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U. S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Number: 0-25505
NCRIC Group, Inc.
District of Columbia 52-2134774
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1115 30th Street, NW, Washington, D.C. 20007
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(Address of principal executive offices) (Zip Code)
202-969-1866
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Act: None
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Securities registered under Section 12(g) of the Act:
Common Stock par value $.01 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained in this form, and will not be contained, to the best of the
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, computed by reference to the average of the closing bid and ask
price of such stock on the Nasdaq SmallCap Market on March 5, 2002 was
approximately $12.4 million.
The number of shares outstanding of the Issuer's Common Stock, the issuer's
only class of outstanding capital stock, as of March 5, 2002 was 3,711,427.
Documents Incorporated by Reference
The following documents, in whole or in part, are specifically incorporated
by reference in the indicated Part of this Annual Report on Form 10-K:
I. Portions of the NCRIC Group, Inc. Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference into certain items of
Part III.
TABLE OF CONTENTS
PART I. Page
Item 1. Business of the Company....................................................... 1
Item 2. Properties.................................................................... 43
Item 3. Legal Proceedings............................................................. 44
Item 4. Submission of Matters to a Vote of Security Holders........................... 44
PART II.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters......... 44
Item 6. Selected Financial Data....................................................... 45
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 47
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................... 73
Item 8. Financial Statements.......................................................... 75
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.................................................................... 108
PART III.
Item 10. Directors and Officers of the Registrant...................................... 108
Item 11. Executive Compensation........................................................ 108
Item 12. Security Ownership of Certain Beneficial Owners and Management................ 108
Item 13. Certain Relationships and Related Transactions................................ 108
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............... 108
PART I
Item 1. Business of the Company
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Background
NCRIC Group, Inc., a District of Columbia corporation, is a holding
company that owns NCRIC, Inc., a medical professional liability insurance
company, and NCRIC MSO, Inc., a physician practice management and financial
services company. The principal operations of NCRIC, Inc. and NCRIC MSO are
conducted in the District of Columbia, Maryland, Virginia, West Virginia,
Delaware and North Carolina. References to "NCRIC" mean NCRIC Group and its
subsidiaries, including their predecessors.
NCRIC Group was organized in December 1998 in connection with the
reorganization of National Capital Reciprocal Insurance Company into a mutual
holding company structure (the "Reorganization"). NCRIC, A Mutual Holding
Company owns all of the outstanding shares of NCRIC Holdings, Inc., which prior
to July 29, 1999, owned all of the outstanding shares of NCRIC Group. Effective
July 29, 1999, NCRIC Group completed a public offering (the "Stock Offering")
and issued 2,220,000 shares of the common stock, to NCRIC Holdings, Inc. and
1,480,000 shares of the common stock in a subscription and community offering at
a price of $7.00 per share.
NCRIC Group owns all of the outstanding shares of NCRIC, Inc. and
NCRIC MSO. The following chart illustrates the organizational structure pursuant
to which the Company operates.
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NCRIC, A Mutual Holding Company
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100% of Shares |
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NCRIC Holdings, Inc.
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60% of Shares |
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NCRIC Group, Inc. 40% of Shares Public
------------- Stockholders
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100% of Shares | 100% of Shares
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| |
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NCRIC, Inc. NCRIC MSO, Inc. d/b/a
HealthCare Consulting
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Subsidiaries Subsidiaries
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District of Columbia law provides that NCRIC, A Mutual Holding
Company must at all times own, directly or indirectly, a majority of the
outstanding voting stock of NCRIC, Inc.
NCRIC is the leading provider of medical professional liability
insurance in the District of Columbia, based on direct premiums written in 2000.
Medical professional liability insurance insures the physician against
liabilities arising from the rendering of, or failure to render, professional
medical services. NCRIC is one of the leading providers of practice management
and financial services to physicians in Virginia and North Carolina. In January
1999, NCRIC expanded its operations through the acquisition of HealthCare
Consulting, Inc., a physician practice management company, its affiliate, HCI
Ventures, LLC, a provider of capital and financial services to management
services organizations, and of Employee Benefits Services, Inc., a provider of
employee benefits services, owned by the stockholders of HealthCare Consulting.
Net proceeds received by NCRIC in the Stock Offering were $8.4
million. In connection with the Stock Offering, NCRIC loaned $1,036,000 to the
Employee Stock Ownership Plan, ESOP, and $518,000 to the stock award plan. The
loans from NCRIC enabled the ESOP to purchase 148,000 shares of NCRIC's common
stock, and the stock award plan to purchase 74,000 shares of NCRIC's common
stock. Of the net proceeds, $5.1 million were used to repay indebtedness
incurred through the acquisition of HealthCare Consulting.
Medical professional liability insurance
NCRIC, Inc. is a medical professional liability insurance company
servicing healthcare providers in the District of Columbia and Maryland. NCRIC,
Inc.'s wholly owned subsidiary, Commonwealth Medical Liability Insurance
Company, CML, sells medical professional liability insurance to healthcare
providers in Virginia, Maryland, West Virginia, and Delaware. CML's policies
closely resemble NCRIC's policies except that insureds of CML do not become
members of NCRIC, A Mutual Holding Company.
Created by District of Columbia physicians in 1980 when medical
professional liability insurance was either unavailable or prohibitively
expensive, NCRIC has provided high quality insurance products to its insureds in
the District of Columbia, a legal jurisdiction which has rejected tort reform
and has the highest cumulative average medical professional liability jury
awards of any jurisdiction in the United States. NCRIC's success rests, among
other factors, on its ability to successfully litigate claims, reduce its
insured's loss exposure through effective risk management and provide its
insureds with individualized service. Recognizing the value of NCRIC's insurance
products, 98% of NCRIC's insureds renewed their policies in 2001. NCRIC believes
that it successfully managed the medical professional liability insurance crisis
of the early 1980's and has prospered since through a combination of physician
governance and professional management expertise. As of December 31, 2001, the
insurance companies had 35 employees.
Over the past four years, NCRIC has distributed a customer
satisfaction survey. In 2001, 90% of those responding indicated that they were
"always pleased" or "almost always pleased" with NCRIC's service, which is
comparable to 2000's rating of 93%.
According to A.M. Best Company, in 2000, 50% of the direct premiums
written for physician and hospital professional liability insurance in the
District of Columbia were written by NCRIC. In addition, during the year ended
December 31, 2001, NCRIC generated 49% of its premiums in Maryland, Virginia,
West Virginia, and Delaware. NCRIC's market share, based on the 2000 data, is
less than 3% in each of these markets. As of December 31, 2001, NCRIC had
approximately 3,000 medical professional liability policies outstanding in all
of its markets. The majority of NCRIC's premiums are generated from individual
and small-group practices, but it also has risk sharing programs with groups of
physicians sponsored by metropolitan Washington, D.C. area hospitals. NCRIC
markets its products directly to its physician clients. NCRIC also markets its
products through independent brokers and agents who produced 90% of new premiums
written in 2001 as compared to 59% in 2000.
Medical professional liability insurance insures the physician or
other healthcare provider against liabilities arising from the rendering of, or
failure to render, professional medical services. NCRIC's policies are written
on a claims-made basis and include legal defense against asserted professional
liability claims.
NCRIC's direct insurance premiums written were $34.5 million, $22.7
million, and $21.4 million for the years ended December 31, 2001, 2000, and
1999, respectively. The historic results of operations may not be indicative of
future operations. The operating results of medical professional liability
insurers are subject to significant fluctuation, which can result in net losses
due to a number of factors, including:
o adverse claims experience;
o judicial trends;
o changes in the investment and interest rate environment; and
o general economic conditions.
NCRIC believes it can best leverage its strengths and appeal to
customers by maintaining strength in its financial accounts. In line with this
philosophy, as of December 31, 2001, NCRIC has established, on a gross basis,
$84.6 million in loss reserves. NCRIC's success in adequate estimation of loss
reserves is demonstrated by its loss development pattern, as displayed in the
chart on page 26. These favorable loss developments have contributed
significantly to NCRIC's reported earnings. While NCRIC believes that its loss
reserves are adequate, there is ultimately no guarantee that reserve levels will
be adequate as losses develop.
Practice management and financial services
NCRIC MSO, Inc. was established in 1997, after thorough due diligence
by a NCRIC Board appointed task force and upon review and approval by the Board,
to be NCRIC's vehicle to provide practice management and financial services to
physicians. Following the due diligence, in 1998, NCRIC selected a joint venture
partner in HealthCare Consulting, HCI Ventures and Employee Benefits Services.
In order to substantially accelerate its entry into the practice management,
financial services and employee benefits markets, NCRIC acquired HealthCare
Consulting, HCI Ventures and Employee Benefits Services in January of 1999.
Today, NCRIC provides practice management and financial services to over 1,200
physicians throughout the mid-Atlantic area of Virginia, North Carolina,
District of Columbia and Maryland. Since the acquisition, NCRIC MSO has been
doing business as HealthCare Consulting.
A key business strategy of NCRIC has been to provide a broad range of
practice management services that give physicians the management expertise they
need to conduct their practices without requiring them to relinquish ownership
or control of their practices. NCRIC serves physicians of all group sizes, from
solo ownership to large integrated group practices and works with other health
care providers, such as hospitals and clinics, in the provision of practice
management services.
NCRIC believes that its practice management and financial services
business diversifies its operations while solidifying the already strong
relationship NCRIC has with its existing insureds through the provision of such
needed management expertise. As NCRIC continues its successful diversification
into practice management and financial services, it continues its goal to
provide an additional distribution channel for its core insurance products.
NCRIC intends to be a partner that physicians can rely on to understand their
problems and who has the foresight to develop services to fit their needs across
a spectrum of business issues.
Other NCRIC Group subsidiaries
In addition to NCRIC, Inc., CML, and NCRIC MSO operations, NCRIC has
a captive insurance operation, a reinsurance brokerage operation, an insurance
agency, and a physicians organization.
American Captive Corporation, ACC, was established in April 2001 as
the first captive insurance company to be licensed in the District of Columbia
under the Captive Insurance Act of 2000 and is authorized to form independent
protected cells to accommodate affinity groups seeking to manage their own risk
through an alternative risk transfer structure. In 2001 ACC was engaged in
establishing the foundation for development of captive management operations. In
February 2002 NCRIC announced formation of a joint venture with Risk Services,
LLC, to form National Capital Risk Services to offer a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
National Capital Insurance Brokerage, Ltd., a wholly-owned subsidiary
of NCRIC, Inc., was formed in 1984 to serve as NCRIC's domestic reinsurance
broker. National Capital Insurance Brokerage, Ltd. has retained commission
income that would otherwise have been paid to outside reinsurance brokers. This
income has been used by NCRIC to offset other operating expenses. National
Capital Insurance Brokerage has also played a critical role in structuring
NCRIC's reinsurance program to provide effective and comprehensive reinsurance
coverage without reducing NCRIC's profitability.
NCRIC Insurance Agency, a wholly-owned subsidiary of NCRIC, Inc.
formed in 1989, offers life, health and disability insurance as well as property
and casualty insurance products. NCRIC Insurance Agency had commission income of
$56,000 in 2001 compared to $80,000 in 2000 and $71,000 in 1999. NCRIC Insurance
Agency offers its products in the same markets as NCRIC. As an insurance agent,
NCRIC Insurance Agency receives commissions for business it places for insurance
companies it represents. NCRIC Insurance Agency markets insurance products not
underwritten by NCRIC. This permits NCRIC's core insureds to obtain a wider
range of insurance products through NCRIC.
NCRIC Physicians Organization, Inc., organized in 1994, a
wholly-owned subsidiary of NCRIC MSO, manages a coalition of physicians which is
organized to contract with managed care payers as an exclusive healthcare
provider network. NCRIC Physicians Organization ended all of its contracts in
1999 and formed an agreement with American Medical Security, AMS, to provide its
network to a developing PPO health plan by AMS for the Washington, D.C.
metropolitan area. NCRIC Physicians Organization reached a settlement with AMS,
effective October 1, 1999, that will provide NCRIC Physicians Organization with
$6,000 per month over a five-year period. The monthly fee of $6,000 is reduced
by $0.75 for each subscriber who enrolls in the network plan.
Current Business Environment
NCRIC strives to provide improving value in its services and products
to the physician clients and the overall health care provider community it
serves. NCRIC is influenced by two primary market environments: first, the
highly specialized financial environment of professional liability, and, second,
the ever-changing health care environment. Continuing to enhance products and
services through existing resources is challenging in today's environment.
Physician clients served by NCRIC have seen a stunning impact on the
financial performance of their business over the past 12 months. A key
environmental factor in NCRIC's business market and upon its clients is in the
rising cost of professional liability insurance. The rising cost stems from
increasing claims severity, as well as, an increase in the frequency of claims
within NCRIC's market areas, the contraction of market capacity, rising
reinsurance costs, and the falling interest rate environment. Occurring
simultaneously is a continuing decrease in the reimbursement to NCRIC clients by
third party payors, particularly Medicare, which can constitute on average up to
40% of a typical physician's total revenue. Further, the increase in regulatory
requirements on physicians adds another layer of compliance costs in order to
continue in the business of medical practice.
The value NCRIC provides in services to its clients will continue to
improve but not without an increase in the cost for its services. While
physicians face a decreasing revenue stream, physicians who utilize and benefit
from the services of NCRIC will see increased rates for professional liability
insurance and for management services. NCRIC recognizes that as it focuses on
improving the value it provides to its clients, its focus must also include
providing its services in the most cost-effective manner in recognition of the
revenue constraints faced by medical providers.
Cost
The costs NCRIC incurs to provide products and services are
increasing due to changes in the current business environment. Within all of
NCRIC's markets for professional liability insurance there has been an
escalation of the severity of claims (cost), including the cost for defending
claims, and an uptick in the frequency of reported claims. In addition to
increasing premium rates in each of its market territories, NCRIC is reducing
pricing credits given to its insureds. At a time when one of the country's
largest insurers, St. Paul Companies, is exiting the medical malpractice market,
NCRIC has met the insurance marketplace challenges head-on with success and
growth. Further, the tragic events of September 11, 2001 and the resulting
impact on the reinsurance capital markets has resulted in the need to pass
through to NCRIC insureds the increase in reinsurance rates for excess limits
coverage.
NCRIC continues to maintain its philosophy of pricing its insurance
products at the level needed to provide a secure financial position to support
its obligations to its insured medical providers. This practice has helped to
hold down the required level of premium rate increases and has diminished the
impact of the cost of its insurance products to the physician community. While
some insurers are increasing the rate of their products beyond 50% and in some
cases, over 100%, NCRIC has been able to temper its increases in the cost of its
products. This leads to NCRIC's ability to continue to deploy the capital needed
to continue a high level of service to its clients, which results in a strong
client retention, while at the same time attracting new customers to NCRIC's
philosophy of prudent financial management. This commitment is shown in our
results of 2001. While NCRIC increased rates in 2001 and again in 2002, in 2001
NCRIC experienced the largest increase in its customer base in its 21-year
history.
Further dominating the cost landscape, NCRIC's clients are facing new
governmental regulations requiring development and implementation of
technological changes in medical practices. This is dominated by compliance
required in coding of services by the Medicare/Medicaid Fraud False Claims Act
and the transfer and handling of patient information as regulated by the Health
Insurance Portability and Accountability Act. Also, the tragic events of
September 11, 2001 are focusing new demands on all health care providers to take
a front line role in providing patient care and safety in the event of future
bioterrorist attacks. It has been estimated that the requirements needed by
health care providers to meet the bioterrorist threats costs could exceed $1
billion. These changing health care requirements are adding to the cost
structure of medical businesses. While this has negative consequences for
NCRIC's clients from a cost control standpoint, it provides new revenue sources
to NCRIC as it assists its clients to comply with the new regulatory
requirements.
Revenue
As NCRIC clients are faced with the challenge of increasing their
revenue to cover increasing costs of services and to continue growth in value of
their medical practices, NCRIC's rates for services to physicians for management
services and professional liability insurance continue to increase.
Physicians today face dramatic challenges as payors restructure their
payment plans. Additionally, health care plans are increasing their premium
rates to employers on average 11%, and in turn employers are pushing these
additional costs to their employees. This cost shifting could have a spiraling
effect on lowering overall reimbursement to the physician and further stressing
physicans revenue. So that NCRIC's clients can preserve their business and meet
opportunities to grow revenue, NCRIC will continue to help physicians protect
their assets through professional liability insurance coverage and management
and financial services.
To identify new sources of revenue, NCRIC's practice management
segment is helping its clients evaluate improvements in technology to improve
office and medical record efficiencies; joint venture of allied health services,
e.g., lab and physical therapy; and non-traditional resources to drive new
revenue.
Leading integration and networking with new capital partners is
another approach NCRIC is aggressively pursuing with its clients to address
decreasing reimbursement. NCRIC has been successful in developing integrated
group practice models to focus on cost sharing, group purchasing and improved
contracting with third party payors. NCRIC is now using its leverage with these
larger groups to provide assistance to clients in expanding their medical
practices through alignment with other businesses. These ventures are focused on
developing "same store" shopping for services, while capitalizing on the venture
to develop a larger distribution system for services. NCRIC has a proven role in
providing additional management services under contract, improving and expanding
its own revenue stream.
Value
To ensure that clients continue to receive valued services, NCRIC
studies the changing health care market to identify new services that add value
for the client and provide added revenue and profitability for the company.
Several recent regulatory changes have allowed NCRIC to diversify into new
products and territories. With the onslaught of the federal government in
investigating Medicare false claims and billing errors, NCRIC has responded to
the market by providing liability coverage through its PracticeGard policies and
envisions expansion of this product throughout the country via American Captive
Corporation. In addition, NCRIC has increased services and revenue in its
management consulting operations by assisting physicians to comply with the new
regulations.
To respond to the existing conditions in the medical professional
liability insurance market, which include significant premium increases,
substantial reductions in the availability of coverage, and a pronounced decline
in capacity within the professional liability insurance industry, NCRIC entered
the alternative risk transfer marketplace with the licensing of its subsidiary
American Captive Corporation, ACC. Alternative risk transfer is broadly defined
as the use of alternative insurance mechanisms as a substitute for traditional
risk-transfer products offered by insurers. These mechanisms include, but are
not limited to, wholly-owned captives, rent-a-captives including protected cell
captives, risk-retention groups and other risk-financing arrangements that
employ elements of self-insurance.
As a protected cell captive, ACC offers an alternative risk financing
vehicle for insureds looking for advantages of a captive insurance company but
without the time and financial commitment involved in establishing a
wholly-owned insurance company. Each insured group is assigned a "protected
cell" that is independent from all other participants. The risk of one cell is
self-contained and is not affected by the risk of another protected cell.
To better meet the requirements of potential healthcare providers
seeking an alternative risk transfer solution, NCRIC identified Risk Services,
LLC, as a partner to complement its core competencies, thus enabling NCRIC to
provide more comprehensive services. In early 2002 NCRIC and Risk Services
joined to form National Capital Risk Services, which offers a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
The flexibility and strength created in the joint venture enables National
Capital Risk Services to customize risk transfer programs and to offer a broad
variety of services, including captive formation and management, insurance
program structuring and design, claims and risk management, underwriting, rating
and policy issuance, reinsurance accessibility, and financial and regulatory
compliance.
ACC is well positioned to meet current professional liability
insurance market needs due to its ability to manage risk and provide access to
increasingly unavailable reinsurance markets. The potential for fee-based
revenue through this venture is greatly enhanced by the ability of National
Capital Risk Services to provide both administrative and consulting services. As
demand for these specialized services increases, NCRIC believes this venture is
well positioned to capitalize on the emerging opportunities.
Increased value to our physician clients is evidenced by the direct
involvement of physicians in the governance of NCRIC. Physician leadership in
the NCRIC Board and committees provides NCRIC with a constant and consistent
"focus group" that provides insight on physician needs, keeping NCRIC ahead of
the curve on improving products and services. In 2001 and early 2002 NCRIC
advanced this model for physician involvement into its new market territories of
Delaware, West Virginia and Virginia by establishing a Physician Advisory Board
in each of these jurisdictions. These groups composed of local physicians will
provide critical insight on local market conditions.
Our vision
NCRIC continues to be a healthcare financial services organization
which provides individual physicians and groups of physicians and other
healthcare providers with economical, high-quality medical professional
liability insurance and the practice management and financial services necessary
for them to succeed in the current healthcare environment. NCRIC believes that
it is well positioned to accomplish these goals. It has a loyal base of
policyholders and management clients to build upon, and NCRIC is very adaptable
to meeting changing needs.
Current channels of distribution and the strong retention of clients
by NCRIC will assist in the growth of the Company and the cross selling of its
expanded range of services and products among existing and new clients. In 2001
NCRIC expanded its client base by 1,100 physicians. This provides for the
opportunity to continue to cross-sell and expand revenue and profitability based
on pure organic internal growth.
NCRIC's insurance operations will market its medical professional
liability products and services to some of its management and financial
services' approximately 1,200 physician clients. Since the HealthCare Consulting
acquisition closed on January 4, 1999, NCRIC has sold 78 medical malpractice
insurance policies to clients of HealthCare Consulting, which, in turn, has sold
services to 23 NCRIC physicians.
The growth and future success of our practice management company will
be best served through organic growth of increased services to existing clients,
development of new services to address the changing health care environment and
governmental regulations, and focusing on mergers and acquisitions that
supplement and strengthen our core practice management services. The HealthCare
Consulting acquisition has provided an opportunity for NCRIC to make available
practice management and employee benefit services to its approximately 3,000
insureds. In 2001 and 2000, NCRIC's practice management revenue from its insured
physicians was approximately $398,000 and $365,000, respectively. Altogether in
2001 NCRIC provided products and services to approximately 4,200 physicians, up
from approximately 3,100 physicians in 2000.
Core Insurance Products
NCRIC underwrites medical professional, office premises, and medical
billings, errors, and omissions liability policy risks for physicians, physician
medical groups and clinics, and other providers in the healthcare industry.
NCRIC currently issues policies on a claims-made basis. Claims-made policies
provide coverage to the policyholder for claims occurring and reported during
the period of coverage. NCRIC also offers prior acts insurance coverage to new
insureds, subject to the new insureds' meeting NCRIC's underwriting criteria.
This coverage extends the effective date of claims-made policies to designated
periods prior to the physicians' becoming an insured of NCRIC. Insureds are
covered continuously while their claims-made policy is in force.
Physician and medical group liability. NCRIC offers separate policy
forms for physicians who are individual practitioners and for those who practice
as part of a medical group. This insurance provides protection for the legal
liability of the insureds for injury as a result of the performance of patient
treatment, failure to treat and failure to diagnose and related types of
malpractice. The policy issued to individual practitioners also provides
secondary coverage of premises liabilities that may arise in the
non-professional operations of the medical practice.
Policy limits. NCRIC offers limits of insurance up to $11 million per
claim, with up to a $13 million aggregate policy limit for all claims reported
with each policy year. The most common limit is $1 million per claim, subject to
a $3 million aggregate policy limit. Higher limits and excess coverage is
written with special reinsurance arrangements.
Reporting endorsements. Extended reporting endorsements are offered
to physicians at the termination of each NCRIC policy. This endorsement extends
indefinitely the period for reporting claims. The price of the reporting
endorsement coverage is based on approved rates. NCRIC provides extended
reporting endorsement coverage at no additional cost for insured physicians who,
while their policy is in force, either die, become disabled to practice their
specialty, or retire under specific considerations.
PracticeGard. NCRIC has established a limited defense reimbursement
benefit of up to $25,000 to defend physicians in proceedings by disciplinary
boards. This benefit is provided within the NCRIC policy at no additional cost.
PracticeGard provides legal counsel to defend the insured from licensure actions
brought by a State Medical Licensing Board, actions involving medical staff
credentialing by hospitals, actions to remove physicians from participation in a
managed care plan and actions to limit participation in government programs like
Medicare and Medicaid.
PracticeGard Plus. In 1999, NCRIC began providing PracticeGard Plus.
This coverage protects physicians and hospitals with coverage for Medicare and
Medicaid billings errors and omissions liability. This coverage provides up to
$1 million in combined limits for defense and indemnity of civil fines. Coverage
is provided under a separate claims-made policy and can be extended to six years
of prior acts coverage.
Program for physicians who do not meet usual underwriting standards.
NCRIC also has a program for physicians who do not meet NCRIC's usual
underwriting standards. After careful consideration and extensive underwriting,
a surcharge is applied to the premiums of these physicians to compensate for the
higher level of risk. NCRIC monitors the activities of these insureds more
closely than those of its other insureds and attempts to rehabilitate these
insureds through risk management training. This program was not a significant
source of revenue in 2001.
Direct premiums. The following table summarizes NCRIC's physician and
medical group professional liability direct annual premiums under policies in
effect as of February 20, 2002.
Direct Premiums Percentage
Group Size Written of Total
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(in thousands)
Solo practitioner physicians .................... $19,965 43%
Groups with two physicians ...................... 1,218 3
Groups with three or more physicians ............ 16,960 37
Sponsored programs, including risk sharing ...... 7,806 17
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Total ................................. $45,949 100%
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Occurrence policies. Until July 1, 1986, NCRIC issued policies on an
occurrence basis. Occurrence policies provide coverage to the policyholder for
all losses incurred during the policy year regardless of when the claims are
reported. As of December 31, 2001, NCRIC has loss and LAE reserves in the amount
of $4.7 million in connection with its potential liability under occurrence
policies.
Maintenance and expansion of core insurance products
NCRIC's future success is in part dependent on its ability to ensure
that its core insurance products continue to meet the needs of healthcare
providers. Expanding NCRIC's relationships with larger groups of physicians,
broadening its geographical boundaries and enhancing its distribution systems
will accomplish growth and retention of NCRIC's core insurance business. NCRIC
will also continue developing appropriate risk financing vehicles for larger
groups. The key elements of NCRIC's strategy to compete effectively and create
profitable long-term growth for its core insurance products are the following:
Maintain its strong franchise or close relationship with area medical
communities. National Capital Reciprocal Insurance Company was founded in 1980
with the strong support of the Medical Society of the District of Columbia and
the District of Columbia's physicians. NCRIC maintains the exclusive endorsement
of the Medical Society of the District of Columbia, as well as that of the
Virginia-based Arlington County Medical Society. NCRIC's endorsement agreement
with the Medical Society of the District of Columbia requires NCRIC, A Mutual
Holding Company to reserve a seat on its board of directors for an individual
nominated by the Medical Society of the District of Columbia. NCRIC also
maintains strong working relationships with the Medical Society of Virginia and
the Delaware Medical Society.
The articles of incorporation of NCRIC, A Mutual Holding Company
require that at least two-thirds of the members of its board of directors and
NCRIC's board of directors be physicians. This direct involvement of physicians
enables NCRIC to better understand medical practice patterns, claims, customer
needs and other relevant matters.
Growth through geographic expansion and expanded distribution
channels. In addition to its dominant position in the District of Columbia area,
NCRIC, through its subsidiary CML, is a significant insurer in Maryland,
Virginia, Delaware, and West Virginia. NCRIC is constantly alert to potential
expansion opportunities in other Mid-Atlantic states. Upon expansion into a new
jurisdiction, NCRIC recruits and retains qualified personnel, not only as
Company employees, but also as defense counsel, agents, and other affiliates.
Competition for qualified personnel may be intense and NCRIC may be unable to
attract and retain qualified persons.
NCRIC continues to expand and support its brokers and agent network.
Historically, direct distribution in the District of Columbia has held down
expenses and provided close ties to NCRIC's insureds. Direct distribution
provided 76% of NCRIC's renewal premiums in 2001. In recent years, new growth
has largely come from NCRIC's force of appointed agents. In 2001, 10% of all new
business was written through direct distribution and 90% through independent
agents. NCRIC believes it can further increase new business through greater use
of independent agents and brokers. This will continue to increase NCRIC's
dependence on insurance agents and other intermediaries.
Enhance current insurance product offerings with new coverages to
increase sales and strengthen ties with physicians. NCRIC has developed other
insurance products in addition to its core medical professional liability
insurance offerings. These products include comprehensive premises liability
coverage for medical offices and NCRIC PracticeGard Plus. PracticeGard Plus is
designed to protect physicians from costly civil fees and penalties related to
the government's new regulations regarding billing coding and compliance.
Additionally, NCRIC has developed a new program, CompliancePlus, which couples
its PracticeGard Plus insurance product with necessary compliance and
educational services. The CompliancePlus package consists of (a) Compliance
Advantage, a comprehensive, Internet-based risk evaluation tool, which serves as
a primary source for information on billing compliance; (b) CompliancePlus
Office Program, a survey and written plan which outlines areas of risk that may
need special interest or attention both now and in the future; and (c)
PracticeGard Plus, a billings errors and omissions insurance product that
provides defense and indemnity coverage for attorney costs as well as civil
fines and penalties sought as a result of compliance violations alleged by
Medicare and Medicaid agencies.
Alternative risk transfer products. NCRIC believes its protected cell
captive, American Captive Corporation, and its alliance with Risk Services, LLC,
in the formation of National Capital Risk Services well positions NCRIC to meet
market needs for alternative risk transfer solutions and to expand its fee-based
administrative and consulting services. Since fee-based revenue from this
business has not yet occurred, there is no certainty as to the impact of this
new product line on NCRIC's financial results.
Growth through strategic acquisitions. NCRIC believes that
consolidation will continue in the medical professional liability insurance
industry. This may give rise to opportunities for NCRIC to make strategic
acquisitions to expand its business, product offerings and geographic scope.
NCRIC is positioned to make acquisitions, since it has access to capital markets
and can issue stock in connection with an acquisition. In addition, NCRIC
intends to diversify into other healthcare-related enterprises through strategic
acquisitions such as the HealthCare Consulting acquisition. NCRIC may be unable
to acquire other medical professional liability insurers or other physician
practice management companies. An unsuccessful or poorly performing acquisition
could have a material adverse effect on NCRIC's business or financial results.
Maintain conservative balance sheet and strong ratings. Management
believes that existing and prospective clients evaluate, among other factors,
the financial strength of NCRIC in any decision regarding the purchase of
medical liability coverage.
Use legal and risk management expertise to vigorously reduce loss
costs. NCRIC's experience with, commitment to and focus on medical professional
liability insurance for over 20 years has allowed it to develop strong knowledge
of the local healthcare and legal environments and to build an extensive
database of medical professional liability claims experience. NCRIC uses this
expertise to select and price risks, to provide risk management services to
prevent or reduce the severity of losses and to aggressively defend against
unjustified claims or excessive settlement demands.
Practice Management Services
On January 4, 1999, NCRIC Group acquired all of the outstanding
shares of HealthCare Consulting, Inc. and all of the outstanding membership
interests of HealthCare Consulting's affiliate, HCI Ventures. NCRIC Group also
purchased all of the assets of Employee Benefits Services, an employee benefits
company formed by the three stockholders of HealthCare Consulting. NCRIC Group
assumed all of the liabilities of HealthCare Consulting, HCI Ventures and those
relating to the assets of Employee Benefits Services. HealthCare Consulting has
been merged into NCRIC MSO, and HCI Ventures has become a wholly owned
subsidiary of NCRIC MSO. HealthCare Consulting and Employee Benefits Services
continue to operate as divisions of NCRIC MSO. The HealthCare Consulting
acquisition has greatly enhanced NCRIC's ability to provide practice management
services, employee benefit services and financial services to physicians in the
Washington, D.C. metropolitan area and throughout the Mid-Atlantic region.
HealthCare Consulting. Since 1978, HealthCare Consulting or its
predecessor has provided practice management services, accounting and tax
services and personal financial planning services to medical and dental
practices throughout the Mid-Atlantic region. HealthCare Consulting offers its
clients extensive experience and expertise in:
o practice management;
o managed care contracting;
o information systems implementation;
o practice evaluations;
o billing and collections;
o personnel;
o practice structure; and
o management and market recognition among key players in the
healthcare industry.
HealthCare Consulting has offices in Lynchburg, Virginia; Richmond, Virginia;
Fredericksburg, Virginia; Washington, D.C.; and Greensboro, North Carolina. As
of December 31, 2001, HealthCare Consulting had approximately 57 employees, of
whom 18 served as practice management consultants and 13 are contracted
employees to physicians' practices.
The following table indicates the sources of HealthCare Consulting's revenues
during the past three calendar years:
2001 2000 1999
----- ----- -----
Practice management ............. 50.5% 52.4% 46.2%
Accounting ...................... 29.9 31.3 35.8
Tax & personal financial planning 13.4 12.7 13.0
Other ........................... 6.2 3.6 5.0
----- ----- -----
Total ........................... 100% 100% 100%
===== ===== =====
HCI Ventures. HCI Ventures provides start-up capital to newly formed
management services organizations. HCI Ventures owns interests ranging from 5%
to 20% in four management services organizations: Middle Fork MSO, L.L.C.;
Central Virginia MSO, L.L.C.; Southwest Virginia MSO, L.L.C.; and Mid-Atlantic
MSO-FBG, L.L.C. Created in 1997, HCI Ventures allows HealthCare Consulting to
have an equity ownership interest in the various management services
organizations for which HealthCare Consulting provides practice management
services. HCI Ventures' income has not been material.
Employee Benefits Services. Employee Benefits Services provides
employee benefits services, plan design, plan administration and plan asset
accounting to approximately 300 clients in the Mid-Atlantic region. The
principal assets that NCRIC acquired from Employee Benefits Services were its
established client base and the systems it had developed to service its clients.
Employee Benefits Services also manages documentation and required forms
filings. Over 55% of HealthCare Consulting's physician practice clients who
qualify for plan administration services utilize Employee Benefits Services as
their employee benefit plan administrator. While Employee Benefits Services
initially provided services only to healthcare businesses, currently over 46% of
its clients are non-healthcare related. As of December 31, 2001, Employee
Benefits Services had twelve employees.
The following table indicates the sources of Employee Benefits
Services' revenues during the past three years:
2001 2000 1999
---- ---- ----
Retirement Plan Accounting and
Administration................................ 89% 90% 91%
Section 125 Administration.................... 11 10 9
---- ---- ----
Total.................................... 100% 100% 100%
==== ==== ====
Maintenance and expansion of core practice management services
The growth and future success of our practice management business
will occur through continued organic growth of services to existing clients;
development of new services to address the changing health care environment and
governmental regulations; continued cross-selling activity with NCRIC insurance
clients; and focusing on mergers and acquisitions that supplement and strengthen
our core practice management services.
Retain existing clientele and bring additional services to strengthen
our relationship. NCRIC's acquisition of HealthCare Consulting brought to NCRIC
some long-standing business relationships, some of which span back to 1973.
NCRIC's practice management company has experienced significant growth and, in
addition to that growth, has seen the stability of providing services to
satisfied clients who retain our services with them year to year. NCRIC
maintains a target of retaining at least 95% of its core clientele. This year,
NCRIC renewed engagement agreements with all clients. NCRIC conducted a thorough
analysis of the service level and fee structure for each client. This analysis
provided the opportunity to identify additional available services not currently
being purchased by the client, which could be offered to improve the client's
medical practice.
Expand through the development of new products and services that meet
changing physician needs from regulations, other providers and payers. NCRIC
continues to monitor the ever-changing healthcare environment for the
development of needed services for physicians. NCRIC evaluates changes in state
and federal regulations, hospital organizational changes, and revamping
reimbursement and payer requirements. This year began the development of our
Data Information Center to centralize the requests of existing clients regarding
management assistance relative to new laws and regulations. This has also shown
to be effective in marketing to potential clients who seek advice and eventual
longer-term fee based services. These issues force physicians to redirect how
they price their services, deliver and market their services, and with whom they
have business relationships. Since the beginning of many of the federal changes
impacting all Medicare providers, NCRIC has been proactive in developing its
services and adding new products to meet the impact these regulations have on
the expenses of running a medical practice.
Focus on services that integrate with our insurance products and can
be cross-sold. NCRIC continues to cross-sell all of its services across each of
its segment's client bases. As an example, NCRIC has developed a program,
CompliancePlus that bundles its PracticeGard Plus policy with its compliance
planning services. A three-year service agreement is required for which the
client/insured receives the insurance policy, access to an Internet-based risk
evaluation tool, chart audits and a compliance plan and educational services.
This product will also be offered through NCRIC's captive insurance company on a
nationwide basis. NCRIC is also providing chart review and coding analysis for
all current PracticeGard clients on a fee basis and is cross-selling the
PracticeGard to those management clients we have serviced with compliance and
coding services.
Growth through strategic acquisitions. NCRIC has sought out
discussions with companies that provide similar services to a similar client
market in new market areas. NCRIC believes that organizations that provide a
niche service, such as billing, or accounting, could supplement its core base of
services with additional resources and personnel. NCRIC further believes that
this is a viable growth strategy through profitable acquisition, or a joint
venture arrangement. NCRIC is also able to offer target acquisitions the
opportunity to expand their product offerings with a viable purchase and
transition of clients, particularly for those nearing retirement. NCRIC may be
unable to acquire other companies and a poorly performing acquisition could have
an adverse effect on NCRIC's business or financial results.
Maintain fee schedules and focus on profitability of services. NCRIC
believes it is critical to develop profitable services as opposed to loss
leaders. On an annual basis, each account and its resource commitment is
evaluated to assess if fee adjustments are appropriate. Additionally, the
overall rate structure is evaluated to ensure continued profitability of NCRIC
services, and an increase in all fees is being implemented in 2002. Further
NCRIC believes that the majority of recurring clients should be moved to a
retainer fee structure so that revenue is more constant level to NCRIC and the
cost of services is more constant to the client. Clients who purchase a single
service or one-time consulting assignment will be charged according to the new
rate structure for 2002. As a result, NCRIC may not have competitive prices for
all its services.
Marketing and policyholder services
Within the District of Columbia, NCRIC markets directly to individual
practitioner physicians and other prospective insureds through its relationships
with medical associations, referrals by existing insureds, advertisements in
medical journals, the presentation of seminars on timely topics for physicians
and direct solicitation to licensed physicians. NCRIC attracts new physicians by
targeting medical residents and physicians just entering medical practice. In
addition, NCRIC participates as a sponsor and participant in various medical
group and hospital administrators' programs, medical association and specialty
society conventions and similar events. NCRIC believes that this personal,
comprehensive approach to marketing is essential to providing medical
professional liability insurance, where special knowledge and experience are a
prerequisite.
NCRIC's primary marketing channel outside D.C is its independent
agent network. In 2001, these agents produced 90% of new premiums and 24% of
renewing premiums. Healthcare providers frequently utilize agents when they
purchase medical professional liability insurance. Therefore, NCRIC believes
that developing its broker relationships in Virginia, Maryland, West Virginia
and Delaware is important to grow its market share. NCRIC selects agents who
have demonstrated experience and stability in the medical professional liability
insurance industry. Brokers and agents receive market rate commissions and other
incentives averaging 9% based on the business they produce and maintain. NCRIC
strives to foster relationships with those brokers and agents who are committed
to promoting NCRIC's products and are successful in producing business for
NCRIC.
NCRIC also has a Policyholder Services department that provides
account information to all insureds and strives to maintain a close relationship
with the medical groups and individual practitioners insured by NCRIC. Each of
these practices has a designated client service representative who can answer
most inquiries and, in other instances, can provide the insured with immediate
access to the person with expertise in a particular department. For hospital
based programs and large and mid-size medical groups, NCRIC has an account
manager assigned to each group who heads a service team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. NCRIC
believes this approach has resulted in its high customer retention rate, year
after year.
Risk management
NCRIC's risk management staff works to aid policyholders in
identifying potential risk exposures and developing strategies to reduce or
eliminate those exposures. To assist in this is NCRIC's risk management
committee, a group of nine physicians representing various specialties. The
committee members provide valuable expertise that helps risk management staff
develop and tailor risk management services to the needs of the individual
insured.
An important component of NCRIC's risk management services is
educational seminars which are given throughout the year in various geographic
locations. In 2001, NCRIC provided a variety of programs to appeal to the needs
and interests of a wide variety of practitioners. "Malpractice Claims: How Do
They Start?" afforded attendees the opportunity to view the claim/litigation
process through the eyes of a plaintiff attorney and a defense attorney and to
learn ways to avoid becoming involved in the malpractice process. For those new
to practice or simply desirous of a refresher course, "Risk Management
Principles" discussed such areas of practice as communication, confidentiality,
informed consent and documentation. "Looking Beyond Disease - Diagnosing
Chemical and Other Exposures" proved to be a timely discussion in light of
recent events. "Use of Prophylactic Antibiotics in Surgical Procedures" was just
one of the many specialty specific programs presented. In 2002, NCRIC will
endeavor to reach out to a greater number of physicians by delivering risk
management programs on a more frequent basis to a larger geographic area. NCRIC
staff is also available to present customized programs, as requested, to
individual physician groups and/or office staff. In recognition of NCRIC's risk
management expertise, staff members are frequently called upon to speak to
groups of residents and other medical organizations. CME accreditation through
the Medical Society of the District of Columbia (MSDC), allows NCRIC to award
2.0 hours of Category 1 CME to those physicians attending a risk management
program. Attendance also entitles NCRIC insureds to a policy premium discount.
Physicians unable to attend a risk management program are given the
opportunity to access NCRIC's risk management services in other ways. Currently,
two home study courses, "Physician Documentation and Communication" and
"Essentials of Communication in the Medical Office," are available and
accessible on-line. Successful completion of a home study course carries 1.5
hours of CME credit. 2002 will bring the addition of specialty specific home
study courses and greater access to on-line risk management information,
including access to forms and the ability to pose questions via the company
website. NCRIC reaches out to physicians through the publication of a quarterly
newsletter, the Risk Prevention Monitor, which provides topical risk management
and practice information. In the upcoming year, member physicians will receive a
risk management notebook to use as a resource in dealing with their daily risk
management questions. The notebook will cover such topics as retention and
release of medical records, termination of the physician-patient relationship,
informed consent, dealing with difficult patients, and treatment of minors.
Those physicians wanting a more "hands on" approach to dealing with
their risk management concerns may participate in an office assessment conducted
by a NCRIC risk management staff member. Assessments begin with the completion
of a detailed questionnaire by physicians and staff to uncover potential areas
of risk in their practices and procedures. A thorough review is then conducted
of the physical office and the physicians' record keeping practices. At the
conclusion, physicians are provided with suggestions on how to control or
eliminate risk exposure. This activity also allows participants to receive 1.5
hours of CME credit. Office assessments may also be conducted on an involuntary
basis at the request of the Underwriting Department.
An important element of NCRIC risk management services is physician
access to information. Experienced staff is available to assist physicians and
office staff in solving their risk management problems. The recent addition of
risk management staff in its Richmond office allows NCRIC to keep abreast of
local issues affecting physicians both from a legislative and medical
perspective and provides area physicians with a local expert to handle their
risk management questions.
Claims and litigation experience
The claims department of NCRIC is responsible for claims
investigation, establishment of appropriate case reserves for loss and LAE,
defense planning and coordination, monitoring of attorneys engaged by NCRIC to
defend a claim and negotiation of the settlement or other disposition of a
claim. NCRIC's policy obligates it to provide a defense for its insureds in any
suit involving a medical incident covered by its policy. Medical professional
liability claims often involve the evaluation of highly technical medical
issues, significant injuries and conflicting expert opinions. In most cases, the
person bringing the claim against the physician is already represented by legal
counsel when NCRIC learns of the potential claim.
NCRIC emphasizes early evaluation and aggressive management of
claims. When a claim is reported, claims department professionals complete an
initial evaluation and set the initial reserve. After a full evaluation of the
claim has been completed, which generally occurs within seven months, the
initial reserve may be adjusted.
Very important to NCRIC is its focus on maintaining a local presence
in the jurisdictions where it writes coverage. This enables an intimate
knowledge of the community, its litigation processes and how this impacts the
processing of claims. It was reported last year that NCRIC significantly
increased the number of its insureds in Virginia. Claims and risk management
services were expanded into Virginia with the opening of an office in Richmond
to give NCRIC a local presence and to further NCRIC's goal to provide top
quality service to its insureds. The strategy employed for structuring claims
and risk management services in Virginia has been used in developing NCRIC's
presence in Delaware and West Virginia where NCRIC gained understanding of the
local medical and legal climates through on-site visits, interviews with local
law firms, discussions with insureds and on-going communications with local law
firms. Sharing successful solutions through a team approach has been a NCRIC
commitment. Attorneys located throughout NCRIC's market territory who have a
successful track record in medical liability defense and share NCRIC's
philosophy have been identified for defending claims against NCRIC insureds.
NCRIC is focused to ensure the delivery of quality claims and risk management
services in all its market locales.
As of December 31, 2001, NCRIC had approximately 430 open cases with
an average of 85 cases being handled by each claims representative. The level of
education of the claims representatives range from certified paralegal to juris
doctor. The professional claims staff has an average of 14 years of experience
handling medical professional liability cases. NCRIC limits the number of claims
handled by each representative to approximately 90 cases. Management believes
that by limiting the case load assigned to each claims representative, each of
its insureds who face claims will receive personalized, professional service,
thus enabling claims to be thoroughly investigated, well-managed and, if a case
has merit, quickly resolved.
NCRIC retains locally based attorneys specializing in medical
professional liability defense to defend claims. NCRIC also obtains the services
of medical experts who are leaders in their specialties and who bring integrity,
credibility and expertise to the litigation process.
NCRIC's claims committee is composed of eight physicians from various
specialties including anesthesiology, general surgery, orthopedic surgery,
neurosurgery, obstetrics, gynecology, internal medicine and radiology. The
claims committee meets monthly to provide evaluation and guidance on claims. The
multi-specialty approach of these physicians adds a unique perspective to the
claims handling process since it provides an opportunity to obtain the opinions
of several different specialists meeting to share their expertise and experience
in the area of liability evaluation and general peer review. This service is
invaluable to the claims representatives and insureds as it provides in-depth
analysis of claims.
In order to further NCRIC's objective of physician involvement and to
provide local physician guidance in jurisdictions where NCRIC provides insurance
coverage outside of Washington, D.C., individual state advisory boards have been
created. These advisory boards shall serve as the preliminary risk screening
mechanism for NCRIC. They shall meet quarterly to address the insurance risks
and exposures of NCRIC, which include but are not limited to, reviewing medical
incidents and assessing claims and practice characteristics of current and
prospective insureds. The advisory boards shall conduct underwriting and claims
reviews and shall bring to the attention of NCRIC all matters of special
interest to healthcare providers in their state. The advisory boards are
composed of physicians of various specialties and include two adjunct members,
one each from the D.C.-based Underwriting and Claims Committees of NCRIC, who
serve as advisors to the local advisory boards and as liaisons to their
respective D.C.-based committees.
Federal law requires that any claim payment, regardless of amount, be
reported to the National Practitioner Data Bank, which can be accessed by
various state licensing and disciplinary boards, hospitals, other healthcare
entities and professional societies. Thus, the physician is often placed in a
difficult position of knowing that a payment may result in the initiation of a
disciplinary proceeding or some other impediment to the physician's ability to
practice. The claims department staff must be able to fully evaluate
considerations of settlement or trial and to effectively communicate NCRIC's
recommendation to its insured. NCRIC may investigate a claim and, with the
written consent of the named insured, settle any claim or suit as it deems
appropriate. In the event the named insured and NCRIC fail to agree that a claim
or suit should be settled, either party may request a review and decision by a
peer review panel selected in accordance with established NCRIC procedures.
Rules of the court systems in the various jurisdictions impact
NCRIC's claims process, particularly in the area of claims handling expenses.
For example, in the District of Columbia the discovery period, during which the
plaintiff's case must be discerned and, in conjunction with an attorney, the
defense developed, generally takes place over a six- to eight-month period of
intense activity, which increases claims handling expenses. The court-imposed
mediation process has not proven to successfully resolve NCRIC's cases in part
because the volunteer mediators are frequently plaintiffs' attorneys. Trials are
being set about one to one and one half years from the date of service of the
complaint. In Virginia there is no mandatory mediation. Trials are set about one
year from the date of service of the motion for judgment. In Virgnia there is an
absolute cap on medical malpractice awards. Currently, the cap is $1,600,000. It
will increase every year until 2008 when it will be $2,000,000. Despite
obstacles presented by the legal environment, management believes its aggressive
claims handling procedures effectively assist NCRIC to reduce losses and obtain
favorable results.
Proactive approaches to reducing NCRIC's exposure and improving its
favorable results include meeting regularly throughout the year with defense
attorneys retained by NCRIC for coordination, discussion and presentations on
all aspects of claims handling.
Claims closed in the 36-month period from January 1999 through
December 2001 resulted in 15% of cases closed with indemnity payment and 85% of
cases closed with no payment. Indemnity payments during this three-year period
totaled $38.7 million, with an average payment per paid claim of $375,756.
Trial results for the 36-month period from January 1999 through
December 2001 reveal that of the 61 cases tried, 32, or 52%, were won by NCRIC,
16 trials resulted in verdicts for the plaintiff, 9 ended in mistrials or hung
juries, and 4 were settled. Of the 16 plaintiff verdicts, 5 awarded amounts in
excess of NCRIC's $500,000 retention. Trial results for 2001 reveal that of the
20 cases tried, 5, or 25%, resulted in plaintiff verdicts, 13 cases, or 65%,
ended in defense verdicts, 2 ended in mistrials or hung juries, which will need
to be retried, and 2 cases were settled. Of the 5 plaintiff verdicts in 2001,
one verdict was awarded in excess of NCRIC's $500,000 retention.
Underwriting
NCRIC's underwriting committee consists of 12 physicians, all of whom
are insureds of NCRIC. Members of the committee are not employees of NCRIC, but
receive compensation for their services on the committee. In addition to the
underwriting committee, NCRIC has a policyholder services department, consisting
of three technicians trained in underwriting, and an administrative assistant.
NCRIC believes that this combination of medical professionals and insurance
industry professionals gives NCRIC a competitive advantage in underwriting
services. The physicians on the underwriting committee are able to assist the
underwriting department's insurance professionals by applying their medical
knowledge to better assess risk.
NCRIC's policyholder services department is responsible for the
evaluation of applicants for medical professional liability coverage, the
issuance of policies and the establishment and implementation of underwriting
standards for all of the coverages underwritten by NCRIC. The policyholder
services department provides information to the underwriting committee to assist
the physicians on the committee in making their decisions.
NCRIC follows what it believes to be consistent and conservative
procedures with respect to the issuance of all physician professional liability
policies. Each applicant or member of an applicant medical group is required to
complete and sign a detailed application that provides a personal and
professional history, the type and nature of the applicant's professional
practice, information relating to specific practice procedures, hospital and
professional affiliations and a complete history of any prior claims and
incidents. NCRIC performs its own independent verification of these matters and
conducts an investigation to determine if there are any lawsuits that may not
have been disclosed in the application.
NCRIC performs a continuous process of reunderwriting its insured
physicians. Information concerning physicians with large losses, a high
frequency of claims or changing or unusual practice characteristics is developed
through renewal applications, claims history and risk management reports. Each
year, NCRIC also sends current practice questionnaires to all of its insured
physicians. These questionnaires request information similar to that submitted
in connection with the physician's original application for insurance, and are
designed to detect any changes in the specialty or practice characteristics of
the physician that may require a higher or lower premium rate or possible
non-renewal of insurance.
The policyholder services department submits all recommendations for
premium surcharges or non-renewal to the underwriting committee for a final
decision. Physicians have the right to seek reconsideration of surcharges by
NCRIC's board of directors, although to date, every request for reconsideration
has resulted in the underwriting committee's decision being upheld. As insureds
are often more comfortable discussing claims and practice issues with their
peers, NCRIC has found that physician interchange with the committee is a
strength of NCRIC.
Rates
NCRIC establishes, through its management and independent actuaries,
rates and rating classifications for its physician and medical group insureds
based on the loss and LAE experience it has developed over the past 20 years and
the loss and LAE experience for the entire medical professional liability
market. NCRIC has various rating classifications based on practice location,
medical specialty and other factors. NCRIC utilizes various discounts, including
discounts for part-time practice, physicians just entering medical practice,
claim-free insureds and risk management participation. Most discounts are
designed to encourage lower risk physicians to insure with NCRIC. Total
discounts granted to a policyholder cannot exceed 25% of the base premium.
Likewise, surcharges cannot exceed 25% of the base premium. Effective rates
equal NCRIC's base rate, less any discounts, plus any surcharges to the insured.
NCRIC establishes its rates based on its previous loss experience,
loss expense adjustments, anticipated policyholder discounts or surcharges, and
NCRIC's fixed and variable operating expenses. In recognition of the increase in
the severity of losses, NCRIC raised base premiums an average of 7.5% effective
January 1, 2001. NCRIC's base rates remained unchanged in 2000 and 1999.
Effective for policy effective dates in 2002, premium rates were raised in all
jurisdictions as follows:
Percentage Increase
Jurisdiction In Premium Rates
------------ ----------------
District of Columbia 11%
Maryland 18
Delaware 12
West Virginia 20
Virginia 18
Since 1993 NCRIC, Inc. has authorized renewal premium dividend
credits to physician insureds that renew their policies. Renewal credits are a
premium credit on the renewal policy's premium. Renewal credits stabilize
policyholder premiums and improve NCRIC, Inc.'s competitive position relative to
other insurers by encouraging policyholder renewals. For accounting purposes,
renewal credits are accrued in the policy year declared as a reduction of
premium income. NCRIC's insureds are not automatically entitled to renewal
credits and only renewing insureds receive renewal credits. NCRIC has in the
past, and will in the future, consider general insurance market conditions as
well as the previous years' loss and loss adjustment expenses in determining
whether or not to authorize renewal credits and the amounts of any renewal
credits. With the rising trend in severity, NCRIC has determined that it will
not provide a renewal premium credit for 2002 renewals.
NCRIC has authorized renewal credits of the following amounts:
Percentage of Earned
Year Renewal Premiums Amount
---- ---------------- ------
2001 0% $ 0
2000 10 1,033,000
1999 10 1,068,940
1998 12.5 1,888,794
1997 16 2,245,918
1996 10 1,452,308
1995 10 1,560,907
1994 10 1,806,450
Risk sharing arrangements
Since its inception, NCRIC has entered into agreements for risk
sharing programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. The predominant type of risk sharing
arrangement offered by NCRIC involves the initial funding of a portion of a
premium being held by NCRIC to pay losses. In this type of arrangement, NCRIC
receives its full gross premium, less applicable credits otherwise granted.
After quota share losses are determined, if loss development is favorable, any
premium in excess of the losses is returned.
Another type of risk sharing arrangement previously offered by NCRIC
is one in which physicians practicing at a hospital pay lower individual
premiums if the physicians in their hospital group, taken as a whole, have
favorable loss experience and comply with risk management protocols. Under such
a risk sharing arrangement, physicians receive an initial premium reduction or
credit. 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
to offset the unfavorable losses.
Risk sharing arrangements help lower NCRIC's risk associated with
medical care provided by the hospital's attending physicians. The arrangements
also establish a cost-effective source of professional liability coverage for
physicians participating in the program.
Loss and LAE reserves
The determination of loss and LAE reserves involves projection of
ultimate losses through an actuarial analysis of the claims history of NCRIC and
other medical professional liability insurers, subject to adjustments deemed
appropriate by NCRIC due to changing circumstances. Included in its claims
history are losses and LAE paid by NCRIC in prior periods, and case reserves for
losses and LAE developed by NCRIC's claims department as claims are reported and
investigated. Actuaries rely primarily on historical loss experience in
determining reserve levels on the assumption that historical loss experience
provides a good indication of future loss experience despite the uncertainties
in loss trends and the delays in reporting and settling claims. As additional
information becomes available, the estimates reflected in earlier loss reserves
might be revised. Any increase or decrease in the amount of reserves, including
reserves for insured events of prior years, would have a corresponding adverse
or beneficial effect on NCRIC's results of operations for the period in which
the adjustments are made.
NCRIC's estimates of the ultimate cost of settling the claims are
based on:
o information then known;
o predictions of future events;
o estimates of future trends in claims frequency and
severity;
o predictions of future inflation rates;
o judicial theories of liability;
o judicial interpretations of insurance contracts;
o legislative activity; and
o other factors.
The inherent uncertainty of establishing reserves is greater for
medical professional liability insurance because lengthy periods may elapse
before notice of a claim or a determination of liability. Medical professional
liability insurance policies are "long tail" policies, which means that claims
and expenses may be paid over a period of 10 or more years. This is longer than
most property and casualty claims. As a result of these long payment periods,
trends in medical professional liability policies may be slow to emerge, and
NCRIC may not promptly modify its underwriting practices and change its premium
rates to reflect underlying loss trends. Finally, changes in the practice of
medicine and healthcare delivery, like the emergence of new, larger medical
groups that do not have an established claims history, and additional claims
resulting from restrictions on treatment by managed care organizations, may not
be fully reflected in NCRIC's underwriting and reserving practices.
NCRIC's independent actuaries review NCRIC's reserves for losses and
LAE periodically and prepare semi-annual reports that include a recommended
level of reserves. NCRIC considers this recommendation as well as other factors,
like loss retention levels and anticipated or estimated changes in frequency and
severity of claims, in establishing the amount of its reserves for losses and
LAE. NCRIC continually refines reserve estimates as experience develops and
claims are settled. Medical professional liability insurance is a line of
business for which the initial loss and LAE estimates may change significantly
as a result of events occurring long after the reporting of the claim. For
example, loss and LAE estimates may prove to be inadequate because of sudden
severe inflation or adverse judicial or legislative decisions.
Activity in the liability for unpaid losses and LAE is summarized as
follows:
Year Ended December 31,
------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
(in thousands)
Balance, beginning of year.............................. $ 81,134 $ 84,282 $ 84,595
Less reinsurance recoverable on unpaid claims....... 27,312 25,815 24,546
------------ ------------ ------------
Net balance............................................. 53,822 58,467 60,049
------------ ------------ ------------
Incurred related to:
Current year................................... 23,056 17,829 20,795
Prior years.................................... (4,198) (5,883) (7,928)
------------ ------------ ------------
Total incurred............................ 18,858 11,946 12,867
------------ ------------ ------------
Paid related to:
Current year................................... 1,599 917 817
Prior years.................................... 16,145 15,674 13,632
------------ ------------ ------------
Total paid............................... 17,744 16,591 14,449
------------ ------------ ------------
Net balance............................................. 54,936 53,822 58,467
Plus reinsurance recoverable on unpaid claims..... 29,624 27,312 25,815
------------ ------------ ------------
Balance, end of year.................................... $ 84,560 $ 81,134 $ 84,282
=========== =========== ===========
The amounts shown above and the reserve for unpaid losses and LAE on the chart
located on the next page are presented in conformity with generally accepted
accounting principles.
The following table reflects the development of reserves for unpaid
losses and LAE for the years indicated, at the end of that year and each
subsequent year. The first line shows the reserves, as originally reported at
the end of the stated year. Each calendar year-end reserve includes the
estimated unpaid liabilities for that coverage year and for all prior coverage
years. The section under the caption "Cumulative Liability Paid Through End of
Year" shows the cumulative amounts paid through each subsequent year on those
claims for which reserves were carried as of each specific year-end. The section
under the caption "Re-estimated Liability" shows the original recorded reserve
as adjusted as of the end of each subsequent year to reflect the cumulative
amounts paid and any other facts and circumstances discovered during each year.
The line "Redundancy" sets forth the difference between the latest re-estimated
liability and the liability as originally established.
The table reflects the effects of all changes in amounts of prior
periods. For example, if a loss determined in 1996 to be $100,000 was first
reserved in 1991 at $150,000, the $50,000 favorable loss development, being the
original estimate minus the actual loss, would be included in the cumulative
redundancy in each of the years 1991 through 1996 shown below. This table
presents development data by calendar year and does not relate the data to the
year in which the claim was reported or the incident actually occurred.
Conditions and trends that have affected the development of these reserves in
the past will not necessarily recur in the future.
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Reserve for Unpaid Losses
and LAE................ $64,333 $86,727 $88,891 $77,647 $68,928 $68,101 $72,031 $84,595 $84,282 $81,134
Cumulative Liability Paid
Through End of Year:
One year later.... 13,094 18,103 19,786 21,667 16,084 14,916 9,667 13,865 20,813 20,828
Two years later... 27,889 35,861 39,293 34,829 27,634 22,237 21,810 32,778 38,078
Three years later. 37,247 51,163 47,348 43,237 32,409 29,135 36,310 42,381
Four years later.. 47,633 56,648 51,845 45,219 34,657 39,938 42,553
Five years later.. 51,482 59,473 52,984 45,682 41,578 44,297
Six years later... 52,276 60,335 53,208 51,450 43,753
Seven years later. 53,098 60,440 58,246 52,551
Eight years later. 53,193 63,395 59,086
Nine years later.. 56,145 64,113
Ten years later... 56,854
Re-estimated Liability:
One year later.... 69,522 79,174 70,640 68,891 62,028 61,121 71,419 72,575 77,373 73,582
Two years later... 61,090 65,174 63,248 66,439 53,429 62,097 64,980 66,733 71,489
Three years later. 54,208 62,521 65,422 60,858 55,883 58,169 61,336 60,752
Four years later.. 54,215 65,225 64,460 62,625 53,400 54,324 54,996
Five years later.. 55,221 67,681 66,275 61,077 50,744 50,977
Six years later... 58,324 69,765 64,877 58,220 47,946
Seven years later. 60,908 68,415 63,514 55,739
Eight years later. 60,218 67,740 61,262
Nine years later.. 59,031 65,671
Ten years later... 58,384
Redundancy $ 5,949 $21,056 $27,629 $21,908 $20,982 $17,124 $17,035 $23,843 $12,793 $ 7,552
General office premises liability incurred losses have been less than
1% of medical professional liability incurred losses in the last five years.
NCRIC does not have reserves for pollution claims as NCRIC's policies exclude
liability for pollution. NCRIC has never been presented with a pollution claim
brought against it or its insureds.
Reinsurance
NCRIC follows customary industry practice by reinsuring a portion of
its risks and paying a reinsurance premium based upon the premiums received on
all policies subject to reinsurance. By reducing NCRIC's potential liability on
individual risks, reinsurance protects NCRIC against large losses. NCRIC has
full underwriting authority for professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The reinsurance program cedes to the
reinsurers up to the maximum reinsurance policy limit (1) those risks insured by
NCRIC in excess of NCRIC's retention -- the amount of exposure retained by NCRIC
and (2) quota share participation -- a percentage of exposure retained by NCRIC.
Although reinsurance does not discharge NCRIC from its primary
liability for the full amount of its insurance policies, it contractually
obligates the reinsurer to pay successful claims against NCRIC to the extent of
risk ceded. NCRIC's current reinsurance program is designed to provide coverage
through separate reinsurance treaties for three layers of risk.
(1) Losses in excess of $500,000 per claim up to $1,000,000.
Effective January 1, 2000 to January 1, 2003, the treaty, which reinsures NCRIC
for losses in excess of $500,000 per claim up to $1,000,000, is a fixed rate
treaty. The reinsurance premium is agreed upon as a fixed percentage of gross
net earned premium income. Gross net earned premium income is NCRIC's gross
premium earned net of discounts.
For claims submitted related to 1999 and prior years, NCRIC has a
swing rated treaty which reinsures NCRIC for losses in excess of $500,000 per
claim, subject to an inner aggregate deductible of 5% of gross net earned
premium income, up to $1,000,000. The ultimate reinsurance premium is subject to
incurred losses and ranges between a minimum premium of 4% of gross net earned
premium income and a maximum premium of 22.5% of gross net earned premium
income. The inner aggregate deductible means that NCRIC must pay losses within
the reinsurance layer until the inner aggregate deductible is satisfied. NCRIC
pays a deposit premium equal to 14% of gross net earned premium income that is
ultimately increased or decreased based on actual losses, subject to the minimum
and maximum premium. Following are the reinsurance premium terms for the swing
rated treaty for calendar years 1999, 1998, 1997 and 1996.
Percentage of Gross Net Earned
------------------------------
Premium Income
--------------
1999 1998 1997 1996
------ ----- ----- -----
Deposit premium........................ 14.0% 14.0% 14.0% 14.0%
Maximum premium........................ 22.5 22.5 22.5 30.0
Minimum premium........................ 4.0 4.0 4.0 4.0
Inner aggregate deductible............. 5.0 5.0 5.0 10.0
NCRIC has recorded, based on actuarial analysis, management's best
estimate of premium expense under the terms of the swing rated treaty. Each
year, for the most recent treaty year, the premium has been capped at the
maximum rate. NCRIC then adjusts the liability and expense as losses develop in
subsequent years.
(2) Losses up to $1,000,000 in excess of $1,000,000 per claim.
NCRIC's first excess layer treaty covers losses up to $1,000,000 in excess of
$1,000,000 per claim. For risks related to claims submitted January 1, 2000 and
thereafter, NCRIC cedes 100% of its risks and premium under this treaty. For
claims related to 1999 and prior years, NCRIC cedes 91% of its risks and premium
to the $1,000,000 excess layer treaty program and retains 9% of the risks and
premium. NCRIC receives a ceding commission from the reinsurers to cover the
cost associated with issuing this coverage to its insureds.
(3) Losses up to $9,000,000 in excess of $2,000,000 per claim. The
second excess layer treaty covers losses up to $9,000,000 in excess of
$2,000,000 per claim. NCRIC cedes 100% of its risks to the $2,000,000 excess
layer treaty program and retains none of the risks. The premium for the
$2,000,000 excess layer treaty is 100% of the premium collected from insureds
for this coverage. NCRIC receives a ceding commission from the reinsurers to
cover the cost associated with issuing this coverage to its insureds.
Ceding commissions, which are 15% of gross ceded reinsurance premiums
in the excess layer treaties are deducted from other underwriting expenses.
Ceding commissions were $644,000, $357,000, and $322,000 in 2001, 2000, and
1999.
Additionally, NCRIC's reinsurance program protects NCRIC from paying
multiple retentions for claims arising out of one event. NCRIC will only pay one
$500,000 retention regardless of the number of original policies or claimants
involved. NCRIC also has protection against losses in excess of its existing
reinsurance. Following is a table that summarizes the structure of NCRIC's
current reinsurance program:
Through December 31, 1999 Effective January 1, 2000
------------------------- -------------------------
Total Amount of Individual Loss Company Reinsurers Company Reinsurers
------------------------------- ------- ---------- ------- ----------
$0 - $500,000................................. 100% 0% 100% 0%
$500,000 - $1,000,000......................... 4 96 0 100
$1,000,000 - $2,000,000....................... 9 91 0 100
Over $2,000,000 .............................. 0 100 0 100
The table does not reflect the effect of the inner aggregate
deductible for treaty years through 1999.
NCRIC may provide higher policy limits through facultative
reinsurance programs. Facultative reinsurance programs are reinsurance programs
which are specifically designed for a particular risk not covered by NCRIC's
existing reinsurance arrangements.
NCRIC determines the amount and scope of reinsurance coverage to
purchase each year based upon its evaluation of the risks accepted,
consultations with reinsurance consultants and a review of market conditions,
including the availability and pricing of reinsurance. NCRIC's primary
reinsurance treaty is placed with non-affiliated reinsurers for a three-year
term with annual renegotiations. NCRIC's current three-year treaty expires
January 1, 2003.
The reinsurance program is placed with a number of individual
reinsurance companies and Lloyds' syndicates to mitigate the concentrations of
reinsurance credit risk. Most of the reinsurers are London companies or Lloyds'
syndicates; there is a small percentage placed with a domestic reinsurer. NCRIC
relies on its wholly owned brokerage firm, National Capital Insurance Brokerage,
Ltd., Willis Re, Inc. and a London-based intermediary to assist it in the
analysis of the credit quality of its reinsurers. NCRIC also requires reinsurers
that are not authorized to do business in the District of Columbia to post a
letter of credit to secure reinsurance recoverable on paid losses.
The following table reflects reinsurance recoverable on paid and
unpaid losses at December 31, 2001 by reinsurer:
Reinsurance
Reinsurer Recoverable
--------- -----------
(in thousands)
Lloyd's of London syndicates............. $ 18,172
Hannover Reinsurance..................... 2,666
CNA Reinsurance of London Limited........ 3,321
Unionamerica Insurance................... 2,433
Transatlantic............................ 2,065
4 other reinsurers....................... 1,420
---------
Total...................... $ 30,077
=========
The effect of reinsurance on premiums written and earned for the
years ended December 31, 2001, 2000, and 1999 is as follows:
Year Ended December 31,
----------------------------------------------------------------------------------------------
2001 2000 1999
---- ---- ----
Written Earned Written Earned Written Earned
------- ------ ------- ------ ------- ------
(in thousands)
Direct..... $ 34,459 $ 28,192 $ 22,727 $ 19,965 $ 21,353 $ 18,832
Ceded ..... (10,542) (7,296) (5,874) (4,110) (4,127) (2,977)
-------- -------- -------- -------- -------- --------
Net ....... $ 23,917 $ 20,896 $ 16,853 $ 15,855 $ 17,226 $ 15,855
======== ======== ======== ======== ======== ========
In late 1999, NCRIC introduced PracticeGard Plus, which provides
errors and omissions coverage on Medicare/Medicaid billing to health care
providers. This coverage provides up to $1 million in indemnity and expense
protection and only pays indemnity on civil fines and penalties. NCRIC reinsures
100% of this risk and receives a 15% ceding commission. NCRIC intends to
evaluate its level of risk acceptance based on how losses develop in the future.
Since this coverage protects a new risk based on recently passed national
legislation, current loss development is uncertain.
Investment portfolio
Investment income is an important component in support of the
operating results of NCRIC. NCRIC utilizes external investment managers who
adhere to policies established and supervised by the investment committee of
NCRIC, Inc. NCRIC's current investment policy has placed primary emphasis on
investment grade, fixed income securities and seeks to maximize after-tax yields
while minimizing portfolio credit risk. Toward achieving this goal, NCRIC's
investment guidelines, which set the parameters for NCRIC's investment policy,
permit investments in tax-advantaged securities such as municipal bonds and
preferred stock. NCRIC's investment guidelines document is reviewed and updated
annually.
Effective January 1, 2000 Zurich Insurance Asset Management, Zurich,
became the external investment manager for NCRIC's fixed income securities
including tax advantaged preferred stocks.
Since 1996, NCRIC and its investment manager have conducted extensive
financial analyses of the investment portfolio using stochastic models to
develop a risk appropriate investment portfolio given the business environment
and risks relevant to NCRIC. Zurich supplements stochastic modeling with the
output from their independent investment research and strategy group to develop
a tailored investment approach for NCRIC. Analysis of NCRIC's capital structure
and risk-bearing ability, valuation, peer comparisons, as well as proprietary
and third party modeling, determine the optimal level of tax advantaged
investments and provide strategy input.
Zurich uses Dynamic Financial Analysis, DFA, a total company tool to
test the company's capital structure and business plan under numerous potential
future economic scenarios. The results of DFA, in the form of probability
distributions on key financial statistics, allow NCRIC to make risk informed
decisions on the structure of its investment portfolio as it relates to its
business profile. DFA output has been especially useful in setting portfolio
policy regarding average duration and optimizing potential equity exposure.
NCRIC has classified its investments as available for sale and
reports them at fair value, with unrealized gains and losses excluded from net
income and reported, net of deferred taxes, as a component of stockholders'
equity. During periods of rising interest rates, as experienced during 1999, the
fair value of NCRIC's investment portfolio will generally decline resulting in
decreases in NCRIC's stockholders' equity. Conversely, during periods of falling
interest rates, as experienced during 2001, the fair value of NCRIC's investment
portfolio will generally increase resulting in increases in NCRIC's
stockholders' equity.
The following table sets forth the fair value and the amortized cost
of the investment portfolio of NCRIC at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
As of December 31, 2001 (in thousands)
U.S. Government and agencies ........................ $ 4,600 $ 161 $ -- $ 4,761
Corporate ........................................... 43,739 977 (1,311) 43,405
Tax-exempt obligations .............................. 19,304 634 (134) 19,804
Asset and mortgage-backed securities................. 28,073 695 (15) 28,753
-------- -------- -------- --------
95,716 2,467 (1,460) 96,723
Equity securities ................................... 6,691 118 (407) 6,402
-------- -------- -------- --------
Total ............................................... $102,407 $ 2,585 $ (1,867) $103,125
======== ======== ======== ========
As of December 31, 2000
U.S. Government and agencies ........................ $ 13,037 $ 490 $ (14) $ 13,513
Corporate ........................................... 32,301 181 (1,763) 30,719
Tax-exempt obligations .............................. 15,379 631 -- 16,010
Asset and mortgage-backed securities................. 31,335 208 (303) 31,240
-------- -------- -------- --------
92,052 1,510 (2,080) 91,482
Equity securities ................................... 7,121 45 (603) 6,563
-------- -------- -------- --------
Total ............................................... $ 99,173 $ 1,555 $ (2,683) $ 98,045
======== ======== ======== ========
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
As of December 31, 1999
U.S. Government and agencies ........................ $ 13,937 $ -- $ (716) $ 13,221
Corporate ........................................... 27,842 25 (1,605) 26,262
Tax-exempt obligations .............................. 14,058 22 (289) 13,791
Asset and mortgage-backed securities................. 38,907 2 (1,246) 37,663
-------- -------- -------- --------
94,744 49 (3,856) 90,937
Equity securities ................................... 4,691 -- (536) 4,155
-------- -------- -------- --------
Total ............................................... $ 99,453 $ 49 $ (4,932) $ 95,092
======== ======== ======== ========
NCRIC's investment portfolio of fixed maturity securities consists
primarily of intermediate-term, investment-grade securities. NCRIC's investment
policy provides that all security purchases be limited to rated securities or
unrated securities approved by management on the recommendation of NCRIC's
investment advisor. As of December 31, 2001, NCRIC held 43 asset and
mortgage-related securities most of which had a quality of Agency/AAA.
Collectively, NCRIC's mortgage-related securities had an average
yield-to-maturity of approximately 5.57%. Approximately 47% of the
mortgage-related securities are pass-thru securities. NCRIC does not have any
interest only or principal only pass-thru securities.
The following table contains the investment quality distribution of
NCRIC's fixed maturity investments at December 31, 2001.
Type/Ratings of Investment Percentage
-------------------------- ----------
Treasury/Agency......................... 20%
AAA..................................... 35
AA...................................... 10
A....................................... 23
BBB..................................... 12
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation and Moody's Investors Service, Inc.
The following table sets forth information concerning the maturities
of fixed maturity securities in NCRIC's investment portfolio as of December 31,
2001, by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
As of December 31, 2001
----------------------------------------------
Amortized Percentage of
Cost Fair Value Fair Value
---- ---------- ----------
(in thousands)
Due in one year or less .............. $ 757 $ 778 0.7%
Due after one year through five years 14,645 15,152 14.7
Due after five years through ten years 22,778 23,486 22.8
Due after ten years .................. 29,463 28,554 27.7
-------- -------- -----
67,643 67,970 65.9
Equity securities .................... 6,691 6,402 6.2
Asset and mortgage-backed securities . 28,073 28,753 27.9
-------- -------- -----
Total ...................... $102,407 $103,125 100%
======== ======== =====
Proceeds from bond maturities, sales and redemptions of available for sale
investments during the years 2001, 2000, and 1999 were $22.0 million, $10.5
million and $66.1 million, respectively. Gross gains of $787,000, $16,000 and
$260,000 and gross losses of $1,065,000, $21,000 and $331,000 were realized on
available for sale investment redemptions during 2001, 2000, and 1999,
respectively.
The average effective maturity and the average modified duration of
the securities in NCRIC's fixed maturity portfolio as of December 31, 2001 and
2000, was 4.7 years and 5.2 years, respectively.
Competition
The competitive landscape has changed dramatically over the past
year. No longer do we see competition from the companies which have
historically been NCRIC's largest competitors: St. Paul Companies and CNA
Insurance Companies. Across the United States the largest writers of medical
professional liability insurance have recently announced significant
retrenchment or full withdrawal from the marketplace. The market now is
dominated by smaller niche players.
According to A.M. Best Company 2000 data, the most recent available,
NCRIC has 50% of the District of Columbia physician and hospital professional
liability market and less than 3% of the market in the other four jurisdictions
in which NCRIC writes insurance. However, the A.M. Best Company data includes
all medical professional liability insurance sold in these jurisdictions
including insurance purchased by institutions like hospitals, which NCRIC does
not insure, but which are insured by its principal competitors. Thus, the A.M.
Best Company data does not accurately reflect NCRIC's share of the medical
professional liability insurance markets in which it participates. A.M. Best
Company reports at least 25 other companies that offered some type of medical
professional liability insurance in each of NCRIC's markets in 2000, and more
companies may enter NCRIC's markets in the future. In addition, NCRIC believes
that the number of healthcare entities that insure their affiliated physicians
through self-insurance or alternative risk-transfer solutions may increase.
Competition continues to be based on many factors, including the
following:
o perceived financial strength of the insurer;
o A.M. Best ratings;
o policy pricing;
o policy terms and conditions; and
o service, reputation and experience.
As the marketplace continues to evolve in the current business
environment, NCRIC may face strong competition from carriers that are closely
focused on narrow geographic markets. NCRIC's competitors may have existing
relationships with insurance brokers or other distribution channels, which NCRIC
may be unable to supplant.
NCRIC believes that its principal strengths are:
o its claims management and underwriting expertise;
o its ability to successfully litigate claims;
o its risk management; and
o its individualized service.
In addition, NCRIC believes that it derives competitive advantage from its
20-year presence in the metropolitan Washington, D.C. medical professional
liability market and its demonstrated commitment to its District of Columbia
physicians.
Risk Factors
The concentration of NCRIC, business in the District of Columbia leaves it
vulnerable to a decrease in the number of medical practices or an increase in
damage awards in the District of Columbia
In 2001, District of Columbia insureds accounted for approximately
51% of NCRIC's direct premiums written. The concentration of NCRIC's business
in the District of Columbia means that NCRIC's revenues and profitability depend
heavily on conditions in the District of Columbia medical community.
If we established inadequate loss and LAE reserves, our profitability will
diminish
NCRIC's reserves for losses and loss adjustment expenses or LAE are
estimates of amounts needed to pay reported and unreported claims and related
LAE. If NCRIC experiences greater than expected severity or frequency of claims,
or both, there is a risk that currently established reserves will prove
inadequate.
Indemnity payments in medical professional liability cases are rising and there
is a risk that a very high jury award could be rendered against NCRIC
We cannot predict the impact of clusters of cases, like the breast
implant or "Fen-Phen" cases. Also, from time to time NCRIC has had, and may in
the future have, very high jury awards rendered against it. This risk is
heightened by the District of Columbia's rejection of tort reform. According to
the National Practitioner Data Bank, for the ten-year period between September
1, 1990 and December 31, 2000, the District of Columbia had the highest
cumulative mean medical liability payment average in the United States at
$397,915, which is 25% higher than the average payment reported for the
nine-year period September 1, 1990 through December 31, 1999. In addition, for
the year 2000, the District of Columbia had the highest mean payment at
$584,338. The next closest jurisdiction is Alabama with a cumulative mean
medical liability payment of $340,185 for the ten-year period between September
1, 1990 and December 31, 2000.
The National Practitioner Data Bank reports, for the ten-year period
between September 1, 1990 and December 31, 2000, the average of the cumulative
mean payments to be $209,175, and the 2000 average mean payment to be $266,338,
for the other four jurisdictions in which NCRIC underwrites insurance.
Our profitability could be adversely affected by market driven changes in the
healthcare industry
Managed care has negatively impacted physicians' ability to
efficiently conduct a traditional medical practice. As a result, many physicians
have joined or affiliated with managed care organizations, healthcare delivery
systems or practice management organizations. The impact of managed care and
tightened Medicare/Medicaid reimbursement may impact a physician's decision to
continue purchasing consulting and practice management services, shifting a
purchase decision from quality and value to price only. Larger healthcare
systems generally retain more risk by accepting higher deductibles and
self-insured retentions or form their own captive insurance companies. This
consolidation has reduced the role of the indivi