NCRIC's principal business operations are conducted from its 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 ten years, commencing April 15, 1998 and expiring April 30, 2008. Annual
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. For a discussion of the differences between statutory and GAAP reporting, see Note 11 to the consolidated financial statements.
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 and changes in methodology if needed, as well as a reflection of updated experience.
The inherent uncertainty in establishing reserves is relatively greater for companies writing long-tail casualty business, like NCRIC. Due to the extended nature of the claim resolution process of professional liability claims, established reserve estimates may be adversely impacted by: judicial expansion of liability standards; expansive interpretations of contracts; inflation associated with medical claims; and the propensity of individuals to file claims. Because of the existence of these uncertainties, NCRIC has historically taken a conservative posture in establishing reserves. NCRIC refines 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.
For 1999 and prior, in accordance with one of NCRIC's primary reinsurance contracts, the portion of the policyholder premium ceded to the reinsurers is "swing rated" or experience rated on a retrospective basis. This swing rated cession program is subject to a minimum and maximum premium range to be paid to the reinsurers in the future, depending upon the extent of losses 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.
NCRIC's practice for accounting for the liability for retrospective premiums accrued under reinsurance treaties has been to record the current year swing rated reinsurance premium at management's best estimate of the ultimate liability, which has generally been the maximum rate payable under terms of the treaty. Due to the long tail nature of the medical malpractice 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.
NCRIC has historically ceded to its reinsurers over 90% of its exposure to individual losses in excess of $1 million, known as excess layer coverage. Excess layer premiums are recorded as current year reinsurance ceded costs. Under the excess layer treaties, effective January 1, 2000, NCRIC cedes 100% of its risks and premiums related to these coverage layers.
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 predicts 2001 trends to include sustained price increases and worsening claims severity. NCRIC actively monitors these industry trends and considers them in relation to NCRIC's circumstances when setting rates or establishing reserves.
Consolidated net income - Years ended December 31, 2000, 1999 and 1998
Net income totaled $3.5 million for the year ended December 31, 2000 compared to $2.5 million for the year ended December 31, 1999. Improvement both in net underwriting results and in practice management results contributed to the increased earnings. Practice management results in 2000 included improvement due to lower legal fees relating to the litigation brought by the NCRIC Physicians Organization and settled in 1999.
Current year reinsurance premiums ceded decreased by $413,000, or 6%, to $6.0 million for the year ended December 31, 2000 from $6.4 million for the year ended December 31, 1999. This decrease is due to the reduced reinsurance premium rate on the primary layer premium as the result of the reinsurance treaty effective January 1, 2000 offset by increased gross premium reinsured. The reinsurance premium due for excess layer coverage at $2.3 million for the year was unchanged. The liability "retrospective premiums accrued under reinsurance treaties" decreased to $5.5 million at December 31, 2000 from $7.2 million at December 31, 1999.
Renewal credits increased $55,000 to $1.2 million for the year ended December 31, 2000 reflecting an increase in premiums on policies eligible for the renewal credit. In general, renewal credits apply to policies written in the District of Columbia and Maryland. 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 59% of total new business written in 2000 from 43% in 1999.
In 2000, 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.
The change in unearned premiums for the period decreased by $424,000 to $2.5 million for the year ended December 31, 1999 from $2.9 million for the year ended December 31, 1998. This decrease resulted from a $1.9 million increase due to the staggering of renewal dates, new business written and extended reporting endorsement coverage offset by a $2.3 million decrease in retrospectively determined policyholder refunds for 1999 due to higher loss experience in the experience-rated programs.
Gross premiums earned before renewal credits increased $2.5 million, or 15%, to $18.8 million
for the year ended December 31, 1999 from $16.3 million for the year ended December 31, 1998. The increase was primarily due to $2.4 million of additional premiums earned under experience-rated programs.
Reinsurance premiums related to prior years under the swing rated treaty were reduced by $3.4 million in 1999 and $9.7 million in 1998 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 1999 change is primarily reflective of the favorable loss development in the 1992 though 1996 loss years. The 1998 change is primarily reflective of the favorable loss development for the 1993 through 1995 loss years. The favorable loss development results largely from NCRIC's decision in 1996 to more aggressively defend high exposure loss cases.
Net investment income increased by $318,000, or 5%, for the year ended December 31, 2000 compared to the prior year reflecting an increase in yields, partially offset by a lower base of average invested assets. Net investment income for the year ended December 31, 2000 was $6.4 million
Net investment income increased by $93,000, or 1.6%, for the year ended December 31, 1999 compared to the prior year reflecting a slight increase in yields. Net investment income for both years was approximately $6.0 million. Average invested assets, which include cash equivalents, were maintained at essentially the same level in both periods. Maturing investments were primarily reinvested in asset and mortgaged backed securities. $2.9 million of funds were used in the January 4, 1999 acquisition of the businesses of HealthCare Consulting, HCI Ventures and Employee Benefit Services. The average effective yield was approximately 5.74% for the year ended December 31, 1999 and 5.68% for the year ended December 31, 1998. The tax equivalent yield was approximately 6.18% at December 31, 1999 and 6.24% at December 31, 1998. The change in investment yields is reflective of the market change in interest rates in 1999 compared to 1998.
Net realized investment losses were $71,000 for the year ended December 31, 1999 compared to net realized gains of $159,000 for the year ended December 31, 1998. Realized losses in 1999 were primarily from the sale of asset and mortgage-backed securities and U.S. government and agencies.
Revenue for practice management and related services is comprised of fees for the services shown in the following chart.
Practice management and related revenues of $4.6 million and $78,000 for the years ended December 31, 1999 and 1998, consisted of fees generated by NCRIC MSO primarily through the businesses acquired on January 4, 1999, HealthCare Consulting and Employee Benefits Services. HealthCare Consulting serves more than 1,100 physician clients in Virginia, North Carolina, South Carolina, Tennessee, and the District of Columbia.
Other income increased $97,000, or 26%, to $470,000 for the year ended December 31, 2000 from $373,000 for the year ended December 31, 1999. Of the increase, $53,000 was in NCRIC Physicians Organization as a result of the 1999 litigation settlement.
Other income increased $16,000, or 4%, to $373,000 for the year ended December 31, 1999 from $357,000 for the year ended December 31, 1998. The primary source of the increase was in brokerage commission income as the result of increased excess layer reinsurance ceded.
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.
Total incurred loss and LAE expense of $12.9 million for year ended December 31, 1999 represented a decrease of $2.8 million, or 18%, compared to $15.7 million incurred for the year ended December 31, 1998.
NCRIC experienced favorable development on estimated losses for prior year's claims for both years. The favorable loss development related to prior years claims was $7.9 million for the year ended December 31, 1999, and $3.5 million for the year ended December 31, 1998. The total loss and LAE ratio was reduced by 54 points for the year ended December 31, 1999 and 19 points for the year ended December 31, 1998, as a result of this favorable development. The 1999 change is primarily reflective of the favorable loss development for the 1992 through 1996 loss years, whereas, the 1998 change is primarily reflective of the favorable loss development for the 1993 through 1995 loss 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 underwriting expense ratio decreased to 20.5% for the year ended December 31, 1999 from 20.9% for the year ended December 31, 1998. This decrease is reflective of the 22% decrease in underwriting expenses partially offset by the decrease in net premiums earned due to the substantial decrease in reinsurance premiums previously described. Underwriting expenses decreased $848,000 to
$3.0 million for the year ended December 31, 1999 from $3.9 million for the year ended December 31, 1998. See "Underwriting expenses".
Year Ended December 31, ----------------------- 2000 1999 -------- -------- (in thousands) Liability for: Losses ................................. $ 55,785 $ 56,462 Loss adjustment expenses ............... 25,349 27,820 -------- -------- $ 81,134 $ 84,282 ======== ======== Reinsurance recoverable on losses ............... $ 27,549 $ 26,627 ======== ========
Losses in the medical professional liability industry can take up to eight to ten years, or occasionally more, to fully settle. Actual amounts are not due from the reinsurers until NCRIC settles a claim.
NCRIC believes that all of its reinsurance recoverables are collectible. See "Business - Reinsurance" for a discussion on the reinsurance program.
Salaries and benefits accounted for approximately 45% of other underwriting expenses; with professional fees, including legal, auditing and director's fees, accounting for approximately another 20% 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 is not entirely predictable.
Practice management and related expenses consist primarily of expenses, such as salaries, general office expenses, and goodwill amortization related to NCRIC MSO operations of the businesses acquired January 4, 1999. The management services organization was established in 1997 to provide physicians with a variety of administrative support and other services but did not have substantive operations until 1998.
Practice management and related expenses increased $125,000, or 3%, to $5.0 million for the year ended December 31, 2000 compared to $4.8 million for the year ended December 31, 2000. The increase is due to general increases in operating expenses, principally compensation, related to supporting a growing base of business.
Other expenses decreased $71,000 to $1.4 million for the year ended December 31, 1999 from $1.5 million for the year ended December 31, 1998. The change resulted primarily from the decrease in expenses in connection with the 1998 reorganization and in expenses for National Capital Insurance Brokerage related to a consulting contract that was transferred to NCRIC, Inc. during 1999 offset largely by an increase of $307,000 in legal fees incurred in connection with litigation brought by NCRIC Physicians Organization, interest on acquisition debt and parent company expenses for directors fees. The litigation was settled in 1999 with terms including a guarantee of a minimum payment to the NCRIC Physicians Organization of $6,000 per month for 60 months.
The effective tax rate for NCRIC is lower than the federal statutory rate principally due to nontaxable investment income.
Deferred federal income tax asset ........... $ 1,918,000 $ 3,298,000 =========== ===========
with other dividends made within the preceding 12 months, exceeds the lesser of (A) 10% of the surplus at the end of the prior year or (B) the prior year's net income excluding realized capital gains. Net income, excluding realized capital gains, for the 2 years preceding the current year is carried forward for purposes of the calculation to the extent not paid in dividends. The law also requires that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to the insurer's outstanding liabilities and adequate to meet its financial needs. The District of Columbia permits the payment of dividends only out of unassigned statutory surplus. Using these criteria, as of December 31, 2000, NCRIC, Inc. would have had available approximately $3.0 million of unassigned statutory surplus available for dividends.
Liquidity. The primary sources of NCRIC subsidiaries' 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 claims, LAE, operating expenses, reinsurance premiums and taxes; and to purchase investments.
NCRIC subsidiaries had negative cash flows from operations for the year ended December 31, 2000 and positive cash flows from operations for the years ended December 31, 1999 and 1998. Cash used in operating activities of NCRIC subsidiaries was $931,000 in 2000 compared to cash provided by operating activities of $5.1 million in 1999 and $3.0 million in 1998. The $6.0 million of decreased cash flow in 2000 compared to 1999 results primarily from a $1.6 million increase in payments for losses and LAE, an increase of $1.3 million in income taxes paid, an increase of $2.4 million for reinsurance under the swing rated treaty, a $1.5 million dividend to the parent company, and a decrease in interest income of $100,000, partially offset by an increase in premiums collected of $900,000. The $2.1 million of increased cash flow in 1999 compared to 1998 results primarily from $2.8 million of additional premiums collected, an increase of $1.3 million in receipts from reinsurers, a decrease of $700,000 in income and premium taxes paid, and net cash inflows of $400,000 from the operations of the practice management and financial services companies acquired January, 1999, partially offset by a $3.1 million increase in payments for losses and LAE. Because of the long-term nature of both payment of claims and the settlement of swing rated reinsurance premiums due to the reinsurers, cash from operations for a medical professional liability insurer like NCRIC, Inc. can vary substantially from year to year.
Comprehensive income was a gain of $5.6 million for the year ended December 31, 2000 compared to a loss of $2.4 million for the year ended December 31, 1999. The increase in comprehensive income results from the increase in unrealized investment gains, net of deferred income taxes, added to the increase in net income.
Financial condition and capital resources. NCRIC subsidiaries invest their positive cash flow from operations primarily in investment grade, fixed maturity securities. As of December 31, 2000, the carrying value of NCRIC subsidiaries securities portfolio was $98.0 million, compared to a carrying value of $94.3 million at December 31, 1999. The portfolios were invested as follows:
Over 78% of the bond portfolio at December 31, 2000 was invested in US Government and agency securities or has a rating of AAA or AA. For regulatory purposes as of December 31, 2000, 95% of the securities portfolio is rated "Class 1", which is the highest quality rated group as classified by the NAIC.
NCRIC subsidiaries believe that all of their fixed maturity securities are readily marketable. Investment duration is closely monitored to provide adequate cash flow to meet operational and maturing liability needs. Asset and liability modeling, including sensitivity analyses and cash flow testing, are performed on a regular basis.
The primary effect of inflation on NCRIC 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 NCRIC's results cannot be conclusively known until claims are ultimately settled. Based on actual results to date, NCRIC believes that loss and LAE reserve levels and NCRIC's ratemaking process adequately incorporates the effects of inflation.
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 1997, 1998 and 1999 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 statutory accounting codification. The National Association of Insurance Commissioners or 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 applies commencing January 1, 2001. Statutory accounting changes resulting from this codification will 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 NCRIC's statutory surplus on January 1, 2001 is an increase of $1.2 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.
A number of statements made by NCRIC in this document are forward-looking statements which involve known and unknown risks and uncertainties which may cause NCRIC's actual results to be materially different from historical results or from the results expressed or implied by the forward-looking statements. These risks and uncertainties include:
Consolidated Statements of Operations for the Years Ended December 31, 2000, 1999, and 1998 71
Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999, and 1998 73
Notes to Consolidated Financial Statements for the Years Ended December 31, 2000, 1999, and 1998 74
Schedule I - Summary of Investments - Other Than Investments in Related Parties 92
Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Companies 100
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, 2000 and 1999, and the results of their operations, and their cash flows for each of the three years in the period ending December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 - -----------------------------------------------------
The Company also provides (i) practice management services, accounting and tax services, and personal
financial planning services to medical and dental practices and (ii) retirement planning services and administration to medical and dental practices and certain other businesses throughout the Mid-Atlantic Region.
Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated in the consolidation.
Goodwill - Goodwill arising from the Company's acquisition 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 is amortized on a straight-line basis over 20 years. Goodwill is shown net of accumulated amortization of $525,000 and $259,000 as of December 31, 2000 and 1999, respectively.
The Company protects itself from excessive losses by reinsuring certain levels of risk in various areas of exposure. Amounts recoverable from reinsurance are estimated in a manner consistent with the loss and loss adjustment expense reserve associated with the reinsured loss.
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, 2000 and 1999, 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.
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. The Company will adopt SFAS 133, as amended, on January 1, 2001. The adoption of this standard will not have a material effect on the financial position or results of operations of the Company.
The composition of shares issued in conjunction with the IPO is as follows (in thousands):
Proceeds from bond maturities and redemptions of available for sale investments during the years ended December 31, 2000, 1999, and 1998, were $10.5 million, $66.1 million, and $58.8 million, respectively. Gross gains of $16,000, $260,000, and $521,000, and gross losses of $21,000, $331,000, and $362,000, were realized on bond redemptions and available for sale investments during years ended December 31, 2000, 1999, and 1998, respectively.
For the years ended December 31, 2000 and 1999, net investment income earned was as follows (in thousands):
Total investment income earned 6,698 6,420 Investment expenses (291) (331) -------- ------- Net investment income $ 6,407 $ 6,089 ======== =======
Liabilities for unpaid losses and loss adjustment expenses represent an estimate of the ultimate net cost of all losses that are unpaid at the balance sheet date, and are based on the loss and loss adjustment expense factors inherent in the Company's experience and expectations. Estimation factors used by the Company reflect current case-basis estimates (supplemented by industry statistical data) and give effect to estimates of trends in claim severity and frequency. These estimates are continually reviewed, and adjustments, reflected in current operations, are made as deemed necessary.
Although the Company believes the liabilities for losses and loss adjustment expenses are reasonable and adequate for the circumstances, it is possible that the Company's actual incurred losses and loss adjustment expenses will not conform to the assumptions inherent in the determination of the liabilities. Accordingly, the ultimate settlement of losses and the related loss adjustment expenses may vary from the amounts included in the financial statements.
The net reduction in incurred losses related to prior years represents development of net losses incurred in prior years. This development results from the re-estimation and settlement of individual losses not covered by reinsurance, which are generally losses under $500,000. 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 1998 change is primarily reflective of the favorable loss development for the 1993 through 1995 loss years. The reduced level of favorable development in 2000 compared to 1999 reflects the increase in severity, which reflects the growing size of plaintiff verdicts and settlements.
The Company has reinsurance agreements that allow the Company to write policies with higher coverage limits than it is individually capable or desirous of retaining by reinsuring the amount in excess of its retention. The Company has both excess of loss treaties and quota share treaties.
December 31, ------------------------- 2000 1999 -------- ------- Deferred tax assets: Unearned premiums $ 825 $ 647 Discounted loss reserves 2,755 2,891 Fair valuation of investments 383 1,477 Depreciation and amortization 17 17 Minimum tax credit carryforward -- 219 State taxes 10 -- Other 271 -- -------- ------- 4,261 5,251 Deferred tax liabilities: Changes in tax accounting method $ (2,208) $(1,852) Other (135) (101) -------- ------- (2,343) (1,953)
State: Current 53 43 Deferred (10) (8) --------- -------- 43 35 --------- -------- $ 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):
As of December 31, 2000, the future minimum annual commitments under noncancellable leases are as follows (in thousands):
Rent expense during the years ended December 31, 2000 and 1999 was $678,000 and $676,000, respectively.
One of the Company's subsidiaries has entered into a contract to purchase new policy administration software; future payments under the contract are required as services are completed by the vendor and total $35,000 as of December 31, 2000.
Defined Contribution Plans - NCRIC sponsors a defined contribution 401(k) profit-sharing plan. Employees who are 21 years or older and have completed 90 days of service are eligible for participation in the plan. Employees may elect to contribute 1 to 15% of total compensation, and all contributions are 100% vested. NCRIC is not required to make matching contributions to the plan, but may make discretionary contributions. Total contributions to the plan by NCRIC for the years ended December 31, 2000, 1999, and 1998, were $177,000, $171,000, and $140,000.
NCRIC Group accounts for compensation cost using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, no compensation expense was recognized since the stock options granted were at an exercise price equal to the fair market value of the common stock on the date the options were granted. Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, requires disclosure of the pro forma net income and earnings per share as if the Company had accounted for its stock options under the fair value method defined in that Statement.
2000 1999 ------ ------ Pro forma net income (in thousands) $3,431 $2,479 Pro forma earnings per share - Basic $ 0.97 $ 0.89 Pro forma earnings per share - Diluted $ 0.96 $ 0.89
Employee Stock Ownership Plan - NCRIC Group has an ESOP for employees who have attained age 21 and completed one year of service. As part of the stock offering, the ESOP borrowed $1.0 million from NCRIC Group to purchase 148,000 shares which are held in a trust account for allocation among participants as the loan is repaid. For shares allocated to the accounts of the ESOP participants as the result of payments made to reduce the ESOP loan, the compensation charge is based upon the average fair value of the shares over the service period. Scheduled loan repayments on December 31, 2000 and 1999 have been made. During the years ended December 31, 2000 and 1999, contributions of $120,000 and $53,000 were made to the plan. During 2000, 14,800 shares were allocated to the plan. In 1999, 6,167 shares were allocated.
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, 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 year ended December 31, 2000, the expense was $47,200.
As of December 31, 2000, 1999, and 1998, 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.
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, is effective January 1, 2001. The effect on NCRIC's statutory surplus on January 1, 2001 is an increase of $1.2 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.
On December 31, 1998, in accordance with the Company's plan of reorganization, NCRIC, Inc. paid a dividend of $250,000 to its ultimate parent, Mutual Holding Company.
During 2000 and 1999, members of the Company's Board of Directors paid NCRIC MSO approximately $157,000 and $150,000, respectively, for practice management related services.
The following is a summary of unaudited quarterly results of operations for 2000 and 1999:
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (IN THOUSANDS) - --------------------------------------------------------------------------------
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999 (IN THOUSANDS) - -------------------------------------------------------------------------------
NOTES TO CONDENSED FINANCIAL STATEMENTS NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
On December 31, 1998, National Capital Reciprocal Insurance Company consummated its plan of reorganization from a reciprocal insurer to a stock insurance company and became a wholly owned subsidiary of NCRIC Group, Inc. (Group) and converted into NCRIC, Inc. Group has no historical operations and was organized in December, 1998, as part of the plan to reorganize its corporate structure.
In Group's financial statements, investment in subsidiaries is stated at cost plus equity in undistributed earnings of subsidiaries since date of reorganization plus unrealized gains and losses of subsidiaries' investments.