The following table sets forth the facilities leased by us at December 31, 2002, along with the applicable lease expiration date:
The following tables set forth selected consolidated historical financial and other data of NCRIC Group for the years and at the dates indicated is derived in part from and should be read together with the audited consolidated financial statements and notes thereto of NCRIC Group, as well as with "Management's Discussion and Analysis of Financial Condition and Results of Operations" which are included elsewhere in this Form 10-K.
The financial statements and data presented herein 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. See Note 11 to the consolidated financial statements for a reconciliation of our net income and equity between GAAP and statutory accounting bases.
Unearned premiums represent premiums billed but not yet fully earned at the end of the reporting period. Premiums receivable represent annual billed and unbilled premiums which have not yet been collected.
The estimation process is an extensive effort. It begins in our claims department with the initial report of a claim. For each claim reported, a case reserve is established by the claims department based on analysis of the facts of the particular case and the judgment of claims management. This estimation process is not by formula but is driven by the investigation of facts combined with the experience and insight of claims management applied to each individual case. The timing of establishing case reserves follows established protocols based on the underlying facts and circumstances on a case by case basis. Specific factors considered include: the claimants assertion of loss; the amount of documented damages asserted; an expert medical assessment; the jurisdiction where the incident occurred; our experience with any similar cases in the past; as well as any other factors pertinent to the specific case.
In consultation with our independent actuary, we utilize several methods in order to estimate losses and LAE reserves by projecting ultimate losses. By utilizing and comparing the results of these methods, we are better able to analyze loss data and establish an appropriate reserve. Our independent actuary provides a point estimate for loss reserves rather than a range. The actuarial valuation of reserves is a critical component of the financial reporting process and provides the foundation for the determination of reserve levels. In addition to reporting under GAAP, we file financial statements with state regulatory authorities based on statutory accounting requirements. These requirements include a certification of reserves by an appointed actuary. The reserves in our statutory filings have been certified by an independent medical professional liability insurance actuary.
Losses and LAE reserve liabilities as stated on the balance sheet are reported gross before recovery from reinsurers for the portion of the claims covered under the reinsurance program. Losses and LAE expenses as stated on the income statement are reported net of reinsurance recoveries.
REINSURANCE. We manage our exposure to individual claim losses, annual aggregate losses, and LAE through our reinsurance program. Reinsurance is a customary practice in the industry. It allows us to obtain indemnification against a specified portion of losses associated with insurance policies we have underwritten by entering into a reinsurance agreement with other insurance enterprises or reinsurers. We pay or cede part of our policyholder premium to reinsurers. The reinsurers in return agree to reimburse us 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 us of liability to our insureds.
Under our current primary reinsurance contract, the premium ceded to the reinsurers is based on a fixed rate applied to policy premium for that coverage layer. During the year, estimated payments are made to the reinsurers, and a final adjustment is made at the end of the year to reflect actual premium earned in accordance with
INVESTMENT PORTFOLIO. Our investment portfolio is composed principally of fixed maturity securities classified as available-for-sale. All securities with gross unrealized losses at the balance sheet date are evaluated for evidence of other-than-temporary impairment, on a quarterly basis. We write down to fair value any security with an impairment that is deemed to be other-than-temporary in the period the determination is made. The assessment of whether such impairment has occurred is based on management's case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for near-term recovery. Factors considered in the evaluation include but are not limited to: (1) interest rates; (2) market-related factors other than interest rates; and (3) financial conditions, business prospects and other fundamental factors specific to the securities issuer. Declines attributable to issuer fundamentals are reviewed in further detail. We have a security monitoring process which includes quarterly review by an investment committee comprised of members of our Board of Directors and representatives of policyholders. Our CEO and CFO also participate in the committee meetings in which our professional investment advisors review with the committee and management the analysis prepared by our investment manager of each security that has certain characteristics including, but not limited to: deterioration of the financial condition of the issuer; the magnitude and duration of unrealized losses; and the credit rating and industry of the issuer. The primary factors considered in evaluating whether a decline in value is other-than-temporary include: the length of time and the extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer; whether the issuer is current on contractually obligated interest and principal payments; and our intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery.
GOODWILL. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill ceased upon adoption of SFAS 142 on January 1, 2002.
Our 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. We actively monitor industry trends and consider them in relation to our circumstances when setting rates or establishing reserves.
CONSOLIDATED NET INCOME YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
Our insurance segment experienced a substantial increase in new business written in the year ended December 31, 2001, which resulted in a rise in net premiums earned. The profitability of a medical professional liability insurance policy is designed to emerge over a period of years rather than in the year the policy is written; profits are designed to accrue through investment income on the invested premiums and through successful resolution of claims. Therefore, the large increase in new business written in the current period causes a strain on current period earnings. In addition, earnings were impacted by reduced net investment income because of lower market yields and by increased incurred losses reflecting increased frequency and severity trends.
Our practice management segment produced a significant increase in revenue primarily as a result of its focused efforts on new business development. Higher revenue was offset by expenses related to the ongoing servicing of new business, the allocation of additional resources to new business development and additional expenses associated with the execution of the contingent purchase payouts. Similar to the insurance segment, in the start-up of new client relationships, we incur costs not covered by initial client revenue; the design of the revenue stream is to recover the initial costs through the on-going client relationship.
The change in unearned premiums for the period increased by $1.4 million to $7.7 million for the year ended December 31, 2002 from $6.3 million for the year ended December 31, 2001. This increase resulted from net new business written throughout the year combined with premium rate increases.
Gross premiums earned before renewal credits increased $15.9 million, or 56%, to $44.1 million for the year ended December 31, 2002 from $28.2 million for the year ended December 31, 2001. The increase was primarily due to $13.2 million of additional premiums earned under basic medical professional liability insurance and $2.0 million of additional gross premiums earned for excess limits coverage.
to conclusion, each year there are fewer outstanding claims in the years covered by this reinsurance treaty. The potential for loss development impacting this reinsurance coverage is reduced each year as the inventory of open claims is reduced. While loss development on an aggregate basis has been favorable, there is no guarantee that development for the remainder of the unresolved claims will follow the same pattern. The liability "retrospective premiums accrued under reinsurance treaties" decreased to $0.6 million at December 31, 2002 from $2.4 million at December 31, 2001.
In 2002 we initiated a program to provide insurance coverage to physicians at four HCA hospitals in West Virginia. Under this arrangement, we cede 100% of the insurance exposure to a captive insurance company affiliated with the sponsoring hospitals. We receive a ceding commission for providing complete policy underwriting, claims and administrative services for these policies. While accounting standards require the premium written to be included as a part of our direct written premium, we have no net written nor net earned premium from this program.
The mix of business produced directly by us versus by agents has changed between years as shown on the following chart of new gross written premium:
Direct.................... $ 2,309 $ 1,206 Agent..................... 9,988 10,964 HCA....................... 793 -- Princeton Cell............ 403 -- ------------- ------------- $ 13,493 $ 12,170 ============= =============
The following chart illustrates the components of gross premium written by state as follows:
Because the September 2000 bill was not paid when due, we initiated legal proceedings to collect. We will use all means legally available to collect the amount due. Although we believe that we will prevail, since the premium amount is disputed, an allowance for uncollectibility has been established and is included in underwriting expenses. Pursuit of this litigation requires an expense for legal fees, which is reported as an underwriting expense, and reduces our net earnings.
The change in unearned premiums for the period increased by $3.5 million to $6.3 million for the year ended December 31, 2001 from $2.8 million for the year ended December 31, 2000. This increase resulted from net new business written throughout the year.
Current year reinsurance premiums ceded increased by $3.0 million, or 50%, to $9.0 million for the year ended December 31, 2001 from $6.0 million for the year ended December 31, 2000. This increase is due to the increased gross premium reinsured. The reinsurance premium rates in 2001 were unchanged from the 2000 level.
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 us. 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.
Net premiums earned before renewal credits increased $5.0 million, or 31%, to $20.9 million for the year ended December 31, 2001 from $15.9 million for the year ended December 31, 2000. Net premiums earned after renewal credits increased by $6.0 million, or 41%, to $20.6 million for the year ended December 31, 2001 from $14.6 million for the year ended December 31, 2000. The increase reflects the $8.2 million growth in gross earned premiums and the lower renewal credits, partially offset by the $3.2 million higher reinsurance premiums in 2001 compared to 2000.
YEAR ENDED DECEMBER 31, --------------------------------- 2001 2000 ------------- ---------- (IN MILLIONS)
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 premium written in our other market areas. Of the increase
In 2001, premium written to clients of the Practice Management Services Segment totaled $854,000 compared to $540,000 in 2000.
THREE MONTHS ENDED DECEMBER 31, --------------------------------- 2001 2000 ----------- ---------- (IN MILLIONS)
Net investment income decreased by $221,000, or 4%, for the year ended December 31, 2002 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, 2002 was $5.9 million compared to $6.1 million for the year ended December 31, 2001. Average invested assets, which include cash equivalents, increased by $5.7 million, or 4%, to $111.4 million for the year ended December 31, 2002. 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 5.33% for the year ended December 31, 2002 and 5.80% for the year ended December 31, 2001. The tax equivalent yield was approximately 5.94% at December 31, 2002 and 6.30% at December 31, 2001. The change in investment yields is reflective of the market change in interest rates in 2002 compared to 2001.
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 $131,000 for the year ended December 31, 2002 compared to $278,000 for the year ended December 31, 2001. During the fourth quarter of 2002, we repositioned our portfolio to replace weak credits with stronger rated bonds, realizing a net gain of $473,000. This partially offset the losses realized in prior quarters of 2002. In 2002, we determined that one fixed maturity security, issued by WorldCom, had experienced an other-than-temporary impairment, and recorded a pre-tax investment loss of $557,000, reducing the carrying value to fair value during the second quarter when the determination was made. Additionally, in 2001, we determined that an equity security consisting of common stock experienced an other-than-temporary impairment. Accordingly, we recorded a pre-tax impairment loss of $300,000 in 2001 relating to that investment.
Revenue for practice management and related services is comprised of fees for the following categories of services provided in 2002: practice management (38%); accounting (31%); tax and personal financial planning (12%); retirement plan accounting and administration (13%); and all other services (6%).
Other income includes revenues from insurance brokerage, insurance agency and physician services, as well as service charge income from installment payments for our insurance premium billings.
The expense for incurred losses and LAE for each year is summarized as follows. All loss expense amounts incurred are reported net of reinsurance amounts recoverable.
The resolution of many of the claims reported to us is determined through a trial. Following is a summary of the trial results for each period.
Of the five plaintiff verdicts in 2002, three verdicts were awarded in excess of our $500,000 retention. Of the five plaintiff verdicts in 2001, one verdict was awarded in excess of our $500,000 retention. No verdicts exceeded our $500,000 retention in 2000.
insurance carriers across the nation. While an increase in severity would tend to cause loss ratios to deteriorate, our reinsurance program for losses in excess of $500,000 provides a layer of protection against the increase in severity of losses.
In the market territories outside of the District of Columbia, or our expansion market areas, our experience covers a time-period insufficient to make a determination on severity trends. In these new market areas, we carefully evaluate developing data to identify and recognize emerging trends as soon as possible.
The combined ratio increased to 116.3% for the year ended December 31, 2002 from 115.2% for the year ended December 31, 2001. The primary factor driving the increased combined ratio was the increase in underwriting expenses offset by a lower incurred loss ratio.
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 $5.3 million, or 30%, to $23.1 million for the year ended December 31, 2001 from $17.8 million for the year ended December 31, 2000 reflecting the rise in the level of liability exposure as a result of expanding business, an increase in the frequency of reported claims, and a rise in the cost of adjudicating and settling claims. An increase in severity was first noted in 1996 and continued through 2001. The increase in severity reflects the growing size of plaintiff verdicts and settlements. Our escalation in this adverse claims trend is similar to the conditions faced by many medical professional liability insurance carriers across the nation. While an increase in severity would tend to cause loss ratios to deteriorate, our reinsurance program for losses in excess of $500,000 provides protection against the increase in severity of losses.
The statutory combined ratio was 111.8% for the year ended December 31, 2001 compared to 95.0% for the year ended December 31, 2000. This increase reflects the same premium and loss level factors noted previously.
The fourth quarter expense for incurred losses and LAE net of reinsurance is summarized as follows:
Total incurred losses and LAE expense of $6.0 million for the fourth quarter of 2001 increased by $3.0 million over the fourth quarter of 2000. The increase in current year losses to $6.4 million for the fourth quarter of 2001 reflects the increase in the level of liability exposure as a result of our expanding business and a rise in the cost of settling claims. The lower level of favorable development of losses reported in prior years reflects the experience on the claims closed during the quarter as well as the continuing upward pressure of severity of losses as reported previously.
AT DECEMBER 31, ----------------------------- 2002 2001 ------------ ------------ (IN THOUSANDS) Liability for: Loss......................................... $ 70,314 $ 56,802 Loss adjustment expense...................... 33,708 27,758 ------------ ------------ Total liability............................... $ 104,022 $ 84,560 ============ ============
THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
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.
In April 2001, we announced the formation of 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 is marketed to organizations and groups wishing to finance and manage their own risk. During 2002, ACC incurred $247,000 in expenses. While one sponsored-cell contract has been signed, the captive cell has not yet begun operations due to delays in regulatory approval in West Virginia.
Other expenses of $1.5 million for the year ended December 31, 2002 increased $222,000, or 18% compared to the year ended December 31, 2001. Expense increases are for captive business development costs and holding company operations.
YEAR ENDED DECEMBER 31, ------------------------------- 2002 2001 2000 -------- -------- -------
The increase in the deferred income tax asset to a balance of $3.8 million as of December 31, 2002 resulted primarily from the growth of the insurance business, particularly in unearned premiums and loss reserves where the timing of recognition for financial statement and tax return reporting differ, in addition to completion of the amortization of the deferred tax liability that had arisen from a change in tax accounting method four years ago. The increase in the deferred income tax asset was partially reduced by the deferred tax liability on unrealized investment gains.
FINANCIAL CONDITION AND CAPITAL RESOURCES. We are a stock holding company whose operations and assets primarily consist of its ownership of NCRIC, Inc. and NCRIC MSO, Inc. We assist our subsidiaries in their efforts to compete effectively and create long-term growth. As a part of this strategy, we 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. Our cash flow from operations consists of dividends from our subsidiaries, if declared and paid, and other permissible payments from our subsidiaries, offset by holding company expenses, which consist of costs for corporate management and interest on the trust preferred securities. The amount of the future cash flow available to us 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 following table displays characteristics of the securities with an unrealized loss in value as of December 31, 2002. No concentrations of industries exist in these securities.
For 2002 and 2001, our 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 2002 and 2001, another subsidiary, NCRIC, Inc., was outside the usual range for two ratios as the result of the rapid increase in premiums and the increase in severity of losses, particularly the adverse development of prior year losses.
(a)(2) FINANCIAL STATEMENT SCHEDULES. The following consolidated financial statement schedules of NCRIC Group, Inc. and subsidiaries are included herein in accordance with Item 8 of Part II of this report.
I. Summary of Investments - Other Than Investments in Related Parties II. Condensed Financial Information of Registrant III. Supplementary Insurance Information
(a)(3) EXHIBITS. The following exhibits are filed as part of this report.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
March 31, 2003 /s/ R. Ray Pate, Jr. __________________ _____________________________________ Date R. Ray Pate, Jr. President and Chief Executive Officer
4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
March 31, 2003 /s/ Rebecca B. Crunk _______________ _________________________________________________ Date Rebecca B. Crunk Senior Vice President and Chief Financial Officer
Date: March 31, 2003 By: /s/ R. Ray Pate, Jr. _____________________________________ R. Ray Pate, Jr. Vice Chairman, President and Chief Executive Officer (Duly Authorized Representative)
/s/ Nelson P. Trujillo Chairman of the Board of March 31, 2003 _____________________________ Directors Nelson P. Trujillo, M.D.
/s/ R. Pate, Jr. Vice Chairman of the Board of March 31, 2003 _____________________________ Directors, President and Chief R. Ray Pate, Jr. Executive Officer (Principal Executive Officer)
/s/ Rebecca B. Crunk Senior Vice President and Chief March 31, 2003 _____________________________ Financial Officer (Principal Rebecca B. Crunk Financial and Accounting Officer)
/s/ Vincent C. Burke, III Director March 31, 2003 _____________________________ Vincent C. Burke, III
/s/ Leonard M. Glassman Director March 31, 2003 _____________________________ Leonard M. Glassman, M.D.
/s/ Luther W. Gray, Jr. Director March 31, 2003 _____________________________ Luther W. Gray, Jr., M.D.
/s/ Edward G. Koch Director March 31, 2003 _____________________________ Edward G. Koch, M.D.
/s/ J. Paul McNamara Director March 31, 2003 _____________________________ J. Paul McNamara
/s/ Raymond Scalettar Director March 31, 2003 _____________________________ Raymond Scalettar, M.D.
/s/ David M. Seitzman Director March 31, 2003 _____________________________ David M. Seitzman, M.D.
/s/ Robert L. Simmons Director March 31, 2003 _____________________________ Robert L. Simmons, M.D.