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 rental is $421,476 with 2% annual increases for the first five years of the term. In the sixth year of the term, the rent increases by $2.00 per rentable square foot and remains at that level for the balance of the term. NCRIC has the option to renew the lease for one additional term of five years. NCRIC also maintains office space in Lynchburg, Richmond, and Fredericksburg, Virginia as well as in Greensboro, North Carolina. Annual rental is $61,692 with the lease term expiring in December, 2002. NCRIC and its subsidiaries lease additional office space that management believes is adequate for its present needs.
Management's Discussion and Analysis of Financial Condition and Results - ------ ------------------------------------------------------------------------ of Operations -------------
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, 2001, 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. Based on successfully attaining the 2000 earnings objectives, the first contingent payment of $1.55 million was made in March, 2001. In June, 2001 the payment of the second contingent purchase payment of $1.46 million was accelerated, the Operating Agreement was terminated and new employment contracts with the former owners were executed.
Unearned premiums represent premiums billed but not yet fully earned at the end of the reporting period. Premiums receivable represent annual billed premiums and retrospective program premiums which have not yet been collected.
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; unfavorable legislative actions; expansive interpretations of contracts; inflation associated with medical claims; and the propensity of individuals to file claims. These risk factors are amplified given the increase in new business written in new markets because there is limited historical data available which can be used to estimate current loss levels. 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.
Under NCRIC's 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 year to reflect actual premium earned in accordance with the treaty.
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
Consolidated net income - Years ended December 31, 2001, 2000 and 1999
NCRIC's 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 settlement 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.
NCRIC's 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, NCRIC incurs 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.
Three months ended December 31, 2001 compared to three months ended December 31,
During 2000, it was determined that one of NCRIC's retrospective programs would not be renewed at the September 1, 2000 renewal date. Under this type of risk sharing program, physicians are underwritten directly by 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.
Gross premiums earned before renewal credits increased $8.2 million, or 41%, to $28.2 million for the year ended December 31, 2001 from $20.0 million for the year ended December 31, 2000. The increase was primarily due to $6.8 million of additional premiums earned under basic medical malpractice insurance and $1.6 million of additional gross premiums earned for excess limits coverage.
Year ended December 31, ------------------------------------ 2001 2000 ------------- ----------- Direct $ 1.2 million $ 1.8 million Agent 11.0 million 2.6 million
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 NCRIC's other market areas. Of the increase in written premium in 2001 over 2000, 26% comes from business written in Maryland, 39% from Virginia, 24% from West Virginia, and 8% from Delaware.
Gross premiums written increased to $5.6 million for the quarter ended December 31, 2001 from $943,000 for the quarter ended December 31, 2000. In addition to the premium rate increase effective for 2001 renewal dates, new business written in the fourth quarter of 2001 significantly exceeded the prior fourth quarter, as shown in the following chart:
Three months ended December 31, ------------------------------------ 2001 2000 ------------- ------------ Direct $0.2 million $0.5 million Agent 3.9 million 0.3 million
Net premiums earned for the three months ended December 31, 2001 increased $2.3 million to $5.9 million from $3.6 million for the three months ended December 31, 2000, reflecting the increase in gross earned premiums partially offset by the lower favorable development of prior years under the swing-rated reinsurance treaty.
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.
The change in unearned premiums for the period increased by $240,000 to $2.8 million for the year ended December 31, 2000 from $2.5 million for the year ended December 31, 1999. This increase resulted primarily from net new business written.
Reinsurance premiums related to prior years under the swing rated treaty were reduced by $1.9 million in 2000 and $3.4 million in 1999 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 2000 change is primarily reflective of the favorable loss development in the 1993 through 1996 years. The 1999 change is primarily reflective of the favorable loss development in the 1992 though 1996 loss years.
Osprey bond $(738,000) E-Health Solutions Group (300,000) Treasury securities 536,000 Miscellaneous gains 30,000 --------- Total $(472,000) =========
Year Ended December 31, -------------------------- 2001 2000 1999 ---- ---- ---- Practice management 43% 44% 40% Accounting 26 28 31 Tax & personal financial planning 12 11 11 Retirement plan accounting & admin 13 13 13 Other 6 4 5 --- --- --- Total 100% 100% 100% === === ===
Practice management and related revenues increased by $304,000, or 25%, to $1.5 million for the fourth quarter of 2001 from $1.2 million for the fourth quarter of 2000. This increase continues the trend of increasing revenues as seen in earlier quarters of 2001, however, the fourth quarter increase at 25% was ahead of the 13% increase in revenue experienced through the first nine months of 2001.
Loss and loss adjustment expenses incurred and combined ratio results _______________________________
The expense for incurred losses and LAE for each year net of reinsurance can be summarized as follows. All loss expense amounts incurred are reported net of reinsurance amounts recoverable.
Year Ended December 31, ------------------------- 2001 2000 1999 ----- ----- ----- Loss and LAE ratio: Current year losses .. 111.9% 122.0% 141.8% Prior year losses .... (20.4) (40.3) (54.1) ----- ----- ----- Total Loss and LAE ratio . 91.5 81.7 87.7 Underwriting expense ratio 23.7 24.6 20.5 ----- ----- ----- Combined ratio ........... 115.2% 106.3% 108.2% ===== ===== =====
Total incurred loss and LAE expense of $18.9 million for year ended December 31, 2001 represented an increase of $7.0 million, or 59%, compared to $11.9 million incurred for the year ended December 31, 2000.
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. 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 combined ratio increased to 115.2% for the year ended December 31, 2001 from 106.3% for the year ended December 31, 2000. The primary factor driving the increased combined ratio was the increase in incurred losses stemming from the lower favorable prior year loss development.
Three Months Ended December 31, ------------------ 2001 2000 ---- ---- Incurred losses and LAE related to: Current year - losses ............ $ 6,358 $ 4,541 Prior years - development ........ (405) (1,520) ------- ------- Total incurred for the quarter $ 5,953 $ 3,021 ======= =======
Total incurred loss 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 NCRIC's 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.
The underwriting expense ratio increased to 24.6% for the year ended December 31, 2000 from 20.5% for the year ended December 31, 1999. This increase is reflective of the 19% increase in underwriting expenses in addition to the increase in reinsurance ceded premiums previously described. Underwriting expenses increased $581,000 to $3.6 million for the year ended December 31, 2000 from $3.0 million for the year ended December 31, 1999. See "Underwriting expenses."
The combined ratio decreased to 106.3% for the year ended December 31, 2000 from 108.2% for the year ended December 31, 1999. The decrease in incurred losses resulted in a combined ratio at the second lowest level for the 1995 through 2000 period.
The loss and LAE reserve liabilities for unpaid claims as of each period are as follows:
Year Ended December 31, ----------------------- 2001 2000 ---- ---- (in thousands) Liability for: Losses ................................. $ 56,802 $ 55,785 Loss adjustment expenses ............... 27,758 25,349 -------- -------- $ 84,560 $ 81,134 ======== ======== Reinsurance recoverable on losses ............... $ 30,077 $ 27,549 ======== ========
Federal income tax at statutory rates 34% 34% 34% Tax exempt income ................... (12) (4) (7) Dividends received .................. (4) (1) (2) Goodwill amortization ............... 5 1 2 Other, net .......................... 4 1 1 -- -- -- Income tax at effective rates ....... 27% 31% 28% == == ==
NCRIC's net deferred tax assets are created by temporary differences that will result in tax benefits in future years due to the differing treatment of items for tax and financial statement purposes. The primary difference is the requirement to discount or reduce loss reserves for tax purposes because of their long-term nature.
Tax expense for the year ended December 31, 2000 was $1.6 million compared to $1.0 million for the year ended December 31, 1999. The Federal corporate income tax rate of 34% was reduced to an effective tax rate of 31% for the year ended December 31, 2000 due to tax-exempt income and nontaxable dividends received, partially offset by non-deductible goodwill amortization. The effective rate of 28% for the year ended December 31, 1999 was lower than the 2000 effective rate primarily due to a lower level of tax-exempt income in 2000. The increase in the provision for income tax is reflective of the increased income before tax combined with the increase in the effective tax rate.
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 consists 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 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, 2001, NCRIC, Inc. had available approximately $3.3 million of unassigned statutory surplus available for dividends.
2001 $ 8.3 million 2000 $(0.8) million 1999 $ 4.3 million
The $9.1 million of increased cash flow provided by operations in 2001 compared to 2000 results primarily from an increase in net premiums received partially offset by increases in payments for income taxes, $797,000, and losses and LAE, $1.0 million. The $5.1 million of decreased cash flow in 2000 compared to 1999 results primarily from an increase in payments for losses and LAE, $1.6 million, income taxes, $1.3 million, reinsurance under the swing rated treaty, $2.4 million, partially offset by an increase in premiums collected, $900,000. 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 can vary substantially from year to year.
Comprehensive income was a gain of $2.8 million for the year ended December 31, 2001 compared to a gain of $5.6 million for the year ended December 31, 2000. The decrease in comprehensive income results from the lower level of increase in net unrealized investment gains, combined with lower net income.
Financial condition and capital resources. NCRIC invests its positive cash flow from operations primarily in investment grade, fixed maturity securities. As of December 31, 2001, the carrying value of the securities portfolio was $103.1 million, compared to a carrying value of $98.0 million at December 31, 2000. The portfolios were invested as follows:
U.S. Government and agencies ....... 4% 14% Asset and mortgage-backed securities 29 32 Tax-exempt securities .............. 19 16 Corporate bonds .................... 42 31 Equity securities .................. 6 7
The accumulated other comprehensive gain totaled $474,000 at December 31, 2001 compared to a loss of $744,000 at December 31, 2000. This improvement in asset values resulted primarily from the reduction in market interest rates. NCRIC's investment portfolio includes a bond issued by Xerox, which carries an 8% coupon and a rating of BB/B. As of December 31, 2001, this security had a carrying value of $562,000, which represents an unrealized pre-tax loss of $484,000, an improvement of $326,000 over its unrealized pre-tax loss of $810,000 as of December 31, 2000. Based on the financial success of Xerox demonstrated over the past year and on the improvement in 2001 of the market value of this issue, NCRIC expects the value of its investment to continue to rise. NCRIC will continue to actively monitor the financial position and outlook for this investment and take any action determined to be appropriate.
The $2.5 million line of credit available as of December 31, 2001 is restricted to working capital for claim settlements. The line of credit is unsecured and renewable. NCRIC has not drawn down on this facility. NCRIC has no 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.
Under terms of the purchase agreement between NCRIC 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 paid the prior owners $1.55 million on March 31, 2001. After analyzing the acquired companies' operations since the acquisition, terms were negotiated and agreed upon for an early payment of the second contingent payment originally scheduled to be paid in 2002. As a result, on June 23, 2001, NCRIC paid $1.46 million, the present value of the remaining payments to the prior owners. During June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance these payments. The term of the loan is 3 years at a floating rate of LIBOR plus two and three-quarter percent. At December 31, 2001, the interest rate was 4.83%. Principal and interest payments are due on a monthly basis.
The equity of NCRIC was $44.5 million at December 31, 2001 and $41.5 million at December 31, 2000. The $3.0 million increase for the year ended December 31, 2001 was due primarily to $1.6 million of net income plus $1.2 million of net unrealized investment gains. The $5.7 million increase for the year ended December 31, 2000 was primarily due to $3.5 million of net income plus $2.1 million of net unrealized investment gains.
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 $1.6 million. This increase is mainly due to the effect of accounting changes related to the implementation of deferred taxes and the removal of the excess of statutory reserves over statement reserves penalty, offset by charges to surplus for overdue receivables.
For 2001 and 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 for 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 2001, another subsidiary, NCRIC, Inc., was outside the usual range for two ratios as the result of the rapid increase in new premium written; for 1999 it was outside the usual range for two ratios as the result of fluctuations in reinsurance ceded premiums under the swing rated reinsurance program.
Authorized Control Level Risk-based Capital Total Adjusted Capital ------------------ ---------------------- NCRIC, Inc. CML NCRIC, Inc. CML ----------- --- ----------- --- (in millions) December 31, 2001.... $4.7 $0.17 $32.8 $4.3 December 31, 2000.... 3.7 0.19 29.8 4.5 December 31, 1999.... 4.1 0.17 29.2 5.0
o general economic conditions including changes in interest rates and the performance of financial markets;
o uncertainties inherent in the estimate of loss and loss adjustment expense reserves and reinsurance;
o uncertainties associated with expanding business in new market areas, including uncertainties associated with claims adjudication experience;
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 - ----------------------------------------------------
Through a series of stock transfers effected in connection with the reorganization, Mutual Holding Company owns all of the outstanding shares of NCRIC Holdings, Inc., which owns all of the outstanding shares of NCRIC Group, Inc. (Company) which owns all of the outstanding shares of NCRIC. District of Columbia law provides that the Mutual Holding Company must at all times own, directly or indirectly, a majority of the outstanding voting stock of NCRIC.
On January 4, 1999, the Company acquired all of the outstanding shares of HealthCare Consulting, Inc., all of the outstanding interests of HCI Ventures, LLC, and all the assets of Employee Benefit Services, Inc. (See Note 2.)
The Company provides comprehensive professional liability and office premises liability insurance under nonassessable policies to physicians having their principal practice in the District of Columbia, Maryland, Virginia, West Virginia, or Delaware. A majority of the Company's insurance business is written in the District of Columbia.
Tail coverage is offered for doctors terminating their insurance policies. This coverage extends ad infinitum the period in which to report future claims resulting from incidents occurring while a claims-made policy was in effect. Beginning in 1988, prior acts insurance coverage was first issued, subject to underwriting criteria for new insureds. Such coverage extends the effective date of claims-made policies to designated periods prior to initial coverage.
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 $909,000 and $525,000 as of December 31, 2001 and 2000, respectively.
The acquired companies achieved the earnings target for 2000, and NCRIC paid the prior owners $1.55 million on March 31, 2001. After analyzing the acquired companies' operations since the acquisition, terms were negotiated and agreed upon for an early payment of the second contingent payment originally scheduled to be paid in 2002. As a result, on June 23, 2001, NCRIC paid $1.46 million, the present value of the remaining payments, to the prior owners. These payments have been added to the balance of goodwill as of December 31, 2001.
During March 2001, SunTrust Bank loaned NCRIC $1,000,000 at an annual rate equal to LIBOR plus one and three-quarter percent to finance the 2001 contingency payment. During June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance these payments. The outstanding debt from the first quarter of 2001 was repaid with a portion of this loan. The term of the loan is 3 years at a floating rate of LIBOR plus two and three-quarter percent. At December 31, 2001, the interest rate was 4.83%. Principal and interest payments are due on a monthly basis.
The initial public offering (IPO) of common stock closed on July 29, 1999 for a total offering of 1,480,000 shares with net proceeds of $8.4 million.
The amortized cost and fair value of debt securities at December 31, 2001 and 2000 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.
For the years ended December 31, 2001, 2000, and 1999 net investment income earned was as follows (in thousands):
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.
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 2001 change is primarily reflective of the favorable loss development for the 1992, 1996, 1997, and 1998 loss years, partially offset by adverse development in the 1995 loss year; whereas, the 2000 change is primarily reflective of the favorable loss development for the 1994, 1996, 1998 and 1999 loss years, partially offset by adverse development in the 1995 loss year. The 1999 change is primarily reflective of the favorable loss development for the 1992 through 1996 loss years. The reduced level of favorable development in 2001 compared to 2000 reflects the increase in severity, which reflects the growing size of plaintiff verdicts and settlements.
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 $128,000 and $149,000 at December 31, 2001 and 2000, respectively. Such letters of credit are issued as security against ceded losses recoverable in the future.
The capital losses can be carried forward for five years. Management expects to utilize the current capital loss carryforwards within that period.
NCRIC entered into an operating lease for 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.
As of December 31, 2001, the future minimum annual commitments under noncancellable leases are as follows (in thousands):
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, 2001, these letters of credit totaled $1.5 million.
Under terms of the purchase agreement between NCRIC and the previous owners of HealthCare Consulting, Inc., HCI Ventures, LLC, and Employee Benefits Services, Inc., additional purchase 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 paid the prior owners $1.55 million on March 31, 2001. After analyzing the acquired companies' operations since the acquisition, terms were negotiated and agreed upon for an early payment of the second contingent payment originally scheduled to be paid in 2002. As a result, on June 23, 2001, NCRIC paid $1.46 million, the present value of the remaining payments, to the prior owners. During June 2001, NCRIC MSO, Inc. borrowed $1,971,000 from SunTrust Bank to finance these payments. The outstanding debt from the first quarter of 2001 was repaid with a portion of this loan. The term of the loan is 3 years at a floating rate of LIBOR plus two and three-quarter percent. At December 31, 2001, the interest rate was 4.83%. Principal and interest payments are due on a monthly basis.
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 up 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 year ended December 31, 2000 were $76,000. No contribution was made for the year ended December 31, 2001.
Stock Option Plan - NCRIC Group has a stock option plan for directors and officers of Mutual Holding Company and its subsidiaries. Options for common stock in an aggregate amount of 74,000 shares were granted at July 29, 1999. The options have terms of ten years and an exercise price of $7 per share, the fair market value of the common stock at the date of grant. The options will become first exercisable at a rate of 33-1/3% at the end of each 12 months of service with NCRIC Group or its subsidiaries after the date of grant.
The exercise price per share for the 74,000 options outstanding at December 31, 2001 is $7.00. The weighted average remaining contractual life of those options is 7.6 years, 8.6 years, and 9.6 years at December 31, 2001, 2000, and 1999, respectively. There was no change in the number of options outstanding or the exercise price since December 31, 1999.
2001 2000 1999 ---- ---- ---- Pro forma net income (in thousands) $1,515 $3,431 $2,479 Pro forma earnings per share - Basic $ 0.43 $ 0.97 $ 0.89 - Diluted $ 0.42 $ 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, 2001, 2000, and 1999 have been made. During the years ended December 31, 2001, 2000, and 1999 contributions were made to the plan of $162,800, $120,000 and $53,000, respectively. During 2001 and 2000, 14,800 shares were allocated to the plan. In 1999, 6,167 shares were allocated.
December 31, ------------------------------- 2001 2000 1999 -------- ------- -------- POLICYHOLDERS' SURPLUS - STATUTORY BASIS $32,759 $29,764 $29,212 Fair valuation of investments 474 (744) (2,866) Deferred taxes 2,726 1,535 1,821 Group stock issuance 7,353 7,145 7,108 Nonadmitted assets and other 1,142 3,749 520 ------- ------- -------
Revenues from external customers $ 21,118 $ 14,990 $ 15,020 Net investment income 6,087 6,317 6,137 Depreciation and amortization 193 208 226 Segment profit before taxes 2,834 5,394 4,880 Segment assets 152,130 137,618 134,482 Segment liabilities 114,424 102,542 104,647 Expenditures for segment assets 153 677 252
Revenues from external customers $ 6,239 $ 5,396 $ 4,603 Net investment income 55 84 53 Depreciation and amortization 555 448 425 Segment profit(loss) before taxes 205 456 (759) Segment assets 9,188 8,114 6,613 Segment liabilities 3,762 2,541 1,294 Expenditures for segment assets 247 50 131
Revenues from external customers $ 27,357 $ 20,386 $ 19,623 Net investment income 6,142 6,401 6,190 Depreciation and amortization 748 656 651 Segment profit before taxes 3,039 5,850 4,121 Segment assets 161,318 145,732 141,095 Segment liabilities 118,186 105,083 105,941 Expenditures for segment assets 400 727 383
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, 2001, 2000 and 1999.
During 2001, 2000, and 1999, members of the Company's Board of Directors paid NCRIC MSO approximately $183,000, $157,000 and $150,000, respectively, for practice management related services.
The following is a summary of unaudited quarterly results of operations for 2001, 2000 and 1999:
Year Ended December 31, 2001 FIRST SECOND THIRD FOURTH ------ -------- ------- --------
Premiums earned and other revenues $5,106 $5,094 $5,224 $ 4,974 Net investment income 1,594 1,588 1,632 1,593 Realized investment gains (losses) -- -- -- (5) Net income 878 851 842 924
Year Ended December 31, 1999 FIRST SECOND THIRD FOURTH ------ -------- ------- -------- Premiums earned and other revenues $4,939 $ 4,140 $4,641 $5,895 Net investment income 1,418 1,496 1,567 1,608 Realized investment gains (losses) 52 (199) 45 31 Net Income 299 581 775 850
LIABILITIES: Due to subsidiaries* $ - $ - Other liabilities 36 71 -------- --------
STOCKHOLDERS' EQUITY: Common stock 37 37 Other stockholders' equity, including unrealized gains or losses on securities of subsidiaries 44,417 41,412 -------- --------
NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 (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, 2001 AND 2000 (IN THOUSANDS) - ------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,579 $ 3,495 Adjustments to reconcile net income to net cash flows from operating activities: Equity in undistributed earnings of subsidiaries (942) (2,790) Amortization and depreciation 51 70 Stock released for coverage of benefit plans 337 168 Other changes in assets and liabilities: (604) (846) ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS 81 105 ------- -------
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 106 1 ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 25 $ 106 ======= =======
NOTES TO CONDENSED FINANCIAL STATEMENTS NCRIC GROUP, INC. AND SUBSIDIARIES (PARENT ONLY) FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
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.
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS) - -------------------------------------------------
DEFERRED FUTURE POLICY OTHER POLICY POLICY BENEFITS, LOSSES, CLAIMS AND ACQUISITION CLAIMS, AND UNEARNED BENEFITS PREMIUM SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE Insurance: ----- ------------- -------- ------- ------- 2001 $ 851 $ 84,560 $ 17,237 $ -- $ 20,603
2000 $ 252 $ 81,134 $ 11,472 $ -- $ 14,611
1999 $ 136 $ 84,282 $ 8,898 $ -- $ 14,666
AMORTIZATION BENEFITS, OF DEFERRED NET LOSSES AND POLICY OTHER INVESTMENT LOSS ACQUISITION OPERATING PREMIUMS SEGMENT INCOME EXPENSES COSTS EXPENSES WRITTEN Insurance: ------ -------- ----- -------- ------- 2001 $ 6,136 $ 18,858 $ 1,337 $ 3,705 $ 34,459
2000 $ 6,407 $ 11,946 $ 645 $ 3,310 $ 22,727
1999 $ 6,089 $ 12,867 $ 386 $ 2,945 $ 21,353
NCRIC GROUP, INC. AND SUBSIDIARIES SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2001 AND 2000 (IN THOUSANDS) - ----------------------------------------------------------------------------
DEFERRED RESERVE FOR POLICY UNPAID CLAIMS NET NET ACQUISITION AND CLAIM UNEARNED PREMIUMS INVESTMENT COSTS ADJUSTMENT EXPENSES PREMIUMS EARNED INCOME ----- ------------------- -------- ------ ------
2001 $ 851 $ 84,560 $ 17,237 $ 20,603 $ 6,136
2000 $ 252 $ 81,134 $ 11,472 $ 14,611 $ 6,407
1999 $ 136 $ 84,282 $ 8,898 $ 14,666 $ 6,089
AMORTIZATION LOSS AND LOSS OF DEFERRED PAID LOSS ADJUSTMENT EXPENSES POLICY AND LOSS RELATED TO : (1) ACQUISITION ADJUSTMENT PREMIUMS CURRENT YEAR PRIOR YEAR COSTS EXPENSES (1) WRITTEN ------------ ---------- ----- ------------ ------- $ 23,056 $ (4,198) $ 1,337 $ 17,744 $ 34,459 $ 17,829 $ (5,883) $ 645 $ 16,591 $ 22,727 $ 20,795 $ (7,928) $ 386 $ 14,449 $ 21,353