The financial statements and data presented in the Form 10-K have been prepared in accordance with generally accepted accounting principles, GAAP, unless otherwise noted. GAAP differs from statutory accounting practices used by regulatory authorities in their oversight responsibilities of insurance companies.
On January 4, 1999 NCRIC Group acquired all the outstanding shares of HealthCare Consulting, Inc., the interests of HCI Ventures, LLC, and the assets of Employee Benefits Services, Inc. The acquisition was recorded as a purchase. The results of operations for the years ended December 31, 2000 and 1999 include the results of the acquired businesses for those periods. Under terms of the purchase agreement, an additional purchase payment could be paid in cash if the acquired business achieved an earnings target in 2000; the target was met and the resulting additional purchase payment of $1.55 million was accrued as of December 31, 2000.
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.
Prior to 1997, NCRIC's policies were written with a January 1 renewal date. Beginning in 1997 and continuing in 1998 and 1999, NCRIC began staggering policy renewal dates throughout the year, which results in a one-time effect when the policy is staggered. Written premiums are increased during the periods when policies are being re-issued, returning to the previous level in the subsequent period. In accordance with GAAP, premiums are earned ratably over the terms of NCRIC's policies, so this change in renewal dates has no effect on premiums earned for any period.
Losses and loss adjustment expenses. Loss and LAE reserves are estimates of future payments for reported and unreported claims and related expenses of adjudicating claims with respect to insured events that have occurred. The change in these reserves from year to year is reflected as an increase or decrease to NCRIC's loss and loss adjustment expenses. Medical professional liability loss and LAE reserves are established based on an estimate of these future payments as reflected in NCRIC's 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 continues to be a complex and uncertain process, requiring the use of informed estimates and judgements. Although NCRIC follows a practice of conservatively estimating its future payments relating to losses incurred, there can be no assurance that currently established reserves will prove adequate in light of subsequent actual experience.
Reinsurance. NCRIC manages its exposure to individual claim losses, annual aggregate losses, and LAE through its reinsurance program. Reinsurance is a customary practice in the industry. It allows NCRIC to obtain indemnification against a specified portion of losses associated with insurance policies it has underwritten by entering into a reinsurance agreement with other insurance enterprises or reinsurers. NCRIC pays or cedes part of its policyholder premium to reinsurers. The reinsurers in return agree to reimburse NCRIC for a specified portion of any claims covered under the reinsurance contract. While reinsurance arrangements are designed to limit losses from large exposures and to permit recovery of a portion of direct losses, reinsurance does not relieve NCRIC of liability to its insureds.
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
Accounting Literature. - 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 adopting SAB No. 101 is not material to its financial statements.
Gross premiums written adjusted for the staggering of renewal dates and retrospective program premiums increased by $1.7 million, or 9%. This increase was due primarily to net new business written in 2000, increasing the number of policyholders by 31%, offset partially by a change in the mix of business in new policies written. Gross premiums written on excess layer coverage increased $200,000 to $2.7 million for the year ended December 31, 2000 from $2.5 million for the year ended December 31, 1999.
Late in the second quarter it was determined that one of NCRIC's retrospective programs would not be renewed at the September 1 renewal. Under this type of risk sharing program, physicians are underwritten directly by NCRIC 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, NCRIC will require additional premium payments from the sponsoring hospital to offset the unfavorable losses.
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 has billed the hospital sponsor $1.3 million under terms of the contract based on actual loss experience through the termination date. Because this bill was not paid when due, NCRIC has initiated legal proceedings to collect. NCRIC will use all means legally available to collect the amount it is due. NCRIC believes that resolution of this matter will not have a material adverse effect on its financial position or results of operations. However, the ultimate outcome cannot be determined at this time.
Net premiums earned before renewal credits at $15.9 million for the year ended December 31, 2000 are flat compared to the year ended December 31, 1999. Net premiums earned after renewal credits decreased by $55,000, less than 1%, to $14.6 million for the year ended December 31, 2000 from $14.7 million for the year ended December 31, 1999. The decrease reflects the $1.5 million lower reinsurance ceded favorable prior year development in 2000 compared to 1999 largely offset by the increase in gross earned premiums.
Gross premiums written increased by $2.1 million, or 11%, to $21.3 million for the year ended December 31, 1999 from $19.2 million for the year ended December 31, 1998. Starting in the fourth quarter of 1997 and continuing through 1999, NCRIC began staggering policy renewal dates. Premiums written for the year ended December 31, 1999 increased approximately $400,000 over the premiums written for the year ended December 31, 1998 due to the re-writing of policies. There is a one-time effect when the policy renewal is staggered which increases premiums written in the current period; premiums written will, all else being equal, return to the previous level in the subsequent period. While the staggering of the renewal dates affects premiums written, earned premiums are not affected for either period.
Gross premiums written, adjusted for the staggering of renewal dates, increased $1.8 million for the year ended December 31, 1999 over the year ended December 31, 1998 due to net new business written in 1999, increasing the number of policyholders by 13%. Gross premiums written on excess layer coverage increased $500,000 to $2.5 million for the year ended December 31, 1999 from $2.0 million for the year ended December 31, 1998.
Reinsurance premiums ceded increased by $7.1 million to $3.0 million for the year ended December 31, 1999 from a credit of $4.1 million for the year ended December 31, 1998. Reinsurance premiums are affected by current year premiums payable to the reinsurers, as well as the retrospective adjustments to accruals for prior year premiums. The increase was the result of a decrease in the credit from prior years premiums under the swing rated insurance treaty due to favorable loss experience.
Current year reinsurance premiums ceded increased by $772,000, or 14%, to $6.4 million for the year ended December 31, 1999 from $5.6 million for the year ended December 31, 1998. This increase is due to an increase in the excess layer coverages purchased by the policyholders plus an increase in the swing rated premium on the primary layer. The reinsurance premium due for excess layer coverage increased by $408,000, or 22%, to $2.3 million for the year ended December 31, 1999 from $1.9 million for the year ended December 31, 1998, consistent with an increase in premiums written for the excess layer coverage. In addition, the premiums related to the swing rated cession program increased by $364,000, or 10%. The liability "retrospective premiums accrued under reinsurance treaties" increased to $7.2 million at December 31, 1999 from $6.5 million at December 31, 1998.
Renewal credits decreased $710,000 to $1.2 million for the year ended December 31, 1999 from $1.9 million for the year ended December 31, 1998 reflecting a decrease in the credit rate to 10% from 12.5%.
Net premiums earned before renewal credits decreased by $4.5 million, or 22%, to $15.9 million for the year ended December 31, 1999 from $20.4 million for the year ended December 31, 1998. Net premiums earned after renewal credits decreased by $3.8 million, or 21%, to $14.7 million for the year ended December 31, 1999 from $18.5 million for the year ended December 31, 1998. The decreases reflect the lower reinsurance ceded favorable prior year development in 1999 compared to 1998 partially offset by the increase in gross earned premiums.
Year Ended December 31, 2000 1999 ----- ----- Practice management 44% 40% Accounting 28 31 Tax & personal financial planning 11 11 Retirement plan accounting & admin 13 13 Other 4 5 ----- ----- Total 100% 100% ===== =====
Total incurred loss and LAE expense of $11.9 million for year ended December 31, 2000 represented a decrease of $921,000, or 7%, compared to $12.9 million incurred for the year ended December 31, 1999.
The total incurred losses are broken into two components - incurred losses related to the current coverage year and development on prior coverage year losses. Current year incurred losses decreased by $3.0 million, or 14%, to $17.8 million for the year ended December 31, 2000 from $20.8 million for the year ended December 31, 1999. The number of new claims reported in 2000 was greater than in 1999; however, the frequency, the number of claims reported per 100 full time equivalent insureds, was flat in 2000 relative to the 1999 level. An increase in severity was first noted in 1996 and continued through 2000. The increase in severity reflects the growing size of plaintiff verdicts and settlements. NCRIC's escalation in this adverse claims trend is similar to the conditions faced by many medical professional liability insurance carriers across the nation. While an increase in severity would tend to cause loss ratios to deteriorate, NCRIC's reinsurance program for losses in excess of $500,000 provides protection against the increase in severity of losses.
The statutory combined ratio was 94.5% for the year ended December 31, 2000 compared to 97.4% for the year ended December 31, 1999. This decrease reflects the same premium and loss level factors noted previously.
The total incurred losses are broken into two components - incurred losses related to the current coverage year and development on prior coverage year losses. Current year incurred losses increased by $1.7 million, or 9%, to $20.8 million for the year ended December 31, 1999 from $19.1 million for the year ended December 31,1998. The frequency, number of new claims reported, in 1999 was greater than in 1998 but remained less than the 1997 level. An increase in severity was first noted in 1996 and continued through 1999. The increase in frequency combined with the continuing heightened level of severity resulted in an increase in the current year loss and LAE ratio to 141.8% for the year ended December 31, 1999 from 103.7% for the year ended December 31, 1998.
The combined ratio increased to 108.2% for the year ended December 31, 1999 from 105.8% for the year ended December 31, 1998, reflecting the decrease in net premiums earned previously described, partially offset by lower incurred losses. The statutory combined ratio was 97.4% for the year ended December 31, 1999 compared to 97.7% for the year ended December 31, 1998. This decrease reflects the same premium and loss level factors noted previously.
Underwriting expenses decreased $848,000, or 22%, to $3.0 million for the year ended December 31, 1999 from $3.9 million for the year ended December 31, 1998. The decrease in expense was due primarily to a decrease in premium taxes related to the reduction in the premium tax rate, a decrease in guaranty fund assessments and a decrease in directors fees and salaries as a result of the reorganization.
Practice management and related expenses of $4.8 million for the year ended December 31, 1999 increased over the 1998 level due to the businesses acquired on January 4, 1999.
Other expenses decreased $202,000 to $1.2 million for the year ended December 31, 2000 from $1.4 million for the year ended December 31, 1999. The primary component of the decrease was a reduction of legal expenses incurred in connection with litigation brought by NCRIC Physicians Organization and settled in 1999 as well as the non-recurrence of interest expense. These decreases were partially offset by an increase in expenses due to meeting the various requirements associated with having common stock traded in the public market and the expense of the stock grants made in September, 2000 under the Stock Award Plan.
Federal income tax at statutory rates ........... 34% 34% 34% Tax exempt income................................ (4) (7) (9) Dividends received............................... (1) (2) (2) Goodwill amortization............................ 1 2 -- Reorganization costs ............................ -- -- 6 Other, net ...................................... 1 1 1 ----- ----- ----- Income tax at effective rates ................... 31% 28% 30% ===== ===== =====
Tax expense for the year ended December 31, 1999 was $1.0 million compared to $1.1 million for the year ended December 31, 1998. The Federal corporate income tax rate of 34% was reduced to an effective tax benefit rate of 28% for the year ended December 31, 1999 due to tax-exempt income and nontaxable dividends received, partially offset by non-deductible goodwill amortization. The effective rate was 30% for the year ended December 31, 1998, higher than the 1999 effective rate primarily due to 1998 reorganization costs. The decrease in federal income tax is reflective of the decreased income before tax for the period combined with the reduction in the effective tax rate.
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. As a result of the 1998 reorganization, NCRIC Group has greater access to the capital markets. This allows NCRIC Group to assist 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.
Liquidity. Liquidity is a measure of an entity's ability to secure enough cash to meet its contractual obligations and operating needs. NCRIC Group's cash flow from operations will consist of dividends from subsidiaries, if declared and paid, and other permissible payments from its subsidiaries, offset by fees paid to NCRIC, Inc., for management services and other expenses. NCRIC Group intends to rely primarily on this cash flow from NCRIC, Inc. and NCRIC MSO, Inc. to pay dividends on its common stock, if any. The amount of the future cash flow available to NCRIC Group may be influenced by a variety of factors, including NCRIC, Inc.'s financial results and regulation by the District of Columbia Department of Insurance and Securities Regulation.
The payment of dividends to NCRIC Group by NCRIC, Inc. is subject to limitations imposed by the District of Columbia Holding Company System Act of 1993. Under the DC Holding Company Act, NCRIC, Inc. must seek prior approval from the Commissioner to pay any dividend which, combined
U.S. Government and agencies..................... 14% 15% Asset and mortgage-backed securities............. 32 40 Tax-exempt securities ........................... 16 14 Corporate bonds and equity securities............ 38 31
NCRIC subsidiaries have no corporate debt. The $2.5 million line of credit available as of December 31, 2000 is restricted to working capital for claim settlements. The line of credit is unsecured and renewable. NCRIC subsidiaries have not drawn down on this facility. As of December 31, 1999, a NCRIC subsidiary had 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. NCRIC subsidiaries have no other material commitments for capital expenditures. NCRIC Group and its subsidiaries are required to pay aggregate annual salaries in the amount of $1.1 million to six persons under employment agreements. In addition, under terms of the purchase agreement between NCRIC Group and the previous owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc., contingency payments totaling $3.1 million could be paid in cash if the acquired companies achieve earnings targets in 2000, 2001, and 2002. During 2000, the earnings target was met and NCRIC Group will pay the prior owners $1.55 million on March 31, 2001.
The equity of NCRIC subsidiaries was $35.5 million at December 31, 2000 and $29.1 million at December 31, 1999. The $6.4 million increase for the year ended December 31, 2000 was due to $4.3 million of net income plus $2.1 million of unrealized investment gains net of tax. The $1.9 million decrease for the year ended December 31, 1999 was due to $3.0 million of net income offset by $4.9 million of unrealized investment losses net of tax.
NAIC IRIS ratios. The NAIC Insurance Regulatory Information System (IRIS), is an early warning system that is primarily intended to be utilized by the 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 the 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.
For 2000, NCRIC's subsidiary CML was outside the usual range on three ratios. The ratio results were impacted by two primary factors: the rapid increase in new premium written in CML and the increase in severity of losses, particularly the adverse development in losses of one prior year. In the opinion of management, because of the reasons for the ratio results for the current year, the ratio results are not indicative of operational problems in this subsidiary. For 1999 and 1998, another subsidiary, NCRIC, Inc., was outside the usual range for two ratios as the result of fluctuations in reinsurance ceded premiums under the swing rated reinsurance program.
December 31, 2000........... $3.7 $0.19 $29.8 $4.5 1999........... 4.1 0.17 29.2 5.0 1998........... 4.5 0.15 24.1 5.0
o general economic conditions including changes in interest rates and the performance of financial markets; o NCRIC, Inc.'s concentration in a single line of business primarily in the District of Columbia; o the impact of managed healthcare; o uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance; o price competition; o uncertainties associated with expanding business in new market areas, including uncertainties associated with claims adjudication experience; o regulatory changes; o ratings assigned by A.M. Best;
o the availability of bank financing and reinsurance; o the mutual holding company structure; and o uncertainties associated with NCRIC Group's acquisition strategy.
Consolidated Balance Sheets as of December 31, 2000 and 1999 70
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 1999, and 1998 72
We have audited the accompanying consolidated balance sheets of NCRIC Group, Inc. and Subsidiaries (the Company) as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ending December 31, 2000. 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.
Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The additional schedules listed in the table of contents are presented for the purpose of additional analysis and are not a required part of the basic financial statements. The additional schedules are the responsibility of the Company's management. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole.
Organization and Basis of Reporting - On April 20, 1998, the Board of Governors of National Capital Reciprocal Insurance Company adopted a plan of reorganization which authorized the formation of NCRIC, A Mutual Holding Company (Mutual Holding Company) and the conversion into NCRIC, Inc. (NCRIC), a stock medical professional liability insurance company. The reorganization became effective on December 31, 1998.
The reorganization separated the contract rights and the membership interests of the policyholders so that their contract rights remain with NCRIC while their membership interests are in the Mutual Holding Company. Each policyholder of a policy that was in force as of December 31, 1998, and who was a member of National Capital Reciprocal Insurance Company, pursuant to the reorganization, became a member of the Mutual Holding Company.
Gross offering proceeds $ 10,360 Less offering expenses (1,998) -------- Net proceeds 8,362 Less: ESOP loan (1,036) Stock Award Plan loan (518) --------- Net proceeds, as adjusted $ 6,808 ========
The accompanying financial statements present the consolidated financial position and results of operations of NCRIC Group, Inc. and subsidiaries.
Liabilities for Losses and Loss Adjustment Expenses - Liabilities for losses and loss adjustment expenses are established on the basis of reported losses and a provision for losses incurred but not reported and related loss adjustment expenses. These amounts are based on the estimates of management and are subject to risks and uncertainties. As facts become known, adjustments to these estimates are reflected in earnings.
Concentrations of Credit Risk - Financial instruments which potentially expose the Company to concentrations of risk consist principally of cash equivalent investments, investments in securities and reinsurance recoverables. Concentrations of credit risk for investments are limited due to the large number of such investments and their distributions across many different industries and geographical areas. Concentrations of credit risk for reinsurance recoverables are limited due to the large number of reinsurers participating in the program.
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, 1999, and 1998, 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 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.
The acquisition has been accounted for using the purchase method. Goodwill is amortized over 20 years on a straight-line basis. The contingent payments would be additions to goodwill and would be amortized over 20 years.
The following pro forma information presents the results of operations for the year ended December 31, 1998 as though the acquisition had occurred at January 1, 1998 (in thousands):
Issued in exchange of convertible notes 43 ----- Total shares issued July 29, 1999 3,743
The 2,220,000 shares issued to NCRIC Holdings has been recognized as a stock split in which its initial 1,000 shares of outstanding stock were replaced by 2,220,000 shares effective with the conclusion of the IPO retroactive to December 31, 1998.
The amortized cost and fair value of debt securities at December 31, 2000 and 1999, are shown by maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties.
U. S Government and agencies $ 811 $ 988 Corporate 2,252 1,424 Tax-exempt obligations 727 723 Asset and mortgage-backed securities 2,167 2,584 Equity securities 360 289 Short term investments 381 412 -------- -------
The Company is contingently liable in the event the reinsurers are unable to meet their obligations under these contracts. There were unused letters of credit executed by reinsurers in favor of the Company of $149,000 and $170,000 at December 31, 2000 and 1999, respectively. Such letters of credit are issued as security against ceded losses recoverable in the future.
The effect of reinsurance on premiums written and earned for the periods ended are as follows (in thousands):
December 31, ----------------------------------------------------------------- 2000 1999 1998 -------------------- -------------------- ------------------- Written Earned Written Earned Written Earned
Direct $22,727 $19,965 $21,353 $18,832 $19,214 $16,270 Ceded Current year (7,746) (5,982) (7,545) (6,395) (6,021) (5,623) Prior year 1,872 1,872 3,418 3,418 9,712 9,712 ------- ------- ------- ------- ------- ------- Total ceded (5,874) (4,110) (4,127) (2,977) 3,691 4,089 ------- ------- ------- ------- ------- ------- Net $16,853 $15,855 $17,226 $15,855 $22,905 $20,359 ======= ======= ======= ======= ======= =======
Year Ended December 31, ----------------------------- 2000 1999 --------- -------- Federal: Current $ 1,220 $ (810) Deferred 298 1,742 --------- -------- 1,518 932 --------- --------
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.
NCRIC entered into an operating lease for new office space located in Washington, D.C., effective on April 15, 1998. The lease terms are for 10 years with a monthly base rent of $35,000 and a 2.0% annual escalator. The Company also maintains office space in Lynchburg, Richmond, and Fredericksburg, Virginia as well as in Greensboro, North Carolina.
2001 $ 652,000 2002 568,000 2003 505,000 2004 497,000 2005 507,000 Thereafter 1,223,000 ------------
NCRIC has established two letters of credit to secure specified amounts of appellate bonds for cases which are in the District of Columbia appellate process. As of December 31, 2000, these letters of credit totaled $2.0 million.
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, 2000 and 1999.
Under terms of the purchase agreement between NCRIC Group and the previous owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc., contingent payments totaling $3.1 million could be paid in cash if the acquired companies achieve earnings targets in 2000, 2001, and 2002. During 2000, the earnings targets were met, and NCRIC Group will pay the prior owners $1.55 million on March 31, 2001. This payment has been added to the balance of goodwill and accrued as a liability as of December 31, 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 5% of each participant's total annual compensation. All contributions are 100% vested. The contributions from NCRIC MSO for the years ended December 31, 2000 and 1999, were $57,000 and $97,000.
The second plan is a defined contribution 401(k) profit-sharing plan. Employees who are 21 years or older and have one year of service are eligible for participation in the plan. Employees may elect to contribute 1 to 15% of total compensation. All contributions are 100% vested. NCRIC MSO is not required to make matching contributions to the plan, but may make discretionary contributions. Total contributions to the plan by NCRIC MSO for the years ended December 31, 2000 and 1999, were $76,000 and $56,000.
The exercise price per share for the 74,000 options outstanding at December 31, 2000 is $7.00. The weighted average remaining contractual life of those options is 8.6 years at December 31, 2000 and 9.6 years at December 31, 1999. There was no change in the number of options outstanding or the exercise price since December 31, 1999.
Prior to the acquisition of HCI, NCRIC MSO paid HealthCare Consulting approximately $150,000 for services performed by HealthCare Consulting during 1998.
NCRIC MSO rents an office building for one of its divisions from a partnership whose partners are HealthCare Consulting senior executives. For this property, NCRIC MSO paid approximately $62,000 in rent for the years ended December 31, 2000 and 1999.
See Investments in the Consolidated Financial Statements and in Note 4 of the Notes to the Consolidated Financial Statements.
For information concerning new accounting standards adopted in 2000 and 1999, see Note 1 of the Notes to the Consolidated Financial Statements.