December 21, 2003 - 5:14am EST by
2003 2004
Price: 10.70 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 74 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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This is a resibmit of my April 2002 idea. Since then the company has converted from a 'complex' MIHC structure to a straight-forward 100% publically owned entity. The value implicit in the MIHC structure has been unlocked to the benefit of shareholders. What remains to be unlocked is the underlying value in the company's business.

For a history and historical numbers for NCRIC, see my earlier posting. As I have said, the company is now 100% publically traded stock, so disregard the MIHC aspects of the writeup.

For more background see Kurran's recent writeup of FPIC and several write ups over the last few years of ACAP.

The investment thesis is that the company has a good operating track record (compare for example ACAP), is selling at a slight discount to tangible book value and is growing rapidly (circa 50% pa) without many of the dangers which accompany such rapid growth. This strain is present during rapid growth for many types of insurers (see especially life insurers). The value of the company is hidden because of considerable "new business strain" which are artifically depressing earnings.


Equity (6,927,365 shares @ $10.70) = $ 74m
Trust Preferred Securities $15m
Enterprise Value $89m

Assets of $262.8m
Liabilities $179.2m
Claims & Expense Liability $116.7m
Tangible Equity of $76m

Book value per share $12 per share
Tangible Book value per share $11 per share
IMO consulting business has some value, but I'm assuming it is closer to $0.20 to $0.40 than $1.00 per share.

Currently they have a lot of 'spare' capital having netted around $34m in the 2003 second step offering. Currently it looks like growing the existing business will tie up most of the capital raised - a very satisfactory outcome for shareholders.

While they are growing premiums they have historically underwritten at a combined ratio of over 100% - offset by investment earnings


Since the start of 2003 NCRIC has been retaining a higher proportion of each policy, having raised their reinsurance retention to $1.0m from $0.5m. This has given them considerable growth in net written and earned premium with no increase in accompanying overhaeds (though volatility will increase). There is NO NEW BUSINESS RISK FROM THIS PORTION OF THE GROWTH.

They are also growing their premium rates and their policy numbers. Premium increase are covered below. The 2003 policy numbers will not be published until the December 2003 10K.

- for those not up to date with the med-mal market, this edited state-by-state review from the 2002 10K gives some idea as to why it is feasible for NCRIC to grow at the rates it has been
[home market]We are one of a few remaining carriers currently writing insurance policies in Washington, D.C. ...
NCRIC 53% market share. [this market NCRIC write primarily direct, others are independent broker driven]
Doctors Company Insurance Group 9% market share
Professionals Advocate (Medical Mutual Group) 8% market share

withdrawing ... St. Paul and Fireman's Fund
downgraded ... Princeton Insurance Company
MLMIC Group 13% market share
SCPIE Holdings 7% market share

withdrawing ... Princeton Insurance Company and MIIX Group
insolvency ... PHICO Insurance
Medical Mutual of Maryland 49% market share.

withdrawing ... St. Paul Companies, Princeton Insurance and MIIX
insolvency ... Doctors Insurance Reciprocal
resulting in approx 30% of physicians seeking new cover in 2003
competitors include State Volunteer Mutual, Medical Mutual of North Carolina, The Doctors Company Insurance Group, MAG Mutual Insurance
Company, Professionals Advocate, and ProAssurance Corporation.

"We currently do not expect to expand our business and we intend to maintain a limited exposure in West Virginia. Although few carriers are currently writing new business in West Virginia, ProAssurance Corporation has emerged as one of the state's primary markets for physicians."
[NOTE that there are some captives in West Virginia and the quarterly numbers don't break them out, so the premium numbers should be taken with a pinch of salt.]


From the Q3 10Q (premium amounts estimated by grossing up 9 month 2003 numbers to 12 months)

Delaware + 27.0% (on $8m of premium)
District of Columbia + 14.8% ($30m prem)
Maryland + 28.1% ($11m prem)
Virginia + 39.7% ($23m prem)
West Virginia + 35.2% ($7m prem - difficulties with regulators anticipated)

These increases take 2 years to be fully earned, so past increases are still being earned - especially increases pricing in available bond yields. Also to the extent that premium growth is being driven by higher premiums on existing policies there is NO 'NEW BUSINESS RISK' and the policies are still seasoned policies. Policy counts aren't available in the 10Q.


Management have been pretty good. So far they have stuck to their knitting except for the Consulting purchase. At the moment they appear to have their hands full with organic growth and committed 75% of second-step funds to the insurance subsidary (rather than the holding company). They were shareholder-aligned enough to go for a second step offering when capital needs began to justify it and the offering also gave them some (more) incentives for improving the share price.


Management's history gives a reasonable level of confidence in reserving levels compared to peers, reducing the biggest risk to an acquirer. The biggest risk is probably a takeout before the company has grown premiums to the extent that current capital allows, so the full potential of the company isn't realised.
A stock acquisition at 20-30% above book could be attractive to someone like PRA or a roll-up trading well above book.

NCRIC would provide entry into DC, Virginia, West Virginia, Maryland and Delaware markets. It is also well capitalised at present - valuable in a stock deal to an acquirer keen to grow.


Absent the Teacher's insurance business NCRIC is likely to always lag the valuation of PRA. However I think PRA's current pricing is indicative of what they could realistically achieve once their capital is fully deployed. At a multiple of 1.5 times book they would be trading at $15.50 (in addition to growth in book value until this point). Those that don't think NCRIC should trade at this sort of multiple to book should reflect on the comparison with ACAP which like NCRIC has appeared here previously. Write ups of this idea have called for the company to trade up to book value.
NCRIC's growth and valuation expansion is likely to be achieved with relatively low (compared to other med-mal insurers) business risk as much of the growth is either from existing policies or organic from states they have been in for 4 or 5 years.

The second leg of the valuation is the option-like returns from any tort reform. The recent case for FPIC stressed this aspect. NCRIC's upside is somewhat more limited in terms of its profit/loss as they have had a $500,000 retention until recently - depending on the nature of any enacted caps, this may mean that their reinsurers are the primary beneficaries.
However since the start of 2003 their retention has been $1m - which means that more recent business is more likely to benefit. Overall valuations and business activity resulting from tort-reform is more likely to affect NCRIC's valuation - making the market more attractive for insurers.


1. Now that the second-step is complete comparative valuations are clearer and liquidity is greatly improved
2. Slowing in the rate of new policy growth - this will reduce the 'new business strain' making the earnings power more

3. Further premium increases and earn-out of past increases. Expect industry pricing to now full reflect available bond

4. Potential for federal and/or state tort reform to benefit NCRIC's reserves and industry valuations and activity
5. Increased activity in the med-mal sector as a consequence of the industry cycle
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