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. See Note 11 to the consolidated financial statements for a discussion of the differences between statutory and GAAP reporting.
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-K. References to "NCRIC" mean NCRIC Group and its subsidiaries, including their predecessors.
In April 2001, NCRIC announced its formation of American Captive Corporation (ACC), a wholly owned subsidiary and the first captive insurance company to be licensed in the District of Columbia under the Captive Insurance Act of 2000. As a captive insurance company, ACC was established to provide an alternative risk-financing vehicle for affinity groups. The captive program will be marketed to organizations and groups wishing to finance and manage their own risk. ACC has incurred $184,000 in costs associated with the start up of the company during the year ended December 31, 2001; no captive protected cells have yet begun operations.
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 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 NCRIC's losses and loss adjustment expenses. As described more fully below,
one component of the expense for losses and loss adjustment costs is the estimate of future payments for claims and related expenses of adjudicating claims.
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 as well as a reflection of updated experience.
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. The swing rated reinsurance premiums are recorded in a manner consistent with the recording of NCRIC's loss reserves.
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 U.S. 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 January, 2001 Best's Review/Preview published by A.M. Best Company, 2000 was a transition year for the medical-malpractice market with prices beginning to firm as the result of poor underwriting experience and increasing reinsurance costs. In this article Best predicted 2001 trends to include sustained price increases and worsening claims severity. In recent months, several companies operating in the medical professional liability insurance market have experienced adverse financial results and have had their ratings from A. M. Best Company downgraded. NCRIC actively monitors these industry trends and considers them in relation to NCRIC's circumstances when setting rates or establishing reserves.
Accounting Literature. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS 142 on January 1, 2002. NCRIC has not yet completed its analysis of the impact of SFAS 142. However, if SFAS 142 was adopted for the year ended December 31, 2001, the after tax impact on the earnings due to the elimination of goodwill amortization would be an increase of approximately $368,000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, SAB No. 101, summarizing certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Based on a review of the NCRIC's revenue recognition polices, the impact of the issuance of SAB No. 101 is not material to its financial statements.
Net income totaled $1.6 million for the year ended December 31, 2001 compared to $3.5 million for the year ended December 31, 2000. Excluding net realized investment losses, operating earnings for the year 2001 were $1.8 million compared to $3.5 million for the year 2000. Total revenue in 2001 increased 24% over the 2000 level. The higher revenue was offset by an increase in loss and loss adjustment expenses, in underwriting expenses, and in practice management expenses.
Results for the fourth quarter of 2001 are a net loss of $312,000 compared to net income of $924,000 in the fourth quarter of 2000. The 2001 fourth quarter result includes net realized investment losses, net of tax, of $312,000. The insurance segment experienced a significant increase in new business written, with the associated impact on net earnings as described above, producing pre-tax earnings of $228,000 before realized investment losses, compared to 2000 fourth quarter pre-tax earnings of $1.6 million. Practice management segment revenues 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.
Year Ended December 31, ----------------------------------- 2001 2000 1999 -------- -------- -------- (in thousands) Gross premiums written* .............. $ 34,459 $ 22,727 $ 21,353 Change in unearned premiums .......... (6,267) (2,762) (2,521) -------- -------- -------- Gross premiums earned before renewal credits ........................... 28,192 19,965 18,832 Reinsurance premiums ceded related to: current year ...................... (8,992) (5,982) (6,395) prior years ....................... 1,696 1,872 3,418 -------- -------- -------- Total reinsurance premiums ceded .. (7,296) (4,110) (2,977) -------- -------- -------- Net premiums earned before renewal credits ........................... 20,896 15,855 15,855 Renewal credits ...................... (293) (1,244) (1,189) -------- -------- -------- Net premiums earned .................. $ 20,603 $ 14,611 $ 14,666 ======== ======== ======== *Net premiums written after renewal credits ........................... $ 23,916 $ 15,610 $ 16,188 ======== ======== ========
Gross premiums written increased by $11.8 million, or 52%, to $34.5 million for the year ended December 31, 2001 from $22.7 million for the year ended December 31, 2000 due to net new business written combined with the premium rate increases, which averaged 7.5%. The gross premiums written include premiums for retrospectively rated programs of $1.4 million for the year ended December 31, 2001 and $2.5 million for the year ended December 31, 2000. Written premium in 2000 included $1.3 million for the billing of previously accrued premium for one of the retrospectively rated risk sharing programs further discussed below. Gross premiums written on excess layer coverage increased $1.8 million to $4.5 million for the year ended December 31, 2001 from $2.7 million for the year ended December 31, 2000.
Reinsurance premiums ceded increased by $3.2 million to $7.3 million for the year ended December 31, 2001 from $4.1 million for the year ended December 31, 2000. The increase was primarily the result of the increase in gross premiums earned. Reinsurance premiums are affected by current year premiums payable to the reinsurers, as well as the retrospective adjustments to accruals for prior year premiums.
Reinsurance premiums related to prior years under the swing rated treaty were reduced by $1.7 million in 2001 and $1.9 million in 2000 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 2001 change is primarily reflective of the favorable loss development in the 1992 and 1996 coverage years. The 2000 change is primarily reflective of the favorable loss development in the 1993 through 1996 years. The liability "retrospective premiums accrued under reinsurance treaties" decreased to $2.4 million at December 31, 2001 from $5.5 million at December 31, 2000.
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 NCRIC's 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 NCRIC's business is written in other jurisdictions where renewal credits are not issued.
The mix of business produced directly by NCRIC versus by agents has changed between years as shown on the following chart of new gross written premium. The proportion of business produced by NCRIC's independent agency force has increased to 90% of total new business written in 2001 from 59% during in 2000.
Year ended December 31, 2000 compared to year ended December 31, 1999
This hospital-sponsored program, which terminated September 1, included 70 physicians insured directly with NCRIC and accounted for approximately $2.3 million in annualized premium. The majority of the physicians formerly in this terminated program have renewed their coverage and initiated participation in other hospital-sponsored programs where NCRIC provides the insurance coverage. Based on the actual accumulated loss experience of the terminated program through September 1, 2000, NCRIC billed the hospital sponsor $1.3 million under terms of the contract based on actual loss experience through the termination date. Because the original bill was not paid when due, NCRIC initiated legal proceedings to collect.
Gross premiums earned before renewal credits increased $1.2 million, or 6%, to $20.0 million for the year ended December 31, 2000 from $18.8 million for the year ended December 31, 1999. The increase was primarily due to $1.6 million of additional premiums earned under basic medical malpractice insurance offset by $450,000 less in premiums earned from risk sharing programs due to improved loss experience under the programs.
While insurance in force continues to follow the historic pattern of insuring risks concentrated in the District of Columbia, there has been notable growth in net earned premium in Virginia, largely as the result of sales by agents and to clients of the Practice Management Services Segment. For the year ended December 31, 2000, net earned premiums from Virginia totaled approximately $1.7 million, an increase of $944,000 over the total of approximately $743,000 for the year ended December 31, 1999.
The mix of business produced directly by NCRIC versus by agents has changed between years as shown on the following chart of new gross written premium. The proportion of business produced by NCRIC's independent agency force increased to 59% of total new business written in 2000 from 43% during the same period in 1999.
Year ended December 31, ------------------------------------ 2000 1999 ------------- -------------- Direct $1.8 million $1.4 million Agent 2.6 million 1.0 million
In 2000, new premium written to clients of the Practice Management Services Segment totaled $483,000, or 11% of total new gross written premium, compared to $56,000 in 1999, or 2% of new gross written premium.
Net investment income decreased by $271,000, or 4%, for the year ended December 31, 2001 compared to the prior year reflecting a decrease in yields partially offset by a higher base of average invested assets. Net investment income for the year ended December 31, 2001 was $6.1 million compared to $6.4 million for the year ended December 31, 2000. Average invested assets, which include cash equivalents, increased by $4.1 million, or 4%, to $105.7 million at December 31, 2001. New investments were primarily directed to corporate bonds and tax-exempt securities with the strategy of maximizing after-tax returns with investment grade securities. The average effective yield was approximately 5.80% for the year ended December 31, 2001 and 6.31% for the year ended December 31, 2000. The tax equivalent yield was approximately 6.30% at December 31, 2001 and 6.72% at December 31, 2000. The change in investment yields is reflective of the market change in interest rates in 2001 compared to 2000.
Net realized investment losses were $278,000 for the year ended December 31, 2001 compared to $5,000 for the year ended December 31, 2000. Through September 30, 2001, the net realized investment gains were comprised of gains on sales of equity securities and corporate and agency bonds. The net realized losses in the fourth quarter of 2001 were comprised of:
The loss taken on the Osprey bond (an Enron partnership) represents NCRIC's entire exposure to Enron securities. E-Health Solutions Group is an equity investment representing seed money provided by NCRIC to a medical information technology company that is developing software products for use by health care providers. While the investment in E-Health Solutions Group may produce value in future periods, an evaluation conducted during the fourth quarter concluded that under Generally Accepted Accounting Principles, NCRIC needed to write off the carrying value of the investment.
The realized investment losses in 2000 were from the sale of U.S. government and agencies securities partially offset by realized gains from the sale of asset and mortgage-backed securities.
Net realized investment losses were $5,000 for the year ended December 31, 2000 compared to $71,000 for the year ended December 31, 1999. The realized investment losses in 2000 were from the sale of U.S. government and agencies securities partially offset by realized gains from the sale of asset and mortgage-backed securities.
Practice management and related revenues increased by $741,000, or 16%, to $5.3 million for the year ended December 31, 2000, from $4.6 million for the year ended December 31, 1999. This revenue consists of fees generated by NCRIC MSO through HealthCare Consulting and Employee Benefits Services. The increase results from both recurring fee business and one-time consulting assignments. Approximately $365,000 of revenue in 2000 results from services provided to existing insureds of NCRIC reflecting results of the cross-selling initiative.
Other income includes revenues from insurance brokerage, insurance agency and physician services, as well as service charge income from NCRIC's financing of physician premiums.
Other income increased $132,000, or 28%, to $602,000 for the year ended December 31, 2001 from $470,000 for the year ended December 31, 2000. The increased revenue resulted primarily from increased brokerage reinsurance treaty commission income generated by the increased current year reinsurance ceded premiums.
Year Ended December 31, --------------------------- 2001 2000 1999 ------- ------- -------- (in thousands) Incurred losses and LAE related to: Current year - losses ........ $23,056 $17,829 $20,795 Prior years - development .... (4,198) (5,883) (7,928) ------- ------- ------- Total incurred for the year ....... $18,858 $11,946 $12,867 ======= ======= =======
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.
NCRIC 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 loss 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."
The fourth quarter expense for incurred losses and LAE net of reinsurance is summarized as follows (in thousands):
NCRIC 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 $5.9 million for the year ended December 31, 2000, and $7.9 million for the year ended December 31, 1999. The total loss and LAE ratio was reduced by 40 points for the year ended December 31, 2000 and 54 points for the year ended December 31, 1999, as a result of this favorable development. 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; whereas, the 1999 change is primarily reflective of the favorable loss development for the 1992 through 1996 loss years. The reduced level of favorable development in 2000 compared to 1999 reflects the increase in severity noted above.
The statutory combined ratio was 95.0% for the year ended December 31, 2000 compared to 96.5% for the year ended December 31, 1999. This decrease reflects the same premium and loss level factors noted previously.
Salaries and benefits accounted for approximately 35% of other underwriting expenses; with professional fees, including legal, auditing and director's fees, accounting for approximately another 15% of the underwriting expenditures. Premium taxes and commissions related to the change in unearned premiums are treated as deferred acquisition costs. Guaranty fund assessments are based on industry loss experience in the jurisdictions where NCRIC does business, which loss experience is not entirely predictable.
Underwriting expenses increased $581,000, or 19%, to $3.6 million for the year ended December 31, 2000 from $3.0 million for the year ended December 31, 1999. The increase in expenses primarily stems from the increase in new business, particularly agent produced business, through increases in commission and other underwriting costs, plus increased premium taxes and an increase in the allowance for uncollectible premium receivables.
Other expenses include expenditures for holding company and subsidiary operations which are not directly related to the issuance of medical professional liability insurance or practice management and related operations, including insurance brokerage, insurance agency and captive development.
Financial condition and capital resources. NCRIC Group is a stock holding company whose operations and assets primarily consist of its ownership of NCRIC, Inc. and NCRIC MSO, Inc. NCRIC Group assists 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.
NCRIC had cash flows provided by (used in) operations for the years ended December 31, as follows:
Over 65% of the bond portfolio at December 31, 2001 was invested in US Government and agency securities or has a rating of AAA or AA. For regulatory purposes as of December 31, 2001, 87% of the securities portfolio is rated "Class 1", which is the highest quality rated group as classified by the NAIC.
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 does 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 1998, 1999 and 2000 are open but not currently under audit. In 2000 the Internal Revenue Service approved a change in accounting method for NCRIC relative to the timing of revenue recognition for tax purposes.
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. 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 Commonwealth Medical Liability Insurance Company 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:
Other factors not currently anticipated by management may also materially and adversely affect NCRIC's results of operations.
We have audited the accompanying consolidated balance sheets of NCRIC Group, Inc. and Subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ending December 31, 2001. 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.
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, 2001 and 2000, and the results of their operations, and their cash flows for each of the three years in the period ending December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
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):
The Company has issued policies on both an occurrence and a claims-made basis. However, subsequent to June 1, 1986, substantially all policies have been 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.
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.
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 software and equipment and furniture and fixtures and ten years for leasehold improvements. The balances of fixed assets at December 31, 2001 and 2000 of $1,585,000 and $1,542,000, respectively, are net of accumulated depreciation of $1,835,000 and $1,477,000.
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 to 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, 2001 and 2000, the Company did not find it necessary to record a provision for impairment of assets.
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.
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.
Revenue Recognition - Premiums revenue is earned pro rata over the terms of the policies. The portion of premiums that will be earned in the future are deferred and reported as unearned premiums. In 2000 and 1999, 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.
New Accounting Pronouncements and Standards - In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), and Statement No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of SFAS 142 on January 1, 2002. NCRIC has not yet completed its analysis of the impact of SFAS 142. However, if SFAS 142 was adopted for the year ended December 31, 2001, the after tax impact on the annual earnings due to the elimination of goodwill amortization would be an increase of approximately $368,000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, SAB No. 101, summarizing certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Based on a review of the Company's revenue recognition polices, the impact of adopting SAB No. 101 is not material to its financial statements.
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 has been amortized over 20 years on a straight-line basis. With the adoption of SFAS 142 on January 1, 2002, the amortization of goodwill will cease.
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.
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
The following tables show the amortized cost and fair value of investments (in thousands):
2001 2000 1999 -------- -------- ------- BALANCE, Beginning of year ......... $ 81,134 $ 84,282 $84,595 Less reinsurance recoverable on unpaid claims .................... 27,312 25,815 24,546 -------- -------- ------- NET BALANCE ........................ 53,822 58,467 60,049 -------- -------- ------- Incurred related to: Current year .............. 23,056 17,829 20,795 Prior years ............... (4,198) (5,883) (7,928 -------- -------- ------- Total incurred .......... 18,858 11,946 12,867
Paid related to: Current year .............. 1,599 917 817 Prior years .............. 16,145 15,674 13,632 -------- -------- ------- Total paid .............. 17,744 16,591 14,449 -------- -------- -------
Plus reinsurance recoverable on unpaid claims ............... 29,624 27,312 25,815 BALANCE, End of year................ -------- -------- ------- $ 84,560 $ 81,134 $84,282 ======== ======== =======
The effect of reinsurance on premiums written and earned for the years ended are as follows (in thousands):
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.
As of December 31, ------------------ 2001 2000 ---- ---- Deferred tax assets: Unearned premiums .............. $ 903 $ 825 Discounted loss reserves ....... 2,709 2,755 Fair valuation of investments .. -- 383 Depreciation and amortization .. 71 7 Capital loss carryforwards ..... 107 13 Allowance for doubtful accounts 165 81 Other .......................... 156 148 ------ ------ 4,111 4,212 Deferred tax liabilities: Change in tax accounting method . (1,084) (2,208) Fair valuation of investments ... (244) -- Deferred policy acquisition costs (289) (86) Other ........................... (12) -- ------ ------ (1,629) (2,294)
2001 2000 1999 ---- ---- ---- Federal: Current $1,734 $1,220 $ (810) Deferred (1,206) 298 1,742 ----- ----- ----- 528 1,518 932 ----- ----- ----- State: Current 83 53 43 Deferred (14) (10) (8) ----- ----- ----- 69 43 35 ----- ----- ----- $ 597 $1,561 $ 967 ===== ===== =====
Federal income tax expense differs from that calculated using the established corporate rate primarily due to nontaxable investment income, as follows (in thousands):
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 have been $0.71 for the year ended December 31, 1999.
2002 $ 629,000 2003 505,000 2004 498,000 2005 507,000 2006 518,000 Thereafter 705,000 ------------
Rent expense during the years ended December 31, 2001, 2000, and 1999 was $662,000, $678,000, and $676,000, 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, 2001, NCRIC had not drawn on this facility.
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 $1.1 million. Another agreement 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, 2001 and 2000.
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 3% of each participant's total annual compensation. All contributions are 100% vested. The contributions from NCRIC MSO for the years ended December 31, 2001, 2000, and 1999 were $67,000, $57,000, and $97,000.
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.
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. Scheduled loan repayments on December 31, 2001, 2000, and 1999 have been made. On September 10, 2000, NCRIC Group granted 74,000 shares of common stock to directors and officers under its stock award plan. The compensation expense is measured at the fair value of the stock on the grant date, $7.875 per share, over the vesting period. For the years ended December 31, 2001 and 2000, the expense was $153,800 and $47,200, respectively.
NET INCOME - GAAP BASIS $ 1,579 $ 3,495 $ 2,505 ======= ======= =======
As of December 31, 2001, 2000, and 1999, statutory capital and surplus 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 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, was effective January 1, 2001. The effect on NCRIC's statutory surplus on January 1, 2001 was an increase of $1.6 million. This increase is
primarily due to the effect of the recognition of deferred taxes and the removal of the excess of statutory reserves over statement reserves penalty, partially offset by charges to surplus for overdue premium receivables.
Selected financial data is presented below for each business segment for the year ended December 31 (in thousands):
Premiums earned and other revenues $6,494 $6,397 $6,909 $ 7,561 Net investment income 1,558 1,538 1,521 1,519 Realized investment gains (losses) 95 2 97 (472) Net income (loss) 930 315 646 (312)
Year Ended December 31, 2000 FIRST SECOND THIRD FOURTH ------ -------- ------- --------
INVESTMENTS: Investments in subsidiaries* $ 42,248 $ 39,767 Bonds - - -------- -------- Total investments 42,248 39,767
OTHER ASSETS: Cash and cash equivalents 25 106 Receivables 133 197 Property and equipment, net 904 882 Due from subsidiaries* 1,162 487 Other assets 18 81 -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,490 $ 41,520 ======== ========
2001 2000 REVENUES: Net investment income $ -- $ 7 Dividends from subsidiaries* 1,500 1,500 Other income 12 22 ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES: Sales, maturities and redemptions of investments -- 743 Investment in purchased business (300) -- Purchases of property and equipment (73) (604) ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from the issuance of common stock -- -- Payments to acquire treasury stock (129) (131) ------- -------
On January 4, 1999, 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 Benefit Services. See Note 2 of the Notes to the Consolidated Financial Statements.
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE IV REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS) - ------------------------------------------------------------------------
BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END DESCRIPTION OF YEAR EXPENSES DEDUCTIONS OF YEAR 2001 ------- -------- ---------- ------- Allowance for Doubtful Accounts $ 350 $ 415 $ (203) $ 562
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE COMPANIES FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS) - --------------------------------------------------------------------------------