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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, 2004
Commission File Number: 0-25505
[LOGO](SM) NCRIC Group, Inc.
Delaware 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
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(Address of Principal Executive Offices)
202-969-1866
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(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. NO |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).
As of March 15, 2005, there were issued and outstanding 6,892,517 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 June 30, 2004 was $59.9 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 2005 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 ............................................................. 28
Item 3. Legal Proceedings ...................................................... 28
Item 4. Submission of Matters to a Vote of Security Holders .................... 29
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters .. 29
Item 6. Selected Financial Data ................................................ 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 31
Item 7A. Quantitative and Qualitative Disclosures About Market Price ............ 54
Item 8. Financial Statements and Supplementing Data ............................ 56
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................... 93
Item 9A. Controls and Procedures ................................................ 93
Item 9B. Other Information ...................................................... 93
PART III
Item 10. Directors and Executive Officers of the Registrant ..................... 93
Item 11. Executive Compensation ................................................. 93
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters ............................................ 93
Item 13. Certain Relationships and Related Transactions ......................... 93
Item 14. Principal Accountant Fees and Services ................................. 93
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ........ 93
PART I
Item 1. Business
General
NCRIC Group, Inc. is a holding company for a specialty property and
casualty insurance company focused on the medical professional liability
insurance market and a physician business management company. Our executive
offices are located at 1115 30th Street, NW, Washington, D.C. 20007 and our
telephone number is (202) 969-1866. Our stock trades on the National Association
of Securities Dealers (Nasdaq) Stock Exchange under the symbol "NCRI."
We maintain a website at www.ncric.com and provide, free of charge, online
access to all of the reports that we file with the Securities and Exchange
Commission, SEC, including our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all amendments to these reports.
These reports, as well as Forms 3, 4 and 5 detailing stock trading by corporate
insiders, are made available as soon as reasonably practical after such material
is electronically filed with or furnished to the SEC. We also provide access to
news releases, earnings conference calls, and quarterly and annual statutory
financial statements filed with the District of Columbia Department of
Insurance, Securities and Banking. All of the previously named documents can be
accessed within the Investor Relations section of our website and are available
for a minimum of one year after their filing or release.
Corporate Organization and History
National Capital Reciprocal Insurance Company, NCRIC, the predecessor
company of our primary insurance subsidiary, NCRIC, Inc., was founded in 1980 by
Washington, D.C. physicians, with the assistance of the Medical Society of the
District of Columbia. NCRIC was formed in response to a medical professional
liability insurance crisis in the District of Columbia. As a physician-governed
reciprocal insurance company, NCRIC began its operations with approximately 500
policyholders, offering a single insurance product. By the mid 1980s, NCRIC
insured more physicians in the District of Columbia than any other carrier, a
distinction we maintain today.
In the late 1990s, with the advent of managed care and the changing
climate affecting the practice of medicine, physicians began to look to us for
assistance in more areas than solely medical professional liability insurance.
In order to raise additional capital, effective December 31, 1998, the
reciprocal was reorganized as a stock insurance company, called NCRIC, Inc.,
with a mutual holding company parent, NCRIC, A Mutual Holding Company. In
addition, two intermediate holding companies were created, and the mutual
holding company became the parent of NCRIC Holdings, Inc., which in turn owned a
majority of the outstanding shares of NCRIC Group, Inc., an insurance holding
company incorporated in Delaware.
In July 1999, we completed an initial public offering and issued 2.2
million shares of NCRIC Group, Inc. common stock to NCRIC Holdings, Inc. and
sold 1.5 million shares to the public. The capital raised in this transaction
was used to purchase HealthCare Consulting, a company that assists physicians in
managing their practices more efficiently through integrated business and
financial management services.
On June 25, 2003, we completed a plan of conversion and reorganization in
which NCRIC Group, Inc. became a fully public company. In the conversion and
related stock offering, NCRIC, A Mutual Holding Company offered for sale its 60%
ownership in NCRIC Group, Inc., and as a result, NCRIC, A Mutual Holding Company
and NCRIC Holdings, Inc. ceased to exist. In the conversion and stock offering,
4.1 million shares of the common stock of NCRIC Group, Inc. were sold to
eligible members, employee benefit plans, directors, officers and employees and
to members of the general public in a subscription and community offering.
The additional capital raised in the 2003 conversion offering, which
totaled $41.4 million in gross proceeds, was used to pursue growth opportunities
in our core market territories in the mid-Atlantic region. Today, as a result of
this expansion, we are the leading medical professional liability insurance
carrier in
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both Delaware and the District of Columbia, and among the top writers in
Virginia and Maryland. We also have a limited market presence in West Virginia.
On February 28, 2005, we announced that the Board of Directors had
approved an agreement to merge NCRIC Group, Inc. into ProAssurance Corporation
in a stock-for-stock transaction that values NCRIC Group at $10.10 per share,
based on the closing price of ProAssurance common stock on Friday, February 25,
2005. Under the terms of the agreement each holder of common stock of NCRIC
Group will have the right to receive 0.25 of a share of ProAssurance common
stock for each share of NCRIC Group. This exchange ratio is subject to
adjustment in the event that the market price of the ProAssurance stock prior to
the closing of the transaction either exceeds $44.00 or is less than $36.00 such
that the exchange ratio would then be adjusted such that the value per NCRIC
Group share would neither exceed $11.00 nor be less than $9.00, respectively.
The transaction is subject to required regulatory approvals and a vote of NCRIC
Group stockholders and is expected to close early in the third quarter of 2005.
Business Overview
We own NCRIC, Inc., a medical professional liability insurance company,
through which we provide individual physicians, groups of physicians and other
healthcare providers with stable, high-quality medical professional liability
insurance. We also own ConsiCare, Inc., formerly known as NCRIC MSO, Inc. d/b/a
HealthCare Consulting and Employee Benefits Services, a business management
company, through which we provide a comprehensive range of integrated business
and financial services to help physicians, dentists and other non-healthcare
related entities operate successfully.
We offer medical professional liability insurance and integrated business
and financial services to physicians and other healthcare providers in Delaware,
the District of Columbia, Maryland, North Carolina, Virginia and West Virginia.
We provide our insurance product and business management services to
approximately 4,700 physicians throughout this market area as of December 31,
2004. The following table shows our insurance segment policy count and gross
premiums written over the last ten years.
Gross
Premiums
Policy Written (in
Count thousands)
------ -----------
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
2004 3,942 87,229
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.
Beginning in 2001, our market presence expanded significantly throughout
Delaware, Virginia and West Virginia as competing medical professional liability
insurers were forced to either restrict their premium writings or exit the
market completely due to financial difficulties. In 2004, our total policy count
declined due to several key factors, including the lower pricing strategies of
several competitors in the Virginia market, our decision to non-renew policies
in the West Virginia market and attrition in the physician population in the
District of Columbia market.
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According to the most recent available market share data from A.M. Best
Company, which considers premiums written for all forms of medical professional
liability coverage including physicians, hospitals and ancillary healthcare
providers, in 2003 we were the highest ranked company in terms of market share
in the District of Columbia and Delaware at 62.4% and 25.2%, respectively. The
following table shows a comparison of our market share by jurisdiction in 2003
and 2002 as reported by A.M. Best:
NCRIC Market Share
------------------
2003 2002
---- ----
District of Columbia 62.4% 56.5%
Delaware 25.2 7.7
Virginia 9.8 8.7
Maryland 4.3 3.3
West Virginia 10.5 7.5
Our medical professional liability insurance company maintains a strong
presence in its local markets. Five jurisdictions represented 100% of our gross
written premiums for the years ended December 31, 2004 and 2003, as displayed in
the following chart:
Year Ended December 31,
--------------------------------------------
2004 2003
------------------- -------------------
(dollars in thousands)
Amount % Amount %
------- ------- ------- -------
District of Columbia ... $25,650 30% $23,216 33%
Virginia ............... 29,612 34 22,640 32
Maryland ............... 11,451 13 8,819 12
West Virginia .......... 7,174 8 7,935 11
Delaware ............... 13,342 15 8,755 12
------- ------- ------- -------
Total ............. $87,229 100% $71,365 100%
======= ======= ======= =======
For the year ended December 31, 2004, our medical professional liability
insurance company produced a combined ratio of 124.8%, consisting of a current
year loss ratio of 80.0% and prior year development of 25.8%. The combined ratio
is a formula used to relate premium income to claims and underwriting expenses
and is calculated by dividing the sum of incurred losses and expenses by earned
premium. It indicates the profitability of an insurer's operations by combining
the loss ratio with expense ratio (including dividends if any). A combined ratio
below 100% generally indicates profitable underwriting prior to the
consideration of investment income.
For the year ended December 31, 2004, we generated $87.2 million of gross
premiums written, $66.5 million of net premiums earned and $79.4 million of
total revenues. At December 31, 2004, we had consolidated assets of $292.9
million, liabilities of $220.9 million, and stockholders' equity of $72.0
million. Our insurance subsidiary is rated "B++" (Very Good) by A.M. Best
Company.
As a result of significant premium rate increases, healthcare providers
are seeking alternative 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
4
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. As of December 31, 2004, ACC had no active
cells.
We offer integrated business management and financial services to
physicians and other business entities in the District of Columbia, North
Carolina and Virginia. These services are heavily concentrated in North Carolina
and Virginia and are utilized by approximately 800 physicians and 250
non-healthcare related businesses. We compete most often with single source
providers of individual services who target small businesses. 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; with respect to our payroll services we compete with
national companies. In 2004, upon the completion of a branding analysis, the
decision was made to re-introduce this business to the market in early 2005
under the brand name of ConsiCare. We believe that this initiative will
differentiate the business management operations from its competitors and
contribute to the establishment of a consistent and distinguishable brand
identity. In addition, a strategic business plan has been developed with the
primary objective of creating growth through the establishment of partnerships
with other successful practice management entities and an increased focus on the
marketing and delivery of an integrated suite of services to new and existing
management services clients.
Management
Our executive management team is led by R. Ray Pate, Jr., president and
chief executive officer. Mr. Pate joined us in 1996 and has more than 20 years
of experience in the medical professional liability insurance business. Rebecca
B. Crunk, senior vice president and chief financial officer, began with us in
1998. Ms. Crunk is a certified public accountant with more than 27 years of
accounting experience in the insurance industry. William E. Burgess, senior vice
president, has been with us for 25 years and is responsible for our risk
management and claims processing functions. Eric R. Anderson is senior vice
president, corporate communications and investor relations. He joined us in 1993
and has 12 years of experience in the medical professional liability insurance
industry and 15 years of experience in the field of corporate communications.
Anne K. Missett is senior vice president, marketing and underwriting for our
primary insurance subsidiary, NCRIC, Inc. Ms. Missett began with us in 2001 and
has more than 20 years of experience in the healthcare industry.
Forward-Looking Statements
This document contains historical information as well as forward-looking
statements that are based upon our estimates and anticipation of future events
that are subject to certain risks and uncertainties that could cause actual
results to vary materially from the expected results described in the
forward-looking statements. The words "anticipate," "believe," "estimate,"
"expect," "hopeful," "intend," "may," "optimistic," "preliminary," "project,"
"should," "will," and similar expressions are intended to identify these
forward-looking statements. There are numerous important factors that could
cause our actual results to differ materially from those in the forward-looking
statements. Thus, sentences and phrases that we use to convey our view of future
events and trends are expressly designated as forward-looking statements as are
statements clearly identified as giving our outlook on future business. 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 regulatory and legislative actions or decisions that adversely
affect our business plans or operations;
o price competition;
o inflation and changes in the interest rate environment;
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o the performance of financial markets and/or changes in the
securities markets that adversely affect the fair value of our
investments or operations;
o changes in laws or government regulations affecting medical
professional liability insurance and practice management and
financial services;
o changes to our rating assigned by A.M. Best;
o the effect of managed healthcare;
o uncertainties inherent in the estimate of loss and loss adjustment
expense reserves and reinsurance;
o changes in the availability, cost, quality, or collectibility of
reinsurance;
o significantly increased competition among insurance providers and
related pricing weaknesses in some markets;
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.
Competition
Medical professional liability insurance is a competitive industry. A
number of carriers that operate in our market territory have higher financial
ratings or have significantly larger financial resources than we do. In
addition, a number of factors, including, but not limited to, the quality of
service, brand recognition, size, financial stability, coverage features and
product pricing, impact our ability to compete successfully in our market area.
We believe that we compare favorably to our competitors based on our depth of
knowledge and history in the markets in which we operate, superior claims
handling ability, physician leadership, excellent customer service reputation,
medical community relationships, established product distribution network,
longevity and name recognition, particularly in the District of Columbia and
Virginia markets.
Our current competition is primarily composed of a number of mono-line
specialty writers that focus on confined, contiguous geographic areas and one
physician-directed national specialty writer. These competitors may have
existing relationships with insurance agents or other distribution channels,
which we may be unable to supplant.
We have seen, however, some indications that a shift in the market may be
underway. Prior to the withdrawal of The St. Paul Companies in 2001, multi-line
commercial writers comprised approximately 35% of the national medical
professional liability insurance market. Subsequent to St. Paul's exit, other
multi-line commercial carriers such as Farmers Insurance Group and Fireman's
Fund also withdrew from the market. With the departure of these significant
commercial carriers, it has not been clear which segment of the market would
fill this void. Based on recent data from the National Underwriters Insurance
Data Services, it appears that GE Insurance Solutions and American International
Group have filled this capacity gap, as each grew their premium writings to more
than $800 million in 2003, up from $200 million and $400 million, respectively,
in 2001. While both of these companies have a presence in our market
territories, at the present time only GE Insurance Solutions presents a
competitive challenge as American International Group focuses primarily on
hospital liability coverage.
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We also believe that several carriers are employing low pricing strategies
in one of our primary markets, Virginia. We experienced a 7.7% reduction in the
number of policies written in Virginia in 2004, and we believe that this
attrition is due to the fact that our product is priced at the high end of the
market.
The following is a brief competitive analysis of the jurisdictions in
which we operate. The A.M. Best market share data considers premiums written for
all forms of medical professional liability coverage including physicians,
hospitals and ancillary healthcare providers.
District of Columbia. We are the leading carrier writing medical
professional liability insurance policies in Washington, D.C. According to A.M.
Best 2003 data, the most recent available, we have 62.4% of the District of
Columbia medical professional liability market share. Professionals Advocate, a
member of The Medical Mutual Group of Maryland, holds an 11.8% market share in
the District of Columbia. The Doctors Company Insurance Group and American
International Group hold market shares of 6.1% and 5.3%, respectively. We
anticipate that growth in the District of Columbia physician population will be
constrained in the near term due to environmental factors. However, recent
medical liability legislation enacted in the state of Maryland may result in
capacity constraints for Professionals Advocate and thus provide us with an
opportunity to increase our District of Columbia market share.
Delaware. Our market share in Delaware increased significantly in 2003 as
a result of the withdrawal from the physician professional liability market by
Fireman's Fund, PHICO, CNA Insurance Companies, and Princeton Insurance Company.
As reported in 2003 data from A.M. Best, we are the state's largest writer, with
25.2% of the market share. CNA is the second leading carrier, with a market
share of 24.2%, however the majority of this business is related to hospital
liability coverage. Other companies licensed in the state include American
International Group, GE Insurance Solutions, and SCPIE Holdings, Inc. which hold
market shares of 10.7%, 7.7% and 7.1%, respectively.
Maryland. While we have been issuing coverage in Maryland since 1980, a
number of these policies have been written to accommodate District of Columbia
policyholders who have elected to relocate their practices to Maryland.
Currently, we hold a 4.3% share of the market. Our primary competitor in the
state is The Medical Mutual Group of Maryland, a physician-governed carrier that
has 41.8% of the market share. Other carriers in the state include American
International Group with an 11.3% market share, GE Insurance Solutions with a
9.0% market share and the Doctors' Company Insurance Group with a 7.3% market
share. We are currently re-evaluating growth plans in Maryland due to the
medical liability reform legislation passed by the Maryland General Assembly in
January 2005.
Virginia. Over the last three years, the Virginia market has offered
considerable expansion opportunities with the departures of The St. Paul
Companies, Princeton Insurance Company, CNA Insurance Companies and MIIX Group,
Inc. in 2002 and the January 2003 exit of the Doctors Insurance Reciprocal. We
experienced significant growth in this market during 2002 and 2003. However,
more recently, due to the low pricing strategies of several carriers in the
market, we have limited our new premium writings in this state. Market share in
Virginia is fragmented among a number of companies. According to A.M. Best 2003
data, we have a 9.8% share of the market. Our primary competitors in the
Virginia marketplace include GE Insurance Solutions with an 11.7% share,
Doctors' Company Insurance Group with an 11.6% share, The Medical Mutual Group
of Maryland with an 11.2% share, American International Group with a 9.4% share,
and Medical Mutual of North Carolina with a 9.1% share. Also competing in
Virginia are State Volunteer Mutual Insurance Company, MAG Mutual Insurance
Company, and ProAssurance Group. Medical liability legislation enacted in the
state of Maryland may result in capacity constraints for The Medical Mutual
Group of Maryland and thus provide an opportunity for growth in the Virginia
market.
West Virginia. In January 2004, we informed the West Virginia Commissioner
of Insurance of our intention to non-renew West Virginia policyholders and began
this process with policies expiring in March 2004. This decision was based on
our inability to achieve an adequate rate level for our West Virginia exposure.
In the third quarter of 2004, we re-filed for a rate increase in the state. This
filing was subsequently approved by the West Virginia Department of Insurance
and we began renewing select West Virginia policies effective September 1, 2004.
We have experienced a reduction in our West Virginia
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business as a result of the non-renewals and the price differential between our
product and the West Virginia Physicians Mutual Insurance Company, the leading
writer in the state. We do not anticipate a significant change in market
position in 2005.
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Insurance Activities
General. We provide medical professional liability insurance for
independent physicians who practice individually or in small groups. Our
insurance protects policyholders against losses arising from professional
liability claims as a result of patient injuries that occur from any act,
omission, or series of related acts or omissions that take place in the
furnishing of professional medical services. The most common policy limit or
amount of coverage that we sell is $1 million of coverage for any one incident
with a $3 million annual aggregate 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 $4 million
dollars of excess coverage that provides coverage for losses up to $5 million
with an annual aggregate limit of $7 million. Optional coverage is available for
the professional corporations under which physicians practice.
Underwriting. Our underwriting 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 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 a
competitive 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 to defend policyholders
against claims, and negotiation of the settlement or other disposition of
claims.
We emphasize early evaluation and aggressive management of claims. When a
claim is reported, our claims professionals complete a preliminary evaluation
and set an 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, 2004, we had approximately 653 open cases with an
average of 73 cases being handled by each claims representative. Our claims
department consists of 12 claims professionals and includes experienced claims
adjusters, certified paralegals and individuals who have earned juris doctor
degrees. The current professional claims staff has an average of 11 years of
experience handling medical professional liability and related insurance 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 objective is to maintain a local presence in the jurisdictions where
we write coverage. We have obtained an understanding of the medical and legal
climates where we write policies through on-site visits, interviews and ongoing
communication with local law firms and discussions with policyholders. We
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retain locally-based attorneys to represent our policyholders. These litigators
specialize in medical professional liability defense and understand and share
our claims philosophy. 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 nine 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 our physician advisory boards. These boards meet
to review medical incidents, assess claims and practice characteristics of
current and prospective policyholders, and bring to our attention all matters of
special interest to healthcare providers in their states.
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 eight physicians comprising various specialties, lends 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, as requested, to
individual physician groups or office staff.
Physicians unable to attend a live seminar are given the opportunity to
access our risk management services in other ways. Currently, four home study
courses are available and accessible online. 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 Medical Society of the District of Columbia,
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 credit.
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 2004, our agent network totaled 30
agencies. These agents produced 63% of renewing premiums in 2004. Physicians
frequently utilize agents when they purchase professional liability insurance.
Therefore, we believe that developing our agent relationships in these states is
important to maintain our market share. We select agents who have demonstrated
experience and stability in the medical professional liability insurance
industry. 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 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
10
excess of $1 million in premium and to foster enhanced communications with these
top producers. Currently, four of our agents are members of this group.
Account information is communicated to all policyholders and agents
through our marketing and underwriting departments. We strive to maintain a
close relationship with the medical groups and individual practitioners insured
by us as well as the agents who make up our agent 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 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.
Over the years, we believe this approach has resulted in our high customer
retention and satisfaction rate.
Risk Sharing Arrangements. As of December 31, 2004, we have ended all
agreements for risk sharing programs for physicians at hospitals in the
Washington, D.C. metropolitan area. The type of risk sharing arrangement we
previously offered involved the initial funding of a portion of a premium being
held to pay losses. In these arrangements, we received full gross premium, less
applicable credits otherwise granted. After quota share losses were determined,
if loss development was favorable, any premium in excess of the losses was
returned.
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 25 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 credits,
including credits for part-time practice, physicians just entering medical
practice, cost-free physicians and risk management participation. Generally,
total credits 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 the need to provide a return to our shareholders, the weighted
average rate increase for our base premiums was 20% effective January 1, 2005,
27% effective January 1, 2004 and 28.0% 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;
o predictions of future events;
o estimates of future trends in claims frequency and severity;
o predictions of future inflation rates;
11
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 before
notice of a claim or a determination of liability. Medical professional
liability insurance policies are long tail policies, which means that claims and
expenses may be paid over a period of ten 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 our 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,
-------------------------------------
2004 2003 2002
--------- --------- ---------
(in thousands)
Balance, beginning of year .................. $ 125,991 $ 104,022 $ 84,560
Less reinsurance recoverable on unpaid
claims ................................... (44,673) (42,412) (29,624)
--------- --------- ---------
Net balance ................................. 81,318 61,610 54,936
--------- --------- ---------
Incurred related to:
Current year ............................. 53,158 44,588 24,063
Prior years .............................. 17,152 5,885 2,766
--------- --------- ---------
Total incurred ......................... 70,310 50,473 26,829
--------- --------- ---------
Paid related to:
Current year ............................. 3,457 4,383 1,491
Prior years .............................. 34,520 26,382 18,664
--------- --------- ---------
Total paid ............................. 37,977 30,765 20,155
--------- --------- ---------
Net balance ................................. 113,651 81,318 61,610
Plus reinsurance recoverable on unpaid
claims ................................... 39,591 44,673 42,412
--------- --------- ---------
Balance, end of year ........................ $ 153,242 $ 125,991 $ 104,022
========= ========= =========
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 accounting
principles generally accepted in the United States of America, GAAP.
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
12
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.
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
Reserve for Unpaid
Losses and LAE ......... $ 77,647 $ 68,928 $ 68,101 $ 72,031 $ 84,595 $ 84,282 $ 81,134 $ 84,560 $104,022 $125,991
Cumulative Liability
Paid Through End of
Year:
One year later ...... 21,667 16,084 14,916 9,667 13,865 20,813 20,828 21,995 31,872 45,255
Two years later ..... 34,829 27,634 22,237 21,810 32,778 38,078 34,253 45,764 61,973
Three years later ... 43,237 32,409 29,135 36,310 42,381 44,696 47,273 64,389
Four years later .... 45,219 34,657 39,938 42,553 44,352 50,634 51,927
Five years later .... 45,682 41,578 44,297 43,581 48,120 53,756
Six years later ..... 51,450 43,753 44,724 46,324 48,893
Seven years later ... 52,551 43,962 46,385 47,015
Eight years later ... 52,737 44,058 46,438
Nine years later .... 52,824 44,095
Ten years later ..... 52,861
Re-estimated Liability:
One year later ...... 68,891 62,028 61,121 71,419 72,575 77,373 73,582 86,534 107,980 138,338
Two years later ..... 66,439 53,429 62,097 64,980 66,733 71,489 73,654 87,074 108,836
Three years later ... 60,858 55,883 58,169 61,336 60,752 68,439 68,528 87,553
Four years later .... 62,625 53,400 54,324 54,996 59,069 63,028 66,024
Five years later .... 61,077 50,744 50,977 53,952 55,191 60,842
Six years later ..... 58,220 47,946 50,666 51,136 53,909
Seven years later ... 55,739 47,099 47,994 50,633
Eight years later ... 55,156 45,329 47,689
Nine years later .... 53,927 45,113
Ten years later ..... 53,795
Redundancy
(deficiency) ........... $ 23,852 $ 23,815 $ 20,412 $ 21,398 $ 30,686 $ 23,440 $ 15,110 $ (2,993) $ (4,814) $(12,347)
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
13
reinsurance program cedes to 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 $457,000, $833,000 and $1.1 million in 2004, 2003 and 2002,
respectively.
14
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 domestic reinsurers. As of
December 31, 2004, 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.
15
The following table reflects reinsurance recoverable on paid and unpaid
losses at December 31, 2004 by reinsurer:
Reinsurance A.M. Best
Reinsurer Recoverable Rating
--------- ----------- ---------
(in thousands)
Lloyd's of London syndicates ................. $22,637 A
Hanover Rueckversicherungs - AG .............. 6,149 A
AXA Reassurance .............................. 4,754 A-
Transatlantic Reinsurance Company ............ 1,835 A+
Aspen Reinsurance Limited .................... 1,569 A
CX Reinsurance LTD ........................... 1,464 NR5
Alea London Limited .......................... 1,304 A-
Unionamerica Insurance ....................... 972 NR3
Terra Nova Insurance Company LTD ............. 691 A-
Other reinsurers ............................. 3,471 A/A-
Total ................................... $44,846
=======
The two reinsurers that are not rated by A.M. Best, CX Reinsurance LTD and
Unionamerica Insurance, have made all requested payments on a timely basis.
The effect of reinsurance on premiums written and earned for the years
ended December 31, 2004, 2003 and 2002 is as follows:
Year Ended December 31,
------------------------------------------------------------------------------
2004 2003 2002
---------------------- ---------------------- ----------------------
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(in thousands)
Direct ........................... $ 87,229 $ 80,992 $ 71,365 $ 61,023 $ 51,799 $ 44,113
Ceded ............................ (14,693) (14,530) (12,088) (13,759) (18,003) (14,023)
-------- -------- -------- -------- -------- --------
Net .............................. $ 72,536 $ 66,462 $ 59,277 $ 47,264 $ 33,796 $ 30,090
======== ======== ======== ======== ======== ========
In late 1999, we introduced PracticeGard Plus, which provides errors and
omissions coverage on Medicare/Medicaid billing to healthcare 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. 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 the 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
16
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 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 2004, 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.
17
The following table sets forth the fair value and the cost or amortized
cost of our investment portfolio at the dates indicated.
Cost or Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
(in thousands)
At December 31, 2004
U.S. Government and agencies ........... $ 37,355 $ 211 $ (253) $ 37,313
Corporate .............................. 48,184 603 (407) 48,380
Tax-exempt obligations ................. 42,571 1,124 (166) 43,529
Asset and mortgage-backed securities ... 50,322 89 (634) 49,777
--------- --------- --------- ---------
178,432 2,027 (1,460) 178,999
--------- --------- --------- ---------
Equity securities ...................... 20,679 2,660 (31) 23,308
--------- --------- --------- ---------
Total ............................... $ 199,111 $ 4,687 $ (1,491) $ 202,307
========= ========= ========= =========
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
========= ========= ========= =========
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, 2004, we held 116 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
4.4%. Approximately 83% 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, 2004.
Type/Ratings of Investment Percentage
-------------------------------- ----------
Treasury/Agency ................ 40.2%
AAA ............................ 24.3
AA ............................. 7.2
A .............................. 16.6
BBB ............................ 11.7
-----
100.0%
=====
The ratings set forth in the table are based on ratings assigned by
Standard & Poor's Corporation.
The following table sets forth information concerning the maturities of
fixed-maturity securities in our investment portfolio as of December 31, 2004,
by contractual maturity. Actual maturities will differ from contractual
maturities because borrowers may have the right to prepay obligations with or
without prepayment penalties.
18
At December 31, 2004
-------------------------------------
Cost or Percentage
Amortized of Fair
Cost Fair Value Value
--------- ---------- ----------
(in thousands)
Due in one year or less ................... $ 8,091 $ 8,084 4%
Due after one year through five years ..... 49,124 49,074 24
Due after five years through ten years .... 44,107 44,516 22
Due after ten years ....................... 26,788 27,549 14
-------- -------- --------
128,110 129,223 64%
Equity securities ......................... 20,679 23,308 12
Asset and mortgage-backed securities ...... 50,322 49,776 24
-------- -------- --------
Total ................................. $199,111 $202,307 100%
======== ======== ========
Proceeds from bond maturities, sales and redemptions of available-for-sale
investments during the years 2004, 2003, and 2002 were $67.9 million, $138.6
million and $39.0 million, respectively. Gross gains of $917,000, $3,441,000 and
$1,437,000 and gross losses of $442,000, $1,511,000 and $1,568,000 were realized
on available for sale investment redemptions during 2004, 2003, and 2002,
respectively.
The average duration of the securities in our fixed-maturity portfolio as
of December 31, 2004 and 2003 was 4.4 years and 4.8 years, respectively.
A.M. Best Company Ratings
As of December 31, 2004, A.M. Best Company, which rates insurance
companies based on factors of concern to policyholders, rated NCRIC, Inc. "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-" rating of NCRIC, Inc. in 2004. On March 4, 2005, A.M. Best
downgraded the rating of NCRIC, Inc. from "A-" to "B++" (Very Good) under review
with negative implications. A "B++" is A.M. Best's fifth highest rating out of
its 15 possible rating classifications. This action followed the February 28,
2005 announcement of NCRIC Group, Inc.'s fourth quarter and year-end 2004
results of a net loss of $8.3 million and $7.1 million, respectively. On
February 28, 2005, we also announced a definitive agreement to merge with
ProAssurance Corporation. The rating will remain under review pending A.M.
Best's review of NCRIC, Inc.'s loss reserves, completion of the merger with
ProAssurance and discussions with management. Our goal is to restore the rating
to its previous level of "A-" once A.M. Best has more time to factor in the
financial strength provided by the proposed transaction with ProAssurance.
A.M. Best's "B++" rating is assigned to those companies that in A.M.
Best's opinion have a good 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.
19
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
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 aggressively litigate 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
In 2003, 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. The increase
in uncertainty is a result of us not knowing the
20
effectiveness of our underwriting and claims adjudication process in the new
states. This risk impacted results of operations in 2004 and 2003 and could
impact future results of operations.
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 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, 2004,
$179 million of our $202 million investment portfolio was invested in fixed
maturities. Unrealized pre-tax net investment gains on investments in fixed
maturities were $567,000 and $868,000 as of December 31, 2004, and 2003,
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 subsidiary may 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 policyholders could require us to pay large sums of
money in excess of our reserve amount.
21
Our revenues and operating performance may fluctuate with insurance business
cycles
Growth in premiums written in the medical professional liability industry
has 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 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 a 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. 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.
As of December 31, 2004, A.M. Best Company rated NCRIC, Inc. "A-"
(Excellent). On March 4, 2005, A.M. Best downgraded the rating of NCRIC, Inc.
from "A-" to "B++" (Very Good) under review with negative implications. A "B++"
rating is A.M. Best's fifth highest rating out of its 15 possible rating
classifications. This action followed the February 28, 2005 announcement of
NCRIC Group, Inc.'s fourth quarter and year-end 2004 results of a net loss of
$8.3 million and $7.1 million, respectively. On February 28, 2005, we also
announced a definitive agreement to merge with ProAssurance Corporation. The
rating will remain under review pending A.M. Best's review of NCRIC, Inc.'s loss
reserves, completion of the merger with ProAssurance and discussions with
management. Our goal is to restore the rating to its previous level of "A-" once
A.M. Best has more time to factor in the financial strength provided by the
proposed transaction with ProAssurance.
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
22
favorable rating. This downgrade or any further 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 risk exposures
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.
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
$15,000 for 2004. 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 accounting principles generally accepted in the
United States of America, 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 of 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.
23
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
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 ConsiCare, Inc. could result in a
goodwill impairment charge
ConsiCare'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 and 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 ConsiCare.
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 Women, 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.
24
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;
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.
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. In 2002, PHICO Insurance Company went into receivership; this
resulted in guaranty fund assessments to us of $355,000. Our 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, 2003
financial statements, was completed and a final report was issued on December 7,
2004. The final report positively assessed our financial stability and operating
procedures.
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
25
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.
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
Practitioner Data Bank payments, claims closed without payments and actions such
as terminations or premiums surcharges with respect to our insureds. Penalties
may attach if we fail to report to either the D.C. Department of Insurance,
Securities and Banking or an applicable state insurance regulator or the
National Practitioner 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,
26
from the previous two calendar years that has not been paid out as dividends.
District of Columbia law gives the Commissioner of Insurance, Securities and
Banking 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, 2004, because of the statutory loss from operations in 2003 and
2004, NCRIC, Inc. has no amounts available for dividends without regulatory
approval.
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 protected cells within American Captive Corporation.
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, we announced formation of a joint venture with Risk Services,
LLC, to form National Capital Risk Services, LLC to offer a complete range of
alternative risk transfer services to healthcare clients throughout the nation.
As of December 31, 2004, ACC had no active cells.
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.
ConsiCare, Inc. ConsiCare, Inc., a wholly owned subsidiary of NCRIC Group,
Inc. incorporated in 1998, provides business management services and employee
benefits services to physicians, dentists and other non-healthcare related
entities in Virginia, North Carolina and the District of Columbia. ConsiCare was
formerly known as NCRIC MSO, Inc. d/b/a HealthCare Consulting, Inc. and Employee
Benefits Services, Inc. The name of this subsidiary was changed to ConsiCare
upon the completion of a branding analysis in the fourth quarter of 2004. In the
first quarter of 2005, this business was re-introduced to the market under the
brand name of ConsiCare. We believe that this initiative will differentiate the
practice management operations from its competitors and contribute to the
establishment of a consistent and distinguishable brand identity.
27
NCRIC Physicians Organization, Inc. NCRIC Physicians Organization, Inc., a
wholly owned subsidiary of ConsiCare, Inc., was organized in 1994 to provide a
network for managed care contracting with third party payers. NCRIC Physicians
Organization no longer contracts as a network and effective October 1, 2004
reached the end of a settlement agreement with a former health plan partner,
American Medical Services.
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, 2004, we employed 107 full-time persons. Sixty-five of
these individuals were employed by NCRIC, Inc. and 42 were employed by
ConsiCare. None of our employees are represented by a collective bargaining unit
and we consider our relationship with our employees to be good.
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 ten years,
commencing April 15, 1998 and expiring April 30, 2008. Annual rental is $421,476
with 2% annual increases, except in the sixth year of the term when the rent
increases by $2.00 per rentable square foot. 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, Fredericksburg and Richmond, Virginia; Greensboro, North Carolina;
Wilmington, Delaware; and Charleston, West Virginia.
The following table sets forth the facilities leased by us at December 31,
2004, 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. 20007 May 31, 2008
424 Graves Mill Road, Lynchburg, Virginia 24502 October 31, 2007
4701 Cox Road, Richmond, Virginia 23060 April 30, 2006
1708 Fall Hill Avenue, Suite 201, Fredericksburg, Virginia 22401 Month-to-Month
600 Green Valley Road, Greensboro, North Carolina 27408 March 31, 2008
1201 N. Orange Street, Suite 901, Wilmington, Delaware 19801 July 31, 2005
300 Association Drive, North Gate Business Park, Charleston, West Virginia 25311 Month-to-Month
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 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.
28
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" and "Regulation of
dividends from insurance subsidiaries").
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, 2004,
there were 6,892,517 publicly held shares of our common stock issued and
outstanding held by approximately 539 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. There were
no repurchases of common stock in the fourth quarter of 2004.
Year Ended December 31, 2004 High Low
---------------------------- ------- -------
Fourth quarter $10.060 $ 8.380
Third quarter 10.020 8.370
Second quarter 10.140 9.110
First quarter 11.920 9.450
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 5.992
Set forth below is information as of December 31, 2004 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 ..... 107,737 $ 3.75 0
- -------------------------------------------------------------------------------------------------------------
Stock Option Plan - 2003 ..... 320,101 $ 10.90 94,269
- -------------------------------------------------------------------------------------------------------------
Stock Award Plan - 1999 ...... 14,365(1) Not Applicable 0
- -------------------------------------------------------------------------------------------------------------
Stock Award Plan - 2003 ...... 109,174(1) Not Applicable 22,540
- -------------------------------------------------------------------------------------------------------------
Equity compensation plans None None None
not approved
by shareholders
- -------------------------------------------------------------------------------------------------------------
Total .................. 551,377 Not Applicable 116,809
=============================================================================================================
- ----------
(1) Represents s