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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, 2003
Commission File Number: 0-25505
[LOGO](SM) NCRIC Group, Inc.
District of Columbia 52-2134774
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1115 30th Street, N.W., Washington, D.C. 20007
(Address of Principal Executive Offices)
202-969-1866
(Registrant's Telephone Number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file reports) and (2) has been subject to such requirements for the
past 90 days. YES |X|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |X|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). NO |X|
As of March 5, 2004, there were issued and outstanding 6,898,865 shares of the
Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the last trade price
of the Common Stock as of March 5, 2004 was $57.0 million.
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 2004 Annual Meeting
of Shareholders are incorporated by reference into certain items of Part III.
TABLE OF CONTENTS
Page
PART I
Item 1. Business .............................................................................. 2
Item 2. Properties ............................................................................ 25
Item 3. Legal Proceedings ..................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ................................... 25
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ................. 25
Item 6. Selected Financial Data ............................................................... 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 28
Item 7A. Quantitative and Qualitative Disclosures About Market Price ........................... 53
Item 8. Financial Statements and Supplementing Data ........................................... 54
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .. 89
Item 9A. Controls and Procedures ............................................................... 89
PART III
Item 10. Directors and Executive Officers of the Registrant .................................... 89
Item 11. Executive Compensation ................................................................ 89
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ........................................................... 89
Item 13. Certain Relationships and Related Transactions ........................................ 89
Item 14. Principal Accountant Fees and Services ................................................ 89
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ....................... 89
PART I
Item 1. Business
Overview
We are a healthcare financial services organization that 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. We own NCRIC, Inc., a medical professional
liability insurance company and NCRIC MSO, Inc., a physician practice management
and financial services company.
We offer medical professional liability insurance and practice management
services to physicians, other health care providers and medical practice
corporations in Delaware, the District of Columbia, Maryland, Virginia and West
Virginia. We currently provide our insurance products and practice management
services to approximately 5,000 physicians throughout this market area as of
December 31, 2003. The following table shows our insurance segment policy count
and gross premiums written over the last eleven years.
Gross
Premiums
Written (in
Policy Count thousands)
------------ -----------
1993 1,215 $22,801
1994 1,226 21,509
1995 1,223 19,506
1996 1,231 19,017
1997 1,250 17,869
1998 1,328 19,214
1999 1,532 21,353
2000 2,010 22,727
2001 2,953 34,459
2002 3,785 51,799
2003 4,229 71,365
As reflected in the table above, we have experienced significant growth
since 1999, and not during the soft-market pricing environment of the
mid-to-late 1990s. We have maintained a disciplined approach towards
underwriting, product pricing and loss reserves, and we have remained focused on
selective expansion in our core markets as pricing conditions have improved.
According to data provided by A.M. Best Company, Inc., in 2002, we had
56.5% of the District of Columbia medical professional liability market share.
We believe that we have one of the highest retention rates of policyholders in
the industry, at approximately 91% for 2003 and 95% for January, 2004 eligible
renewals, and our market presence has expanded significantly as competing
medical professional liability insurers have been forced to either restrict
their premium writings or exit the market completely due to financial
difficulties. According to A.M. Best, in 2002, the most recent available, we had
the following market shares by jurisdiction:
NCRIC Market Share of
Market Departing
Share 2002 Carriers
---------- ---------------
District of Columbia 56.5% 9.5%
Delaware 7.7 57.5
Virginia 8.7 17.5
Maryland 3.3 22.4
West Virginia 7.5 31.9
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We have a strong management team with many years of industry experience.
R. Ray Pate, President and Chief Executive Officer, has 8 years with us and 19
years of experience in the medical professional liability insurance business.
William E. Burgess, Senior Vice President, has been with us for 22 years and has
been responsible for our risk management and claims processing functions.
Stephen S. Fargis, Senior Vice President and Chief Operating Officer, joined us
in 1995 and has 20 years of experience in the healthcare industry. Mr. Fargis
has been responsible for implementing our growth strategy in our existing and
new geographic markets. Rebecca B. Crunk, Senior Vice President and Chief
Financial Officer, has been with us since 1998 and is responsible for our
financial reporting functions. Ms. Crunk is a certified public accountant with
26 years of experience in insurance industry accounting.
Given the long-tail nature of our professional liability insurance
business, we focus on our operating ratio, which combines the ratio of
underwriting income or loss to net premiums earned, referred to as the combined
ratio, offset by the benefit of investment income generated from our cash and
invested assets, also expressed as a percentage of premiums earned. Our average
statutory operating ratio for the five-year period ended December 31, 2002 was
77.9%. This compares favorably to an average statutory operating ratio of 97.0%
for the property and casualty industry over the same period, according to data
published by A.M. Best. The long-tail nature of our business also results in a
higher level of invested assets and investment income as compared to other
property and casualty lines of business. At December 31, 2002 our ratio of cash
and invested assets, which totaled $122.5 million, to statutory surplus was 2.8x
as compared to 2.9x for the property and casualty industry according to
information reported by A.M. Best, the most recent available industry data. For
the five years ended December 31, 2002, our net investment income averaged 29.4%
of net premiums earned compared to 13.2% for the property and casualty industry
over the same period according to information reported by A.M. Best, in each
case determined on a statutory basis.
For the year ended December 31, 2003, we generated $71.4 million of gross
premiums written, $47.3 million of net premiums earned and $61.3 million of
total revenues. At December 31, 2003, we had consolidated assets of $262.5
million, liabilities of $184.5 million, and stockholders' equity of $78.0
million. Our insurance subsidiaries are rated "A-" (Excellent) by A.M. Best.
Forward-Looking Statements
Certain statements contained herein are not based on historical facts and
are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Such forward-looking statements may be identified by reference to a future
period or periods, or by the use of forward-looking terminology, such as "may,"
"will," "believe," "expect," "estimate," "anticipate," "continue," or similar
terms or variations on those terms, or the negative of those terms. These
forward-looking statements include: statements of our goals, intentions and
expectations; statements regarding our business plans, prospects, growth and
operating strategies; and estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks, assumptions
and uncertainties, including, among other things, the following important
factors that could affect the actual outcome of future events:
o general economic conditions, either nationally or in our market
area, that are worse than expected;
o price competition;
o inflation and changes in the interest rate environment and
performance of financial markets;
o adverse changes in the securities markets;
o changes in laws or government regulations affecting medical
professional liability insurance and practice management and
financial services;
o NCRIC, Inc.'s concentration in a single line of business;
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o our ability to successfully integrate acquired entities;
o changes to our ratings assigned by A.M. Best;
o impact of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o the cost and availability of reinsurance;
o changes in accounting policies and practices, as may be adopted by
our regulatory agencies and the Financial Accounting Standards
Board; and
o changes in our organization, compensation and benefit plans.
We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and wish to
advise readers that the factors listed above could affect our financial
performance and could cause actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements. We do not undertake and specifically decline
any obligation to publicly release the result of any revisions that may be made
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
Business Strategy
Our business strategy is designed to enhance our profitability and
strengthen our position as a leading provider of medical professional liability
insurance, alternative risk financing services, and financial and practice
management services in the Mid-Atlantic region. The major elements of our
business strategy are:
Strengthen and expand our medical professional liability insurance business by:
Adhering to strict underwriting criteria and disciplined pricing
practices. We consistently have followed strict underwriting procedures with
respect to the issuance of all of our insurance policies and do not manage our
business to achieve a certain level of premium growth or market share. In
addition, we solicit the input of physicians from a cross section of medical
specialties to assess accurately the underwriting risks in each of our market
territories. We seek to achieve our principal objective of attracting and
retaining high quality business by focusing on independent physicians who
practice individually or in small groups who we believe are more receptive to
our service-intensive approach and more likely to remain with us in times of
price based competition. We continually monitor market conditions to identify
potentially negative trends that may require corrective actions in our prices
and underwriting criteria.
Aggressively managing policyholder claims. In addition to prudent risk
selection, we seek to control our underwriting results through effective claims
management. Our claims department focuses on the early evaluation and aggressive
management of medical professional liability claims. We investigate each claim
and vigorously litigate claims that we consider unwarranted or claims where
settlement resolution cannot be achieved. We have established an understanding
of the legal climates in our core market area and we retain locally based
attorneys who specialize in medical professional liability defense. We believe
this approach contributes to lower overall costs, and results in greater
customer loyalty.
Maintaining our financial strength. We are rated "A-" (Excellent) by A.M.
Best. An "A-" rating is assigned to companies that have, on balance, excellent
balance sheet strength, operating performance and business profile. These
companies, in A.M. Best's opinion, have a strong ability to meet their ongoing
obligations to policyholders. We have sustained our financial strength and
stability during difficult market conditions through adhering to strict
underwriting, pricing and loss reserving practices. We are committed to abiding
to these practices. We recognize the importance of our A.M. Best rating to our
customers and agents and intend to manage our business to protect our financial
security.
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Expanding our distribution channels and pursuing strategic acquisitions.
In addition to our leading position in the District of Columbia, we are a
significant insurer in Delaware, Maryland, and Virginia. Historically, direct
sales in the District of Columbia were the primary source of written premiums.
In recent years, growth in states outside of the District of Columbia has
largely come through our independent agents. In 2003, 6% of all new business was
written through direct distribution and 94% through independent agents. We
believe we can further increase business through the continued use of
independent agents. We also believe that consolidation will continue in the
medical professional liability insurance industry. This may give rise to
opportunities for us to make strategic acquisitions to expand our business.
Maintaining close relationships 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 (MSDC) and the District of
Columbia's physicians. We maintain the exclusive endorsement of the MSDC, as
well as that of the Virginia-based Arlington County Medical Society. We also
maintain strong working relationships with the Medical Society of Virginia and
the Delaware Medical Society.
Utilize our expertise in medical professional liability insurance to offer
alternative risk transfer products to healthcare providers.
As a result of significant premium rate increases, healthcare providers
are seeking alternatives methods to secure medical professional liability
coverage. We established American Captive Corporation (ACC) under District of
Columbia Law in 2001 to form independent protected captive cells to accommodate
affinity groups seeking to manage their own risk through an alternative risk
transfer structure. Alternative risk transfer is broadly defined as the use of
alternative insurance mechanisms as a substitute for traditional risk-transfer
products offered by insurers. ACC is well positioned to meet current
professional liability insurance market needs due to our ability to manage risk
and provide access to increasingly unavailable reinsurance markets. We believe
this venture is strategically placed to capitalize on the emerging opportunities
as demand for these specialized services increases. We are competing with
established national brokerage and specialty companies to provide both the risk
transfer vehicle and services to support and manage captives. We also compete on
a regulatory level with other jurisdictions and varying regulatory requirements
in such domiciles as Hawaii, Bermuda, the Caribbean and Europe.
Provide practice management services to assist physicians in the practice of
medicine.
We offer practice management and financial services to physicians in the
District of Columbia, North Carolina and Virginia. These services are heavily
concentrated in North Carolina and Virginia and are utilized by approximately
900 physicians. Most of our clients are small and solo practitioners. We compete
most often with single source providers of individual services who target small
business. In our accounting, tax and financial services we also compete with
local and regional certified public accounting firms. In our retirement plan
administration we compete with large brokerage firms; while with respect to our
payroll services we compete with national companies.
Growth Opportunities
Financial pressure on medical professional liability companies and market
contraction in the industry has occurred as companies that expanded nationally
or outside of their traditional market areas have sought to reduce or in some
cases eliminate their medical professional liability insurance business on a
going forward basis in order to regain financial stability. For several years in
the 1990s, many of these carriers engaged in soft-market pricing tactics that
generally resulted in lower premium rates. Reduced profitability, reductions in
surplus and capacity constraints have led many medical professional liability
carriers to withdraw from, or limit new business in, one or more markets.
We have maintained strict underwriting criteria and a disciplined approach
with respect to pricing our product and establishing reserves. We have remained
focused on growth in our existing markets as pricing
5
conditions have improved. Further industry contraction and a hard insurance
market characterized by increasing premium rates, lesser competition and a
shortage of capital may create additional opportunities for growth within our
market area. We raised additional capital through the 2003 stock offering to
better position ourselves to pursue further growth and market opportunities that
arise.
In our market areas, over the past 24 months we have experienced
contraction of competition. The St. Paul Companies, a national writer and the
country's largest medical professional liability insurance carrier in 2001,
exited the market leaving behind an approximately 9% industry-wide market share.
This had a significant impact on our Delaware and Virginia markets as The St.
Paul Companies had 2002 market shares of 22% and 15%, respectively. In addition,
Fireman's Fund, another leading carrier also withdrew from the market. Princeton
Insurance Company and MIIX Group, Inc. also have restricted writing
policies to their domiciled states leaving former policyholders seeking coverage
in our key markets of Delaware, Maryland and Virginia. Furthermore, financial
difficulties led to the insolvency of Doctors Insurance Reciprocal (a
subsidiary of The Reciprocal Group of America), leaving more than 1,000
physicians needing coverage in Virginia.
Competition
The competitive environment in the medical professional liability industry
has changed significantly over the past several years. We do not expect
competition from the national companies, such as The St. Paul Companies and CNA
Insurance Companies, which have historically been our largest competitors. The
largest writers of medical professional liability insurance have recently
decided to retrench or exit the marketplace. As a result, the market now is
composed of companies similar to us that offer a single line of insurance,
medical professional liability insurance.
We expect to face competition from those companies that are focused on
narrow geographic markets. In addition, our competitors may have existing
relationships with insurance brokers or other distribution channels, which we
may be unable to supplant.
The following is a brief summary of our primary competitors in the
jurisdictions in which we operate.
District of Columbia. We are one of a few remaining carriers currently
writing medical professional liability insurance policies in Washington, D.C.
According to A.M. Best 2002 data, the most recent available, we have 56.5% of
the District of Columbia medical professional liability market share. The
Doctors Company Insurance Group holds a 12.7% market share in the District of
Columbia. Professionals Advocate, a member of The Medical Mutual Group, holds an
8.5% market share in the District of Columbia.
Delaware. As a result of the withdrawal of Fireman's Fund, CNA Insurance
Companies and MLMIC Group from the Delaware market, which held 21.8%, 18.3% and
11.5%, respectively, of the Delaware market share, we are expanding our market
share among Delaware physicians. Companies licensed to do business in the state
include GE Global Insurance Group and SCPIE Holdings, Inc. which hold market
shares of 11.7% and 6.9%, respectively, based on 2002 data.
Maryland. We also have been writing insurance policies in Maryland since
1980. The departure of Princeton Insurance Company and MIIX Group, Inc. from
Maryland and the insolvency of PHICO Insurance Company has created opportunities
for growth in the state. Our primary competitor in Maryland is Medical Mutual of
Maryland, a physician-governed carrier that has approximately 43% of the market
share.
Virginia. Our primary competitors in the Virginia marketplace include
State Volunteer Mutual Insurance Company, Medical Mutual of North Carolina, The
Doctors Company Insurance Group, MAG Mutual Insurance Company, Professionals
Advocate, and ProAssurance Corporation. We have experienced significant growth
in the Virginia market in the last three years. In 2002, The St. Paul Companies,
Princeton Insurance Company, CNA
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Insurance Companies and MIIX Group, Inc. exited this market creating additional
growth opportunities. In addition, in January 2003 the largest underwriter of
medical professional liability insurance in Virginia, Doctors Insurance
Reciprocal, entered into receivership.
West Virginia. We currently expect to reduce our business in West
Virginia. In 2004 we are non-renewing policies at their expiration and we are
not writing new business.
Insurance Activities
General. We provide medical professional liability insurance for
independent physicians, and their professional corporations, who practice
individually or in small groups. We generally sell an insurance product with $1
million of coverage for any one incident with a $3 million limit for incidents
reported within the policy year. Our policies are written on a claims-made basis
and include coverage for the entire defense cost of the claim. These policies
provide coverage for claims arising from incidents that both occur and are
reported to us while the policy is in force. A claims-made policy is in force
from the starting date of the initial policy period and continues in force from
that date through each subsequent renewal. Policyholders can purchase up to $10
million dollars of excess coverage that provides coverage for losses up to $11
million with an annual limit of $13 million.
Underwriting. Our 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. In addition, this department provides information to the D.C.
underwriting committee and Virginia, West Virginia and Delaware Physician
Advisory Boards. These boards are comprised of physicians who represent a cross
discipline of medical specialties and provide valued input on local standards of
care as they relate to understanding medical risk and underwriting in each area.
We believe this combination of medical and insurance industry professionals
provides an advantage in underwriting services when compared to our competitors.
We adhere to consistent and strict underwriting procedures with respect to
the issuance of all physician medical 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.
We also perform a continuous process of underwriting policyholders at
renewal. 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.
Claims. Our claims department is responsible for claims investigation,
establishment of appropriate case reserves for losses and LAE, defense planning
and coordination, monitoring of attorneys engaged by us to defend an insured
against a claim and negotiation of the settlement or other disposition of a
claim.
We emphasize early evaluation and aggressive management of claims. When a
claim is reported, our claims professionals complete a preliminary 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.
As of December 31, 2003, we had approximately 616 open cases with an
average of 62 cases being handled by each claims representative. Our claims
department consists of 11 claims professionals and the level of education ranges
from certified paralegal to juris doctor. The current professional claims staff
has an average of 11 years of experience handling medical professional liability
cases. We limit the number of claims handled by each representative to fewer
than 90 cases. We believe this number is lower than other companies in the
medical professional liability insurance industry.
Our focus is to maintain a local presence in the jurisdictions where we
write coverage. We have obtained an understanding of the local medical and legal
climates where we write policies through on-site visits, interviews with local
law firms, discussions with policyholders and ongoing communications with local
law firms. We retain
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locally-based attorneys who specialize in medical professional liability defense
and share our philosophy to represent our policyholders. We also retain the
services of medical experts who are leaders in their specialties and who bring
credibility and expertise to the litigation process.
Our D.C. claims committee is composed of 9 physicians from various
specialties and 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 as it provides an opportunity to obtain the opinions of
several different specialists meeting to share their knowledge in the area of
liability evaluation and general peer review.
Our objective of local physician claims guidance is carried out in
Delaware and Virginia through advisory boards which serve as our preliminary
risk screening mechanism. These boards meet to review medical incidents, assess
claims and practice characteristics of current policyholders, and bring to our
attention all matters of special interest to healthcare providers in their
state.
Risk management. The goal of our risk management staff is to assist our
policyholders in identifying potential areas of exposure to loss and to develop
strategies to reduce or eliminate such risk. Our risk management committee, a
group of nine physicians comprising various specialties, lend their individual
expertise in the development of risk management services tailored to the needs
of the individual policyholders to aid in this endeavor.
Our risk management staff presents educational seminars throughout the
year in locations convenient to our policyholders. Programs designed to address
the needs and interests of physicians are held throughout the District of
Columbia, Delaware, Maryland and Virginia, and cover a wide variety of topics.
Our staff is also available to present customized programs, on an as requested
basis, to individual physician groups and/or office staff.
Physicians unable to attend a live seminar are given the opportunity to
access our risk management services in other ways. Currently, three home study
courses are available and accessible either on-line or in booklet format. Those
physicians wanting a more involved approach to dealing with their risk
management concerns may participate in an office assessment conducted by one of
our risk management staff members.
CME accreditation through the MSDC, allows us to award Category 1 CME
credit to those physicians who attend a live seminar, successfully complete a
home study course, or undergo an office assessment. Participation in one of
these activities also entitles policyholders to a 5% policy premium discount.
Marketing. Within the District of Columbia, we market directly to
individual physicians and other prospective policyholders through our sponsored
relationship with the MSDC, referrals by existing policyholders, advertisements
in medical journals, and direct solicitation to licensed physicians. We attract
new physicians by targeting medical residents and physicians just entering
medical practice. In addition, we participate as a sponsor and participant in
various medical group and hospital administrators' programs, medical association
and specialty society conventions and similar events. We believe that our
comprehensive approach, market knowledge and insurance expertise all play key
roles in the successful direct marketing of our medical professional liability
insurance in this jurisdiction.
Our primary marketing channel in Delaware, Maryland, Virginia and West
Virginia is our independent agent network. In 2003, our agent network totaled 33
agencies. These agents produced 94% of new premiums and 53% of renewing premiums
in 2003. Healthcare providers frequently utilize agents when they purchase
medical professional liability insurance. Therefore, we believe that developing
our broker relationships in these states is important to grow our market share.
We select 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. We strive to foster relationships with those brokers and
agents who are committed to promoting our products and are successful in
producing business for us. In 2002, we created the President's Gold Circle to
recognize agencies that contribute growth in excess of $1 million in premium and
to foster enhanced communications with these top producers.
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Account information is communicated to all policyholders and agents
through our policyholder services department. This department strives to
maintain a close relationship with the medical groups and individual
practitioners insured by us as well as the agents who make up our agency
network. To best serve clients and agents, we deploy client service
representatives who can answer most inquiries and, in other instances, provide
immediate access to an appropriate individual who has the expertise to provide a
response. For hospital-based programs and large and mid-size medical groups, we
have an account manager assigned to each group who leads a team comprised of
underwriting, risk management and claims management representatives, each of
whom may be contacted directly by the policyholder for prompt response. Over the
years, we believe this approach has resulted in our high customer retention and
satisfaction rate.
Risk Sharing Arrangements. We have entered into agreements for risk
sharing programs for groups of physicians practicing at some hospitals in the
Washington, D.C. metropolitan area. The type of risk sharing arrangement offered
involves the initial funding of a portion of a premium being held to pay losses.
In this type of arrangement, we receive 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.
Risk sharing arrangements help lower our 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.
We continued to reduce the level of risk share discount offered in our
risk sharing programs in 2003, and established an administrative management
program for intensive risk management services specific to these programs. This
new administrative program is provided on a fee basis and generates additional
non-risk bearing revenue.
Rates. We establish rates and rating classifications for physician and
medical group policyholders in the District of Columbia based on the losses and
LAE experience we have developed over the past 23 years. For our other market
areas, we rely on losses and LAE experience data from the medical professional
liability industry. We have various rating classifications based on practice
location, medical specialty and other factors. We utilize premium discounts,
including discounts for part-time practice, physicians just entering medical
practice, claim-free physicians and risk management participation. Generally,
total discounts granted to a policyholder do not exceed 25% of the base premium.
In addition, surcharges generally do not exceed 25% of the base premium.
Effective rates equal our base rate, less any discounts, plus any surcharges to
the policyholder.
Our rates are established based on previous loss experience, loss
adjustment expenses, anticipated policyholder discounts or surcharges, and fixed
and variable operating expenses. In recognition of the increase in the severity
of losses and increases in other cost components, the weighted average rate
increase for our base premiums was 27% effective January 1, 2004, and 27%
effective January 1, 2003.
Reserves for Losses and LAE. The determination of losses and LAE reserves
involves projection of ultimate losses through an actuarial analysis of our
claims history and other medical professional liability insurers, subject to
adjustments deemed appropriate by us due to changing circumstances. Included in
our claims history are losses and LAE paid by us in prior periods, and case
reserves for losses and LAE developed by our 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 our results of operations for the
period in which the adjustments are made.
Our estimates of the ultimate cost of settling the claims are based on
numerous factors including, but not limited to:
o information then known;
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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; and
o legislative activity.
The inherent uncertainty of establishing reserves is greater for medical
professional liability insurance because lengthy periods may elapse between
notice of a claim and 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 we may not
promptly modify our underwriting practices and change our 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 our underwriting and reserving practices.
Our independent actuary reviews our reserves for losses and LAE
periodically and prepares semi-annual reports that include a recommended level
of reserves. We consider 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 reserves for losses and LAE. We
continually refine reserve estimates as experience develops and claims are
settled. Medical professional liability insurance is a line of business for
which the initial losses and LAE estimates may change significantly as a result
of events occurring long after the reporting of the claim. For example, losses
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,
----------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Balance, beginning of year ................. $104,022 $ 84,560 $ 81,134
Less reinsurance recoverable on unpaid
claims ................................... 42,412 29,624 27,312
-------- -------- --------
Net balance ................................ 61,610 54,936 53,822
-------- -------- --------
Incurred related to:
Current year ............................. 44,588 24,063 23,056
Prior years .............................. 5,885 2,766 (4,198)
-------- -------- --------
Total incurred ........................ 50,473 26,829 18,858
-------- -------- --------
Paid related to:
Current year ............................. 4,383 1,491 1,599
Prior years .............................. 26,382 18,664 16,145
-------- -------- --------
Total paid ............................ 30,765 20,155 17,744
-------- -------- --------
Net balance ................................ 81,318 61,610 54,936
Plus reinsurance recoverable on unpaid
claims ................................... 44,673 42,412 29,624
-------- -------- --------
Balance, end of year ....................... $125,991 $104,022 $ 84,560
======== ======== ========
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 GAAP.
10
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 (deficiency)" 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
1993 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 1993 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.
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(in thousands)
Reserve for Unpaid
Losses and LAE .......... $88,891 $77,647 $68,928 $68,101 $72,031 $84,595 $ 84,282 $ 81,134 $ 84,560 $104,022
Cumulative Liability
Paid Through End of
Year:
One year later ........ 19,786 21,667 16,084 14,916 9,667 13,865 20,813 20,828 21,995 31,872
Two years later ....... 39,293 34,829 27,634 22,237 21,810 32,778 38,078 34,253 45,764
Three years later ..... 47,348 43,237 32,409 29,135 36,310 42,381 44,696 47,273
Four years later ...... 51,845 45,219 34,657 39,938 42,553 44,352 50,634
Five years later ...... 52,984 45,682 41,578 44,297 43,581 48,120
Six years later ....... 53,208 51,450 43,753 44,724 46,324
Seven years later ..... 58,246 52,551 43,962 46,385
Eight years later ..... 59,086 52,737 44,058
Nine years later ...... 59,108 52,824
Ten years later ....... 59,110
Re-estimated Liability:
One year later ........ 70,640 68,891 62,028 61,121 71,419 72,575 77,373 73,582 86,534 107,980
Two years later ....... 63,248 66,439 53,429 62,097 64,980 66,733 71,489 73,654 87,074
Three years later ..... 65,422 60,858 55,883 58,169 61,336 60,752 68,439 68,528
Four years later ...... 64,460 62,625 53,400 54,324 54,996 59,069 63,028
Five years later ...... 66,275 61,077 50,744 50,977 53,952 55,191
Six years later ....... 64,877 58,220 47,946 50,666 51,136
Seven years later ..... 63,514 55,739 47,099 47,994
Eight years later ..... 61,262 55,156 45,329
Nine years later ...... 60,160 53,927
Ten years later ....... 59,926
Redundancy (deficiency) .. $28,965 $23,720 $23,599 $20,107 $20,895 $29,404 $ 21,254 $ 12,606 $ (2,514) $ (3,958)
General office premises liability incurred losses have been less than 1%
of medical professional liability incurred losses in the last five years. We do
not have reserves for pollution claims as our policies exclude liability for
pollution. We have never been presented with a pollution claim brought against
us or our insureds.
Reinsurance. We follow customary industry practice by reinsuring a portion
of our risks and paying a reinsurance premium based upon the premiums received
on all policies subject to reinsurance. By reducing our potential liability on
individual risks, reinsurance protects us against large losses. We have full
underwriting authority for medical professional liability policies including
premises liability policies issued to physicians, surgeons, dentists and
professional corporations and partnerships. The 2003 and 2004 reinsurance
program cedes to
11
the reinsurers up to the maximum reinsurance policy limit those risks insured by
us in excess of our $1 million retention.
Although reinsurance does not discharge us from our primary liability for
the full amount of our insurance policies, it contractually obligates the
reinsurer to pay successful claims against us to the extent of risk ceded. Our
current reinsurance program is designed to provide coverage through separate
reinsurance treaties for two layers of risk.
Losses in excess of $1,000,000 per claim up to $2,000,000. Effective
January 1, 2003 to January 1, 2006, the treaty, which reinsures us for losses in
excess of $1,000,000 per claim up to $2,000,000, 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 our gross premium earned net
of discounts for coverage limits up to $2,000,000.
Effective January 1, 2000 to January 1, 2003 our primary treaty reinsures
losses in excess of $500,000 per claim up to $1,000,000 and is a fixed rate
treaty. Our first excess cession 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
to January 1, 2003, under this first excess cession treaty, we cede 100% of our
risks and premium.
For claims submitted for 1999 and prior years, we have a swing-rated
treaty which reinsures us for losses in excess of $500,000 per claim up to
$1,000,000, subject to an inner aggregate deductible of 5% of gross net earned
premium income. 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 we must pay losses within the reinsurance layer
until the inner aggregate deductible is satisfied. We paid 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
We have recorded, based on actuarial analysis, management's best estimate
of premium expense under the terms of the swing-rated treaty. In the initial
year of development for each coverage year, the premium was capped at the
maximum rate. We then adjust the liability and expense as losses develop in
subsequent years.
For claims related to 1999 and prior years, we cede 91% of our risks and
premium to the $1,000,000 excess layer treaty program and retain 9% of the risks
and premium. We receive a ceding commission from the reinsurers to cover the
costs associated with issuing this coverage.
Losses up to $9,000,000 in excess of $2,000,000 per claim. An excess
cession layer treaty covers losses up to $9,000,000 in excess of $2,000,000 per
claim. We cede 100% of our risks to the $2,000,000 excess layer treaty program
and retain 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. We receive a
ceding commission from the reinsurers to cover the costs associated with issuing
this coverage.
Ceding commissions, which are 15% of gross ceded reinsurance premiums in
the excess layer, are deducted from other underwriting expenses. Ceding
commissions were $833,000, $1.1 million and $644,000 in 2003, 2002 and 2001,
respectively.
12
Additionally, our reinsurance program protects us from paying multiple
retentions for claims arising out of one event. In most situations we will only
pay one retention regardless of the number of original policies or
claimants involved. We also have protection against losses in excess of our
existing reinsurance. We may provide higher policy limits reinsured through
facultative reinsurance programs. Facultative reinsurance programs are
reinsurance programs which are specifically designed for a particular risk not
covered by our existing reinsurance arrangements.
We determine the amount and scope of reinsurance coverage to purchase each
year based upon evaluation of the risks accepted, consultations with reinsurance
consultants and a review of market conditions, including the availability and
pricing of reinsurance. Our primary reinsurance treaty is placed with
non-affiliated reinsurers for a three-year term with annual renegotiations. Our
current three-year treaty expires January 1, 2006.
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 European companies or Lloyds'
syndicates; there is a small percentage placed with a domestic reinsurer. As of
December 31, 2003, the amounts recoverable from reinsurers attributable to
Lloyds of London represents a total of 48 syndicates. We rely on our wholly
owned brokerage firm, National Capital Insurance Brokerage, Ltd., Willis Re,
Inc. and a London-based intermediary to assist in the analysis of the credit
quality of reinsurers. We also require 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, 2003 by reinsurer:
Reinsurance A.M. Best
Reinsurer Recoverable Rating
--------- -------------- ---------
(in thousands)
Lloyd's of London syndicates .................. $28,117 A+
Hanover Rueckversicherungs - AG ............... 5,494 NR3
CX Reinsurance LTD ............................ 2,393 B+
Unionamerica Insurance ........................ 1,331 A++
Transatlantic Reinsurance Company ............. 3,183 A-
AXA Reassurance ............................... 3,664 A-
Terra Nova Insurance Company LTD .............. 1,015 A/A-
Other reinsurers .............................. 2,903
-------
Total ..................................... $48,100
=======
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2003, 2002 and 2001 is as follows:
Year Ended December 31,
------------------------------------------------------------------------------
2003 2002 2001
---------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(in thousands)
Direct ... $ 71,365 $ 61,023 $ 51,799 $ 44,113 $ 34,459 $ 28,192
Ceded .... (12,088) (13,759) (18,003) (14,023) (10,542) (7,296)
-------- -------- -------- -------- -------- --------
Net ...... $ 59,277 $ 47,264 $ 33,796 $ 30,090 $ 23,917 $ 20,896
======== ======== ======== ======== ======== ========
In late 1999, we 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. We reinsure 100% of this risk and
receive a ceding commission. We intend to evaluate our level of risk acceptance
based on how losses develop in the future.
13
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 our operating results. We utilize external investment managers who
adhere to policies established and supervised by our investment committee. Our
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, our investment guidelines,
which set the parameters for our investment policy, permit investments in
high-yield bonds, tax-advantaged securities such as municipal bonds and
preferred stock, and common stock. During 2003, an allocation to common stock
was implemented as a measure to provide a level of protection against a rising
interest rate environment. An allocation of the portfolio to high-yield
securities was funded in January, 2004. Our investment guidelines document is
reviewed and updated as needed, at least annually.
Deutsche Asset Management (DeAM), previously Zurich Scudder Insurance
Asset Management, was the external investment manager for our fixed income
securities including tax advantaged preferred stocks for the year ended December
31, 2002. Effective January 1, 2003, Standish Mellon Asset Management became the
external investment manager for our fixed income portfolio. We utilize three
different managers, each with a different investment objective, for our equity
securities portfolio. The high-yield bond allocation is invested through a
mutual fund instrument in order to achieve adequate diversity of underlying
credits.
Each year we, along with our fixed maturity securities 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 us. Standish Mellon supplemented
stochastic modeling with the output from their independent investment research
and strategy group to develop a tailored investment approach for us. Analysis of
our 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.
Standish Mellon used Dynamic Financial Analysis (DFA) a total company tool
to test our 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 us to make risk informed decisions on the
structure of our investment portfolio as it relates to our business profile. DFA
output has been especially useful in setting portfolio policy regarding average
duration and optimizing potential equity exposure.
We have classified our investments as available for sale and report 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 mid-year 2003, the fair
value of our fixed income investment portfolio will generally decline resulting
in decreases in our stockholders' equity. Conversely, during periods of falling
interest rates, as experienced during 2002, the fair value of our investment
portfolio will generally increase resulting in increases in our stockholders'
equity.
14
The following table sets forth the fair value and the amortized cost of
our investment portfolio at the dates indicated.
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(in thousands)
At December 31, 2003
U.S. Government and agencies ........... $ 29,328 $ 75 $ (118) $ 29,285
Corporate .............................. 41,773 247 (720) 41,300
Tax-exempt obligations ................. 35,329 1,907 (78) 37,158
Asset and mortgage-backed securities ... 55,446 186 (631) 55,001
-------- ------- --------- --------
161,876 2,415 (1,547) 162,744
-------- ------- --------- --------
Equity securities ...................... 10,269 1,373 (29) 11,613
-------- ------- --------- --------
Total ................................ $172,145 $ 3,788 $ (1,576) $174,357
======== ======= ========= ========
At December 31, 2002
U.S. Government and agencies ........... $ 27,664 $ 292 $ (4) $ 27,952
Corporate .............................. 32,680 1,567 (488) 33,759
Tax-exempt obligations ................. 30,416 2,309 (21) 32,704
Asset and mortgage-backed securities ... 19,549 882 (150) 20,281
-------- ------- --------- --------
110,309 5,050 (663) 114,696
Equity securities ...................... 5,561 150 (287) 5,424
-------- ------- --------- --------
Total ................................ $115,870 $ 5,200 $ (950) $120,120
======== ======= ========= ========
At December 31, 2001
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
======== ======= ========= ========
Our investment portfolio of fixed maturity securities consists primarily
of intermediate-term, investment-grade securities. Our investment policy
provides that all security purchases be limited to rated securities or unrated
securities approved by management on the recommendation of our investment
advisor. At December 31, 2003, we held 134 asset and mortgage-related
securities, most of which had a quality of Agency/AAA. Collectively, our
mortgage-related securities had an average yield to maturity of approximately
4.47%. Approximately 81.3% of the mortgage-related securities are pass-through
securities. We do not have any interest only or principal only pass-through
securities.
The following table contains the investment quality distribution of our
fixed maturity investments at December 31, 2003.
Type/Ratings of Investment Percentage
-------------------------------------------- ----------
Treasury/Agency ............................ 42.3
AAA ........................................ 27.4
AA ......................................... 6.0
A .......................................... 14.1
BBB ........................................ 10.2
-----
100.0
=====
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 our investment portfolio as of December 31, 2003,
by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
15
At December 31, 2003
------------------------------------
Percentage
Amortized of Fair
Cost Fair Value value
--------- -------------- ----------
(in thousands)
Due in one year or less ............................... $ 1,912 $ 1,923 1%
Due after one year through five years ................. 39,363 39,886 23
Due after five years through ten years ................ 45,918 46,483 27
Due after ten years ................................... 19,237 19,451 11
-------- -------- ---
106,430 107,743 62%
Equity securities ..................................... 10,269 11,613 7
Asset and mortgage-backed securities .................. 55,446 55,001 31
-------- -------- ---
Total .............................................. $172,145 $174,357 100%
======== ======== ===
Proceeds from bond maturities, sales and redemptions of available for sale
investments during the years 2003, 2002, and 2001 were $138.6 million, $39.0
million and $22.0 million, respectively. Gross gains of $3,441,000, $1,437,000
and $787,000 and gross losses of $1,511,000, $1,568,000 and $1,065,000 were
realized on available for sale investment redemptions during 2003, 2002, and
2001, respectively.
The average duration of the securities in our fixed maturity portfolio as
of December 31, 2003 and 2002, was 4.8 years and 4.4 years, respectively.
A.M. Best Company Ratings
A.M. Best, which rates insurance companies based on factors of concern to
policyholders, rated NCRIC, Inc. and CML "A-" (Excellent). This is the fourth
highest rating of the 15 ratings that A.M. Best assigns. NCRIC, Inc. received
its initial rating of "B" in 1988, was upgraded to "B+" in 1989, to "B++" in
1996 and was upgraded to "A-" in 1997. A.M. Best reaffirmed the "A-" ratings of
NCRIC, Inc. and CML in 2003. A.M. Best reviews its ratings periodically.
A.M. Best's "A-" rating is assigned to those companies that in A.M. Best's
opinion have a strong ability to meet their obligations to policyholders over a
long period of time. In evaluating a company's financial and operating
performance, A.M. Best reviews:
o the company's profitability, leverage and liquidity;
o its book of business;
o the adequacy and soundness of its reinsurance;
o the quality and estimated market value of its assets;
o the adequacy of its reserves and surplus;
o its capital structure;
o the experience and competence of its management; and
o its market presence.
Risk Factors
Our results may be affected if actual insured losses differ from our loss
reserves
Significant periods of time often elapse between the occurrence of an
insured loss, the reporting of the loss to us and our payment of that loss. To
recognize liabilities for unpaid losses, we establish reserves as balance sheet
liabilities representing estimates of amounts needed to pay reported losses and
the related loss adjustment expenses. The process of estimating loss reserves is
a difficult and complex exercise involving many variables and subjective
16
judgments. We regularly review our reserving techniques and our overall level of
reserves. As part of the reserving process, we review historical data and
consider the impact of various factors such as:
o trends in claim frequency and severity;
o changes in operations;
o emerging economic and social trends;
o inflation; and
o changes in the regulatory and litigation environments.
This process assumes that past experience, adjusted for the effects of
current developments and anticipated trends, is an appropriate, but not
necessarily accurate, basis for predicting future events. There is no precise
method for evaluating the impact of any specific factor on the adequacy of
reserves, and actual results are likely to differ from original estimates. To
the extent loss reserves prove to be inadequate in the future, we would need to
increase our loss reserves and incur a charge to earnings in the period the
reserves are increased, which could have a material adverse impact on our
financial condition and results of operations. Although we intend to estimate
conservatively our future payments relating to losses incurred, there can be no
assurance that currently established reserves will prove adequate in light of
subsequent actual experience. Our ultimate liability will be known only after
all claims are closed, which is likely to be several years into the future.
The loss reserves of our insurance subsidiary also may be affected by
court decisions that expand liability on our policies after they have been
priced and issued. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserved amounts. Our policy to litigate aggressively claims
against our insureds that we consider unwarranted or claims where settlement
resolution cannot be achieved may increase the risk that we may be required to
make such payments.
The change in our reinsurance program effective January 1, 2003 exposes us to
larger losses
We increased our retention of loss from $500,000 to $1,000,000 for each
and every loss. As a result, we expect a higher level of losses and are subject
to a higher level of loss volatility since it is more difficult to predict the
number and timing of losses in excess of $500,000.
We purchase limited reinsurance for protection against more than one
insured being involved in a single incident so that we are exposed to no more
than one retention of loss in a single medical incident. The limited protection
may not be adequate if there are several policyholders involved in a single
medical incident and a jury returns an extraordinarily high verdict against all
defendants.
Our earnings may not increase as a result of growth in new business in states in
which we have limited operating experience
In recent years we have expanded our business in Delaware, Virginia and
West Virginia. We utilize publicly available information on loss experience of
our competitors when we price our products in states when we can not rely on our
own experience. The use of competitor data does not provide the same level of
confidence as when we can use our own historical data from territories we have
been operating in for many years, i.e., the District of Columbia and Maryland.
The increase in uncertainty is a result of us not knowing the effectiveness of
our underwriting and claims adjudication process in the new territory.
Our revenues and income may fluctuate with interest rates and investment results
We generally rely on the positive performance of our investment portfolio
to offset insurance losses and to contribute to our profitability. As our
investment portfolio is primarily comprised of interest-earning assets,
prevailing economic conditions, particularly changes in market interest rates,
may significantly affect our operating
17
results. Changes in interest rates also can affect the value of our
interest-earning assets, which are principally comprised of fixed rate
investment securities. Generally, the value of fixed rate investment securities
fluctuates inversely with changes in interest rates. Interest rate fluctuation
could adversely affect our GAAP stockholders' equity, total comprehensive income
and/or cash flows. As of December 31, 2003, $162.7 million of our $174.4 million
investment portfolio was invested in fixed maturities. Unrealized pre-tax net
investment gains on investments in fixed maturities were $867,000 and $4.2
million as of December 31, 2003, and 2002, respectively.
In accordance with our investment policies, the duration of our investment
portfolio is intended to be similar to our expectation for the duration of our
loss reserves. Changes in the actual duration of our loss reserves from our
expectations may affect our results. Our investment portfolio, however, is
subject to prepayment risk primarily due to our investments in mortgage-backed
and other asset-backed securities. An investment has prepayment risk when there
is a risk that the timing of cash flows that result from the repayment of
principal might occur earlier than anticipated because of declining interest
rates or later than anticipated because of rising interest rates. We are subject
to reinvestment risk to the extent that we are not able to reinvest prepayments
at rates comparable to the rates on the maturing investments.
Regulatory changes could have a material impact on our operations
Our insurance businesses are subject to extensive regulation by state
insurance authorities in each state in which we operate. Regulation is intended
for the benefit of policyholders rather than stockholders. In addition to the
amount of dividends and other payments that can be made by our insurance
subsidiaries, these regulatory authorities have broad administrative and
supervisory power relating to:
o rates charged to insurance customers;
o licensing requirements;
o trade practices;
o capital and surplus requirements; and
o investment practices.
These regulations may impede or impose burdensome conditions on rate
increases or other actions that we may want to take to enhance our operating
results, and could affect our ability to pay dividends on our common stock. In
addition, we may incur significant costs in the course of complying with
regulatory requirements. Most states also regulate insurance holding companies
like us in a variety of matters such as acquisitions, changes of control, and
the terms of affiliated transactions. Future legislative or regulatory changes
may adversely affect our business operations.
The unpredictability of court decisions could have a material impact on our
financial results
The financial position of our insurance subsidiaries may also be affected
by court decisions that expand insurance coverage beyond the intention of the
insurer at the time it originally issued an insurance policy or by a judiciary's
decision to accelerate the resolution of claims through an expedited court
calendar, thereby reducing the amount of investment income we would have earned
on related reserves. In addition, a significant jury award, or series of awards,
against one or more of our insureds could require us to pay large sums of money
in excess of our reserve amount.
Our revenues and operating performance may fluctuate with insurance business
cycles
Growth in premiums written in the medical professional liability industry
have fluctuated significantly over the past 10 years as a result of, among other
factors, changing premium rates. The cyclical pattern of such fluctuation has
been generally consistent with similar patterns for the broader property and
casualty insurance industry, due in part to the participation in the medical
professional liability industry of insurers and reinsurers
18
which also participate in many other lines of property and casualty insurance
and reinsurance. Historically, the financial performance of the property and
casualty insurance industry has tended to fluctuate in cyclical patterns
characterized by periods of greater competition in pricing and underwriting
terms and conditions, a soft insurance market, followed by period of capital
shortage, lesser competition and increasing premium rates, a hard insurance
market.
For several years in the 1990s, the medical professional liability
industry faced a soft insurance market that generally resulted in lower premium
rates. The medical professional liability industry is currently in a hard
insurance market cycle. We cannot predict whether, or the extent to which, the
recent increase in premium rates will continue.
Our geographic concentration ties our performance to the economic, regulatory
and demographic conditions of the Mid-Atlantic Region
Our revenues and profitability are subject to prevailing economic,
regulatory, demographic and other conditions in the region in which we write
insurance. We write our medical professional liability insurance in the District
of Columbia, Delaware, Maryland, Virginia and West Virginia. Because our
business is concentrated in a limited number of states, we may be exposed to
adverse developments that may have a greater affect on us than the risks of
doing business in a broader market area.
Our business could be adversely affected if we are not able to attract and
retain independent agents
We depend in part on the services of independent agents in marketing our
insurance products. We face competition from other insurance companies for the
services and allegiance of our independent agents. While we believe that the
commissions and services we provide to our agents are competitive with other
insurers, changes in commissions, services or products offered by our
competitors could make it more difficult for us to attract and retain
independent agents to sell our insurance products.
If we are unable to maintain a favorable A.M. Best Company rating, it may be
more difficult for us to write new business or renew our existing business
A.M. Best assesses and rates the financial strength and claims-paying
ability of insurers based upon its criteria. The financial strength ratings
assigned by A.M. Best to insurance companies represent independent opinions of
financial strength and ability to meet policyholder obligations, and are not
directed toward the protection of investors. A.M. Best ratings are not ratings
of securities or recommendations to buy, hold or sell any security.
Our insurance subsidiary holds a financial strength rating of "A-"
(Excellent) by A.M. Best. An "A-" rating is A.M. Best's fourth highest rating
out of its 15 possible rating classifications. Financial strength ratings are
used by agents and customers as an important means of assessing the financial
strength and quality of insurers. If our financial position deteriorates, we may
not maintain our favorable rating. A downgrade or withdrawal of any such rating
could severely limit or prevent us from writing desirable business or renewing
our existing business.
If market conditions cause reinsurance to be more costly or unavailable, we may
be required to bear increased risks or reduce the level of our underwriting
commitments
As part of our overall risk and capacity management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our insurance
company subsidiary. Market conditions beyond our control determine the
availability and cost of the reinsurance we purchase, which may affect the level
of our business and profitability. We may be unable to maintain our current
reinsurance coverage or to obtain other reinsurance coverage in adequate amounts
and at favorable rates. If we are unable to renew our expiring reinsurance
coverage or to obtain new reinsurance coverage, either our net exposure risk
would increase or, if we are unwilling to bear an increase in net risk
exposures, we would have to reduce the amount of risk we underwrite.
19
We cannot guarantee that our reinsurers will pay in a timely fashion, if at all,
and, as a result, we could experience losses
We transfer some of the risk we have assumed to reinsurance companies in
exchange for part of the premium we receive in connection with the risk.
Although reinsurance coverage makes the reinsurer liable to us to the extent the
risk is transferred, it does not relieve us of our liability to our
policyholders. If our reinsurers fail to pay us or fail to pay us on a timely
basis, our financial results would be adversely affected.
The guaranty fund assessments that we are required to pay to state guaranty
associations may increase and our results of operations and financial conditions
could be adversely affected
Each jurisdiction in which we operate has separate insurance guaranty fund
laws requiring property and casualty insurance companies doing business within
their respective jurisdictions to be members of their guaranty associations.
These associations are organized to pay covered claims (as defined and limited
by the various guaranty association statutes) under insurance policies issued by
insolvent insurance companies. Most guaranty association laws enable the
associations to make assessments against member insurers to obtain funds to pay
covered claims after a member insurer becomes insolvent. These associations levy
assessments (up to prescribed limits) on all member insurers in a particular
state on the basis of the proportionate share of the premiums written by member
insurers in the covered lines of business in that state. Maximum assessments
permitted by law in any one year generally vary between 1% and 2% of annual
premiums written by a member in that state.
Property and casualty guaranty fund assessments incurred by us totaled
$355,000 for 2002. We received a refund of $25,000 and accrued an assessment of
$137,000 in 2003. Our policy is to accrue the guaranty fund assessments when
notified and in accordance with GAAP. We cannot reasonably estimate liabilities
for insolvency because of the lack of adequate financial data on insolvent
companies.
Our business could be adversely affected by the loss of one or more employees
We are heavily dependent upon our senior management and the loss of
services of our senior executives could adversely affect our business. Our
success has been, and will continue to be, dependent on our ability to retain
the services or our existing key employees and to attract and retain additional
qualified personnel in the future. The loss of services of any of our senior
management or any other key employee, or the inability to identify, hire and
retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of our business operations. While we have
employment agreements with our senior executives, we currently do not maintain
key employee insurance with respect to any of our employees.
We are a holding company and are dependent on dividends and other payments from
our operating subsidiaries, which are subject to dividend restrictions
We are a holding company whose principal source of funds is cash dividends
and other permitted payments from our operating subsidiaries, principally NCRIC,
Inc. If our subsidiaries are unable to make payments to us, or are able to pay
only limited amounts, we may be unable to pay dividends or make payments on our
indebtedness. The payment of dividends by these operating subsidiaries is
subject to restrictions set forth in the insurance laws and regulations of the
District of Columbia. See "Insurance Regulatory Matters - Regulation of
Dividends and Other Payments From Our Operating Subsidiaries."
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 individual physician and the small medical group, which
20
represents a significant portion of our policyholders, in the medical
professional liability insurance purchasing decision.
Rising interest rates would increase interest costs associated with the trust
preferred securities issued by us
In December 2002 we issued $15,000,000 of trust preferred securities. The
trust preferred securities bear interest at a rate of 400 basis points over the
three-month London Interbank Offered Rate (LIBOR) and adjust quarterly subject
to a maximum interest rate of 12.5%. Our interest expense will increase if the
three-month LIBOR increases.
State insurance regulators may not be willing to approve our captive insurance
operations
While higher pricing and reduced availability of traditional insurance
sources have created favorable market conditions for this risk financing
vehicle, state insurance regulators may not be willing to approve our captive
insurance operations or market conditions may change.
A decline in revenue and profitability in NCRIC MSO could result in a SFAS 142
impairment charge
NCRIC MSO's revenue is subject to clients facing declining reimbursement for
their services. Therefore, in an effort to pare their own expenses to improve
their net profitability, our clients may not order new services, or may diminish
or possibly cease using our existing services. This could result in a reduction
of revenue to us, thereby reducing net income and resulting in an impairment
charge relative to the goodwill ascribed to NCRIC MSO.
The premium collection litigation may reduce earnings and stockholders equity
As disclosed elsewhere in this report, a jury returned an $18.2 million
judgment against NCRIC, Inc. in connection with the premium collection
litigation initiated by NCRIC, Inc. against Columbia Hospital for Woman, CHW.
NCRIC, Inc. intends to appeal this verdict, and has filed post-trial motions,
including motions to set aside and to reduce the verdict. The outcome of the
post-trial motions and potential appellate process is not predictable. An
outcome that requires NCRIC to pay a significant amount to CHW would reduce
stockholders' equity and would reduce the statutory measure of policyholders
surplus and therefore could potentially reduce our capacity to write insurance.
In addition, expenses incurred in appealing the verdict are expected to be
significant and will reduce earnings.
Insurance Company Regulation
General. NCRIC, Inc. is subject to supervision and regulation by the
District of Columbia Department of Insurance, Securities and Banking and
insurance authorities in Delaware, Maryland, Virginia and West Virginia. This
regulation is concerned primarily with the protection of policyholders'
interests rather than stockholders' interests. Accordingly, decisions of
insurance authorities made with a view to protecting the interests of
policyholders may reduce our profitability. The extent of regulation varies by
jurisdiction, but this regulation usually includes:
o regulating premium rates and policy forms;
o setting minimum capital and surplus requirements;
o regulating guaranty fund assessments;
o licensing of insurers and agents;
o approving accounting methods and methods of setting statutory loss
and expense reserves;
o underwriting limitations;
o restrictions on transactions with affiliates;
21
o setting requirements for and limiting the types and amounts of
investments;
o establishing requirements for the filing of annual statements and
other financial reports;
o conducting periodic statutory examinations of the affairs of
insurance companies;
o approving proposed changes of control; and
o limiting the amounts of dividends that may be paid without prior
regulatory approval.
Without the approval of the District of Columbia Commissioner of
Insurance, Securities and Banking, NCRIC, Inc. may not diversify out of the
healthcare and insurance fields through an acquisition or otherwise.
NAIC Codification. The Codification of Statutory Accounting Principles was
developed by the NAIC as a comprehensive guide to statutory accounting intended
to provide analysts and other users with more comparable financial statements.
Much of statutory accounting is based on GAAP with modifications that emphasize
the concepts of conservatism and solvency inherent in statutory accounting. The
Codification was mandated by the NAIC to be effective as of January 1, 2001.
Statutory accounting changes resulting from this guidance do not have an effect
on the financial statements prepared in accordance with GAAP, which have been
included with this document and filed with the Securities and Exchange
Commission.
Guaranty fund laws. Each of the jurisdictions in which we do business has
guaranty fund laws under which insurers doing business in those jurisdictions
can be assessed on the basis of premiums written by the insurer in that
jurisdiction in order to fund policyholder liabilities of insolvent insurance
companies. Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to assist in the
payment of policyholder claims against insolvent insurers. In the District of
Columbia, insurance companies are assessed in three categories: (i) automobile;
(ii) workers' compensation; and (iii) all other. An insurance company licensed
to do business in the District of Columbia is only liable to pay an assessment
if another insurance company within its category becomes insolvent. We are in
the "all other" category.
Significant assessments could have a material adverse effect on our
financial condition or results of operations. While we will not necessarily be
liable to pay assessments each year, the insolvency of another insurance company
within our category of insurance could result in the maximum assessment being
imposed on us over several years. We cannot predict the amount of future
assessments. During 2001 we received an assessment due to the insolvency of
Reliance Insurance Company. Recently PHICO Insurance Company went into
receivership; this resulted in guaranty fund assessments to us of $355,000 in
2002. The 2003 assessment covered PHICO, Legion and Reciprocal of America. In
each of the jurisdictions in which we conduct business, the amount of the
assessment cannot exceed 2% of our direct premiums written per year in that
jurisdiction.
Examination of insurance companies. Every insurance company is subject to
a periodic financial examination under the authority of the insurance
commissioner of its jurisdiction of domicile. Any other jurisdiction interested
in participating in a periodic examination may do so. The last completed
periodic financial examination of NCRIC, Inc., based on December 31, 1999
financial statements, was completed and a final report was issued on February
20, 2001. The final report positively assessed our financial stability and
operating procedures. The last periodic financial examination report of CML,
based on December 31, 2001 financial statements, was issued on August 30, 2002.
The periodic financial examination positively assessed CML's financial stability
and operating procedures. The District of Columbia has informed us of their
intention to perform a periodic financial examination in 2004 of NCRIC, Inc. as
of December 31, 2003.
Approval of rates and policies. The District of Columbia, Virginia and
Delaware require us to submit rates to regulators on a file and use basis. Under
a file and use system, an insurer is permitted to bring new rates and policies
into effect on filing them with the appropriate regulator, subject to the right
of the regulator to object within a fixed period of days. In each of the
District of Columbia, Delaware and Virginia, rating plans, policies and
endorsements must be submitted to the regulators 30 days prior to their
effectiveness. Maryland and West Virginia are prior approval jurisdictions. The
possibility exists that we may be unable to implement desired rates, policies,
endorsements, forms or manuals if these items are not approved by an insurance
commissioner.
22
Medical professional liability reports. We principally write medical
professional liability insurance and, as such, requirements are placed upon us
to report detailed information with regard to settlements or judgments against
our insureds. In addition, we are required to report to the D.C. Department of
Insurance, Securities and Banking or state regulatory agencies or the National
Practitioners Data Bank payments, claims closed without payments and actions
like terminations or premiums surcharges with respect to our insureds. Penalties
may attach if we fail to report to either the Department of Insurance, Banking
and Securities or an applicable state insurance regulator or the National
Practitioners Data Bank.
Changes in government regulation of the healthcare system. Federal and
state governments recently have considered reforming the healthcare system.
While some of the proposals could be beneficial to our business the adoption of
others could adversely affect us. Public discussion of a broad range of
healthcare reform measures will likely continue in the future. These measures
that would affect our medical professional liability insurance business and our
practice management products and services include, but are not limited to:
o spending limits;
o price controls;
o limits on increases in insurance premiums;
o limits on the liability of doctors and hospitals for tort claims;
and
o changes in the healthcare insurance system.
Insurance Holding Company Regulation. The Commissioner of Insurance,
Securities and Banking of the District of Columbia has jurisdiction over NCRIC
Group as an insurance holding company. We are required to file information
periodically with the Department of Insurance, Securities and Banking, including
information relating to our capital structure, ownership, financial condition
and general business operations. In the District of Columbia, transactions by an
insurance company with affiliates involving loans, sales, purchases, exchanges,
extensions of credit, investments, guarantees or other contingent obligations,
which within any 12-month period aggregate at least 3% of the insurance
company's admitted assets or 25% of its surplus, whichever is greater, require
prior approval. Prior approval is also required for all management agreements,
service contracts and cost-sharing arrangements between an insurance company and
its affiliates. Some reinsurance agreements or modifications also require prior
approval.
District of Columbia insurance laws also provide that the acquisition or
change of control of a domestic insurance company or of any person or entity
that controls an insurance company cannot be consummated without prior
regulatory approval. A change in control is generally defined as the acquisition
of 10% or more of the issued and outstanding shares of an insurance holding
company.
Regulation of dividends from insurance subsidiaries. The District of
Columbia insurance laws limit the ability of NCRIC, Inc. to pay dividends.
Without prior notice to and approval of the Commissioner of Insurance,
Securities and Banking, NCRIC, Inc. may not declare or pay an extraordinary
dividend, which is defined as any dividend or distribution of cash or other
property whose fair market value, together with other dividends or distributions
made, within the preceding 12 months exceeds the lesser of (1) 10% of NCRIC,
Inc.'s statutory surplus as of the preceding December 31, or (2) NCRIC, Inc.'s
statutory net income excluding realized capital gains, for the 12-month period
ending the preceding December 31, but does not include pro rata distributions of
any class of our own securities. In calculating net income under the test,
NCRIC, Inc. may carry forward net income, excluding realized capital gains, from
the previous two calendar years that has not been paid out as dividends.
District of Columbia law gives the Commissioner broad discretion to disapprove
dividends even if the dividends are within the above-described limits. The
District of Columbia permits the payment of dividends only out of unassigned
statutory surplus. Using these criteria, as of December 31, 2003, because of the
statutory loss from operations in 2002 and 2003, NCRIC, Inc. has no amounts
available for dividends without regulatory approval.
23
Our Companies
We were organized in December 1998 in connection with the reorganization
of National Capital Reciprocal Insurance Company into a mutual holding company
structure. NCRIC, A Mutual Holding Company owned all of the outstanding shares
of NCRIC Holdings, Inc. Effective July 29, 1999, we completed an initial public
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.
On June 24, 2003, a plan of conversion and reorganization was approved by
the members of NCRIC, A Mutual Holding Company and by the shareholders of NCRIC
Group, Inc. In the conversion and related stock offering, the Mutual Holding
Company offered for sale its 60% ownership interest in NCRIC Group. As a result
of the conversion and stock offering, the Mutual Holding Company ceased to
exist, and NCRIC Group became a fully public company.
NCRIC, Inc. NCRIC, Inc., a wholly owned subsidiary of NCRIC Group, Inc.,
is the former National Capital Reciprocal Insurance Company incorporated in 1980
and is a licensed property and casualty insurance company domiciled in the
District of Columbia. NCRIC, Inc. provides professional liability insurance to
physicians in the District of Columbia, Delaware, Maryland, Virginia and West
Virginia. Commonwealth Medical Liability Insurance Company, CML, was merged into
NCRIC, Inc. as of December 31, 2003. CML was originally incorporated in 1989.
CML provided professional liability insurance to physicians in Delaware,
Maryland, Virginia and West Virginia.
National Capital Insurance Brokerage, Ltd. National Capital Insurance
Brokerage, Ltd., a wholly owned subsidiary of NCRIC, Inc. incorporated in 1984,
is a licensed insurance brokerage that provides reinsurance brokerage services
to NCRIC, Inc. and to protected cells within American Captive Corporation.
American Captive Corporation. ACC, a wholly owned subsidiary of NCRIC,
Inc. incorporated in 2001, is an organization that is authorized to form
independent protected cells to accommodate affinity groups seeking to manage
their own risk through an alternative risk transfer structure. 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.
NCRIC Insurance Agency, Inc. NCRIC Insurance Agency, Inc., a wholly owned
subsidiary of NCRIC, Inc. incorporated in 1989, is a licensed insurance agency
that has strategic partnerships with experienced brokers to provide life,
health, disability, and long term care coverage to our clients. These products
are not underwritten by us.
NCRIC MSO, Inc. NCRIC MSO, Inc., a wholly owned subsidiary of NCRIC Group,
Inc. incorporated in 1998, provides practice management services and employee
benefits services to physicians and dentists in the District of Columbia, North
Carolina and Virginia.
NCRIC Physicians Organization, Inc. NCRIC PO, Inc., a wholly owned
subsidiary of NCRIC MSO, Inc., was organized in 1994 to provide a network for
managed care contracting with third party payers. NCRIC PO no longer contracts
as a network and effective October 1, 2004 will reach the end of a settlement
agreement with a former health plan partner, American Medical Services. In this
settlement, AMS currently pays $6,000 per month to NCRIC PO.
NCRIC Statutory Trust I. NCRIC Statutory Trust I was formed in 2002 as a
special purpose entity for the purpose of issuing trust preferred securities.
Personnel
As of December 31, 2003, we employed 98 full-time persons. None of our
employees are represented by a collective bargaining unit and we consider our
relationship with our employees to be good.
24
Website Disclosure of Certain Regulatory Filings
We maintain a website at www.ncric.com and make available, free of charge,
through this website our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and all amendments to those reports as soon
as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission ("SEC"). These forms can be
accessed within the Investor Relations portion of the website by clicking on
"SEC Filing."
Item 2. Properties
Our principal business operations are conducted from our leased executive
offices, which consist of approximately 18,156 square feet located at 1115 30th
Street, N.W., Washington, D.C. 20007. The term of the lease is for 10 years,
commencing April 15, 1998 and expiring April 30, 2008. Annual rental is $421,476
with 2% annual increases for the first five years of the term. In the sixth year
of the term, the rent increases by $2.00 per rentable square foot and remains at
that level for the balance of the term. We have the option to renew the lease
for one additional term of five years. In November, 2003 we leased additional
space across the street from our executive offices at 1055 Thomas Jefferson
Street, N.W. Washington, D.C. 20007. We also maintain office space in Lynchburg
and Richmond, Virginia as well as in Greensboro, North Carolina.
The following table sets forth the facilities leased by us at December 31,
2003, along with the applicable lease expiration date:
Property Location Lease Expiration Date
-------------------------------------------------------- ---------------------
Offices:
1115 30th Street, N.W., Washington, D.C. 20007 April 30, 2008
1055 Thomas Jefferson Street, N.W. Washington, D.C. 2007 May 31, 2008
424 Graves Mill Road, Lynchburg, Virginia 24502 October 31, 2007
4701 Cox Road, Richmond, Virginia 23060 April 30, 2004
600 Green Valley Road, Greensboro, North Carolina 27408 March 31, 2008
Item 3. Legal Proceedings
We are from time to time named as a defendant in various lawsuits
incidental to our insurance business. In many of these actions, plaintiffs
assert claims for exemplary and punitive damages. We vigorously defend these
actions, unless a reasonable settlement appears appropriate. Aside from the
matter discussed in Item 7 under Net Premiums Written, Year ended December 31,
2003 compared to Year ended December 31, 2002, Premium Collection Litigation and
reported in Note 14 to the Consolidated Financial Statements included in Item 8
of this Form 10-K, we believe that these legal proceedings in the aggregate are
not material to our consolidated financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
We do not currently pay cash dividends on our common stock and we do not
intend to pay any cash dividends in the foreseeable future. As a holding company
with no direct operations, we rely on cash dividends and other permitted
payments from our insurance subsidiaries to pay any future dividends to our
stockholders. State insurance laws and restrictions under our credit agreement
limit the amounts that may be paid to us by our insurance subsidiaries, See
"Business of NCRIC Group - Insurance company regulation."
25
Our common stock is traded on the Nasdaq National Market under the symbol
"NCRI." The following table sets forth the high and low closing prices for
shares of our common stock for the periods indicated. As of December 31, 2003,
there were 6,898,865 publicly held shares of our common stock issued and
outstanding held by approximately 564 shareholders of record. Note: the stock
prices for dates prior to the June, 2003 conversion and stock offering have been
adjusted to reflect the conversion and issuance of additional shares.
Year Ended December 31, 2003 High Low
---------------------------- ------- -------
Fourth quarter $11.510 $ 9.110
Third quarter 11.560 10.150
Second quarter 10.600 8.203
First quarter 12.858 5.792
Year Ended December 31, 2002 High Low
---------------------------- ------- -------
Fourth quarter $ 5.893 $ 5.325
Third quarter 6.001 5.325
Second quarter 6.161 5.545
First quarter 6.954 5.588
Set forth below is information as of December 31, 2003 as to any equity
compensation plans of the Company that provides for the award of equity
securities or the grant of options, warrants or rights to purchase equity
securities of the Company.
====================================================================================================================
Number of securities to
be issued upon exercise Number of securities
Equity compensation plans of outstanding options Weighted average remaining available for
approved by shareholders and rights exercise price issuance under plan
- --------------------------------------------------------------------------------------------------------------------
Stock Option Plan - 1999 ........ 124,311 $ 3.75 0
- --------------------------------------------------------------------------------------------------------------------
Stock Option Plan - 2003 ........ 392,608 $10.90 21,762
- --------------------------------------------------------------------------------------------------------------------
Stock Award Plan - 1999 ......... 28,730(1) Not Applicable 0
- --------------------------------------------------------------------------------------------------------------------
Stock Award Plan - 2003 ......... 125,970(1) Not Applicable 39,778
- --------------------------------------------------------------------------------------------------------------------
Equity compensation plans None None None
not approved by shareholders
- --------------------------------------------------------------------------------------------------------------------
Total ...................... 671,439 Not Applicable 32,810
====================================================================================================================
- ----------
(1) Represents shares that have been granted but have not yet vested.
26
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial
and other data of NCRIC Group for the years and at the dates indicated are
derived in part from and should be read together with the audited consolidated
financial statements and notes thereto of NCRIC Group, as well as with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" which are included elsewhere in this Form 10-K.
At or for the Year Ended December 31,
-------------------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
Statement Of Operations Data:
Gross premiums written .......................... $ 71,365 $ 51,799 $ 34,459 $ 22,727 $ 21,353
========= ========= ========= ========= =========
Net premiums written ............................ $ 59,277 $ 33,804 $ 23,624 $ 15,610 $ 16,188
========= ========= ========= ========= =========
Net premiums earned ............................. $ 47,264 $ 30,098 $ 20,603 $ 14,611 $ 14,666
Net investment income ........................... 6,008 5,915 6,136 6,407 6,089
Net realized investment gains (losses) .......... 1,930 (131) (278) (5) (71)
Practice management and related income .......... 4,906 5,800 6,156 5,317 4,576
Other income .................................... 1,155 1,013 602 470 373
--------- --------- --------- --------- ---------
Total revenues .............................. 61,263 42,695 33,219 26,800 25,633
Losses and loss adjustment expenses ............. 50,473 26,829 18,858 11,946 12,867
Underwriting expenses ........................... 10,003 8,168 4,877 3,591 3,010
Practice management and related expenses ........ 5,222 5,811 6,063 4,970 4,845
Interest expense on Trust Preferred Securities .. 826 62 0 0 0
Other expenses .................................. 1,651 1,405 1,245 1,237 1,439
--------- --------- --------- --------- ---------
Total expenses .............................. 68,175 42,275 31,043 21,744 22,161
--------- --------- --------- --------- ---------
Income (loss) before income taxes ............... (6,912) 420 2,176 5,056 3,472
Income tax provision (benefit) .................. (2,694) (322) 597 1,561 967
--------- --------- --------- --------- ---------
Net income (loss)................................ $ (4,218) $ 742 $ 1,579 $ 3,495 $ 2,505
========= ========= ========= ========= =========
Balance Sheet Data:
Invested assets ................................. $ 174,357 $ 120,120 $ 103,125 $ 98,045 $ 95,092
Total assets .................................... 262,546 202,687 161,002 145,864 140,947
Reserves for losses and loss adjustment expenses. 125,991 104,022 84,560 81,134 84,282
Total liabilities ............................... 184,567(1) 154,870(1) 116,548 104,415 105,152
Total stockholders' equity ...................... 77,979 47,817 44,454 41,449 35,795
Selected GAAP Underwriting Ratios(2):
Losses and loss adjustment expenses ratio ....... 106.8% 89.1% 91.5% 81.7% 87.7%
Underwriting expense ratio ...................... 21.2% 27.2% 23.7% 24.6% 20.5%
Combined ratio .................................. 128.0% 116.3% 115.2% 106.3% 108.2%
Selected Statutory Data:
Losses and loss adjustment expenses ratio ....... 106.8% 89.2% 90.0% 75.3%