. $ 6,358 $ 4,541 Prior years-development.......................... (405) (1,520) --------- --------- Total incurred for the quarter.................... $ 5,953 $ 3,021 ========= =========
For 2002, salaries and benefits accounted for approximately 24% of other underwriting expenses, bad debt expense 16%, with professional fees, including legal, auditing and director's fees, accounting for approximately another 14% of the underwriting expenditures. The amortization of premium taxes and commissions related to the change in unearned premiums reflects the balance. Guaranty fund assessments are based on industry loss experience in the jurisdictions where we do business, which loss experience is not entirely predictable.
Practice management and related expenses decreased $252,000 million, or 4%, to $5.8 million for the year ended December 31, 2002 compared to $6.1 million for the year ended December 31, 2001. Expense decreased due to the cessation of goodwill amortization with the implementation of SFAS 142 effective January 1, 2002 partially offset by additional expenses associated with the transition of client service for two of the former owners as they moved towards the expiration of their employment contracts at the end of 2002 and other transitional costs associated with the continued integration of the purchased companies.
Practice management and related expenses increased $1.1 million, or 22%, to $6.1 million for the year ended December 31, 2001 compared to $5.0 million for the year ended December 31, 2000. Expenses increased as a result of the growth in new business and business development efforts during 2001. In addition, goodwill amortization increased by $131,000, interest expense increased $75,000, and compensation expense increased by $70,000 as a result of the contingent purchase payments made in 2001 to the prior owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc.
Practice management and related expenses of $1.7 million in the fourth quarter of 2001 increased over the $1.2 million incurred in the fourth quarter of 2000 due to the same factors influencing the growth of expenses throughout the year 2001, that is, expenses associated with the growth of new business and with the contingent purchase payments made in 2001. Additional fourth quarter expense included increases for bad debts and employee compensation.
Other expenses of $1.2 million for the year ended December 31, 2001 are unchanged from the expense level for the year ended December 31, 2000. Other expenses include amounts incurred to meet the various requirements associated with having common stock traded in the public market; the expense of the stock grants made in September, 2000 under the Stock Award Plan; and, in 2001, $184,000 of start-up expenses for the new captive insurance company subsidiary.
Federal income tax at statutory rates........ 34% 34% 34% Tax exempt income............................ (89) (12) (4) Dividends received........................... (21) (4) (1) Goodwill amortization........................ 0 5 1 Other, net................................... (1) 4 1 ------ ------ ------ Income tax at effective rates................ (77)% 27% 31% ====== ====== ======
Tax expense for the year ended December 31, 2001 was $597,000 compared to $1.6 million for the year ended December 31, 2000. The Federal corporate income tax rate of 34% was reduced to an effective tax rate of 27% for the year ended December 31, 2001 due to tax-exempt income and nontaxable dividends received, partially offset by non-deductible goodwill amortization and other, principally state income taxes. The effective rate of 31% for the year ended December 31, 2000 was higher than the 2001 effective rate primarily due to a lower level of tax-exempt income in 2000. The decrease in the provision for income tax is reflective of the decreased income before tax combined with the decrease in the effective tax rate.
payment of dividends only out of unassigned statutory surplus. Using these criteria, as of December 31, 2002, NCRIC, Inc. had approximately $1.2 million of unassigned statutory surplus available for dividends.
LIQUIDITY. The primary sources of our 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 losses and LAE, operating expenses, reinsurance premiums, taxes, and to purchase investments.
We had cash flows provided by (used in) operations for the years ended December 31, as follows:
The $4.9 million of decreased cash flow provided by operations in 2002 compared to 2001 results primarily from an increase in net claims and claims settlement cost payments and a change in the timing of the receipt of premiums. Prior to 2002, a majority of insureds financed their annual premium through an outside financing company, which then remitted the full annual premium to us at the beginning of the policy year. For policies with 2002 effective dates, we provide the option to policyholders to pay their premiums in installments throughout the policy year. This has the impact of spreading the cash receipts from premiums over the policy year. Because of the long-term nature of both the payments of claims and the settlement of swing-rated reinsurance premiums due to reinsurers, cash from operations for a medical professional liability insurer like us can vary substantially from year to year.
Comprehensive income was a gain of $3.1 million for the year ended December 31, 2002 compared to $2.8 million for the year ended December 31, 2001. The increase in comprehensive income results from the $1.1 million increase in net unrealized investment gains, combined with the $0.8 million lower net income.
FINANCIAL CONDITION AND CAPITAL RESOURCES. We invest our positive cash flow from operations primarily in investment grade, fixed maturity securities. As of December 31, 2002, the carrying value of the securities portfolio was $120.1 million, compared to a carrying value of $103.1 million at December 31, 2001. The portfolios were invested as follows:
U.S. Government and agencies.................... 23% 4% Asset and mortgage-backed securities............ 28 29 Tax exempt securities .......................... 27 19 Corporate bonds................................. 17 42 Equity securities............................... 5 6 ------- ------- 100% 100% ======= =======
Over 64% of the bond portfolio at December 31, 2002 was invested in U.S. Government and agency securities or has a rating of AAA or AA. Over 99% of the bond portfolio as of December 31, 2002 was held in investment grade (BBB or better) securities as rated by Standard & Poor's. For regulatory purposes, as of December 31, 2002, 94% of the portfolio is rated Class 1, which is the highest quality rated group as classified by the NAIC. The accumulated other comprehensive income totaled $2.8 million at December 31, 2002 compared to $474,000 at December 31, 2001. This improvement in asset values resulted primarily from the reduction in market interest rates.
At December 31, 2002, our portfolio included total gross unrealized gains of $5.2 million, or 4.3% of the $120.1 million carrying value of the portfolio, and total unrealized losses of $950,000, or less than 1% of the carrying value of the portfolio. The total unrealized losses are comprised of seventeen different securities, including eight Treasury Note issues, six corporate debt fixed maturity securities (five of which are investment grade), with lengths of time to maturity ranging from nine to twenty-eight years, two preferred stock issues, and one equity issue.
All of the fixed maturity securities are meeting and are expected to continue to meet all contractual obligations for interest payments.
At December 31, 2002, the aggregate fair value of the securities with unrealized losses was $12.6 million, or 93% of the aggregate carrying value of those securities of $13.6 million. The largest single security with an unrealized loss at December 31, 2002 relates to a bond issued by Xerox Capital Trust, which matures in 2027 and carries a coupon rate of 8%. The unrealized pre-tax loss relating to this security is approximately $241,000 based on the fair value of $280,000 at December 31, 2002. We will continue to actively monitor the financial position and outlook for this investment and take any action determined to be appropriate. Unrealized losses related to other securities are not individually significant, nor is there any concentration of unrealized losses with respect to the type of security or industry.
The following table displays the maturity distribution of those fixed maturity securities with an unrealized loss in value as of December 31, 2002:
We are required to pay aggregate annual salaries in the amount of $945,000 to four persons under employment agreements.
Under terms of the purchase agreement between the previous owners of HealthCare Consulting, Inc., HCI Ventures, LLC, Employee Benefits Services, Inc. and us, contingency payments totaling $3.1 million could be paid in cash if the acquired companies achieved earnings targets in 2000, 2001, and 2002. During 2000, the earnings target was met and we paid the prior owners $1.55 million on March 31, 2001. After analyzing the acquired companies' operations since the acquisition, terms were negotiated and agreed upon for an early payment of the second contingent payment originally scheduled to be paid in 2002. As a result, on June 23, 2001, we paid $1.46 million, the present value of the remaining payments to the prior owners. During June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance these payments. The term of the loan is 3 years at a floating rate of LIBOR plus one and one-half percent. The interest rate was 2.93% and 4.83% at December 31, 2002 and December 31, 2001, respectively. Principal and interest payments are due on a monthly basis.
Our stockholders' equity totaled $47.8 million at December 31, 2002 and $44.5 million at December 31, 2001. The $3.3 million increase for the year ended December 31, 2002 was due primarily to $742,000 of net income plus $2.3 million of net unrealized investment gains. The $3.0 million increase for the year ended December 31, 2001 was primarily due to $1.6 million of net income plus $1.2 million of net unrealized investment gains.
The primary effect of inflation on us 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 our results cannot be conclusively known until claims are ultimately settled. Based on actual results to date, we believe that loss and LAE reserve levels and our ratemaking process adequately incorporate the effects of inflation.
For tax years prior to the stock offering, we filed a consolidated United States Federal income tax return with our parent and subsidiaries. For tax years after the stock offering, we do 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 own directly and indirectly less than 80% of the outstanding shares of NCRIC Group. Tax years 1999, 2000 and 2001 are open but not currently under audit. In 2000 the Internal Revenue Service approved a change in accounting method for us relative to the timing of revenue recognition for tax purposes.
NAIC STATUTORY ACCOUNTING CODIFICATION. The National Association of Insurance Commissioners (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 by the state insurance regulators. The project was intended to re-examine current statutory accounting practices and to ensure uniform accounting treatment from a regulatory standpoint. Many of the changes to statutory accounting are based on generally accepted accounting principles with modifications that emphasize the concept of conservatism and solvency inherent in statutory accounting. The accounting mandated by the codification applied commencing January 1, 2001. Statutory accounting changes resulting from this codification do 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. The effect on our statutory surplus on January 1, 2001 was an increase of $1.6 million. This increase is mainly due to the effect of accounting changes related to the implementation of deferred taxes and the removal of the excess of statutory reserves over statement reserves penalty, offset by charges to surplus for overdue receivables.
NAIC IRIS RATIOS. The NAIC Insurance Regulatory Information System (IRIS) is an early warning system that is primarily intended to be utilized by 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 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.
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 (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. The first level of regulatory action, a review by the domiciliary insurance commissioner of a company prepared RBC plan, is instituted at the point a company's total adjusted capital is at a level equal to or less than two times greater than the authorized control level risk-based capital. For all periods presented, the total adjusted capital levels for NCRIC, Inc. and CML were significantly in excess of the authorized control level of RBC. As a result, the RBC requirements are not expected to have an impact on our operations. Following is a presentation of the total adjusted capital for NCRIC, Inc. and CML compared to the authorized control level of RBC:
Independent Auditors' Report Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000
IV. Reinsurance V. Valuation and Qualifying Accounts VI. Supplemental Information Concerning Property-Casualty Insurance Companies
3.1 Articles of Incorporation of NCRIC Group, Inc.* 3.2 Bylaws of NCRIC Group, Inc.* 10.1 Stock Option Plan* 10.2 Stock Award Plan* 10.3 Employment Agreement between NCRIC Group, Inc., NCRIC Inc., and R. Ray Pate, Jr.** 10.4 Employment Agreement between NCRIC Group, Inc, NCRIC, Inc. and Rebecca B. Crunk** 10.5 Employment Agreement between NCRIC Group, Inc. and Stephen S. Fargis*** 10.6 Employment Agreement with William E. Burgess**** 10.7 Lease* 10.8 Amendment to Lease* 10.9 Termination Agreement and Release between NCRIC Group, Inc., NCRIC MSO, Inc., HCI Ventures, LLC, and L.E. Shepherd Jr., William A. Hunter, Jr. and Barry S. Pillow** 10.10 Administrative Services Agreement* 10.11 Tax Sharing Agreement* 21 Subsidiaries 23.2 Consent of Deloitte & Touche LLP 99.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
On December 4, 2002, NCRIC Group, Inc. filed a report on Form 8-K relating to the issuance of $15 million of trust preferred securities.
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Rebecca B. Crunk, Senior Vice President and Chief Financial Officer, certify that:
6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
/s/ Pamela W. Coleman Director March 31, 2003 _____________________________ Pamela W. Coleman, M.D.
/s/ Martin W. Dukes, Jr. Director March 31, 2003 _____________________________ Martin W. Dukes, Jr., M.D.
/s/ Prudence Pl Kline Director March 31, 2003 _____________________________ Prudence P. Kline, M.D.
* 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. ** Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-25505), originally filed with the Commission on March 27, 2002. *** Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 0-25505), originally filed with the Commission on March 23, 2001. **** Incorporated by reference into this document from the Exhibits to Form S-1 Registration Statement, originally filed with the Commission on March 25, 2003, Registration No. 333-104023.