PRESIDENT’S MESSAGE

National Catholic’s 2003 operating year could accurately be characterized as having had its share of both success and failure. Nonetheless, I am pleased to report that there were substantially more, and more significant, successes than there were experiences of failure. Let’s proceed to examine both what went well and what went poorly.

Our financial results represent the only operational area that produced a disappointing result – essentially National Catholic’s only real “failure” during the year. At year-end your company posted a net operating loss of $282,878.

While financial losses are never the source of rejoicing and congratulatory celebrations, this particular one is somewhat unusual and very interesting. One needs to “dissect” it to truly understand its significance (or relative lack thereof). Significantly, embedded in this overall loss are two very positive financial results and related accomplishments. These are: 1) National Catholic generated a solid underwriting profit, even in the face of underwriting expenses that increased year-over-year by 70% (strictly as a function of increased paid losses and loss reserve increases). This point is critical in light of the basic recognition that National Catholic is, after all, an insurance company and no insurance company can sustain itself financially and operate with stability over the long haul, unless it can generate an underwriting profit. Your company has generated an underwriting profit in three of the last four years. 2) Even while virtually all expenses of the company were inflating year-over-year, total General and Administrative expenses of The National Catholic Risk Retention Group, Inc. remained almost exactly “flat” as compared to 2002 (there was actually a $304 increase), because of successful efforts to economize wherever possible. [N.B. This G&A result is not evident in the income statement contained within this annual report, because of our audit firm’s recommendation to apply to 2002 year-end G&A a large one-time, non-recurring payment made to National Catholic by its reinsurer, which had the effect of “deflating” the actual 2002 year-end expenses.]

So where did the operating loss come from? Quite simply, it was the result of a net realized capital loss on sale of investments in the amount of $1,471,564. The loss resulted when National Catholic transferred its equity holdings from a socially screened S&P 500 Index Fund, into a socially screened Russell 3000 Index Fund (note that the decision was made following analysis by the company’s investment advisory firm and separate deliberation by the Investment Committee and the Board of Directors). Importantly, note that the diminished value of the securities in the S&P 500 Fund had already been “captured” and reflected in the company’s Shareholders’ Equity account as “accumulated other comprehensive loss,” throughout 2002 and 2003. When the sale occurred, this previously unrealized investment loss immediately became realized and transferred for accounting purposes to the company’s Income Statement, resulting in a massive negative “hit” to the otherwise positive underwriting and expense control results of National Catholic.

I would be remiss in my description of this event if I did not also convey the fact that this investment decision was unquestionably a good one. There are three reasons that this is a fair statement: 1) the broader, more diversified Russell 3000 index holdings should reduce the volatility of National Catholic’s equity performance over the long haul; 2) the Russell 3000 has historically demonstrated a small but nevertheless incremental performance “edge” over the S&P 500, which National Catholic has already benefited from since the time of the transfer (September 2003) to the date of this message (March 2004); and 3) the new fund has an even more comprehensive social screen.

Meanwhile, National Catholic’s 2003 performance was in every other regard excellent.

Marketing results produced the addition of two new shareholders: the Archdiocese of Denver on July 1, 2003 and the Archdiocese of Philadelphia on December 1, 2003. We extend a very heartfelt welcome to both of our new shareholders!

Critically, National Catholic’s VIRTUS^® program continues to establish the benchmark and “set the standard” for the Church’s efforts to eliminate the scourge of child sexual abuse. At year-end 2003, National Catholic’s Protecting God’s Children™ program had been selected and implemented by 77 dioceses; an additional 13 were scheduled for new or further training; and over two dozen more were engaged in discussion/planning with National Catholic regarding implementation of Protecting God’s Children. Also, and significantly, as evidence of National Catholic’s commitment to the entire Church, 46 of the dioceses engaged with National Catholic’s VIRTUS program were not shareholders. It is an inarguable fact that in its time of crisis, the Church has received far more assistance from National Catholic’s VIRTUS program, than has been provided by any other program, of any other nature, from any other source.

We are indeed very thankful that our efforts have been so blessed.

I would like to address one remaining issue that often has been expressed by our shareholders as one of their major concerns regarding National Catholic’s results. Please note that sexual misconduct claims have not severely impacted National Catholic’s claim results at any time in company history, including the last two years. In fact, sexual misconduct incident reports and sexual misconduct assigned claim loss reserves/payments, both declined significantly in 2003 as compared to 2002.

In closing, I want to thank all of our shareholders and friends for your support, confidence and encouragement. Be assured that we will always do our very best to serve you and our Church.

Michael J. Bemi
President and CEO