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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period From _________ to __________.
Commission File Number: 001-14593
THE MIIX GROUP, INCORPORATED
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3586492
(State or other jurisdiction of incorporation or (I.R.S. employer
organization) identification number)
TWO PRINCESS ROAD, LAWRENCEVILLE, NEW JERSEY 08648
(Address of principal executive offices and zip code)
(609) 896-2404
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: Common Stock, par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 12 months (or for such shorter periods as the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /X/ NO / /
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
amendment to this Form 10-K. / /
The aggregate market value on March 22, 2000 of the voting stock held
by non-affiliates of the registrant was $160,652,552.
As of March 22, 2000, the number of outstanding shares of the
Registrant's Common Stock was 14,512,083.
DOCUMENTS INCORPORATED BY REFERENCE
No proxy statement, annual report to security holders or prospectus
filed pursuant to Rule 424(b) under the Securities Act of 1933 is incorporated
by reference into this Report on Form 10-K.
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THE MIIX GROUP, INCORPORATED
1999 FORM 10-K
TABLE OF CONTENTS
PART I ........................................................................ 2
ITEM 1. BUSINESS................................................................ 2
ITEM 2. PROPERTIES.............................................................. 21
ITEM 3. LEGAL PROCEEDINGS....................................................... 22
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................... 22
PART II ........................................................................ 22
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS... 22
ITEM 6. SELECTED FINANCIAL DATA................................................. 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................... 24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............. 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................. 33
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.................................................... 33
PART III ........................................................................ 33
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................... 33
ITEM 11. EXECUTIVE COMPENSATION.................................................. 37
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......... 37
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................... 37
PART IV ........................................................................ 37
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K........ 37
SIGNATURES ...................................................................... 42
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES...................................... F-1
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The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-K, the Company's Annual Report to
Stockholders, any Form 10-Q or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to uncertainties and other factors that could cause
actual results to differ materially from such statements. These uncertainties
and other factors (which are described in more detail elsewhere in this Form
10-K) include, but are not limited to: (i) the Company having sufficient
liquidity and working capital; (ii) the Company's ability to achieve consistent
profitable growth; (iii) the Company's ability to diversify its product lines;
(iv) the continued adequacy of the Company's loss and loss adjustment expense
reserves; and (v) the Company's avoidance of any material loss on collection of
reinsurance recoverables. The words "believe," "expect," "anticipate,"
"project," and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
The MIIX Group, Incorporated ("The MIIX Group") was organized as a Delaware
corporation in October 1997 and is the parent company of a group of insurance
and insurance-related subsidiaries conducting business principally in New
Jersey. The MIIX Group began operating as a publicly traded company on July 30,
1999. On August 4, 1999, the reorganization of the Medical Inter-Insurance
Exchange of New Jersey (the "Exchange") was consummated according to a Plan of
Reorganization. The Plan of Reorganization included several key components,
including: formation of The MIIX Group to be the ultimate parent; the transfer
of assets and liabilities held by the Exchange to MIIX Insurance Company (MIIX),
formed for that purpose; acquisition of New Jersey State Medical Underwriters,
Inc. and its wholly owned subsidiaries (the "Underwriter"); distribution of
shares of common stock of The MIIX Group and/or cash to current and former
members of the Exchange("distributees") as defined in the Plan of
Reorganization; and dissolution of the Exchange. In connection with the
reorganization, 11,854,033 shares of The MIIX Group Common Stock were issued to
distributees and 814,815 shares of The MIIX Group Common Stock were issued to
the Medical Society of New Jersey, plus $100,000 in cash, in exchange for all
Common Stock of the Underwriter. The MIIX Group sold three million shares of its
Common Stock in an underwritten public offering ("the Offering") that closed on
August 4, 1999. Of the offered shares, 90,000 were reserved for sale and
subsequently sold to officers and employees of the Company. On August 11, 1999
an additional 450,000 shares were sold to underwriters of the Offering pursuant
to an over-allotment option contained in the Offering underwriting agreement.
The Common Stock is listed on the New York Stock Exchange("NYSE") under the
trading symbol "MHU."
For purposes of this Report on Form 10-K, the "Company" refers at all times
prior to August, 4, 1999, the effective date of the Reorganization, to the
Exchange and its subsidiaries, collectively, and at all times on or after such
effective date, to The MIIX Group and its subsidiaries, collectively; the term
"The MIIX Group" refers at all times to The MIIX Group, Incorporated, excluding
its subsidiaries.
OVERVIEW
Based on direct premiums written in 1998, the Company is the leading provider of
medical professional liability insurance in New Jersey and is ranked 8th among
medical professional liability insurers in the United States. The Company
currently insures approximately 16,000 physicians and other medical
professionals who practice alone, in medical groups, clinics or in other health
care organizations. The Company also insures more than 185 hospitals, extended
care facilities, and other health care organizations. The Company's business has
historically been concentrated in New Jersey but has expanded to other states in
recent years. The Company currently writes policies in 23 states and the
District of Columbia. In 1999, approximately 47% of the Company's total direct
premiums written were generated outside of New Jersey. In addition to the
Company's medical malpractice insurance operations, the Company also offers a
broad range of complementary insurance products to its insureds and operates
several fee-based consulting and other businesses.
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Medical professional liability insurance, also known as medical malpractice
insurance, insures the physician, other medical professional or health care
institution against liabilities arising from the rendering of, or failure to
render, professional medical services. Under the typical medical professional
liability policy, the insurer also is obligated to defend the insured against
alleged claims.
In 1998, total medical professional liability direct premiums written in the
United States were approximately $6.0 billion, according to data compiled by
A.M. Best, an insurance rating agency, and in New Jersey were approximately
$273.4 million, according to data compiled by OneSource Information Services,
Inc. ("OneSource"), an online data service. The Company's market share of such
direct premiums written was 3.8% in the United States according to data compiled
by A.M. Best and 41% in New Jersey according to data compiled by OneSource. In
1999, medical malpractice insurance accounted for approximately 99% of the
Company's direct premiums written.
The Company had total revenues and net income of $265.1 million and $20.8
million, respectively, for 1999 and $264.9 million and $29.7 million,
respectively, for 1998. As of December 31, 1999, the Company had total assets of
$1.8 billion and total equity of $318.7 million.
The Exchange was organized as a New Jersey reciprocal insurance exchange in
1977. A New Jersey reciprocal insurance exchange is an entity that may be formed
by persons seeking a particular type of insurance coverage. In the case of the
Exchange, medical and osteopathic physicians formed the Exchange to provide
medical malpractice insurance. The Exchange had been operated to generate
profits, and such profits were part of the Exchange's surplus account. Under New
Jersey law, the business of a reciprocal insurance exchange must be conducted by
a separate entity acting as the attorney-in-fact of such exchange. The
Underwriter, a corporation that, prior to the reorganization, had been wholly
owned by the Medical Society of New Jersey, served as attorney-in-fact for the
Exchange.
State laws regulate the process of soliciting insurance, the underwriting of
insurance, the rates charged, the nature of insurance products sold, the
financial accounting methods of the insurer, the amount of money required to be
maintained by the insurer to guard against insolvency and many other aspects of
the day-to-day operations of the Company. See "Business -- Regulation."
BUSINESS STRATEGY
The Company has adopted a strategy which it believes will allow it to compete
effectively and create long-term growth. To maximize the strategy's
effectiveness, the Company completed the Plan of Reorganization to convert from
a reciprocal insurer to a stock insurer, in order to provide the Company with
greater flexibility and access to capital. The Company's strategy is to:
- maintain the Company's historically close relationship with
the medical community;
- maintain underwriting discipline to seek to assure that
profitability, rather than premium volume, is emphasized;
- enhance product offerings to facilitate "one-stop shopping"
for the Company's extensive customer base;
- take advantage of strategic merger and acquisition
opportunities;
- expand distribution channels; and
- continue to expand geographically.
This strategy is designed to capitalize on the Company's strengths that have
enabled it to achieve its current market position, including (i) its experience
with, commitment to and focus on medical professional liability insurance, (ii)
its history of providing a stable premium environment to its customers, (iii)
the high level of service it delivers to insureds, including the aggressive
defense of claims on their behalf, (iv) its "A (Excellent)" rating by A.M. Best,
(v) its capacity on a per insured basis, (vi) its ability to customize product
features and programs to fit the needs of different customers and (vii) its
close relationship with the medical community.
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Maintain Close Relationship with the Medical Community. Since its founding in
1977, the Company has maintained a close relationship with the medical
community. In addition to the active involvement of practicing physicians on
several of the Company's advisory committees, the Company and the medical
professional liability insurance that it offers have the endorsements of
different medical associations. The Company will continue to utilize practicing
physicians on advisory committees to provide management with input on medical
practice patterns, claims, customer needs and other relevant matters. In
addition, the Company will endeavor to maintain the medical associations'
endorsements.
Maintain Underwriting Discipline. The Company's experience with, commitment to
and focus on medical professional liability insurance for over 20 years has
allowed it to develop strong knowledge of the market and to build an extensive
database of medical malpractice claims experience. The Company takes advantage
of this specialized expertise in medical professional liability insurance to set
premiums that it believes are appropriate for exposures being insured. As the
Company expands its business, the Company intends to maintain underwriting
discipline and emphasize profitability over premium growth.
Enhance Product Offerings. In addition to its core medical professional
liability insurance products, the Company has developed other products and
services for health care institutions. Additional products currently offered
include comprehensive liability coverage for medical offices, directors and
officers, managed care errors and omissions, employment practices, fiduciary,
property and worker's compensation. Most of these coverages are underwritten by
the Company; several products are marketed by the Company and underwritten by
other insurance carriers with which the Company has developed strategic
alliances. The Company has also introduced the option for large health care
institutions to purchase excess insurance coverage on a multi-year basis for a
guaranteed prepaid premium. The Company intends to continue to increase the
number of products it offers to its customer base in order to be able to provide
them with a full range of coverages.
Take Advantage of Strategic Merger and Acquisition Opportunities. The Company
believes that the Reorganization has better positioned the Company to make
strategic mergers and acquisitions by providing greater access to capital as a
source of financing and creating an attractive stock acquisition currency. The
Company believes that consolidation in the medical professional liability
insurance industry will continue and that opportunities to make a strategic
merger and acquisition may arise, thus providing an effective way to expand the
Company's business, product offerings and geographic scope.
Expand Distribution Channels. The Company has traditionally written insurance on
a direct basis in New Jersey. In connection with the Company's expansion outside
New Jersey, the Company has increasingly utilized brokers and agents. In 1999,
68% of the Company's direct premiums written were generated through independent
brokers and agents. By increasing its use of this distribution channel, the
Company will be better positioned to achieve growth. In order to expand its
distribution channels further, the Company intends to develop additional
relationships with selected brokers and agents who have demonstrated expertise
in the medical malpractice insurance market.
Expand Geographically. From its inception in 1977 through 1990, all of the
Company's business was written in New Jersey. In 1991, the Company began to
write business in Pennsylvania and in 1996 began its expansion to other states.
Since 1996, the Company has expanded its operations significantly and currently
writes policies in 23 states and the District of Columbia. As a result of this
expansion, the proportion of the Company's business written in states other than
New Jersey has grown from approximately 11% in 1996 to 47% in 1999. Over time,
the Company intends to become licensed to write insurance in all 50 states,
although the Company may choose not to write insurance in certain states based
on market or regulatory conditions. In addition, the Company has three regional
sales and customer support offices to assist its marketing efforts outside of
New Jersey.
PRODUCT OFFERINGS
The Company has developed a variety of insurance products to cover the
professional liability exposure of individual and institutional health care
providers. The Company's core products include medical professional liability
insurance for individual providers, medical groups and health care institutions
on a claims made, "modified claims made" or occurrence basis.
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In New Jersey, the Company offered physicians traditional occurrence coverage
from 1977 through 1986 and has offered a form of occurrence-like coverage,
"modified claims made," from 1987 to the present. The Company's modified claims
made policy is called the Permanent Protection Plan (the "PPP"). Under the PPP,
coverage is provided for claims reported to the Company during the policy period
arising from incidents since inception of the policy. The PPP includes "tail
coverage" for claims reported after the expiration of the policy for occurrences
during the policy period. The premium for tail coverage is included as part of
the annual premium, and the insured physician automatically receives tail
coverage when the policy is terminated for any reason. The automatic provision
for tail coverage in effect results in occurrence-like coverage provided under
the PPP.
Traditional claims made coverage is offered to institutions in New Jersey. In
Pennsylvania traditional occurrence coverage is primarily offered to physicians
and traditional claims made coverage is primarily offered to institutions. In
other states, the Company issues policies primarily on a claims made coverage
basis to physicians and institutions. Tail coverage may be offered as an
endorsement to those accounts written on a pure claims made basis to extend the
period when losses could be reported to the Company. Additional premium is
collected at the time such endorsement is purchased by the insured. In a number
of states, the Company offers policy limits up to $10,000,000 per incident and
$12,000,000 in the aggregate for individual physicians. Policy limits of up to
$75,000,000 per incident and in the aggregate are offered to institutions and
medical groups.
In addition to its core medical professional liability insurance products, the
Company has developed other products and services for health care institutions.
Expanded products offered include comprehensive liability coverage for medical
offices, directors and officers, managed care errors and omissions, employment
practices, fiduciary, property and worker's compensation.
For premises liability and property exposures of medical offices, the Company
offers the Medical Office Policy written on an occurrence basis. Commercial
general liability coverage is offered on an occurrence basis only.
Excess/umbrella liability provides coverage excess of underlying policies or
self-insured retentions. Directors and officers coverage and errors and
omissions coverage are offered on a claims made basis. The Company has also
introduced the option for large health care institutions to purchase excess
insurance coverage on a multi-year basis for a guaranteed prepaid premium. Such
coverages are also available with reinstatement options, combined with the
ability to pre-purchase such options at the inception of the policy. The Company
underwrites most of these coverages, and the remaining coverages are marketed by
the Company and underwritten by other insurance carriers with which the Company
has developed strategic alliances.
Substantially all of the Company's policies are offered for periods of one year,
with renewal occurring on the anniversary date of the policy inception. Premiums
are recorded as earned over the life of the policy period. The PPP policy
provides occurrence-like coverage, and accordingly the premiums are earned in
the period the policy is written consistent with the recording of the expected
ultimate loss and LAE reserves on an occurrence basis. A profile of the
Company's direct premiums written is summarized in the table below.
For the Year Ended December 31,
-------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
(in thousands)
% of % of % of
$ total $ total $ total
-------- ------- -------- ------- -------- -------
Professional Liability Products
Occurrence/Occurrence-like $152,520 62% $141,437 61% $127,610 79%
Claims Made 89,253 37% 82,543 36% 31,195 19%
Other Products 2,653 1% 6,334 3% 3,625 2%
======== === ======== === ======== ===
Direct Premiums Written $244,426 100% $230,314 100% $162,430 100%
======== === ======== === ======== ===
The Company expects that the majority of new policies issued in states other
than New Jersey and Pennsylvania will be on a claims made basis. As a result,
the Company expects the profile of its direct written premiums to be different
in the future. When claims made coverage is more significant as a percentage of
the Company's business, loss reserves may develop more rapidly. See "Business --
Loss and LAE Reserves."
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MARKETING AND POLICYHOLDER SERVICES
The Company employs various strategies for marketing its products and providing
policyholder services. In New Jersey, the Company markets its products to
physicians and physician groups principally through medical associations,
referrals by existing policyholders, advertisements in medical journals,
seminars on health care topics for physicians, and direct mail solicitation. The
Company's professional liability program has the endorsement of different
medical associations. In addition to these direct marketing channels, the
Company sells its products through independent brokers and agents who currently
produce approximately 40% of the Company's direct premiums written in New
Jersey. Health care institutions frequently prefer brokers over direct
solicitation when they purchase professional liability insurance, and the
Company believes that its broker relationships in New Jersey are important to
its ability to grow in that market segment. To provide localized marketing and
policyholder services in New Jersey and nationally, the Company operates three
regional offices. See "Business -- Business Strategy -- Maintain Close
Relationship with the Medical Community."
Outside New Jersey, the Company markets its products exclusively through
independent brokers and agents. In 1999, 128 independent brokers and agents
actively marketed the Company's products in 23 states and the District of
Columbia and produced approximately 68% of the Company's direct premiums written
on a national basis. No national broker or regional agency accounted for more
than 11% of the Company's year-end direct premiums written. The Company selects
brokers and agents that it believes have demonstrated growth and stability in
the medical malpractice insurance industry, strong sales and marketing
capabilities, and a focus on selling medical professional liability insurance.
Brokers and agents receive market rate commissions and other incentives based on
the business they produce. The Company strives to maintain relationships with
those brokers and agents who are committed to promoting the Company's products
and are successful in producing business for the Company. See "Business --
Business Strategy -- Expand Distribution Capabilities."
The Company also provides risk management services through its home office and
regional offices. In addition to supplementing the Company's marketing efforts,
these services are designed to reduce potential loss exposures by educating
policyholders on ways to improve medical practice and implement risk reduction
measures. The Company conducts surveys for hospitals and large medical groups to
review their practice procedures and to focus on specific areas in which
concerns arise. The Company prepares reports that identify areas of the
insured's medical practice that may need attention and provides recommendations
to the policyholder. The Company also presents periodic seminars for medical
societies and other groups to educate physicians on risk management techniques.
These educational programs are designed to increase risk awareness and to reduce
the risk of injury to patients and third parties.
UNDERWRITING
The Company maintains a dual underwriting function at its home office and at
each regional office. The home office Underwriting Department is responsible for
the underwriting and servicing of all institutional accounts and individual
providers that exceed the regional office underwriting authority. In addition,
the home office Underwriting Department is responsible for the issuance,
establishment and implementation of underwriting standards for all of the
coverages underwritten by the Company.
The Company's regional office underwriting staff have the authority to evaluate,
approve and issue medical professional liability coverage for individual
providers and medical groups with annual premiums up to a threshold amount.
The Company follows consistent and strict procedures with respect to the
issuance of all professional liability insurance policies. Individual providers
are required to submit an application for coverage along with supporting claims
history and proof of licensure. The individual provider applications provide
information regarding the medical training, current practice and claims history
of the applicant. Institutions are required to submit an application for
coverage, hard copy loss runs, proof of accreditation, financial statements,
copies of contracts with medical providers, information on employed
professionals and other information. An account analysis form is completed for
each submission and, if coverage is approved, the coverage recommendation and
the pricing methodology is added.
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Risk management surveys may be performed prior to quoting a large account to
ascertain the insurability of the risk. All written accounts are referred to the
Risk Management Department to schedule risk management services. Representatives
from the Risk Management Department meet with the insured institution to develop
programs to control and reduce risk.
The Underwriting Department meets periodically with the Underwriting Committee
of the Company to review the guidelines for premium surcharges, cancellations
and non-renewals and any candidate for cancellation or non-renewal. The
Underwriting Committee is composed of senior officers of the Company.
The Company maintains quality control through periodic audits at the
underwriting and processing levels. Renewal accounts are underwritten as
thoroughly as new accounts. Insureds who no longer meet underwriting guidelines
are identified as non-renewal candidates. All non-renewal candidates are
referred to the home office Underwriting Department and discussed with the
Underwriting Committee to approve the Underwriting Department's recommendations.
PRICING
The Company establishes, through its own actuarial staff and independent
consulting actuaries, rates and rating classifications for its insureds based
on loss and loss adjustment expense ("LAE") experience it has developed and on
other relevant information. The Company has various rating classifications
based on practice location, medical specialty and other factors. The Company
applies various discounts, including discounts for part-time practice,
physicians just entering medical practice, large medical groups and claims
experience. The Company has established its premium rates and ratings
classifications for hospitals and managed care organizations using the
Company's own loss and LAE data as well as data filed publicly by other
insurers.
CLAIMS
The Company's Claims Department is responsible for claims investigation,
establishment of appropriate case reserves for loss and allocated loss
adjustment expenses ("ALAE"), defense planning and coordination, supervision of
attorneys engaged by the Company to defend a claim, and negotiation of the
settlement or other disposition of a claim. All of the Company's primary
policies require it to defend its insureds. Medical malpractice claims often
involve the evaluation of highly technical medical issues, severe injuries, and
conflicting medical opinions. In almost all cases, the person bringing the claim
against the insured is already represented by legal counsel when the claim is
reported to the Company.
Litigation defense is provided almost exclusively by private law firms with
lawyers whose primary focus is defending malpractice cases. The Company also
maintains a staff counsel office located in New Jersey to defend malpractice
cases.
The claims representatives at the Company have on average more than 10 years of
experience handling medical professional liability cases. The Company limits the
average number of cases handled per claims representative to ensure personal
attention to each case.
The claims operation is assisted in its efforts by its technical unit, which is
responsible for training and educating the claims staff. The technical unit
manages the Company's relationship with defense counsel and helps control ALAE
associated with claims administration. The unit also is responsible for tracking
developments in case law and coordinating mass tort litigation.
A major resource for the Company's claims function is its database built over a
21-year period. The database provides comprehensive details on each claim, from
incident to resolution, coupled with a document file relating to each claim. The
database enables the Company's claims professionals to analyze trends in claims
by specialty, type of injury, precipitating causes, frequency and severity,
plaintiffs' counsel, expert witnesses, and other factors. The Company also uses
the data to identify and analyze trends and to develop seminars to educate
individual physicians, physician groups, hospital staff, and other insureds on
risk management to control and reduce their exposure to claims.
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LOSS AND LAE RESERVES
Loss reserves recorded by the Company include estimates of amounts owed for
losses and for LAE. LAE consists of two types of costs, allocated loss
adjustment expenses ("ALAE") and unallocated loss adjustment expenses ("ULAE").
ALAE are settlement costs that can be allocated to a specific claim such as
attorney fees and court costs. ULAE consists of costs that are general in nature
and cannot be allocated to any specific claim, primarily including salaries and
overhead associated with the Company's claim department. ULAE reserves recorded
by the Company represent management's best estimate of the internal costs
necessary to settle all incurred claims, including incurred but not reported
("IBNR") claims.
The determination of loss and LAE reserves involves the projection of ultimate
losses through an actuarial analysis of the claims history of the Company and
other professional liability insurers, subject to adjustments deemed appropriate
by the Company due to changing circumstances. Included in the Company's claims
history are losses and LAE paid by the Company in prior periods, and case
reserves for anticipated losses and ALAE developed by the Company's claim
department as claims are reported and investigated. Management relies primarily
on such 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 may be revised. Any increase in the
amount of aggregate reserves reported in the financial statements, including
reserves for insured events of prior years, could have an adverse effect on the
Company's results of operations for the period in which the adjustments are
made.
There are significant inherent uncertainties in estimating ultimate losses in
the casualty insurance business and these uncertainties are increased in periods
when a company is expanding into new markets with new distribution channels. The
uncertainties are even greater for companies writing long-tail casualty
insurance, such as medical malpractice insurance, and in particular the
occurrence or occurrence-like coverages that substantially make up the Company's
current reserves. These additional uncertainties are due primarily to the longer
period of time during which an insured may seek coverage for a claim in respect
of an occurrence or occurrence-like policy as opposed to a claims made policy.
With the longer claim reporting and development period, reserves are more likely
to be impacted by, among other factors, changes in judicial liability standards
and interpretation of insurance contracts, changes in the rate of inflation and
changes in the propensities of individuals to file claims.
The Company offered traditional occurrence coverage from 1977 through 1986 and
has offered a form of occurrence-like coverage, "modified claims made," from
1987 to the present. The Company's modified claims made policy is the PPP. See
"Business-- Product Offerings." Under the PPP, coverage is provided for claims
reported to the Company during the policy period arising from incidents since
inception of the policy. The PPP includes "tail coverage" for claims reported
after expiration of the policy for occurrences during the policy period and thus
is reserved on an occurrence basis. Loss and LAE reserves carried for PPP
policies and traditional occurrence policies constitute approximately 80% of the
gross loss and LAE reserves at December 31, 1999.
The following table provides a summary of gross loss and LAE reserves by policy
type.
Gross Loss and Loss Adjustment Expense Reserves by Policy Type
(in thousands)
Professional Liability
----------------------------------------------
Occurrence/ % of Claims % of % of Total Gross
Occurrence-Like Total Made Total Other Total Reserves
--------------- ------- -------- ------- -------- ------- -----------
Gross Reserves Held as of:
December 31, 1997 $ 818,129 93.4% $ 42,423 4.8% $ 16,169 1.8% $ 876,721
December 31, 1998 825,636 86.8% 104,759 11.0% 21,264 2.2% 951,659
December 31, 1999 837,724 79.5% 185,497 17.6% 30,376 2.9% 1,053,597
As displayed in the above table, the proportion of the gross loss and LAE
reserves held on claims made professional liability policies has grown from 4.8%
of total gross loss and LAE reserves held at December 31, 1997 to 17.6% at
December 31,
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1999. This is primarily the result of the Company's expansion into new states
since 1997. The majority of policies sold in these new states have been claims
made.
Since a significant portion of the Company's reserves are recorded on an
occurrence basis, and given the long time that typically elapses between the
coverage incident and the resolution of the claim, IBNR reserves have
consistently represented a majority of the gross reserves recorded by the
Company. The following table summarizes the components of gross loss and LAE
reserves including ULAE reserves, and indicates that IBNR reserves constitute a
majority of gross reserves on a consistent basis:
Components of Gross Loss and Loss Adjustment Expense Reserves
(in thousands)
Loss and Loss and Total
ALAE Case % of ALAE IBNR % of ULAE % of Gross
Reserves Total Reserves Total Reserves Total Reserves
-------- ----- -------- ----- -------- ----- ----------
Gross Reserves Held as of:
December 31, 1997 $ 260,779 29.8% $ 591,158 67.4% $ 24,784 2.8% $ 876,721
December 31, 1998 299,178 31.4% 623,842 65.6% 28,639 3.0% 951,659
December 31, 1999 381,564 36.2% 640,096 60.8% 31,937 3.0% 1,053,597
The Company has issued occurrence policies since 1977 and occurrence-like
policies since 1987. There is a significant lag in reporting of incidents or
occurrences inherent in the medical malpractice insurance industry. As a result
the Company continues to experience reported claims that are alleged to have
occurred as far back as 1977.
The following table illustrates the amount and percentage of gross loss and LAE
reserves held by the Company at December 31, 1999 categorized by accident year.
Gross Loss and Loss Adjustment Expense Reserves By Accident Year
As of December 31, 1999
(in thousands)
Accident Year Gross Reserves % of Total
- ---------------------------------------------- -------------- ----------
1977-89..................................... 23,795 2.3%
1990........................................ 8,821 .8%
1991........................................ 12,950 1.2%
1992........................................ 17,859 1.7%
1993........................................ 38,462 3.7%
1994........................................ 52,928 5.0%
1995........................................ 108,266 10.3%
1996........................................ 136,254 12.9%
1997........................................ 180,113 17.1%
1998........................................ 224,201 21.3%
1999........................................ 249,948 23.7%
------------ ------
Total Gross Reserves held by the Company.... $ 1,053,597 100.0%
============ ======
As shown in the above tables, at December 31, 1999: approximately 80% of gross
reserves are occurrence based; over 60% of gross reserves are IBNR reserves; and
over 85% of gross reserves relate to the most recent five accident years, which
are the most immature in terms of loss development.
The Company uses a disciplined approach to setting and adjusting financial
statement loss and LAE reserves that begins with the claims adjudication
process. Claims examiners establish case reserves by a process that includes
extensive development and use of statistical information that allows for
comparison of individual claim characteristics against historical patterns and
emerging trends. This process also provides critical information for use in
pricing of products and establishing the IBNR component of the financial
statement reserves.
Initially, the Company establishes its best estimate of loss and LAE reserves
using pricing assumptions. The reserves are evaluated every quarter and annually
and are adjusted thereafter as circumstances warrant. These periodic evaluations
include a variety of loss development techniques that incorporate various data
accumulated in
9
11
the claims settlement process including paid and incurred loss data, accident
year development statistics, and loss ratio analyses. Important in these
analyses are considerations of the amounts for which claims have settled in
comparison to case reserves held at settlement. Case reserves are eliminated
upon settlement of related claims. Actual settlement amounts above or below case
reserves are then regularly evaluated to determine whether estimated ultimate
losses by accident year, including IBNR reserves, should be adjusted. Changes to
aggregate reserves reported in the financial statements are made based upon the
extent and nature of these variances over the long claim development period
together with changes in estimates of the total number of claims to be settled.
As a final test of management's determination as to whether it believes that
aggregate reserves reported in the financial statements are adequate and
appropriate, management considers the detailed analysis performed by the
actuarial staff of its independent auditors in connection with the audit of the
Company's financial statements.
Recorded loss and LAE reserves represent management's best estimate of the
remaining costs of settling all incurred claims. While the Company believes that
its reserves for losses and LAE are adequate, there can be no assurance that the
Company's ultimate losses and LAE will not deviate, perhaps substantially, from
the estimates reflected in the Company's financial statements. If the Company's
reserves should prove inadequate, the Company will be required to increase
reserves, which could have a material adverse effect on the Company's financial
condition or results of operations.
Activity in the liability for unpaid losses and loss adjustment expenses gross
of reinsurance is summarized as follows:
Year Ended December 31,
--------------------------------------
1999 1998 1997
-------- -------- --------
Balance as of January 1, gross of reinsurance
recoverable................................... $ 951,659 $876,721 $795,449
Incurred related to:
Current year............................... 254,570 214,413 189,163
Prior years................................ 16,514 3,822 205
---------- -------- --------
Total incurred.................................. 271,084 218,235 189,368
Paid related to: ---------- -------- --------
Current year............................... 4,622 1,343 6,879
Prior years................................ 164,524 141,954 101,217
---------- -------- --------
Total paid...................................... 169,146 143,297 108,096
---------- -------- --------
Balance at end of period, gross of reinsurance
recoverable................................... 1,053,597 951,659 876,721
Reinsurance recoverable......................... 406,409 325,795 270,731
========== ======== ========
Balance at end of period, net of reinsurance.... $ 647,188 $625,864 $605,990
========== ======== ========
The aggregate reserves reported in the financial statements represent
management's best estimate of the remaining costs of settling all incurred
claims. The Company increased prior year gross reserves by $16.5 million, $3.8
million and $0.2 million during 1999, 1998 and 1997, respectively.
Notwithstanding management's analysis and determination in setting its best
estimate of aggregate reserves reported in the financial statements, which may
or may not require adjustments to aggregate prior year reserves, management
regularly evaluates, and adjusts when appropriate, its estimates of accident
year ultimate losses and LAE (i) as part of its pricing analyses, (ii) as part
of its evaluation of the effectiveness of its reinsurance programs and (iii) for
reporting to regulatory authorities such as the Internal Revenue Service and the
state insurance departments. Accordingly, reserves established for losses and
LAE on individual accident years may experience greater volatility than
aggregate reserves reported in the Company's financial statements. Individual
accident year reserves cover a smaller amount of business over a shorter period
of time than do the aggregate reserves, which are an accumulation of reserves
pertaining to all accident years. Estimated ultimate losses and LAE associated
with individual accident years were adjusted in 1999, 1998 and 1997. The
following table presents the estimated ultimate losses and LAE gross of
reinsurance (including changes in such estimates) by accident year:
10
12
Accident Year Development
(in thousands)
Changes in Estimated
Ultimate Losses and LAE
Estimated Ultimate for the Year Ended
Losses and LAE as of December 31, December 31,
---------------------------------------------------- --------------------------------------
Accident Year 1996 1997 1998 1999 1997 1998 1999
- ------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
1989 and Prior $ 871,866 $ 864,796 $ 866,162 $ 862,755 $ (7,070) $ 1,366 $ (3,407)
1990 116,637 119,545 119,428 119,855 2,908 (117) 427
1991 119,310 121,531 121,454 110,419 2,221 (77) (11,035)
1992 114,116 113,610 112,404 112,488 (506) (1,206) 84
1993 137,279 140,304 121,990 118,450 3,025 (18,314) (3,540)
1994 150,519 150,613 154,063 144,513 94 3,450 (9,550)
1995 161,301 156,099 165,973 169,024 (5,202) 9,874 3,051
1996 167,406 172,141 174,681 178,048 4,735 2,540 3,367
1997 189,163 195,469 213,762 6,306 18,293
1998 214,413 233,237 18,824
1999 254,570
---------- ---------- --------- ---------- ---------- ------- ---------
Total Estimated Ultimate Losses
and LAE $1,838,434 $2,027,802 $2,246,037 $2,517,121 $ 205 $ 3,822 $ 16,514
---------- ---------- ---------- ---------- ========== ========= =========
Less: Total Paid Loss and LAE $1,042,985 $1,151,081 $1,294,378 $1,463,524
---------- ---------- ---------- ----------
Gross Loss and LAE Reserves as
of December 31 $ 795,449 $ 876,721 $ 951,659 $1,053,597
========== =========== ========== ==========
The accident year reserve development detailed in the above table is indicative
of the potential volatility of accident year reserve estimates. Management
believes that the level of volatility experienced and reflected therein, which
ranged up to plus or minus 10% of estimated accident year ultimate losses at
December 31, 1999, is not unreasonable for the medical malpractice line of
business.
Specific factors noted in management's actuarial analyses that gave rise to the
accident year development in 1999 included the following. Reserves held on
accident years 1989 and prior were decreased to reflect reduced reserve
development on case reserves from that previously projected. Reserves on
accident years 1991, 1993 and 1994 were substantially reduced, reflecting lower
than previously projected loss frequencies and severities. Accident year 1994
reserves were adjusted for the first time from initial pricing-based estimates.
With six years of loss experience, management believes there is now sufficient
actuarial confidence to adjust these very slowly developing reserves held on the
occurrence-like PPP book. Reserves held on accident years 1995 and 1996 were
increased to reflect higher loss expectations for the occurrence Pennsylvania
physician and claims made hospital books of business. Additional reserves were
recorded for accident year 1997 to reflect greater loss expectations for the
Pennsylvania physicians, hospital and expansion state physician books of
business. Reserves held on accident year 1998 were increased to reflect higher
than anticipated claim frequencies, primarily on the expansion state physician
book of business.
Specific factors noted in management's actuarial analyses that gave rise to
accident year development in 1998 and 1997 included the following. During 1998:
reserves on 1989 and prior accident years were increased modestly to recognize
slower than previously projected development of the occurrence-like reserves;
reserves for accident years 1990 through 1992 were reduced, reflecting generally
lower frequencies and severities than previously projected; reserves for
accident year 1993 were adjusted for the first time from initial pricing-based
estimates in 1998; reserves held on accident years 1994 through 1996 were
increased, primarily relating to the claims made hospital book; and reserves for
accident year 1997 were increased, primarily reflecting higher claim frequencies
on claims made business written in certain states than previously projected.
During 1997: reserves held on accident years 1989 and prior were reduced,
primarily as the result of lower loss costs associated with improvements in the
internal claims settlement process; reserves held on accident years 1990 and
1991 were increased, reflecting higher than anticipated claims frequencies
relating primarily to insured physicians practicing obstetrics and gynecology
and internal medicine specialties; and reserves held on accident years 1995 and
1996 were adjusted, largely as the result of development on a specific medical
professional liability program with a large hospital group and development on
the claims made hospital book of business.
As previously discussed, approximately 80% of the Company's December 31, 1999
gross loss and LAE reserves are related to occurrence or occurrence-like
policies, which is down from 87% at December 31, 1998 and 93% at December 31,
1997. Management initially establishes its best estimate of reserves based on
the underlying pricing assumptions and adjusts those estimates over time as
significant developments in the legal environment or significant changes in
expected patterns of claim
11
13
frequency and/or severity become apparent. However, the Company is continuing to
expand its operations into a number of states, and the Company expects that the
majority of the policies issued in such states will be on a claims made basis.
As a result, the Company believes that as claims made reserves continue to
comprise a greater percentage of aggregate reserves it is likely that more
frequent adjustments to aggregate reserves recorded in the financial statements
will become necessary because the reporting period for claims made policies is
shorter, which facilitates the ability of the Company to more quickly determine
ultimate losses.
On a net of reinsurance basis, the activity in the liability for unpaid losses
and LAE is summarized as follows:
Year Ended December 31,
---------------------------------------------
1999 1998 1997
----------- ----------- -----------
Balance as of January 1, net of
reinsurance recoverable .................... $ 625,864 $ 605,990 $ 573,700
Net reserves acquired in acquisition
of the Underwriter .......................... 8,286
Incurred related to:
Current year ............................ 189,000 157,952 120,496
Prior years ............................. (14,014) (2,084) 0
----------- ----------- -----------
Total incurred ............................... 174,986 155,868 120,496
----------- ----------- -----------
Paid related to:
Current year ............................ 4,589 1,328 3,930
Prior years ............................. 157,359 134,666 84,276
----------- ----------- -----------
Total paid ................................... 161,948 135,994 88,206
----------- ----------- -----------
Balance at end of period, net of
reinsurance recoverable .................... 647,188 625,864 605,990
Reinsurance recoverable ...................... 406,409 325,795 270,731
----------- ----------- -----------
Balance at end of period, gross of reinsurance $ 1,053,597 $ 951,659 $ 876,721
----------- ----------- -----------
Net loss and LAE reserves reported in accordance with statutory accounting
principles were $103.3 million and $167.8 million lower than the net loss and
LAE reserves displayed above at December 31, 1998 and 1997, respectively. The
differences relate to a 1992 contract accounted for using deposit accounting for
GAAP reporting. The Company commuted this contract on September 30, 1999, and
there was no difference at December 31, 1999 between net loss and LAE reserves
reported on a GAAP basis and those reported in accordance with statutory
accounting principles.
The following tables reflect the development of reserves for unpaid losses and
LAE, including reserves on assumed reinsurance, for the periods 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. Reserves at each calendar
year-end include the estimated unpaid liabilities for that report or accident
year and for all prior report or accident years. The section under the caption
"Liability reestimated as of" shows the originally reported reserves as adjusted
as of the end of each subsequent year to reflect the cumulative amounts paid and
all other facts and circumstances discovered during each year. The line
"Cumulative redundancy (deficiency)" reflects the difference between the latest
reestimated reserves and the reserves as originally established. The section
under the caption "Cumulative amount of liability paid through" shows the
cumulative amounts paid through each subsequent year on those claims for which
reserves were carried as of each specific year end.
The tables reflect the effect of all changes in amounts of prior periods. For
example, if a loss determined in 1995 to be $100,000 was first reserved in 1989
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1989 through 1994
shown below. The tables present development data by calendar year and do 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.
12
14
TABLE I. LOSS AND LAE RESERVES DEVELOPMENT - GROSS
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
LOSS AND LAE RESERVES $502,928 $554,076 $593,828 $629,064 $667,200 $688,455 $748,660 $795,449 $876,721 $951,659
LIABILITY REESTIMATED
AS OF:
One year later 516,113 541,778 583,133 616,042 623,988 688,455 748,660 795,654 880,543 968,173
Two years later 503,199 529,531 570,108 572,831 623,986 688,450 744,130 793,170 878,233
Three years later 495,663 516,501 532,877 572,831 623,989 689,122 739,106 772,567
Four years later 482,667 487,918 532,878 572,871 624,567 674,224 715,136
Five years later 463,784 487,921 540,067 570,424 606,219 647,203
Six years later 463,788 490,398 538,126 570,390 588,748
Seven years later 456,563 486,236 539,298 556,459
Eight years later 449,493 487,485 525,283
Nine years later 450,859 484,505
Ten years later 447,452
CUMULATIVE REDUNDANCY
(DEFICIENCY) 55,476 69,571 68,545 72,605 78,452 41,252 33,524 22,882 (1,512) (16,514)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID
THROUGH:
One year later $ 80,959 $ 67,483 $ 79,239 $ 83,837 $ 83,522 $ 98,053 $116,532 $101,217 $141,954 $164,524
Two years later 146,137 144,987 161,532 165,737 179,714 212,284 214,484 231,755 298,785
Three years later 218,676 221,931 238,998 256,860 284,828 293,323 332,920 373,232
Four years later 286,181 288,463 318,934 348,868 343,563 407,357 452,055
Five years later 335,723 339,121 389,638 395,242 436,921 492,388
Six years later 370,225 390,991 413,413 462,920 486,861
Seven years later 391,596 401,626 459,668 493,034
Eight years later 396,442 437,768 479,717
Nine years later 414,288 451,889
Ten years later 423,657
The Company experienced favorable development on gross financial statement
reserves held at each year-end in the table except 1997 and 1998, largely in
reserves first recorded in 1994 and prior years. The Company believes that this
favorable development has resulted from (i) the disciplined approach to
establishing reserves for medical malpractice insurance losses and LAE; and (ii)
the improvements made to the internal claims settlement process. These internal
claims settlement process improvements resulted from: key staffing additions,
including a new Vice President of Claims, in 1990; the building of a detailed
claims database over a 20-year period, which enables the Company's claims
professionals to better evaluate and resolve claims; the addition of staff
counsel in 1993 to defend certain malpractice cases and to control legal costs;
and the expansion and enhancement of the risk management department in 1993 to
provide support to insureds in controlling and reducing their exposure to
claims. It is not possible to quantify the impact that these changes have had on
development of loss reserves. Most of the favorable reserve development
evidenced in the table was recognized during 1993 ($13.0 million) and 1994
($43.2 million). Favorable development was recognized at that time because major
trends in loss experience were first credibly apparent then. The loss experience
in the early 1990's, to some extent resulting from the then recently introduced
internal changes discussed above, suggested that the very conservative reserving
posture maintained by the Company since its inception during the medical
malpractice crisis of the late 1970's was no longer appropriate. Earlier
projections of loss frequencies and severities no longer appeared likely, and
financial statement loss and LAE reserves were adjusted accordingly. Financial
statement loss and LAE reserves established since 1994 have been set based upon
this new understanding. Development of reserves since 1994 has primarily
consisted of: favorable adjustments pertaining to specific accident years on the
occurrence-like PPP policy book; adverse development on the Pennsylvania
physicians book; adverse development on hospital claims made reserves; and
adverse development on claims made policies written in certain expansion states.
13
15
TABLE II. LOSS AND LAE RESERVES DEVELOPMENT - NET
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
LOSS AND LAE
RESERVES-GROSS $502,928 $554,076 $593,828 $629,064 $667,200 $688,455 $748,660 $795,449 $876,721 $951,659
REINSURANCE RECOVER-
ABLE ON UNPAID LOSSES 400 1,025 8,265 3,037 62,682 112,917 165,729 221,749 270,731 325,795
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
502,528 553,051 585,563 626,027 604,518 575,538 582,931 573,700 605,990 625,864
LIABILITY REESTIMATED
AS OF:
One year later 513,096 534,087 581,453 600,655 559,518 575,538 582,931 573,700 603,906 611,850
Two year later 494,044 527,847 560,688 555,656 559,518 575,538 582,931 573,321 603,809
Three years later 491,987 512,867 521,671 555,656 559,518 575,538 580,883 588,477
Four years later 477,053 482,498 521,828 555,655 559,518 575,124 579,766
Five years later 456,696 482,658 529,008 555,656 559,133 566,608
Six years later 457,795 485,125 525,111 555,484 548,242
Seven year later 450,860 479,007 524,574 541,142
Eight years later 443,028 478,072 510,517
Nine years later 442,210 475,050
Ten years later 438,761
CUMULATIVE REDUNDANCY
(DEFICIENCY) 63,767 78,001 75,046 84,885 56,276 8,930 3,165 (14,777) 2,181 14,014
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(in thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID
THROUGH:
One year later $ 78,967 $ 67,479 $ 79,239 $ 83,212 $ 82,572 $ 97,496 $116,194 $ 84,276 $134,666 $157,359
Two years later 144,141 144,983 161,532 164,469 178,357 211,426 197,370 214,404 284,887
Three years later 216,680 221,927 238,998 255,586 283,370 278,571 315,743 365,517
Four years later 284,185 288,459 318,928 347,493 328,836 392,522 437,779
Five years later 333,727 339,111 389,579 381,408 422,194 478,731
Six years later 368,223 390,928 401,000 449,086 473,702
Seven years later 389,541 394,999 447,255 479,987
Eight years later 390,579 431,141 468,091
Nine years later 408,425 446,049
Ten years later 418,581
The aggregate excess reinsurance contracts, in place since 1993, provide
coverage above aggregate retentions for losses and ALAE occurring in 1993 and
after, other than losses and ALAE retained by Lawrenceville Property and
Casualty Company ("LP&C") and losses and ALAE retained by MIIX or reinsured
under other insignificant reinsurance contracts. LP&C's retention is $200,000
per loss. The aggregate reinsurance contracts, therefore, have the effect of
holding underwriting year net incurred losses and ALAE, other than losses and
ALAE retained by LP&C and other losses and ALAE not subject to the aggregate
excess reinsurance contracts, at a constant level as long as such losses and
ALAE ceded under the aggregate excess reinsurance contracts remain within the
coverage limits. Ceded losses and ALAE have remained within coverage limits in
each year since 1993. The adjustment to net reserves in 1999 relates to losses
and LAE not covered by the aggregate reinsurance contracts, including,
primarily, losses and ALAE for accident years 1992 and prior, losses and ALAE
for accident years 1997 and 1998 retained by LP&C, and ULAE.
General liability incurred losses have been less than 3.0% of medical
malpractice incurred losses in the last five years. The Company does not have
material reserves for pollution claims and the Company's claims experience for
pollution coverage has been negligible.
While the Company believes that its reserves for losses and LAE are adequate,
there can be no assurance that the Company's ultimate losses and LAE will not
deviate, perhaps substantially, from the estimates reflected in the Company's
financial statements. If the Company's reserves should prove inadequate, the
Company will be required to increase reserves, which could have a material
adverse effect on the Company's financial condition or results of operations.
REINSURANCE
Reinsurance Ceded. The Company follows customary industry practice by reinsuring
some of its business. The Company typically cedes to reinsurers a portion of its
risks and pays a fee based upon premiums received on all policies so subject to
such reinsurance. Insurance is ceded principally to reduce net liability on
individual risks and to provide aggregate loss and LAE protection. Although
reinsurance does not legally discharge the ceding insurer from its primary
liability for the full extent of the policies reinsured, it does make the
reinsurer liable to the insurer to the extent of the reinsurance ceded. The
Company reviews its reinsurance needs annually and makes changes in its
reinsurance arrangements as necessary. The Company determines how much
reinsurance to purchase based upon its evaluation of the risks it has insured,
consultations with its reinsurance brokers, and market conditions, including the
availability and pricing of reinsurance.
14
16
The Company reinsures its risks primarily under two reinsurance contracts, the
Specific Contract and the Aggregate Contract. During 1999, the Company's
retention for casualty business under the Specific Contract was $10 million per
loss. For medical professional liability and commercial general liability
business, coverage was provided up to $65 million per loss above the retention.
For other casualty business, coverage was provided up to $15 million per loss
above the retention. Property coverage was also provided under the Specific
Contract in the amount of $14.5 million in excess of a Company retention of
$500,000 per loss per policy. The Company retains an 8% co-participation in
covered losses. The Company has maintained specific excess of loss reinsurance
coverage generally similar to that just described for several years.
The Aggregate Contract in 1999 provided several coverages on an aggregate excess
of loss, specific excess of loss, and quota share basis. The primary coverage
afforded under the Aggregate Contract attaches above a Company retention
measured on an underwriting year basis as a 75% loss and ALAE ratio. Reinsurers
provide coverage for an additional 75% loss and ALAE ratio, with an aggregate
annual limit of $200 million. The Company has maintained aggregate excess of
loss coverage generally similar to that just described since 1993. See "Business
- -- Loss and LAE Reserves -- Table II -- Loss and LAE Reserves Development --
Net."
Each of the aggregate excess reinsurance contracts contains an adjustable
premium provision that may result in changes to ceded premium and related funds
held charges, based on loss experience under the contract. During 1999, combined
ceded losses under the aggregate excess reinsurance contracts were increased by
a net amount of $15.3 million, resulting in net additional premium charges of
$10.1 million and net additional funds held charges of $0.2 million. During
1998, combined ceded losses under the aggregate excess reinsurance contracts
were increased by a net amount of $0.3 million, resulting in net additional
premium charges of $3.3 million and net reduction in funds held charges of $1.9
million. No adjustments to ceded losses under the aggregate excess reinsurance
contracts were made during 1997. Each of the aggregate excess reinsurance
contracts also contains a profit sharing provision whereby a significant portion
of any favorable gross loss and ALAE reserve development may ultimately be
returned to the Company once all subject losses and ALAE have been paid or the
contract has been commuted. Profit sharing would be recorded by the Company
after the funds withheld balance related to an aggregate excess reinsurance
contract exceeds the related ceded reserves, after any adjustments under the
adjustable premium provisions. Profit sharing would then be recorded as an
offset to funds held charges and to the funds withheld liability. There was no
accrual of profit sharing at December 31, 1999, 1998 or 1997.
The major elements of ceded reinsurance activity are summarized in the following
table:
For the year ended December 31,
-----------------------------------------
1999 1998 1997
------- ------- -------
(in thousands)
Ceded premiums earned ...... $47,961 $36,105 $42,337
Ceded Losses and LAE ....... 96,777 62,367 68,872
Funds held charges ......... 14,338 13,420 13,361
Credit risk from reinsurance is controlled by placing the reinsurance with
large, highly rated reinsurers and by collateralizing amounts recoverable from
reinsurers. The following table identifies the Company's most significant
reinsurers, the total amount recoverable from them for unpaid losses, prepaid
reinsurance premiums and other amounts as of December 31, 1999, and collateral
held by the Company primarily in the form of funds withheld and letters of
credit as of December 31, 1999. No other single reinsurer's percentage
participation in 1999 exceeded 5% of the total reinsurance recoverable at
December 31, 1999.
At December 31, 1999
---------------------------------
Total Amounts Total Amount of
Reinsurer Recoverable Collateral Held
------------- ---------------
(In Thousands)
Hannover Reinsurance (Ireland) Ltd............................. $ 177,128 $ 174,170
Eisen und Stahl Reinsurance (Ireland) Ltd...................... 41,022 41,382
Scandinavian Reinsurance Company Ltd........................... 51,804 56,562
London Life and Casualty Reinsurance Corporation............... 64,420 65,646
Underwriters Reinsurance Company (Barbados).................... 62,588 60,283
15
17
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist it in such analysis. To date, the Company
has not experienced any material difficulties in collecting reinsurance
recoverables. No assurance can be given, however, regarding the future ability
of any of the Company's reinsurers to meet their obligations.
Reinsurance Assumed. The Company assumed reinsurance under various contracts
with assumed written premiums of $12.7 million, $1.5 million and $4.6 million in
1999, 1998 and 1997, respectively. In 1999, $12.5 million of the assumed written
premiums related to an excess of loss contract providing medical professional
liability coverage on an institutional account. In 1998, the assumed written
premiums primarily related to medical professional liability coverage provided
to AMM under a quota share contract and two excess of loss contracts. In 1997,
$10.9 million of assumed written premium related to a novation agreement
pertaining to certain policies written for a large hospital group during 1989
through 1997. Existing ceded reinsurance agreements with the hospital group's
captive insurer covering the novated business remain in effect following the
novation. Other assumed written premiums in 1997 related primarily to the
reinsurance contract with AMM as well as a quota share reinsurance contract with
a large reinsurer covering casualty facultative business.
The Company believes that as more managed care organizations and integrated
health care delivery systems retain a larger part of their exposure directly or
through captive arrangements, they will need to obtain excess insurance or
reinsurance for the potentially larger losses, and the Company believes that it
is prepared to meet this need through assumed reinsurance arrangements.
INVESTMENT PORTFOLIO
An important component of the operating results of the Company has been the
return on its invested assets. Such investments are made by investment managers
and internal management under policies established at the direction of the
Company's Board of Directors. The Company's current investment policy has placed
primary emphasis on investment grade, fixed maturity securities and maximization
of after-tax yields while minimizing credit risks of the portfolio. The Company
currently uses two outside investment managers for fixed maturity securities. At
December 31, 1999 and 1998, the average credit quality of the fixed income
portfolio was AA-.
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated. All of the fixed maturity investments are
held as available-for-sale.
December 31, 1999 December 31, 1998
-------------------------- ---------------------------
Cost or Cost or
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies.................................. $ 107,044 $ 101,493 $ 119,083 $ 123,264
Obligations of states and political
subdivisions.............................. 162,078 155,193 176,798 185,216
Foreign securities - U.S. dollar
denominated............................... 35,619 34,145 15,694 15,128
Corporate securities........................ 350,897 332,141 322,477 324,330
Mortgage-backed and other asset-backed
securities................................ 476,293 454,834 407,140 409,801
---------- ---------- ---------- ----------
Total Fixed Maturity Investments............ 1,131,931 1,077,806 1,041,192 1,057,739
Equity Investments.......................... 13,169 12,394 3,159 3,159
Short Term.................................. 92,743 92,743 104,800 104,800
---------- ---------- ---------- ----------
Total investments........................ $1,237,843 $1,182,943 $1,149,151 $1,165,698
========== ========== ========== ==========
The investment portfolio of fixed maturity investments consists primarily of
intermediate-term, investment-grade securities along with a modest allocation to
below investment-grade (i.e. high yield) fixed maturity investments not to
exceed 7.5% of invested assets. The Company's investment policy provides that
all security purchases be limited to rated securities or unrated securities
approved by the Investment Committee.
The table below contains additional information concerning the investment
ratings of the fixed maturity investments at December 31, 1999:
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Percentage of
S&P Rating of Investment (1) Amortized Cost Fair Value Fair Value
- -------------------------------------------- -------------- ----------- -------------
(in thousands)
AAA (including U.S. Government and Agencies) $ 619,073 $ 593,966 55.1%
AA ......................................... 83,558 78,617 7.3%
A .......................................... 242,543 227,136 21.1%
BBB ........................................ 123,737 120,057 11.1%
Other Ratings (below investment grade) ..... 63,020 58,030 5.4%
Not Rated .................................. 0 0 0.0
---------- ---------- ------
Total ................................... $1,131,931 $1,077,806 100.0%
========== ========== ======
(1) The ratings set forth above are based on the ratings, if any, assigned
by Standard & Poor's Rating Services ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by another nationally
recognized ratings agency were used.
The following table sets forth certain information concerning the maturities of
fixed maturity investments in the investment portfolio as of December 31, 1999
by contractual maturity:
Percentage of
Maturity of Investment Amortized Cost Fair Value Fair Value
- ---------------------- -------------- ------------ -------------
(in thousands)
Due one year or less .............................. $ 21,394 $ 21,374 2.0%
Due after one year through five years ............. $ 103,736 $ 100,527 9.3%
Due after five years through ten years ............ $ 225,811 $ 214,376 20.0%
Due after ten years ............................... $ 304,698 $ 286,695 26.5%
Mortgage-backed and other asset-backed securities . $ 476,292 $ 454,834 42.2%
---------- ---------- ------
Total .................................... $1,131,931 $1,077,806 100.0%
========== ========== ======
The average effective maturity and the effective duration of the securities in
the fixed maturity portfolio (excluding short-term investments) as of December
31, 1999, was 7.90 years and 5.57 years, respectively.
The mortgage-backed portfolio represents approximately 28% of the total fixed
income portfolio, and is allocated equally across "standard" and "more complex"
securities, while the asset-backed portfolio represents approximately 14% of the
total fixed income portfolio.
Standard mortgage-backed securities are issued on and collateralized by an
underlying pool of single-family home mortgages. Principal and interest payments
from the underlying pool are distributed pro rata to the security holders. More
complex mortgage-backed security structures prioritize the distribution of
interest and principal payments to different classes of securities which are
backed by the same underlying collateral mortgages.
COMPETITION
The physician professional liability insurance market in the United States is
highly competitive. According to A.M. Best, in 1998 there were 279 companies
nationally that wrote medical professional liability insurance. In New Jersey,
where approximately 53% of the Company's 1999 premiums were written for the year
ended December 31, 1999, the Company's principal competitor is Princeton
Insurance Companies. In New Jersey and other states, the Company's principal
competitors include CNA Insurance Group, PHICO Insurance Company and St. Paul
Companies. Substantially all of these companies rank among the top 20 medical
malpractice insurers nationally and are actively engaged in soliciting insureds
in the states in which the Company writes insurance. In addition, as the Company
expands into new states, it may face strong competition from local carriers that
are closely focused on narrow geographic markets. The Company expects to
encounter such competition from doctor-owned insurance companies and commercial
companies in other states as it carries out its expansion plans. Many of the
Company's current and potential competitors have greater financial resources
than the Company and may seek to acquire market share by decreasing pricing for
their products below prevailing market rates, thereby reducing profitability.
The Company believes that several insurance companies possessing greater
financial resources than the Company are writing medical malpractice insurance
in New Jersey and Pennsylvania that provides the same coverage as the Company's
products at prices much lower than the Company's
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prices. This price competition could have a material adverse effect on the
Company's financial condition and results of operations. The Company believes
that the principal competitive factors, in addition to pricing, include
financial stability and A.M. Best ratings, breadth and flexibility of coverage,
and the quality and level of services provided.
The hospital professional liability insurance market is also extremely
competitive. Most of the Company's principal insurance company competitors for
physicians and medical groups also now actively compete in the hospital
professional liability insurance market. Moreover, the Company's primary
competitor in New Jersey was founded to provide professional liability coverage
to hospitals, while the Company traditionally served the individual physician
market. The Company also believes that the number of health care entities that
insure their affiliated physicians through self-insurance may rise.
The Company plans to compete by diversifying its products, expanding
geographically, extending its distribution channels, and differentiating itself
through superior claims, risk management, and customer services. All markets in
which the Company now writes insurance and in which it expects to enter have
certain competitors with substantially greater financial and operating resources
than the Company.
REGULATION
MIIX, LP&C and MIIX New York are each subject to supervisory regulation by their
respective states of incorporation, commonly called the state of domicile.
Lawrenceville Re., Ltd. (Lawrenceville Re) is subject to laws governed by the
Bermuda Registrar of Companies. MIIX is domiciled in New Jersey, LP&C is
domiciled in Virginia, MIIX New York is domiciled in New York and Lawrenceville
Re is domiciled in Bermuda. Therefore, the laws and regulations of these states,
and those of Bermuda, including the tort liability laws and the laws relating to
professional liability exposures and reports, have the most significant impact
on the operations of the combined company.
Holding Company Regulation. As part of a holding company system, MIIX, LP&C and
MIIX New York are subject to the Insurance Holding Company Systems Acts (the
"Holding Company Act") of their domiciliary states. The Holding Company Act
requires the domestic company to file information periodically with the state
insurance department and other state regulatory authorities, including
information relating to its capital structure, ownership, financial condition
and general business operations. Certain transactions between an insurance
company and its affiliates, including sales, loans or investments, are deemed
"material" and require prior approval by New Jersey, Virginia and/or New York
insurance regulators. In New Jersey and Virginia, transactions 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
capital and surplus, whichever is lesser, require prior approval. In New York,
such transactions which within any 12 month period aggregate to more than 1% of
the insurance company's admitted assets as of the end of such company's last
fiscal year require the prior approval of the New York Insurance Department.
Prior approval is also required for all management agreements, service
contracts, and cost-sharing arrangements between affiliates. Certain reinsurance
agreements or modifications also require prior approval.
Certain other material transactions, not involving affiliates, must be reported
to the domiciliary regulatory agency within 15 days after the end of the
calendar month in which the transaction occurred (in contrast to prior
approval). These transactions include acquisitions and dispositions of assets
that are nonrecurring, are not in the ordinary course of business, and exceed 5%
of the Company's admitted assets. Similarly, nonrenewals, cancellations, or
revisions of ceded reinsurance agreements, which affect statutorily established
percentages of the Company's business, are also subject to disclosure.
The Holding Company Act also provides that the acquisition or change of
"control" of a domestic insurance company or of any person or entity that
controls such an insurance company cannot be consummated without prior
regulatory approval. In general, a presumption of "control" arises from the
ownership of voting securities and securities that are convertible into voting
securities, which in the aggregate constitute 10% or more of the voting
securities of the insurance company or of a person or entity that controls the
insurance company, such as The MIIX Group. A
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person or entity seeking to acquire "control," directly or indirectly, of the
Company would generally be required to file an application for change of control
containing certain information required by statute and published regulations and
provide a copy of the application to the Company. The Holding Company Act also
effectively restricts the Company from consummating certain reorganizations or
mergers without prior regulatory approval.
Regulation of Dividends from Insurance Subsidiaries. The Holding Company Act of
the State of New Jersey will limit the ability of MIIX to pay dividends to The
MIIX Group. Without prior notice to and approval of the Commissioner, MIIX 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
greater of such subsidiary's statutory net income, excluding realized capital
gains, of the preceding calendar year or 10% of statutory surplus as of the
preceding December 31. The law further requires that an insurer's statutory
surplus following a dividend or other distribution be reasonable in relation to
its outstanding liabilities and adequate to meet its financial needs. New Jersey
permits the payment of dividends only out of statutory earned (unassigned)
surplus unless the payment out of other funds is approved by the Commissioner.
In addition, a New Jersey insurance company is required to give the New Jersey
Department notice of any dividend after declaration, but prior to payment.
The other United States domiciled Insurance Subsidiaries will be subject to
similar provisions and restrictions under the Holding Company Acts of other
states. Lawrenceville Re is subject to restrictions imposed by the Bermuda
Registrar of Companies.
Insurance Company Regulation. The Company is subject to the insurance laws and
regulations in each state in which it is licensed to do business. The Company is
licensed in 32 states and the District of Columbia. In one such state, the
license currently does not include the authority to write medical malpractice
insurance. The extent of regulation varies by state, but such regulation usually
includes: (i) regulating premium rates and policy forms; (ii) setting minimum
capital and surplus requirements; (iii) regulating guaranty fund assessments;
(iv) licensing companies and agents; (v) approving accounting methods and
methods of setting statutory loss and expense reserves; (vi) setting
requirements for and limiting the types and amounts of investments; (vii)
establishing requirements for the filing of annual statements and other
financial reports; (viii) conducting periodic statutory examinations of the
affairs of insurance companies; (ix) approving proposed changes of control; and
(x) limiting the amounts of dividends that may be paid without prior regulatory
approval. Such regulation and supervision are primarily for the benefit and
protection of policyholders and not for the benefit of investors.
Insurance Guaranty Associations. Most states, including New Jersey, Virginia and
New York require admitted property and casualty insurers to become members of
insolvency funds or associations that generally protect policyholders against
the insolvency of such insurers. Members of the fund or association must
contribute to the payment of certain claims made against insolvent insurers.
Maximum contributions required by law in any one year vary by state, and are
usually between 1% and 2% of annual premiums written by a member in that state
during the preceding year. New Jersey and Virginia, the states in which MIIX and
LP&C are respectively domiciled, and Texas, Pennsylvania, Maryland and Kentucky,
states in which the Company has significant business, permit a maximum
assessment of 2%. Ohio permits a maximum assessment of 1.5%. New York requires
contributions of 1/2 of 1% of annual premiums written during the preceding year
until such time that the fund reaches a minimum amount set by New York.
Contributions can be increased if the fund falls below the minimum. New York law
does not establish a maximum assessment amount. New Jersey permits recoupment of
guaranty fund payments through future policy surcharges. Virginia and Texas
permit premium tax reductions as a means of recouping guaranty fund payments.
Most other states permit recoupment through future rate increases.
Examination of Insurance Companies. Every insurance company is subject to a
periodic financial examination under the authority of the insurance commissioner
of its state of domicile. Any other state interested in participating in a
periodic examination may do so. The last completed periodic financial
examination of the Exchange, based on December 31, 1996 financial statements,
was completed on November 24, 1999, and a report was issued on December 1, 1999.
The last periodic financial examination of LP&C, based on December 31, 1996
financial statements, was completed on April 25, 1997, and a report was issued
on August 4, 1997. LP&C is
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currently scheduled to commence its latest periodic examination in April, 2000.
Various states also conduct "market conduct examinations" which are unscheduled
examinations designed to monitor the compliance with state laws and regulations
concerning the filing of rates and forms and company operations in general. The
Company has not undergone a market conduct examination.
Risk-Based Capital. In addition to state-imposed insurance laws and regulations,
insurers are subject to the general statutory accounting practices and the
reporting format of the National Association of Insurance Commissioners (the
"NAIC"). The NAIC's methodology for assessing the adequacy of statutory surplus
of property and casualty insurers includes a risk-based capital ("RBC") formula
that attempts to measure statutory capital and surplus needs based on the risks
in a company's mix of products and investment portfolio. The formula is designed
to allow state insurance regulators to identify potentially under-capitalized
companies. Under the formula, a company determines its RBC by taking into
account certain risks related to the insurer's assets (including risks related
to its investment portfolio and ceded reinsurance) and the insurer's liabilities
(including underwriting risks related to the nature and experience of its
insurance business). The RBC rules provide for different levels of regulatory
attention depending on the ratio of an insurance company's total adjusted
capital to its "authorized control level" of RBC. At December 31, 1999, MIIX's
RBC was 2.45 times greater than the threshold requiring the least regulatory
attention. At December 31, 1999 LP&C's RBC was 11.09 times greater than the
threshold requiring the least regulatory attention. MIIX New York did not write
any premium during 1999, and therefore the RBC ratio is not meaningful for that
period.
NAIC-IRIS Ratios. The NAIC Insurance Regulatory Information System ("IRIS") was
developed by a committee of state insurance regulators and is primarily intended
to assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 12 ratios for the property and casualty
insurance industry and specifies a range of "usual values" for each ratio.
Departure from the "usual value" range on four or more ratios may lead to
increased regulatory oversight from individual state insurance commissioners. In
1999 MIIX's ratios were all within the usual range. In 1998 the Exchange had one
ratio (change in net writings) slightly outside the usual range as a result of
growth in business presented by opportunities in a dynamic marketplace. In 1999,
LP&C had two ratios (two-year overall operating ratio and change in
policyholders' surplus) outside the usual range, in 1998 LP&C had two ratios
(change in net writings and two-year overall operating ratio) and in 1997 LP&C
had two ratios (change in net writings and change in surplus). These ratios
reflect the increase in premiums written during the early years of operation,
capital contributions by MIIX and the high cost of expanding LP&C's business, as
LP&C was acquired in 1996 and had no business at that time. IRIS ratio results
for MIIX New York are not applicable due to no business written in this company
in 1999.
Regulation of Investments. The Insurance Subsidiaries are subject to state laws
and regulations that require diversification of their investment portfolios and
limit the amount of investments in certain investment categories such as below
investment grade fixed income securities, real estate and equity investments.
Failure to comply with these laws and regulations would cause investments
exceeding regulatory limitations to be treated as non-admitted assets for
purposes of measuring statutory surplus and, in some instances, would require
divestiture of such non-qualifying investments over specified time periods
unless otherwise permitted by the state insurance authority under certain
conditions. The Company did not have any non-qualifying investments in 1999.
Prior Approval of Rates and Policies. Pursuant to the New Jersey Insurance Code,
a domestic insurer must submit policies and endorsements to the Commissioner for
prior approval, but rating plans and rates are not subject to review until 30
days after use. Virginia law requires LP&C to submit rating plans, rates,
policies, and endorsements to regulators for prior approval. The possibility
exists that the Company may be unable to implement desired rates, policies,
endorsements, forms, or manuals if such items are not approved by the applicable
regulatory authorities. In the past, substantially all of the Company's rate
applications have been approved in the normal course of review. In most other
states, policy forms usually are subject to prior approval by the regulatory
agency while rates usually are "file and use." Unlike most other states, New
York's Insurance Department sets the rates for medical malpractice coverage on
an annual basis.
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Medical Malpractice Tort Reform. Major revisions to New Jersey's statutory
scheme governing medical malpractice took effect in 1995. These revisions
included raising joint and several liability standards, requiring certificates
of merit, eliminating strict liability of health care providers due to defective
products used in their practices, and capping punitive damages at the greater of
five times compensatory damages or $350,000. The Company believes that these
changes are bringing stability to the medical malpractice insurance business in
New Jersey by making it more feasible for insurers to assess certain risks.
Legislation passed in 1996 in Pennsylvania provides, among other things, that
plaintiffs must prove causation in informed consent cases, that punitive damages
assessed against individual defendants be capped at twice the compensatory
damages, and that the Pennsylvania Medical Professional Liability Catastrophe
Loss Fund (the "Cat Fund") be responsible for delay damages and post-judgment
interest. Texas tort reform applicable to cases accruing on or after September
1, 1996, bars plaintiffs from recovery if their own negligence is more than 50%
responsible for their injuries, while defendants shall generally be jointly and
severally liable only if found to be more than 50% responsible. Exemplary
damages shall not exceed the greater of $200,000, or two times the economic
damage plus the non-economic damage, not to exceed $750,000.
Medical Malpractice Reports. The Company principally writes medical malpractice
insurance and additional requirements are placed upon them to report detailed
information with regard to settlements or judgments against their insureds. In
addition, the Company is required to report to state regulatory agencies and/or
the National Practitioner Data Bank, payments, claims closed without payments,
and actions by the Company, such as terminations or surcharges, with respect to
its insureds. Penalties may attach if the Company fails to report to either the
state agency or the National Practitioner Data Bank.
Catastrophe Funds. In two states in which the Company writes insurance, its
liability is capped at a level below the Company's typical policyholder limits
of coverage. Pennsylvania's Cat Fund provides coverage for medical malpractice
claims exceeding $400,000 per claim for physicians and hospitals and $1.2
million and $2.0 million aggregate per year for physicians and hospitals,
respectively. The Cat Fund coverage is limited to $800,000 per claim and $2.4
million in the aggregate. Similarly, effective July 1, 1999 physicians in
Indiana are required to purchase insurance limits of $250,000 per claim and
$750,000 in the aggregate. Effective July 1, 1999 the Indiana Patient
Compensation Fund provides an additional $1 million of coverage per claim for an
insured. A plaintiff's maximum total recovery for medical malpractice occurring
after June 30, 1999 causing injury or death is $1.25 million in Indiana.
A.M. BEST RATINGS
In 1999, A.M. Best, which rates insurance companies based on factors of concern
to policyholders, rated the Company "A (Excellent)" for the fifth consecutive
year and reaffirmed the rating in November of 1999. This is the third highest
rating of 16 ratings that A.M. Best assigns. The Company earned its first
rating, a "B+," in 1992 and achieved an "A" rating by 1995.
A.M. Best publications indicate that the "A" rating is assigned to those
companies that in A.M. Best's opinion have a strong ability to meet their
obligations to policyholders over a long period of time. In evaluating a
company's financial and operating performance, A.M. Best reviews the company's
profitability, leverage, and liquidity; its book of business; the adequacy and
soundness of its reinsurance; the quality and estimated market value of its
assets; the adequacy of its loss reserves and surplus; its capital structure;
the experience and competence of its management; and its market presence.
EMPLOYEES
The Company employs approximately 235 persons. None of the Company's employees
are covered by a collective bargaining agreement. The Company believes that its
relations with its employees are good.
ITEM 2. PROPERTIES
The Company leases 49,000 square feet of space from the Medical Society of New
Jersey in Lawrenceville, New Jersey, where its home office and Mid-Atlantic
Region office are located. The Company also leases 28,000 square feet of space
in a second Lawrenceville office building, where its claim department and a
subsidiary are
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based. The Company's regional office facilities are located in rented office
space in Indianapolis (5,000 square feet) and Dallas (5,000 square feet). The
Company believes that its office space is adequate for its present needs and
that it will be able to secure additional office space in the future if
necessary.
ITEM 3. LEGAL PROCEEDINGS
ACTIONS OPPOSING THE PLAN OF REORGANIZATION
Prior to the reorganization of the Company, three physician members of the
Exchange (the "appellants") filed an appeal in the New Jersey Superior Court,
Appellate Division, challenging the Commissioner of Banking and Insurance's
Order approving the Plan of Reorganization. The principal arguments raised by
the appellants were that: (1) the pro rata, three-year look-back allocation of
stock was unfair to long-time members; (2) the Commissioner lacked statutory
authority to approve the reorganization because there is no statute specifically
authorizing the conversion of a reciprocal exchange to a stock company; and (3)
there was insufficient advance notice of the public hearing on the Plan. During
the pendency of the appeal, the appellants made a total of six applications to
the New Jersey Department of Banking and Insurance, the New Jersey Superior
Court, Appellate Division and the New Jersey Supreme Court seeking to stay the
reorganization and/or the initial public offering of MIIX Group stock. All of
these applications were denied. On February 14, 2000, the New Jersey Superior
Court, Appellate Division issued an Opinion that rejected the appellants'
challenge to the Commissioner's Order approving the Plan of Reorganization. The
appellants have filed a petition for review of the Appellate Division decision
with the New Jersey Supreme Court. The Company plans to vigorously oppose the
petition.
In January 1999, five physician members of the Exchange filed a putative class
action against the Exchange, Underwriter, MIIX Group, certain of their officers
and the board of the Exchange. Other parties were subsequently added as
defendants in the action. Among other things, plaintiffs sought to force the
Exchange to declare a dividend from surplus and reserves, challenge various
components of the reorganization including, but not limited to, the stock
allocation formula contained in the Plan of Reorganization and the valuation of
Underwriter, challenge the composition of the Board of Directors of MIIX Group
as excessive, challenge key executive compensation and benefit packages as
excessive, challenge the proposed IPO share price of MIIX Group stock as
inadequate, challenge the MIIX Prospectus as misleading and to recover
unspecified monetary damages. While the action was pending, the plaintiffs also
sought on numerous occasions to stay the members' vote on the Plan of
Reorganization and the IPO of MIIX Group stock. All of those applications were
denied. In August 1999, the trial court dismissed all of plaintiffs' claims on
the grounds that the court lacked jurisdiction to hear them because they were
part of the appeal of the Commissioner's Order and/or because they failed to
state a legal claim. Plaintiffs have filed a Notice of Appeal with the New
Jersey Superior Court, Appellate Division seeking review of the trial court's
orders dismissing the Complaint and denying plaintiffs' applications for
injunctive relief. The Company plans to vigorously oppose the appeal.
The Company may be a party to litigation from time to time in the ordinary
course of business. Management believes that the Company is not currently a
party to any litigation which may have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock became publicly tradeable on the NYSE on July 30,
1999 under the symbol of "MHU." The following table shows the price ranges per
share in each quarter since that date:
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High Low
1999
----
Third Quarter (since July 31) $18.31 $14.19
Fourth Quarter $17.00 $11.69
2000
----
First Quarter (January 1-March 22) $14.125 $11.00
On March 22, 2000, the closing price of the Company's stock was $12.125.
STOCKHOLDERS OF RECORD
The approximate number of shareholders of record of the Company's Common Stock
as of March 22, 2000 was 7,537. That number excludes the beneficial owners of
shares held "in street" names or held through participants in depositories.
DIVIDENDS
The MIIX Group, Incorporated's Board of Director's (the "Board") declared a cash
dividend of $.05 per share on its common stock each quarter of 1999, since July
30, 1999. On February 16, 2000, the Board declared a $.05 quarterly dividend
payable on March 31, 2000 to shareholders of record on March 15, 2000. The
Company expects to continue the payment of quarterly dividends to its
shareholders. The continued payment and amount of cash dividends will depend
upon, among other factors, the Company's operating results, overall financial
condition, capital requirements and general business conditions.
The MIIX Group, Incorporated is a holding company largely dependent upon
dividends from its subsidiaries to pay dividends to its shareholders. The
insurance company subsidiaries are subject to state laws and regulations that
restrict their ability to pay dividends. MIIX Insurance Company, The MIIX
Group's principal insurance subsidiary, may pay dividends to the MIIX Group in
any year, without regulatory approval, to the extent such dividends do not
exceed the greater of statutory net income, excluding realized capital gains, of
the preceding calendar year or 10% of statutory surplus at the end of the
preceding year. In 1999 the MIIX Insurance Company could have paid dividends to
the MIIX Group of approximately $25.3 million without the prior approval of the
New Jersey Insurance Commissioner. See Note 9 of the Notes to Consolidated
Financial Statements and "Business Regulation Regulation of Dividends from
Insurance Subsidiaries."
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth selected consolidated financial and operating
data for the Company. The income statement data set forth below for each of the
five years in the period ended December 31, 1999 and the balance sheet data as
of December 31, 1999, 1998, 1997 and 1996 are derived from the consolidated
financial statements of the Company audited by Ernst & Young LLP, independent
auditors. The balance sheet data as of December 31, 1995 is derived from
unaudited consolidated financial statements of the Company which management
believes incorporate all of the adjustments necessary for the fair presentation
of the financial condition as of such date. All selected financial data are
presented in accordance with GAAP, except for the item entitled "statutory
surplus," which is presented in accordance with Statutory Accounting Principles
("SAP"). The statutory surplus amounts are derived from the audited statutory
financial statements of the Company and, in the opinion of management, fairly
reflect the specified data for the periods presented. The information set forth
below should be read in conjunction with, and is qualified by reference to, the
Company's financial statements and related notes thereto included elsewhere
herein.
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(in thousands, except per share amounts)
For the Year Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- -----------
INCOME STATEMENT DATA:
Total premiums written ............. $ 257,100 $ 231,858 $ 177,908 $ 146,768 $ 138,066
========= ========== =========== ========== ===========
Net premiums earned ............... $ 187,845 $ 162,501 $ 123,330 $ 107,887 $ 105,256
Net investment income ............. 75,661 65,107 53,892 49,135 51,896
Realized investment gains (losses) (6,770) 36,390 10,296 5,832 13,149
Other revenue ..................... 8,323 891 2,884 3,164 2,807
--------- ---------- ---------- ---------- -----------
Total revenues ................ 265,059 264,889 190,402 166,018 173,108
--------- ---------- ---------- ---------- -----------
Losses and loss adjustment expenses .. 174,986 155,868 120,496 110,593 107,889
Underwriting expenses ................ 42,618 42,063 25,415 17,553 14,743
Funds held charges ................... 14,338 13,420 13,361 10,273 6,996
Other expenses ....................... 3,333 0 0 0 0
Restructuring charge ................. 2,409 0 0 0 0
Impairment of capitalized system
development costs .................. 0 12,656 0 0 0
---------- ----------- ----------- ----------- -----------
Total expenses ................ 237,684 224,007 159,272 138,419 129,628
---------- ----------- ----------- ----------- -----------
Income before income taxes ........... 27,375 40,882 31,130 27,599 43,480
Income tax expense ................... 6,617 11,154 2,006 10,004 11,402
---------- ----------- ----------- ----------- -----------
Net income .................... $ 20,758 $ 29,728 $ 29,124 $ 17,595 $ 32,078
========== =========== =========== =========== ===========
BALANCE SHEET DATA (AT END OF PERIOD):
Total investments ................. $1,182,943 $ 1,165,698 $ 1,026,971 $ 916,330 $ 895,146
Total assets ...................... 1,837,158 1,674,262 1,446,559 1,295,441 1,173,681
Total liabilities ................. 1,518,454 1,351,419 1,136,585 1,033,129 919,050
Total stockholders' equity ........ 318,704 322,843 309,974 262,312 254,631
ADDITIONAL DATA:
GAAP ratios:
Loss ratio ........................ 93.1% 95.9% 97.7% 102.5% 102.5%
Expense ratio ..................... 22.7% 25.9% 20.6% 16.3% 14.0%
----------- ----------- ----------- ----------- -----------
Combined ratio .................... 115.8% 121.8% 118.3% 118.8% 116.5%
=========== =========== =========== =========== ===========
Statutory surplus .................... $ 268,445 $ 253,166 $ 242,395 $ 208,478 $ 184,651
=========== =========== =========== =========== ===========
Basic earnings per share (1).......... $ 1.54 $ 2.47 $ 2.42 $ 1.46 $ 2.67
=========== ========== =========== =========== ===========
Diluted earnings per share (1) ....... $ 1.53 $ 2.47 $ 2.42 $ 1.46 $ 2.67
=========== ========== =========== =========== ===========
Dividend per share ................... $ .10 $ 0 $ 0 $ 0 $ 0
=========== ========== =========== =========== ===========
Book value per share (1).............. $ 20.94 $ 26.90 $ 25.78 $ 21.81 $ 15.36
=========== ========== =========== =========== ===========
(1) Basic earnings per share of common stock for the year ended December 31,
1999 is computed using the weighted average number of common shares
outstanding during the year of 13,497,110. Diluted earnings per share of
common stock for the year ended December 31, 1999 is computed using the
weighted average number of common shares outstanding during the year of
13,534,052. Basic and diluted earnings per share for the years ended
December 31, 1998 and prior gives effect to the issuance of approximately
12,025,000 shares of Common Stock to Distributees in the Company's
reorganization consummated on August 4, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and the related notes thereto appearing elsewhere in this
Annual Report. The consolidated financial statements for 1999 include the
accounts and operations of The MIIX Group, Incorporated ("The MIIX Group") and
its wholly-owned subsidiaries, including, since August 4, 1999, New Jersey State
Medical Underwriters, Inc. and its wholly-owned subsidiaries ("the
Underwriter"). The consolidated financial statements for 1999 prior to August 4,
1999, and for 1998 and 1997, include the accounts and operations of the former
parent company Medical Inter-Insurance Exchange (the "Exchange") and its
wholly-owned subsidiaries.
OVERVIEW
REORGANIZATION AND INITIAL PUBLIC OFFERING
On August 4, 1999, the reorganization of the Exchange was consummated. The
reorganization was conducted according to a Plan of Reorganization adopted by
the Board of Governors of the Exchange on October 15, 1997 and approved by
members of the Exchange at a special meeting held on March 17, 1999 and by the
Commissioner of the New Jersey Department of Banking and Insurance ("the
Commissioner"). The Plan of Reorganization included several key components,
including: formation of The MIIX Group to be the ultimate parent company for the
Company; the transfer of assets and liabilities held by the Exchange to an
affiliated stock insurance company, MIIX Insurance Company, formed for that
purpose; acquisition of the Underwriter; distribution of shares of The MIIX
Group common stock and/or cash to current and former members of the Exchange
("distributees") as defined in the Plan
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of Reorganization; and dissolution of the Exchange. In connection with the
reorganization, 11,854,033 shares of The MIIX Group common stock were issued to
distributees and 814,815 shares were issued to the Medical Society of New
Jersey, plus $100,000 in cash, in exchange for all common stock of the
Underwriter.
The Plan has been challenged in two court actions. On February 14, 2000, the
Appellate Division of the Superior Court of New Jersey affirmed the
Commissioner's order approving the Plan of Reorganization, rejecting all of
appellants' contentions, in response to an appeal filed by three individual
insureds challenging the Commissioner's order. Appellants are now seeking review
of the Appellate Court's decision by the New Jersey Supreme Court. A second
court action challenging certain aspects of the Plan of Reorganization and
seeking damages and injunctive relief that was filed by five individual insureds
in January 1999 was dismissed by the trial court in August 1999 and is now on
appeal. The Company intends to continue vigorously defending against these
actions.
The MIIX Group sold three million shares of its common stock in an underwritten
public offering ("the Offering") that closed on August 4, 1999. On August 11,
1999 an additional 450,000 shares were sold to underwriters of the Offering
pursuant to an over-allotment option in the Offering underwriting agreement. The
net proceeds of the Offering of approximately $37.3 million consisted of gross
proceeds of $46.5 million less reorganization and offering costs of $9.2 million
and have been used for general corporate purposes, including payment of
dividends and the repurchase of shares under a stock buyback program. During
August 1999, the Company approved a stock repurchase program authorizing the
purchase of up to one million shares of common stock in the open market. During
November 1999, the program was amended, authorizing the purchase of up to an
additional two million shares. Through December 31, 1999, 1,236,809 shares had
been repurchased at a total cost of $19.2 million.
GENERAL
The medical malpractice industry is cyclical in nature. Many factors influence
the financial results of the medical malpractice industry, several of which are
beyond the control of the Company. These factors include, among other things,
changes in severity and frequency of claims; changes in applicable law;
regulatory reform; and changes in inflation, interest rates and general economic
conditions.
The availability of medical malpractice insurance, or the industry's
underwriting capacity, is determined principally by the industry's level of
capitalization, historical underwriting results, returns on investments and
perceived premium rate adequacy.
Management periodically reviews the Company's guidelines for premiums,
surcharges, discounts, cancellations and non-renewals and other related matters.
As part of this review, rates and rating classifications for its physicians,
medical groups and other insureds are evaluated based on current and historical
losses, LAE and other actuarially significant data. The process may result in
changes in rates for certain exposure classes.
LOSS AND LAE RESERVES
The determination of loss and loss adjustment expense ("LAE") reserves involves
the projection of ultimate losses through an actuarial analysis of the claims
history of the Company and other professional liability insurers, subject to
adjustments deemed appropriate by the Company due to changing circumstances.
Management relies primarily on such historical 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 have been
and may continue to be revised. The Company increased prior year gross reserves
by $16.5 million and $3.8 million in 1999 and 1998 respectively. No adjustments
to prior year gross reserves were made during 1997.
The Company offered traditional occurrence coverage from 1977 through 1986 and
has offered a form of occurrence-like coverage, "modified claims made," from
1987 to the present. Occurrence and modified claims made coverages have
constituted the majority of the Company's business throughout its history. In
recent years, however, the Company has increased its claims made business.
Development of losses and LAE is longer and slower for occurrence business than
claims made business.
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Management believes the extent and, particularly, the frequency of reserve
adjustments may increase in the future in response to the Company's expansion
into new states and the increasing proportion of claims made insurance coverage
being provided in those new markets. There are significant uncertainties in
estimating losses and LAE in the casualty insurance business and these
uncertainties are increased in periods when a company is expanding into new
markets with new distribution channels. In addition, the shorter reporting
period for claims made policies should allow the Company to more quickly
determine ultimate losses on this business. Gross loss and LAE reserves on
claims made policies amounted to $185.5 million, or 17.6% of total gross loss
and LAE reserves at December 31, 1999, compared to gross loss and LAE reserves
on claims made policies of $104.8 million, or 11.0% of total gross loss and LAE
reserves at December 31, 1998.
Reserves for incurred but not reported claims ("IBNR reserves") have
consistently represented the majority of total loss and LAE reserves held by the
Company. At December 31, 1999 and 1998, gross IBNR reserves composed 60.8% and
65.6%, respectively, of total gross loss and LAE reserves. The decrease in the
proportion of IBNR in 1999 is primarily the result of additional claims made
basis reserves, which develop more quickly from IBNR reserves into reported case
reserves than the Company's occurrence basis loss and LAE reserves.
REINSURANCE
The Company reinsures its risks primarily under two reinsurance contracts, a
specific excess of loss contract ("Specific Contract") and an aggregate excess
of loss contract ("Aggregate Contract"). During 1999, the Company's retention
for casualty business under the Specific Contract was $10 million per loss. For
medical professional liability and commercial general liability business,
coverage was provided up to $65 million per loss above the retention. For other
casualty business, coverage was provided up to $15 million per loss above the
retention. Property coverage was also provided under the Specific Contract in
the amount of $14.5 million in excess of a Company retention of $500,000 per
policy. The Company retains an 8% co-participation in covered losses. The
Company has maintained specific excess of loss reinsurance coverage generally
similar to that described for several years.
The Aggregate Contract in 1999 provided several coverages on an aggregate excess
of loss, specific excess of loss, and quota share basis. The primary coverage
afforded under the Aggregate Contract attaches above a Company retention
measured as a 75% loss and allocated loss adjustment expense ratio ("loss and
ALAE ratio"). Reinsurers provide coverage for an additional 75% loss and ALAE
ratio, with an aggregate annual limit of $200 million. The Company has
maintained aggregate excess of loss coverage generally similar to that described
since 1993.
The Company's aggregate reinsurance contracts are maintained on a funds withheld
basis whereby the Company holds the ceded premiums in a funds withheld account
for the purpose of paying losses and related loss adjustment expenses. Interest
charges are credited on funds withheld at predetermined contractual rates.
UNDERWRITING EXPENSES
The Company's expansion into new states has increased certain underwriting
expenses. The Company believes that its plan of expansion through broker and
agent distribution channels will increase its marketing expenses, but it also
believes that these relationships will reduce the need to make other significant
distribution and administrative expenditures. Commissions for policies sold
through brokers and agents typically range from 2.0% to 12.5% of premiums,
whereas the Company does not incur commissions on products it sells directly. To
the extent that brokered business represents an increased percentage of the
Company's business in the future, expense ratios may increase.
CAUTIONARY STATEMENT
Statements in this Annual Report that are not strictly historical constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are subject to
uncertainties and other factors that could cause actual results to differ
materially from such statements. In addition to specific uncertainties and other
factors mentioned elsewhere in this report, these uncertainties and other
factors include, but are not limited to: (i) the Company having sufficient
liquidity and
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working capital; (ii) the Company's ability to achieve consistent profitable
growth; (iii) the Company's ability to diversify its product lines; (iv) the
continued adequacy of the Company's loss and loss adjustment expense reserves;
and (v) the Company's avoidance of any material loss on collection of
reinsurance recoverables. The words "believe," "expect," "anticipate,"
"project," and similar expressions identify forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999, COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET PREMIUMS EARNED Net premiums earned increased $25.3 million, or 15.6%, to
$187.8 million in 1999 from $162.5 million in 1998, composed of increased direct
and assumed premiums earned, offset somewhat by an increase in ceded earned
premiums. Direct and assumed premiums earned increased $37.2 million, or 18.7%,
to $235.8 million in 1999 from $198.6 million in 1998. This increase was
composed of an increase in direct premiums earned of $27.3 million resulting
from an increase in direct premiums written during the second half of 1998 and
during 1999 and an increase in assumed premiums earned of $9.9 million,
principally due to a large assumed excess of loss reinsurance contract written
on an institutional account. Ceded earned premiums increased $11.9 million, or
32.8%, to $48.0 million in 1999 from $36.1 million in 1998, primarily resulting
from additional ceded losses under aggregate reinsurance contracts during 1999.
NET INVESTMENT INCOME Net investment income increased $10.6 million, or 16.2%,
to $75.7 million in 1999 from $65.1 million in 1998. Average invested assets
during 1999 increased to approximately $1.2 billion in 1999 from $1.1 billion in
1998. The average pre-tax yield on the investment portfolio increased to 6.22%
in 1999 from 5.88% in 1998 primarily as the result of changes in asset
allocation with an increased concentration in higher pre-tax yielding
securities, including disposition of the Company's equity portfolio with
reinvestment of the proceeds in fixed maturity securities, in an increasing
market yield environment.
REALIZED INVESTMENT GAINS AND LOSSES Net realized investment losses were $6.8
million in 1999 compared to net realized investment gains of $36.4 million in
1998. In 1999, the net losses were primarily due to sales of fixed-maturity
investments to reposition the investment portfolio in an increasing market yield
portfolio. In 1998 the net gains were primarily composed of $38.4 million on the
disposition of the Company's equity portfolio, partially offset by a $14.0
million loss realized on the expiration of an equity collar position on July 13,
1998. The remaining net realized gains in 1998 of $12.0 million resulted from
sale of fixed-maturity investments in a generally falling market yield
environment.
OTHER REVENUE Other revenue increased $7.4 million to $8.3 million in 1999 from
$.9 million in 1998. The increase in 1999 consists primarily of $3.4 million of
revenues associated with the leasing, brokerage and other businesses acquired by
the Company in the acquisition of the Underwriter on August 4, 1999, a gain of
$3.5 million resulting from common stock received during 1999 in the
demutualization of Manulife Financial Corp., and a $1.0 million death benefit
received during 1999 from a corporate owned life insurance policy.
LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) Losses and LAE increased $19.1 million,
or 12.3%, to $175.0 million in 1999 from $155.9 million in 1998. Losses and LAE
were net of ceded losses and LAE of $96.1 million in 1999 and $62.4 million in
1998. The ratio of net losses and LAE to net premiums earned improved to 93.1%
in 1999 from 95.9% in 1998. This improvement is principally attributable to a
reduction in the gross loss and LAE ratio on the Company's physician occurrence
business written in 1999, combined with an increasing portion of the Company's
business being written on a claims made basis which is expected to result in a
lower ultimate loss and LAE ratio. Changes in loss and LAE reserves held on
prior accident years also impacted the ratio of net losses and LAE to net
premiums earned in 1999 and 1998. During 1999, gross loss and LAE reserves were
increased by $16.5 million, ceded loss and LAE reserves were increased by $30.5
million, and ceded earned premiums associated with the adjustments to ceded loss
and LAE reserves were increased by $10.6 million. During 1998, gross loss and
LAE reserves were increased by $3.8 million, ceded loss and LAE reserves were
increased by $5.9 million, and ceded earned premiums associated with the
adjustments to ceded loss and LAE reserves were increased by $3.3 million.
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UNDERWRITING EXPENSES Underwriting expenses increased $.5 million, or 1.3%, to
$42.6 million in 1999 from $42.1 million in 1998. The increase in expenses was
attributable to the costs of acquiring new business, primarily through a broker
distribution network, and to the increased infrastructure costs necessary to
service the increased volume of business activity in 1999. The ratio of
underwriting expenses to net premiums earned, however, declined to 22.7% in 1999
from 25.9% in 1998. This improvement was primarily the result of greater
economies of scale present with the larger premium in 1999 combined with the
impact of the Company's cost reduction efforts, including the restructuring
undertaken in June 1999.
FUNDS HELD CHARGES Funds held charges increased $.9 million, or 6.8%, to $14.3
million in 1999 from $13.4 million in 1998. Funds held charges relate to the
Company's ceded aggregate reinsurance contracts, for which balances due to
reinsurers are withheld as collateral for losses and loss adjustment expenses
ceded under the contracts. The increase in funds held charges in 1999 was
primarily due to the increase in reinsurance recoverable on unpaid losses ceded
under the contracts during 1999.
OTHER EXPENSES Other expenses amounted to $3.3 million in 1999 and primarily
consisted of the costs associated with the leasing, brokerage and other
businesses acquired by the Company in the acquisition of the Underwriter on
August 4, 1999.
RESTRUCTURING CHARGE The Company undertook a restructuring during the second
quarter of 1999 and on June 23, 1999 announced the reduction of regional and
home office staff and the closing of the regional offices in Boston and Atlanta
to centralize their functions at the Company's home office. The Company
recognized a pre-tax charge of $2.4 million related to this restructuring. All
actions contemplated by the charge were taken in June 1999 and no adjustments to
the restructuring charge reserve were recorded during the balance of 1999.
IMPAIRMENT OF CAPITALIZED SYSTEM DEVELOPMENT COSTS During 1998, management
replaced its policy administration system and accordingly recognized a $12.7
million pre-tax charge representing the net book value of capitalized costs
associated with the old computer system which is no longer being used for the
Company's operations.
INCOME TAXES Income taxes decreased $4.5 million, or 40.7%, to $6.6 million in
1999 from $11.1 million in 1998. The effective tax rate decreased to 24.2% in
1999 from 27.3% in 1998, due primarily to the significant realized investment
gains in 1998.
YEAR ENDED DECEMBER 31, 1998, COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET PREMIUMS EARNED Net premiums earned increased $39.2 million, or 31.8%, to
$162.5 million in 1998 from $123.3 million in 1997, composed of increased direct
and assumed premiums earned and a decrease in ceded earned premiums. Direct and
assumed premiums earned increased $33.0 million, or 19.9%, to $198.6 million in
1998 from $165.6 million in 1997. This increase consisted of additional direct
premiums earned of $45.5 million in 1998, primarily representing additional
business written during the latter half of 1997 and during 1998 in expansion
states for the Company, offset by a decrease in assumed premiums earned of $12.5
million in 1998, primarily due to a large assumed reinsurance contract written
on an institutional group in 1997 and not repeated in 1998. Ceded earned
premiums decreased $6.2 million in 1998 compared to 1997 largely due to ceded
reinsurance premiums associated with this large assumed reinsurance contract in
1997 and not repeated in 1998.
NET INVESTMENT INCOME Net investment income increased $11.2 million, or 20.8%,
to $65.1 million in 1998 from $53.9 million in 1997. Average invested assets
during 1998 increased to approximately $1.1 billion during 1998 from $1.0
billion in 1997. The average pre-tax yield on the investment portfolio increased
to 5.88% in 1998 from 5.61% in 1997 primarily as the result of changes in asset
allocation with an increased concentration in higher pre-tax yielding securities
and a corresponding decrease in government and tax-exempt security holdings.
REALIZED INVESTMENT GAINS Net realized investment gains increased $26.1 million
to $36.4 million in 1998 from $10.3 million in 1997. In 1998 the net gains were
primarily composed of $38.4 million in net gains on the disposition of the
Company's equity portfolio, partially offset by a $14.0 million loss realized on
the expiration of an equity collar position on July 13, 1998. The remaining net
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realized gains in 1998 of $12.0 million resulted from sale of fixed-maturity
investments in a generally falling market yield environment. In 1997 the net
gains consisted of net trading gains of $8.7 million from the equity portfolio
and $1.6 million from sale of fixed-maturity investments.
OTHER REVENUE Other revenue decreased $2.0 million, or 69.1%, to $.9 million in
1998 from $2.9 million in 1997 and was primarily composed of finance charge
income associated with the Company's financing of policyholder premiums, which
declined as the Company outsourced its installment payment plans in the second
quarter of 1998.
LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) Losses and LAE increased $35.4 million,
or 29.4%, to $155.9 million in 1998 from $120.5 million in 1997. Losses and LAE
were net of ceded losses and LAE of $62.4 million in 1998 and $68.9 million in
1997. The ratio of net losses and LAE to net premiums earned decreased to 95.9%
in 1998 from 97.7% in 1997. This decrease is principally attributable to an
increasing portion of the Company's business being written on a claims made
basis which is expected to result in a lower ultimate loss and LAE ratio.
Changes in loss and LAE reserves held on prior accident years also impacted the
ratio of net losses and LAE to net premiums earned in 1998. During 1998, gross
loss and LAE reserves were increased by $3.8 million, ceded loss and LAE
reserves were increased by $5.9 million, and ceded earned premiums were
increased as the result of the additional ceded losses and LAE by $3.3 million.
No adjustments to loss and LAE reserves held on prior accident years were made
during 1997.
UNDERWRITING EXPENSES Underwriting expenses increased $16.6 million, or 65.5%,
to $42.1 million in 1998 from $25.4 million in 1997. The increase in expenses
was attributable to the costs of acquiring new business, primarily through a
broker distribution network, and to increased infrastructure costs necessary to
service the increased volume of business activity. The ratio of underwriting
expenses to net premiums earned increased to 25.9% in 1998 from 20.6% in 1997.
FUNDS HELD CHARGES Funds held charges of $13.4 million in 1998 remained
unchanged from 1997. Funds held charges relate to the Company's ceded aggregate
reinsurance contracts, for which balances due to reinsurers are withheld as
collateral for losses and loss adjustment expenses ceded under the contracts.
Funds held charges remained flat in 1998 compared to 1997 as the result of an
increase in interest accrued on funds held of $1.9 million consistent with the
change in the funds held balances, offset by an adjustment to funds held
interest of $1.9 million associated with adjustments to ceded losses and premium
under the aggregate reinsurance contracts during 1998.
IMPAIRMENT OF CAPITALIZED SYSTEM DEVELOPMENT COSTS During 1998, management
replaced its policy administration system and accordingly recognized a $12.7
million pre-tax charge representing the net book value of capitalized costs
associated with the old computer system which is no longer being used for the
Company's operations.
INCOME TAXES Income taxes increased $9.2 million to $11.2 million in 1998 from
$2.0 million in 1997. The effective tax rate increased to 27.3% in 1998 from
6.4% in 1997, due primarily to the significant realized gains in 1998 and
release of a $4.2 million provision for tax contingencies in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The MIIX Group is a holding company whose assets primarily consist of all of the
capital stock of its subsidiaries. Its principal sources of funds are dividends
and other permissible payments from its subsidiaries and the issuance of debt
and equity securities. The insurance company subsidiaries are restricted by
state regulation in the amount of dividends they can pay in relation to surplus
and net income without the consent of the applicable state regulatory authority,
principally the New Jersey Department of Banking and Insurance. MIIX Insurance
Company, The MIIX Group's principal insurance subsidiary, may pay dividends to
The MIIX Group in any year, without regulatory approval, to the extent such
dividends do not exceed the greater of statutory net income (excluding realized
capital gains) of the preceding calendar year or 10% of statutory surplus at the
end of the preceding year. The MIIX Group expects that these current limitations
imposed on MIIX Insurance Company should not affect its ability to declare and
pay dividends sufficient to support The MIIX Group's initial dividend policy.
Applicable regulations further require that an insurer's statutory surplus
following a dividend or other distribution be reasonable in relation to its
outstanding liabilities and adequate to meet its financial needs. New Jersey
permits the
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payment of dividends only out of statutory earned (unassigned) surplus unless
the payment out of other funds is approved by the Commissioner. The other
insurance subsidiaries are subject to similar provisions and restrictions. No
significant amounts are currently available for payment of dividends by
insurance subsidiaries other than MIIX Insurance Company without prior approval
of the applicable state insurance department or Bermuda Registrar of Companies.
The primary sources of the Company's liquidity are insurance and assumed
reinsurance premiums collected, net investment income, proceeds from the
maturity or sale of invested assets, recoveries from reinsurance and revenues
from non-insurance operations. Funds are used to pay losses and LAE, operating
expenses, reinsurance premiums and taxes. The Company's net cash flow from
operating activities was $107.4 million in 1999 compared to $92.7 million in
1998 and $64.6 million in 1997. The rise in positive cash flow during this
period resulted from increases in collected premiums in excess of increases in
paid losses and LAE and in paid underwriting expenses. Because of the inherent
unpredictability related to the timing of the payment of claims, it is not
unusual for cash flow from operations for a medical malpractice insurance
company to vary, perhaps substantially, from year to year.
The Company invests its positive cash flow from operating activities primarily
in fixed maturity securities. The Company's current investment strategy seeks to
maximize after-tax income through a high quality, diversified,
duration-sensitive, taxable bond and tax-preferred municipal bond portfolio,
while maintaining an adequate level of liquidity. The Company currently plans to
continue this strategy.
The Company held collateral of $271.6 million and $228.1 million at December 31,
1999 and 1998 respectively, in the form of funds held, for recoverable amounts
on ceded unpaid losses and LAE under certain reinsurance contracts. Under the
contracts, reinsurers may require that a trust fund be established to hold the
collateral should one or more triggering events occur, such as a downgrade in
the Company's A.M. Best rating to B+ or lower, or a reduction in statutory
capital and surplus to less than $60 million. Otherwise no restrictions are
placed on investments held in support of the funds held. In accordance with the
provisions of the reinsurance contracts, the funds held are credited with
interest at contractual rates ranging from 7.5% to 8.6%, which is recorded as an
expense in the year incurred.
Cash dividends paid to stockholders were $0.10 per share in 1999. The Company
expects to pay dividends in the future. However, payment of dividends is subject
to approval by the Board of Directors, earnings and the financial condition of
the Company.
Based on historical trends, market conditions and its business plans, the
Company believes that its sources of funds will be sufficient to meet its
liquidity needs over the next 18 months and beyond. However, because economic,
market and regulatory conditions may change, there can be no assurance that the
Company's funds will be sufficient to meet these liquidity needs.
During August 1999, the Company approved a stock repurchase program authorizing
the purchase of up to 1,000,000 shares of its common stock in the open market.
During November 1999, the program was amended, authorizing the purchase of up to
an additional 2,000,000 shares. Through December 31, 1999, 1,236,809 shares had
been repurchased at a total cost of $19.2 million.
YEAR 2000
Because certain computer software programs have historically been designed to
use a two-digit code to identify the year for date-sensitive material, such
programs may not properly recognize post twentieth century dates. This could
result in system failures and improper information processing that could disrupt
the Company's business operations.
The Company began evaluating this issue in 1996 in connection with an overall
evaluation of the Company's systems and during 1997 assigned a project manager
to study the Company's information systems and computers to determine whether
they would appropriately handle post-1999 date codes. The identification of
compliance issues included the Company's internal systems and processes, as well
as exposure from service providers, brokers and other external business
partners. Software applications, hardware and information technology ("I/T")
infrastructure and non I/T systems such as the Company's telephone, security and
heating and ventilating
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systems were reviewed and those requiring upgrading or replacement to improve
computing capabilities and to ensure Year 2000 compliance were identified. In
this process the Company determined that its claims administration systems was
not Year 2000 compliant and a replacement system that the vendor represented to
be Year 2000 compliant was purchased and is now in operation. The Company also
upgraded its telephone system to make it Year 2000 compliant.
Management completed the development of alternative Year 2000 contingency plans
during 1999. Such plans would most likely involve the assignment of internal and
external resources to process business manually during the period of any
non-compliance. The plans remain available should Year 2000 difficulties develop
at some point in the future.
The Company completed its Year 2000 review, identification and remediation
process during 1999, at a total cost of less than $500,000. No Year 2000
difficulties related to internal systems or the systems of service providers and
other external business partners were encountered in January 2000. The Company,
however, may still be adversely impacted to the extent Year 2000 difficulties
result in claims being made against the Company's insureds. The Company's
liability for such claims, if any, is not clearly established. To date, the
Company is unaware of any such claims.
MARKET RISK OF FINANCIAL INSTRUMENTS
Market risk represents the potential for loss due to adverse changes in the fair
value of financial instruments. The market risk associated with the financial
instruments of the Company relates to the investment portfolio, which exposes
the Company to risks related to unforeseen changes in interest rates, credit
quality, prepayments and valuations. Analytical tools and monitoring systems are
in place to continually assess and react to each of these elements of market
risk.
Interest rate risk is considered by management to be the most significant market
risk element currently facing the Company. Interest rate risk is the price
sensitivity of a fixed maturity security to changes in interest rates. The
Company views these potential changes in price within the overall context of
assets and liability management. To reduce the Company's interest rate risk,
duration targets are set for the fixed income portfolio after consideration of
the duration of associated liabilities, primarily losses and LAE reserves, and
other factors.
The tables below provide, as of December 31, 1999 and 1998, information about
the Company's fixed maturity investments, which are sensitive to changes in
interest rates, showing principal amounts and the average yield applicable
thereto by expected maturity date and type of investment. The expected
maturities displayed have been compiled based upon the earlier of the investment
call date or the maturity date or, for mortgage-backed securities, expected
payment patterns based on statistical analysis and management's judgment. Actual
cash flows could differ, perhaps significantly, from the expected amounts.
At December 31, 1999:
Expected Maturity Date
--------------------------------------------------------------------------------- Total
(in thousands) Principal
2000 2001 2002 2003 2004 Thereafter Amounts Fair Value
---------- ---------- ---------- ---------- ---------- ----------- ---------- -----------
Government & Agency $ 5,010 $ 3,651 $ 3,220 $ 5,915 $ 415 $ 109,284 $ 127,495 $ 116,175
- - Average Yield ... 4.68% 6.07% 5.67% 6.27% 6.71% 6.22% 6.22%
Corporate ......... $ 17,402 $ 19,451 $ 30,125 $ 30,725 $ 48,145 $ 231,037 $ 376,885 $ 351,603
- - Average Yield ... 6.39% 6.40% 6.67% 7.19% 6.99% 7.36% 7.15%
Mortgage-Backed ... $ 9,234 $ 10,198 $ 20,738 $ 12,943 $ 20,067 $ 247,582 $ 320,762 $ 302,470
- - Average Yield ... 7.33% 6.48% 6.76% 6.74% 6.75% 6.80% 6.80%
Asset-Backed ...... $ 5,069 $ 13,383 $ 11,930 $ 15,578 $ 29,090 $ 84,611 $ 159,661 $ 152,365
Average Yield .... 7.20% 6.90% 6.06% 7.39% 4.65% 7.88% 7.01%
Municipal ......... $ 0 $ 4,080 $ 0 $ 0 $ 0 $ 160,420 $ 164,500 $ 155,193
- - Average Yield ... 0.00% 5.17% 0.00% 0.00% 0.00% 5.24% 5.24%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTALS ............ $ 36,715 $ 50,763 $ 66,013 $ 65,161 $ 97,717 $ 832,934 $1,149,303 $1,077,806
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At December 31, 1998:
Expected Maturity Date
----------------------
Total
(in thousands) Principal
1999 2000 2001 2002 2003 Thereafter Amounts Fair Value
---- ---- ---- ---- ---- ---------- ------- ----------
Government & Agency $ 430 $ 1,710 $ 2,651 $ 5,769 $ 415 $ 136,570 $ 147,545 $ 138,392
- - Average Yield ... 5.94% 6.12% 6.18% 4.51% 6.64% 5.65% 5.62%
Corporate ......... $ 14,300 $ 30,960 $ 23,450 $ 4,500 $ 28,745 $ 226,299 $ 328,254 $ 324,330
- - Average Yield ... 5.87% 6.22% 6.60% 6.47% 6.25% 7.12% 6.85%
Mortgage-Backed ... $ 10,313 $ 20,343 $ 9,780 $ 25,176 $ 32,072 $ 188,001 $ 285,685 $ 288,151
- - Average Yield ... 6.34% 7.03% 7.16% 6.68% 6.45% 6.52% 6.58%
Asset-Backed ...... $ 11,301 $ 0 $ 14,299 $ 13,500 $ 5,500 $ 75,336 $ 119,936 $ 121,650
Average Yield .... 5.78% 0.00% 6.69% 6.98% 7.47% 7.09% 6.93%
Municipal ......... $ 0 $ 0 $ 11,480 $ 2,225 $ 10,490 $ 147,165 $ 171,360 $ 185,216
- - Average Yield ... 0.00% 0.00% 5.07% 5.90% 5.21% 5.18% 5.18%
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTALS ............ $ 36,344 $ 53,013 $ 61,660 $ 51,170 $ 77,222 $ 773,371 $1,052,780 $1,057,739
At December 31, 1999, the Company had net after-tax unrealized losses on its
fixed maturity investment portfolio of $38.8 million, which included a deferred
tax valuation allowance of $3.6 million. The net after-tax unrealized losses of
$38.8 million on the fixed maturity portfolio represented 10.8% of total
stockholders' equity gross of net after-tax unrealized losses on investments.
The net unrealized losses were the result of the rise in market interest rates
during 1999. The unrealized losses at December 31, 1999 do not significantly
impact the Company's ability to meet all regulatory capital requirements.
Management does not expect that significant unrealized losses will be realized
on the fixed maturity portfolio given the credit quality of the portfolio at
December 31, 1999, the Company's positive operating cash flows, and the
Company's policy of matching asset and liability maturities. Asset and liability
matching is an important part of the Company's portfolio management process. The
Company utilizes financial modeling and scenario analysis to closely monitor the
effective modified duration of both assets and liabilities in order to minimize
any mismatching. The goal of effective asset/liability management is to allow
payment of claims and operating expenses from operating funds without disrupting
the Company's long-term investment strategy.
In addition to interest rate risk, fixed maturity securities like those
comprising the Company's investment portfolio involve other risks such as
default or credit risk. The Company manages this risk by limiting the amount of
higher risk corporate obligations (determined by credit rating assigned by
private rating agencies) in which it invests.
Mortgage-backed and asset-backed securities involve similar risks associated
with fixed maturity investments: interest rate risk, reinvestment rate risk, and
default or credit risk. In addition, mortgage-backed and asset-backed securities
also possess prepayment risk, which is the risk that a security's originally
scheduled interest and principal payments will differ considerably due to
changes in the level of interest rates. The Company purchases mortgage-backed
and asset-backed securities structured to enhance credit quality and/or provide
prepayment stability.
Short term investments are composed of highly rated money market instruments.
The Company also holds a portfolio of equity investments. At December 31, 1999,
the cost and fair value of equity investments was $12.4 million and $13.2
million respectively. At December 31, 1998, the cost and fair value of equity
investments was $3.2 million. A 10% decline in value of the equity investments
at December 31, 1999 would result in after-tax accumulated unrealized losses on
equity investments of $1.3 million, or .6% of total stockholders' equity gross
of net after-tax unrealized losses on investments.
EFFECTS OF INFLATION
The Company considers the effects of inflation in pricing insurance coverages
provided and in reserving for losses and LAE. There may be long periods between
the sale of insurance coverage and the reporting of losses, particularly with
respect to coverage provided by the Company on occurrence-basis policies.
Further, there are typically significant periods of time between reporting and
settlement of losses. The actual effects of inflation on the Company's operating
results cannot be accurately known until losses are reported and ultimately
settled. Management
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believes that the Company's pricing and loss and LAE reserving processes
adequately incorporate the effects of inflation.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosures about market risk are included in Item
7 under "Management's Discussion And Analysis of Financial Condition And Results
of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedule on page F-1 are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the individuals who
currently serve as directors and executive officers of The MIIX Group. The MIIX
Group has seven executive officers, Messrs. Mr. Koreyva, Ms. Costante, Mr. Grab,
Mr. Hudson, Ms. Kramer, Mr. Redman and Mr. Smereck.
Name Position Class
- ---- -------- -----
Kenneth Koreyva President, Chief Executive Officer and Director I
Patricia A. Costante Senior Vice President N/A
Edward M. Grab Senior Vice President N/A
Joseph J. Hudson Executive Vice President N/A
Lisa Kramer Executive Vice President N/A
Thomas M. Redman Senior Vice President, Chief Financial Officer N/A
and Treasurer
Daniel G. Smereck Senior Vice President N/A
Angelo S. Agro, M.D. Director I
Harry M. Carnes, M.D. Director II
Paul J. Hirsch, M.D. Director III
Vincent A. Maressa, Esq. Director II
Robert S. Maurer, D.O. Director II
A. Richard Miskoff, D.O. Director III
Charles J. Moloney, M.D. Director II
Eileen Marie Moynihan, M.D. Director III
Fred M. Palace, M.D. Director II
Carl Restivo, Jr., M.D. Director I
Gabriel F. Sciallis, M.D. Director III
Martin L. Sorger, M.D. Director III
Bessie M. Sullivan, M.D. Director II
The MIIX Group's Certificate of Incorporation provides for a Board of Directors
consisting of at least nine but not more than thirty-five directors. The Board
of Directors currently consists of fourteen members divided into three classes,
with the members of each class elected for a term of three years. Consistent
with the Company's desire to reduce the size of the Board of Directors,
effective the date of this year's annual meeting the Board of Directors will be
reduced to eleven members. The terms of the Class 11, Class 111 and Class 1
Directors are scheduled to expire in 2000, 2001 and 2002, respectively.
Information regarding Directors of the Company is incorporated by reference to
the section entitled "Election of Directors" in the Company's definitive proxy
statement to be filed with the SEC in connection with the Annual Meeting of
Shareholders to be held May 5, 2000 (the "Proxy Statement"). Information
regarding Executive Officers is set forth below.
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35
Kenneth Koreyva, (44) Director since 1999. Mr. Koreyva became President and
Chief Executive Officer of the Company in 1999. He served as Executive Vice
President and Chief Financial Officer from 1998 to 1999 and as Vice President
from 1991 to 1998. He is a member of the American Institute of Certified Public
Accountants.
Patricia A. Costante, (43) became Senior Vice President in 2000 and has been
Executive Vice President of MIIX Healthcare Group, Inc. since 1996. Ms. Costante
was President of Costante Associates, Inc. from 1993 to 1996. Ms. Costante is an
adjunct faculty member at the Graduate School of Social Work, Rutgers--The State
University of New Jersey.
Edward M. Grab, (44) became Senior Vice President in 2000. He joined the Company
as Vice President of Underwriting and Chief Actuary in 1999. Prior to joining
the Company, Mr. Grab was Vice President and Actuary for Zurich Financial
Services Group from 1996 to 1999. He was Assistant Vice President for Selective
Insurance Group from 1986 to 1996. Mr. Grab is a Fellow of the Casualty
Actuarial Society.
Joseph J. Hudson, (59) became Executive Vice President in 1998. Mr. Hudson
served as Vice President of Marketing and Business Development from 1994 to
1998. He is a member of the American Society of Hospital Risk Managers, the
Professional Liability Underwriting Society and the Society of Chartered
Property and Casualty Underwriters.
Lisa Kramer, (54) became Executive Vice President in 1999. Ms. Kramer served as
Vice President Claims from 1990 to 1999. She is a member of the American Bar
Association, the International Association of Defense Counsel and the
Philadelphia Bar Association.
Thomas M. Redman, (42) became Senior Vice President and Chief Financial Officer
in 1999. Mr. Redman has served in several capacities with the Company, including
Vice President Finance of MIIX Insurance Company, since 1997. Before joining
MIIX, Mr. Redman held a number of corporate finance positions with John Hancock
Property and Casualty Insurance Companies from 1985 to 1993 culminating in the
positions of Senior Vice President and Chief Financial Officer of John Hancock
Management Company and President of John Hancock Insurance Company of Bermuda,
Ltd. From 1993 to 1996, Mr. Redman attended Harvard Law School and received a
J.D. degree in 1996.
Daniel G. Smereck, (30) became Senior Vice President in 1999. Mr. Smereck has
served in various capacities with the Company, including President of MIIX
Insurance Company and Vice President of Asset Management from October 1996 to
1999. Prior to joining the company, he completed his Masters Degree in Finance
from Boston College from 1995 to 1996 and worked as an Investment Consultant
with Fidelity Financial Group from 1994 to 1995. He is a member of the American
Management Association and is an adjunct faculty member for The College of New
Jersey's Finance Department.
Vincent A. Maressa, Esq., (57) Chairman of the Board of Directors since 1997.
Mr. Maressa has been Chairman of the Board of Directors of the New Jersey State
Medical Underwriters, Inc. (the "Underwriter"), now a subsidiary of the Company,
since 1990 and a member of the Board of Directors of the Underwriter since 1977.
He has been the Executive Director and General Counsel of the Medical Society of
New Jersey since 1973. Mr. Maressa is a member of the American Bar Association,
the American Society of Medical Executives and Mercer County Bar Association.
Angelo S. Agro, M.D., (51) Director since 1997. Dr. Agro has been a member of
the Board of Directors of the Underwriter since 1990. He is a physician
certified by the American Board of Otolaryngology. Dr. Agro has practiced in
Voorhees, New Jersey for more than five years with Professional Otolaryngology
Associates. He is a member of the American Academy of Otolaryngology, the
American Medical Association, the American College of Surgeons and the Medical
Society of New Jersey. Dr. Agro is a Trustee of Camden County College.
Harry M. Carnes, M.D., (67) Director since 1997. Dr. Carnes became a member of
the Board of Directors of the Underwriter in 1989. He has been a physician in
Audubon, New Jersey, for more than five years. Dr. Carnes is a member of the
American Academy of Family Practice, the Camden County Medical Society, and the
Medical Society of New Jersey. He is Chairman of the New Jersey Medical
Political Action Committee and a delegate to the American Medical Association.
Paul J. Hirsch, M.D., (62) Vice Chairman of the Board of Directors since 1997.
Dr. Hirsch has been Vice Chairman of the Board of Directors of the Underwriter
since 1990. He has been a board-certified physician in Bridgewater, New Jersey,
for more
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36
than five years with BioSport Orthopaedics and Sports Medicine. Dr. Hirsch is a
member of the American Academy of Orthopedic Surgeons, the American Orthopaedic
Association, the American College of Surgeons, the Arthroscopy Association of
North America, the American Medical Association and the Medical Society of New
Jersey. He currently serves on the Board of Trustees for Raritan Valley
Community College, Somerset IPA and the Academy of Medicine of New Jersey. Dr.
Hirsch is a clinical professor of orthopedic surgery at Seton Hall School of
Graduate Medical Education and Editor in Chief of New Jersey Medicine.
Robert S. Maurer, D.O., (67) Director since 1997. Dr. Maurer has been a member
of the Board of Directors of the Underwriter since 1977. He has been a
board-certified physician in Stratford, New Jersey, for more than five years.
Dr. Maurer has been an Associate Professor of Clinical Family Medicine at
UMDNJ-SOM since 1992. He is a member of the American Osteopathic Association,
the American Osteopathic College of Family Practitioners, the American
Osteopathic College of Rheumatology, the Middlesex County Osteopathic Society
and the New Jersey Association of Osteopathic Surgeons and Physicians.
A. Richard Miskoff, D.O., (58) Director since 1997. Dr. Miskoff became a member
of the Board of Governors of the Exchange in 1994. He has been a board-certified
physician in Edison, New Jersey, for more than five years. Dr. Miskoff is a
member of the American Osteopathic Association, the American Society of Clinical
Oncologists, the American Society of Hematology and the New Jersey Association
of Osteopathic Physicians. He is President of the Middlesex County Medical
Society of Osteopathic Physicians.
Charles J. Moloney, M.D., (65) Director since 1997. Dr. Moloney became Assistant
Secretary of the Board of Governors of the Exchange since 1979. He has been a
board-certified physician in Moorestown, New Jersey, for more than five years.
Dr. Moloney is a member of the American Academy of Pediatrics and the Medical
Society of New Jersey.
Eileen Marie Moynihan, M.D., (47) Director since 1997. Dr. Moynihan became a
member of the Board of Governors of the Exchange in 1995. She has been a
board-certified rheumatologist in Woodbury, New Jersey for more than five years.
In 1999, Dr. Moynihan joined Empire-New Jersey as Medical Director. From 1988
until 1999 she was the Medical Director of the Eastern District Office for XACT
Medicare (Highmark, Inc.). She is a member of the Academy of Medicine of New
Jersey, the American College of Rheumatology, the American Medical Association,
the Camden County Medical Society and the New Jersey Rheumatism Association. Dr.
Moynihan is also a member and treasurer of the Medical Society of New Jersey.
Fred M. Palace, M.D., (64) Director since 1997. Dr. Palace has been a member of
the Board of Directors of the Underwriter since 1990. He has been a
board-certified radiologist in Morristown, New Jersey, for more than five years
with Morris Imaging Assoc., P.A. Dr. Palace is a member of the Medical Society
of New Jersey.
Carl Restivo, Jr., M.D., (54) Director since 1997. Dr. Restivo has been a member
of the Board of Directors of the Underwriter since 1997. He has been a
board-certified physician in Jersey City, New Jersey, for more than five years.
Dr. Restivo is a delegate for the New Jersey Chapter of the American Medical
Association and a past president of the Arthritis Foundation. He is a past
president of the Medical Society of New Jersey.
Gabriel F. Sciallis, M.D., (55) Director since 1997. Dr. Sciallis became
Assistant Secretary of the Board of Governors of the Exchange in 1979. He has
been a board-certified physician in Mercerville, New Jersey, for more than five
years. He is a member of the American Academy of Dermatology, the Dermatology
Society of New Jersey, the Medical Society of New Jersey, and the Mercer County
Medical Association.
Martin L. Sorger, M.D., (65) Director since 1997. Dr. Sorger became a member of
the Board of Governors of the Exchange in 1979. He has been a board-certified
orthopedic physician in Glen Ridge, New Jersey, and a member of the Montclair
Orthopedic Group for more than five years. Dr. Sorger is a member of the
American Academy of Orthopedic Surgeons, the American Medical Association, the
American College of Surgeons and a former member of its Board of Councilors, and
a former member of the Alumni Council of the Columbia Medical School. He is a
member of the executive committee of the New Jersey Orthopedic Society and a
past president.
Bessie M. Sullivan, M.D., (58) Director since 1997. Dr. Sullivan became a member
of the Board of Governors of the Exchange in 1992. She has been a
board-certified
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physician in Edison, New Jersey, for more than five years with the Arthritis,
Allergy & Immunology Center. Dr. Sullivan is a member of the American Medical
Association, the American Rheumatism Association, a member and Secretary of the
New Jersey Medical Society and a member of the Executive Committee of the Union
County Medical Society.
Committee Memberships and Number of Meetings Held in 1999
---------------------------------------------------------
Name Audit Compensation Executive Nominating
---- ----- ------------ --------- ----------
Angelo S. Agro, M.D. X(1) X
Harry M. Carnes, M.D. X
Paul J. Hirsch, M.D. X(1) X X
Kenneth Koreyva X
Vincent A. Maressa, Esq. X X(1)
Eileen Marie Moynihan, M.D. X
Carl Restivo, Jr., M.D. X X
Martin Sorger, M.D. X X(1)
Bessie M. Sullivan, M.D. X X
Number of Meetings in 1999 2 3 2 1
(1) Chairman of Committee.
Executive Committee. The Executive Committee has the authority to exercise all
powers of the Board of Directors between meetings of the Board, except in cases
where action of the entire Board is required by the Company's Amended and
Restated Certificate of Incorporation, the By-Laws or applicable law. The
Executive Committee consists of four members, one of whom is required to be the
Chairman of the Board of Directors.
Audit Committee. The primary function of the Audit Committee is to assist the
Board of Directors in fulfilling its financial oversight responsibilities. In
this capacity, the Audit Committee reviews the financial reports and other
financial information provided by the Company to certain third parties;
evaluates the Company's systems of internal controls regarding financial and
accounting matters; evaluates the Company's financial reporting activities and
the accounting standards and principles adopted by the Company; evaluates and
monitors the Company's auditing, accounting and financial reporting processes
generally; meets with the Company's independent auditors and recommends to the
Board the independent auditors to be engaged by the Company. The Audit Committee
currently consists of three members.
Compensation Committee. The Compensation Committee establishes remuneration
levels for the Board of Directors, the Chief Executive Officer and, in
consultation with the Chief Executive Officer, approves remuneration levels for
the top five executives and other executive officers of the Company. The
Compensation Committee also determines the terms of the more significant
employee benefit programs and administers executive compensation programs,
including the Company's bonus plans, equity-based programs and deferred
compensation plans. The Chief Executive Officer of the Company, in consultation
with other executives, establishes remuneration levels for other employees of
the Company. The Compensation Committee currently has five members.
Nominating Committee. The Nominating Committee nominates candidates for election
to the Board of Directors of the Company. The Nominating Committee currently has
four members.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act generally requires the Company's executive
officers and directors, and persons who own more than ten percent of the Common
Stock, to file reports of beneficial ownership and changes in beneficial
ownership with the Securities and Exchange Commission ("SEC"). The Company
became subject to the requirements of Section 16(a) on February 3, 1999.
Regulations promulgated by the SEC require the Company to disclose in this
Report on Form 10-K any reporting violations with respect to the 1999 fiscal
year, which came to the Company's attention based on a review of the applicable
filings required by the SEC to report such status as an officer or director or
such changes in beneficial ownership as submitted to the Company. Based solely
on review of such forms received by it,
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Harry M. Carnes, M.D. and Thomas M. Redman are the only reporting persons to
have made late filings under Section 16(a). Dr. Carnes filed a Form 5 on
February 11, 2000, to report an acquisition of shares of the Company's Common
Stock in December 1999, which should have been reported on a Form 4 by January
10, 2000. Mr. Redman filed an amended Form 3 on March 17, 2000, which should
have been reported on the original Form 3 filed on November 10, 1999. These
statements are based solely on a review of the copies of such reports furnished
to the Company by its officers, directors and security holders and their written
representations that such reports accurately reflect all reportable transactions
and holdings.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Security Ownership of Certain Beneficial Owners and
Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the Proxy
Statement under the heading "Certain Relationships and Related Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (2) and (d)
The required schedules as identified on the Index to Financial
Statements on page F-1 of the 10-K are incorporated herein by
reference. All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and therefore have been omitted.
(a) (3) and (c) The following exhibits are filed herewith unless otherwise
indicated:
Exhibit
Number Description
2.1 Plan of Reorganization of Medical Inter-Insurance Exchange
(incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (Reg. No. 333-59371)).
2.2 Stock Purchase Agreement between The Medical Society of New Jersey and
the MIIX Group, Incorporated (incorporated by reference to the exhibit
filed with the registrant's registration statement on Form S-1 (Reg.
No. 333-59371)).
2.3 Amendment No. 1 to Stock Purchase Agreement between The Medical Society
of New Jersey and the MIIX Group, Incorporated, dated as of September
20, 1998 (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
2.4 Amendment No. 2 to Stock Purchase Agreement between The Medical Society
of New Jersey and The MIIX Group, Incorporated, dated as of December
21, 1998 (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
2.5 Resolution of the Medical Inter-Insurance Exchange of New Jersey Board
of Governors amending the Plan of Reorganization (incorporated by
reference to the exhibit filed with the registrant's registration
statement on Form S-1 (Reg. No. 333-59371)).
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39
3.1 Restated Certificate of Incorporation of the MIIX Group, Incorporated
(incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (Reg. No. 333-59371)).
3.2 Bylaws of The MIIX Group, Incorporated (incorporated by reference to
the exhibit filed with the registrant's registration statement on Form
S-1 (Reg. No. 333-59371)).
10.1 Lease Between the Medical Society of New Jersey and New Jersey State
Medical Underwriters, Inc. dated June 29, 1981 (incorporated by
reference to the exhibit filed with the registrant's registration
statement on Form S-1 (Reg. No. 333-59371)).
10.2 Extension of Lease between the Medical Society of New Jersey and New
Jersey State Medical Underwriters, dated July 7, 1999.
10.3 Lease Between Princeton Pike Corporate Center Associates IV and
Physician Healthcare Plan of New Jersey Inc. dated May 24, 1991 and
assigned to New Jersey State Medical Underwriters, Inc. on February 11,
1997 (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.4 Specific Excess Reinsurance Contract, effective January 1, 1997, among
Medical Inter-Insurance Exchange of New Jersey and Swiss Reinsurance
Company; Hannover Ruckversicherungs; Underwriters Reinsurance Company;
Kemper Reinsurance Company; and London Life and Casualty Reinsurance
Corporation (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.5 Specific Excess Reinsurance Contract, effective January 1, 1997,
between Medical Inter-Insurance Exchange of New Jersey and American
Re-Insurance Company (incorporated by reference to the exhibit filed
with the registrant's registration statement on Form S-1 (Reg. No.
333-59371)).
10.6 Combined Quota Share, Aggregate and Specific Excess of Loss Reinsurance
Treaty, effective November 1, 1996, among Medical Inter-Insurance
Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.,; E&S
Reinsurance (Ireland) Ltd.; Underwriters Reinsurance Company (Barbados)
Inc.; London Life and Reinsurance Corporation; and Lawrenceville Re,
Ltd. (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.7 Specific Excess Reinsurance Contract, effective January 1, 1996 and
terminated December 31, 1996, among Medical Inter-Insurance Exchange of
New Jersey and Swiss Reinsurance Company; Hannover Ruckversicherungs;
Underwriters Reinsurance Company; American Re-Insurance Company; Kemper
Reinsurance Company; and London Life and Casualty Reinsurance
Corporation (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.8 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance
Treaty, effective January 1, 1996 among Medical Inter-Insurance
Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.; Eisen
und Stahl Reinsurance (Ireland) Ltd.; London Life and Casualty
Reinsurance Corporation; and Scandinavian Reinsurance Company, Ltd.;
and Lawrenceville Re, Ltd. (incorporated by reference to the exhibit
filed with the registrant's registration statement on Form S-1 (Reg.
No. 333-59371)).
10.9 Specific Excess Reinsurance Contract, effective January 1, 1995 and
terminated December 31, 1995 among Medical Inter-Insurance Exchange of
New Jersey and Swiss Reinsurance Company; Hannover Ruckversicherungs;
Underwriters Reinsurance Company; and PMA Reinsurance Corporation
(incorporated by reference to the exhibit filed with the registrant's
registration statement on Form S-1 (Reg. No.
333-59371)).
10.10 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance
Treaty, effective January 1, 1995 among Medical Inter-Insurance
Exchange of New Jersey and Hanover Reinsurance (Ireland) Ltd.; Eisen
und Stahl Reinsurance (Ireland) Ltd.; London Life and Casualty
Reinsurance Corporation; and Scandinavian Reinsurance Company Ltd.
(incorporated by
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reference to the exhibit filed with the registrant's registration
statement on Form S-1 (Reg. No. 333-59371)).
10.11 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance
Treaty, effective January 1, 1994 among Medical Inter-Insurance
Exchange of New Jersey and Scandinavian Reinsurance Company Ltd.;
Hannover Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance
(Ireland) Ltd. (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.12 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance
Treaty, effective January 1, 1993 among Medical Inter-Insurance
Exchange of New Jersey and Scandinavian Reinsurance Company Ltd.;
Hannover Reinsurance (Ireland) Ltd.; and Eisen und Stahl Reinsurance
(Ireland) Ltd. (incorporated by reference to the exhibit filed with the
registrant's registration statement on Form S-1 (Reg. No. 333-59371)).
10.13 Combined Aggregate and Casualty Catastrophe Excess of Loss Reinsurance
Treaty, effective December 15, 1992 among Medical Inter-Insurance
Exchange of New Jersey and Hannover Reinsurance (Ireland) Ltd.; and
Eisen und Stahl Reinsurance (Ireland) Ltd. (incorporated by reference
to the exhibit filed with the registrant's registration statement on
Form S-1 (Reg. No. 333-59371)).
10.14 Amended and Restated 1998 Long Term Incentive Equity Plan of The MIIX
Group, Incorporated.
10.15* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Kenneth Koreyva.
10.16* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Patricia A. Costante.
10.17* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Edward M. Grab.
10.18* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Joseph J. Hudson.
10.19* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Lisa Kramer.
10.20* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Thomas M. Redman.
10.21* Employment Agreement among The MIIX Group, Incorporated, New Jersey
State Medical Underwriters, Inc. and Daniel G. Smereck.
10.22* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Daniel Goldberg (incorporated by reference to
the exhibit filed with the registrant's registration statement on Form
S-1 (Reg. No. 333-59371)).
10.23* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Kenneth Koreyva.
10.24* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Patricia A. Costante.
10.25* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Edward M. Grab.
10.26* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Joseph Hudson (incorporated by reference to the
exhibit filed with the registrant's registration statement on Form S-1
(Reg. No. 333-59371)).
10.27* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Lisa Kramer.
39
41
10.28* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Thomas M. Redman.
10.29* Form of Stock Purchase and Loan Agreement by and between The MIIX
Group, Incorporated and Daniel G. Smereck (incorporated by reference to
the exhibit filed with the registrant's registration statement on Form
S-1 (Reg. No. 333-59371)).
10.30* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999 by and between New Jersey State Medical
Underwriters, Inc. and Kenneth M. Koreyva.
10.31* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Patricia
A. Costante.
10.32* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Edward M.
Grab.
10.33* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Joseph J.
Hudson.
10.34* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Lisa
Kramer.
10.35* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Thomas M.
Redman.
10.36* Non-Qualified Deferred Compensation Agreement entered into and
effective December 15, 1999, by and between The MIIX Group,
Incorporated, New Jersey State Medical Underwriters, Inc. and Daniel G.
Smereck.
40
42
10.41 Addendum No. 2 to the Combined Quota Share, Aggregate and Specific
Excess of Loss Reinsurance Treaty, effective November 1, 1998, among
Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance
(Ireland) Ltd.; E&S Reinsurance (Ireland) Ltd.; Underwriters
Reinsurance Company (Barbados) Inc.; London Life and Casualty
Reinsurance Corporation; Lawrenceville Re, Ltd.; and European
Reinsurance Company of Zurich (incorporated by reference to the exhibit
filed with the registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999 as filed with the Securities and
Exchange Commission on November 15, 1999 (file no. 001-14593)).
10.42 Addendum No. 3 to the Combined Quota Share, Aggregate and Specific
Excess of Loss Reinsurance Treaty, effective January 1, 1999, among
Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance
(Ireland) Ltd; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance
Company (Barbados) Inc.; and European Reinsurance Company of
Zurich(incorporated by reference to the exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 as filed with the Securities and Exchange Commission
on November 15, 1999 (file no. 001-14593)).
10.43 Addendum No. 4 to the Combined Quota Share, Aggregate and Specific
Excess of Loss Reinsurance Treaty, effective January 1, 1999, among
Medical Inter-Insurance Exchange of New Jersey and Hannover Reinsurance
(Ireland) Ltd; E&S Reinsurance (Ireland) Ltd.; Underwriters Reinsurance
Company (Barbados) Inc.; and European Reinsurance Company of
Zurich(incorporated by reference to the exhibit filed with the
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999 as filed with the Securities and Exchange Commission
on November 15, 1999 (file no. 001-14593)).
10.44 Excess Cession and Event Reinsurance Contract, effective January 1,
1999, among Medical Inter-Insurance Exchange and Hannover
Ruckversicherungs-Aktiengesellschaft; and Swiss Reinsurance Company
(incorporated by reference to the exhibit filed with the registrant's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999
as filed with the Securities and Exchange Commission on November 15,
1999 (file no. 001-14593)).
10.45 Excess Cession and Event Reinsurance Contract, effective January 1,
1999, between Medical Inter-Insurance Exchange and American
Re-Insurance Company (incorporated by reference to the exhibit filed
with the registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999 as filed with the Securities and Exchange
Commission on November 15, 1999 (file no. 001-14593)).
10.46 Draft Endorsement No. 1, effective January 1, 2000, to the Excess
Cession and Event Reinsurance Contract between Medical Inter-Insurance
Exchange and Hannover Ruckversicherungs-Aktiengesellschaft.
10.47 Draft Endorsement No. 1, effective January 1, 2000, to the Excess
Cession and Event Reinsurance Contract between Medical Inter-Insurance
Exchange and Swiss Reinsurance Company.
10.48 Draft Endorsement No. 1, effective January 1, 2000, to the Excess
Cession and Event Reinsurance Contract between Medical Inter-Insurance
Exchange and American Re-insurance Company.
10.49 Draft Combined Quota Share and Aggregate Reinsurance Treaty, effective
November 1, 1999 between MIIX Insurance Company and Hannover
Reinsurance (Ireland) Ltd.
10.50 Draft Combined Quota Share and Aggregate Reinsurance Treaty, effective
November 1, 1999 between MIIX Insurance Company and E+S Reinsurance
(Ireland) Ltd.
10.51 Draft Combined Quota Share and Aggregate Reinsurance Treaty, effective
November 1, 1999 between MIIX Insurance Company and Swiss Reinsurance
Company.
11 No statement re computation of per share earnings is required to be
filed because the computations can be clearly determined from the
materials contained herein.
41
43
21.1 Subsidiaries of The MIIX Group, Incorporated (incorporated by reference
to the exhibit filed with the registrant's registration statement on
Form S-1 (Reg. No. 333-59371)).
27.1 Financial Data Schedules.
* Represents a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
During the quarter ended December 31, 1999, a Current Report on
Form 8-K dated December 16, 1999 was filed by the Company.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE MIIX GROUP, INCORPORATED
By: /s/ KENNETH KOREYVA
---------------------------------------
Kenneth Koreyva
President and Chief Executive Officer
March 22, 2000
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Vincent A. Maressa, Esq. and Kenneth Koreyva,
each and individually, his or her attorneys-in-fact, with full power of
substitution and resubstitution, for him or her in any and all capacities, to
sign each amendment to this Report on Form 10-K and to file the same with
exhibits thereto and other documents in connection therewith with the Securities
and Exchange Commission, granting unto each of such attorneys-in-fact and agents
full power and authority to do and perform each and every act and thing
requisite and necessary in connection with such matters and hereby ratifying and
confirming all that each such attorney-in-fact, or his agent or substitutes, may
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ KENNETH KOREYVA President, Chief Executive
- --------------------------- Officer and Director
Kenneth Koreyva (principal executive officer) March 22, 2000
/s/ THOMAS REDMAN Senior Vice President and
- ---------------------------- Chief Financial Officer
Thomas Redman (principal financial and
accounting officer) March 22, 2000
/s/ ANGELO S. AGRO Director
- ----------------------------
Angelo S. Agro, M.D. March 22, 2000
/s/ HARRY M. CARNES Director
- ----------------------------
Harry M. Carnes, M.D. March 22, 2000
42
44
/s/ PAUL J. HIRSCH Director
- ----------------------------
Paul J. Hirsch, M.D. March 22, 2000
/s/ VINCENT A. MARESSA Director
- ----------------------------
Vincent A. Maressa, Esq. March 22, 2000
/s/ ROBERT S. MAURER Director
- ----------------------------
Robert S. Maurer, D.O. March 22, 2000
/s/ A. RICHARD MISKOFF Director
- ----------------------------
A. Richard Miskoff, D.O. March 22, 2000
/s/ CHARLES J. MOLONEY Director
- ----------------------------
Charles J. Moloney, M.D. March 22, 2000
/s/ EILEEN MARIE MOYNIHAN Director
- ----------------------------
Eileen Marie Moynihan, M.D. March 22, 2000
/s/ CARL RESTIVO, JR. Director
- ----------------------------
Carl Restivo, Jr., M.D. March 22, 2000
/s/ GABRIEL F. SCIALLIS Director
- ----------------------------
Gabriel F. Sciallis, M.D. March 22, 2000
/s/ MARTIN L. SORGER Director
- ----------------------------
Martin L. Sorger, M.D. March 22, 2000
/s/ BESSIE M. SULLIVAN Director
- ----------------------------
Bessie M. Sullivan, M.D. March 22, 2000
43
45
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
----
Report of Independent Auditors................................................................F- 2
Consolidated Balance Sheets as of December 31, 1999 and 1998..................................F- 3
Consolidated Statements of Income for the years ended
December 31, 1999, 1998 and 1997............................................................F- 4
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1999.....................................................................F- 5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997...........................................................F- 6
Notes to Consolidated Financial Statements....................................................F- 7
Schedule I -- Summary of Investments -- Other than
Investments in Related Parties..............................................................F-22
Schedule II - - Condensed Financial Information of Registrant................................F-23
(ALL OTHER SCHEDULES FOR WHICH PROVISION IS MADE IN THE APPLICABLE ACCOUNTING
REGULATION OF THE SECURITIES AND EXCHANGE COMMISSION ARE OMITTED FOR THE REASON
THAT THEY ARE NOT APPLICABLE OR THE INFORMATION IS OTHERWISE CONTAINED IN THE
FINANCIAL STATEMENTS).
F-1
46
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The MIIX Group, Incorporated
We have audited the accompanying consolidated balance sheets of The MIIX Group,
Incorporated and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedules listed in the Index at Item 14(a).
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
MIIX Group, Incorporated and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole present fairly, in all material respects,
the information set forth therein.
ERNST & YOUNG LLP
New York, New York
March 22, 2000
F-2
47
THE MIIX GROUP, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
ASSETS
Securities available-for-sale:
Fixed-maturity investments, at fair value (amortized cost:
1999 -- $1,131,931; 1998 -- $1,041,192)................ $1,077,806 $1,057,739
Equity investments, at fair value (cost: 1999 -- $13,169;
1998 -- $3,159).... ................................... 12,394 3,159
Short-term investments, at cost which approximates fair
value.................................................. 92,743 104,800
---------- ----------
Total investments................................. 1,182,943 1,165,698
Cash........................................................ 2,574 1,408
Accrued investment income................................... 14,319 13,563
Premium receivable, net..................................... 17,920 23,876
Reinsurance recoverable on unpaid losses.................... 406,409 325,795
Prepaid reinsurance premiums................................ 27,646 26,921
Reinsurance recoverable on paid losses, net................. 236 724
Deferred policy acquisition costs........................... 3,165 2,810
Due from Attorney-in-Fact................................... 0 3,949
Deferred income taxes....................................... 69,733 34,731
Net investment in direct financing leases................... 25,522 0
Other assets................................................ 86,691 74,787
---------- ----------
Total assets...................................... $1,837,158 $1,674,262
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unpaid losses and loss adjustment expenses.................. $1,053,597 $ 951,659
Unearned premiums........................................... 75,433 54,139
Premium deposits............................................ 27,913 28,392
Funds held under reinsurance treaties....................... 271,637 228,148
Payable for securities...................................... 205 34,115
Notes payable and other borrowings.......................... 16,461 0
Other liabilities........................................... 73,208 54,966
---------- ----------
Total liabilities................................. $1,518,454 $1,351,419
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 50,000,000 shares
authorized, no shares issued and outstanding............. $ 0 $ 0
Common stock, $.01 par value, 100,000,000 shares
authorized, 16,469,939 shares issued, 15,258,567
shares outstanding....................................... 165 0
Additional paid-in capital.................................. 52,942 0
Retained earnings........................................... 328,897 312,087
Treasury stock, at cost (1999 - 1,236,809 shares)........... (19,249) 0
Stock purchase loans and unearned stock compensation........ (4,934) 0
Accumulated other comprehensive income (loss)............... (39,117) 10,756
---------- ----------
Total stockholders' equity............................ $ 318,704 $ 322,843
---------- ----------
Total liabilities and stockholders' equity............ $1,837,158 $1,674,262
========== ==========
See accompanying notes
F-3
48
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- -------- --------
REVENUES
Net premiums earned........................................ $187,845 $162,501 $123,330
Net investment income...................................... 75,661 65,107 53,892
Realized investment gains (losses)......................... (6,770) 36,390 10,296
Other revenue.............................................. 8,323 891 2,884
-------- -------- --------
Total revenues................................... 265,059 264,889 190,402
EXPENSES
Losses and loss adjustment expenses........................ 174,986 155,868 120,496
Underwriting expenses...................................... 42,618 42,063 25,415
Funds held charges......................................... 14,338 13,420 13,361
Other expenses............................................. 3,333 0 0
Restructuring charge....................................... 2,409 0 0
Impairment of capitalized system development costs......... 0 12,656 0
-------- -------- --------
Total expenses................................... 237,684 224,007 159,272
Income before income taxes................................. 27,375 40,882 31,130
Provision for income taxes................................. 6,617 11,154 2,006
-------- -------- --------
Net income................................................. $ 20,758 $ 29,728 $ 29,124
======== ======== ========
Basic earnings per share of common stock (see Note 16)..... $1.54 $2.47 $2.42
===== ===== =====
Diluted earnings per share of common stock (see Note 16)... $1.53 $2.47 $2.42
===== ===== =====
Dividend per share of common stock......................... $0.10 $ 0 $ 0
===== ===== =====
See accompanying notes
F-4
49
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Three Years Ended December 31, 1999
(In thousands, except share amounts)
Number
of
Shares Additional
Out- Common Paid-In Retained
standing Stock Capital Earnings
-------- ----- ------- --------
Balance at January 1, 1997....... 0 $ 0 $ 0 $253,235
Net income..................... 29,124
Other comprehensive income,
net of tax:
Unrealized appreciation on
securities available-for-
sale, net of deferred taxes
---------- ------ ------- --------
Balance at December 31, 1997..... 0 0 0 282,359
Net income..................... 29,728
Other comprehensive income,
net of tax:
Unrealized depreciation on
securities available-for-
sale, net of deferred taxes
---------- ------ ------- --------
Balance at December 31, 1998..... 0 0 0 312,087
Net income..................... 20,758
Other comprehensive income,
net of tax:
Unrealized depreciation on
securities available-for-
sale, net of deferred taxes
Shares issued to distributees.. 11,854,033 119 (119)
Proceeds from initial public
offering, net of offering and
reorganization costs........ 3,450,000 35 37,315
Acquisition of Underwriter..... 814,815 8 10,992
Shares issued for execution of
stock purchase and loan
agreements.................. 351,091 3 4,635
Purchase of treasury stock..... (1,236,809)
Cash dividends to stockholders. (1,560)
Cash issued to distributees, in
lieu of common stock........ (2,269)
Restricted stock grants and
unearned stock compensation. 25,437
---------- ------ ------- --------
Balance at December 31, 1999..... 15,258,567 $ 165 $52,942 $328,897
========== ====== ======= ========
Stock
Purchase
Loans Accumulated
and Other
Unearned Comprehensive Total
Treasury Stock Income Stockholders'
Stock Compensation (Loss) Equity
----- ------------ ------ ------
Balance at January 1, 1997....... $ 0 $ 0 $ 9,077 $262,312
Net income..................... 29,124
Other comprehensive income,
net of tax:
Unrealized appreciation on
securities available-for-
sale, net of deferred taxes 18,538 18,538
-------- ------- -------- --------
Balance at December 31, 1997..... 0 0 27,615 309,974
Net income..................... 29,728
Other comprehensive income,
net of tax:
Unrealized depreciation on
securities available-for-
sale, net of deferred taxes (16,859) (16,859)
-------- ------- -------- --------
Balance at December 31, 1998..... 0 0 10,756 322,843
Net income..................... 20,758
Other comprehensive income,
net of tax:
Unrealized depreciation on
securities available-for-
sale, net of deferred taxes (49,873) (49,873)
Shares issued to distributees.. 0
Proceeds from initial public
offering, net of offering and
reorganization costs........ 37,350
Acquisition of Underwriter..... 11,000
Shares issued for execution of
stock purchase and loan
agreements.................. (4,728) (90)
Purchase of treasury stock..... (19,249) (19,249)
Cash dividends to stockholders. (1,560)
Cash issued to distributees, in
lieu of common stock........ (2,269)
Restricted stock grants and
unearned stock compensation. (206) (206)
-------- ------- -------- --------
Balance at December 31, 1999..... $(19,249) $(4,934) $(39,117) $318,704
======== ======= ======== ========
See accompanying notes
F-5
50
THE MIIX GROUP, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................ $ 20,758 $ 29,728 $ 29,124
Adjustments to reconcile net income to net cash
provided by operating activities (net of balances
acquired):
Unpaid losses and loss adjustment expenses......... 73,653 74,938 81,272
Unearned premiums.................................. 21,272 33,253 12,588
Premium deposits................................... (479) 7,368 (16,224)
Premium receivable, net............................ 5,956 (19,059) (271)
Reinsurance balances, net.......................... (37,362) (14,645) (14,649)
Deferred policy acquisition costs.................. (355) (2,710) 351
Realized (gains) losses............................ 6,770 (36,390) (10,296)
Depreciation, accretion and amortization........... (2,662) (980) (1,029)
Deferred income taxes ............................. (10,110) (7,957) (1,417)
Due from Attorney-in-Fact.......................... (594) (3,258) (3,687)
Impairment of capitalized system development costs. 0 12,656 0
Accrued investment income.......................... (708) (3,239) (142)
Net investment in direct financing leases.......... 961 0 0
Other assets....................................... 25,582 3,158 (8,526)
Other liabilities.................................. 4,743 19,831 (2,461)
--------- --------- ---------
Net cash provided by operating activities.............. 107,425 92,694 64,633
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed-maturity investment sales.......... 856,302 664,988 228,005
Proceeds from fixed-maturity investments matured,
called, or prepaid................................... 97,278 112,473 120,034
Proceeds from equity investment sales.................. 1,553 105,789 24,249
Cost of investments acquired........................... (1,055,237) (976,889) (444,168)
Purchase of Underwriter (net of cash acquired)......... (198) 0 0
Realized loss on equity collar termination............. 0 (14,000) 0
Change in short-term investments, net.................. 13,079 (19,655) 1,085
Net receivable/payable for securities.................. (30,496) 31,131 (430)
--------- -------- --------
Net cash used in investing activities.................. (117,719) (96,163) (71,225)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net of
offering and reorganization costs..................... 37,350 0 0
Net proceeds from notes payable and other borrowings.... (2,804) 0 0
Purchase of treasury stock.............................. (19,249) 0 0
Cash dividends to stockholders.......................... (1,560) 0 0
Cash in lieu of stock paid to distributees.............. (2,269) 0 0
Subordinated loan certificates redeemed................. (8) 0 0
------- ------- -------
Net cash provided by financing activities............... 11,460 0 0
Net change in cash...................................... 1,166 (3,469) (6,592)
Cash at beginning of year............................... 1,408 4,877 11,469
------- ------- -------
Cash at end of year..................................... $ 2,574 $ 1,408 $ 4,877
========= ========= =========
See accompanying notes
F-6
51
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND RELATED MATTERS
The accompanying consolidated financial statements include the accounts and
operations of The MIIX Group, Incorporated (the "MIIX Group") and its
wholly-owned subsidiaries, MIIX Insurance Company ("MIIX"), which assumed all of
the residual assets and liabilities and ongoing business of Medical
Inter-Insurance Exchange of New Jersey (the "Exchange") in the reorganization of
the Exchange, Lawrenceville Holdings, Inc. ("LHI"), Lawrenceville Property and
Casualty Company ("LP&C"), MIIX Insurance Company of New York ("MIIX New York")
and, from August 4, 1999, New Jersey State Medical Underwriters, Inc. and its
wholly-owned subsidiaries (the "Underwriter"), collectively (the "Company").
On August 4, 1999, the reorganization of the Exchange was consummated according
to a Plan of Reorganization adopted by the Board of Governors of the Exchange on
October 15, 1997 and approved by members of the Exchange at a special meeting
held on March 17, 1999 and by the Commissioner of the New Jersey Department of
Banking and Insurance ("the Commissioner"). The Plan of Reorganization included
several key components, including: formation of The MIIX Group to be the
ultimate parent company for the Company; the transfer of assets and liabilities
held by the Exchange to MIIX, formed for that purpose; acquisition of the
Underwriter; distribution of shares of The MIIX Group common stock and/or cash
to current and former members of the Exchange ("distributees") as defined in the
Plan of Reorganization; and dissolution of the Exchange. In connection with the
reorganization, 11,854,033 shares of The MIIX Group common stock were issued to
distributees and 814,815 shares were issued to the Medical Society of New Jersey
plus $100,000 in cash in exchange for all common stock of the Underwriter. The
reorganization was accounted for at historical cost as the transfers of assets
and liabilities described above were between entities under common control. The
acquisition of the Underwriter was accounted for using the purchase method and
gave rise to $7.8 million of goodwill.
The MIIX Group sold three million shares of its common stock in an underwritten
public offering ("the Offering") that closed on August 4, 1999. Of the offered
shares, 90,000 were reserved for sale and subsequently sold at the Offering
Price ($13.50 per share), to officers and employees of the Company. On August
11, 1999, an additional 450,000 shares were sold to underwriters of the Offering
pursuant to an over-allotment option contained in the Offering underwriting
agreement. The net proceeds of the Offering were approximately $37.3 million,
consisting of gross proceeds of $46.5 million less reorganization and offering
costs of $9.2 million.
During August 1999, The MIIX Group approved a stock repurchase program
authorizing the purchase of up to one million shares of its common stock in the
open market. During November 1999, the program was amended, authorizing the
purchase of up to an additional two million shares. Through December 31, 1999,
1,236,809 shares had been repurchased at a total cost of $19.2 million.
The Company provides a wide range of insurance products to the medical
profession and health care institutions. The primary business of the Company is
medical professional liability insurance and it issues claims made, modified
claims made with prepaid extended reporting endorsements, and occurrence basis
policies. Seventy-four percent and 73% of the Company's direct premiums during
1999 and 1998, respectively, were written in two states.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States
("GAAP") which differs from statutory accounting practices prescribed or
permitted by regulatory authorities (see Note 9). The significant accounting
policies followed by the Company that materially affect financial reporting are
summarized below:
F-7
52
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of The MIIX Group and its wholly-owned subsidiaries, MIIX and, from
August 4, 1999, the Underwriter. MIIX owns 100% of LHI, a property and casualty
insurance holding company, which owns 100% of LP&C and MIIX New York. The
Underwriter's principal wholly-owned subsidiaries include Medical Brokers, Inc.,
an insurance agency, Pegasus Advisors, Inc., a reinsurance intermediary,
Hamilton National Leasing Corporation, a leasing company, MIIX Healthcare Group,
a healthcare consulting firm, and Lawrenceville Re. Ltd., a Bermuda-domiciled
reinsurance company. All significant intercompany transactions and balances have
been eliminated in the consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Investments
The Company has designated its entire investment portfolio as
available-for-sale. As such, all investments are carried at their fair values.
The Company has no securities classified as "trading" or "held-to-maturity."
Investments are recorded at the trade date.
Changes in fair values of available-for-sale securities, after adjustment of
deferred income taxes, are reported as unrealized appreciation or depreciation
directly in equity as a component of other comprehensive income.
For the loan-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic life
of securities. Prepayment assumptions are obtained from both proprietary and
broker/dealer estimates and are consistent with the current interest rate and
economic environment. When actual prepayments differ significantly from
anticipated prepayments, which are assessed periodically, the effective yield is
recalculated to reflect actual payments to date and anticipated future payments.
The net investment in the security is adjusted through net investment income to
the amount that would have existed had the new effective yield been applied
since the acquisition of the security.
Premiums and discounts on investments (other than loan-backed bonds) are
amortized/accreted to investment income using the interest method over the
contractual lives of the investments. Realized investment gains and losses are
included as a component of revenues based on a specific identification of the
investment sold.
Short-term investments include investments maturing within one-year and other
cash and cash equivalent balances earning interest.
Premium Receivable
Premium receivable is net of an allowance for doubtful accounts as of December
31, 1999 and 1998 of $781,207 and $455,000, respectively. Amounts charged to
expense in 1999, 1998 and 1997 were $17,000, ($172,000) and $627,000,
respectively.
Reinsurance Recoverable on Paid Losses
Reinsurance recoverable on paid losses at both December 31, 1999 and 1998 is net
of an allowance of $1,300,000.
Deferred Policy Acquisition Costs
Policy acquisition costs, (primarily commissions, premium taxes and other
selling expenses) which vary with and are directly related to the production of
business, are capitalized and amortized over the effective period of the related
policies. Anticipated investment income is considered in determining if premium
deficiencies exist.
F-8
53
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets
Intangible assets consist primarily of goodwill, resulting from the acquisition
of subsidiaries. Goodwill is amortized over 15 years.
Software Development Costs
Costs incurred in the development of software used for Company operations are
capitalized and amortized over a useful life ranging from three to five years.
Losses and Loss Adjustment Expenses
Estimates for unpaid losses and loss adjustment expenses are based on the
Company's evaluation of reported claims and actuarial analyses of the Company's
operations since its inception, including assumptions regarding expected
ultimate losses and reporting patterns, and estimates of future trends in claim
severity and frequency. The Company's philosophy is to have a disciplined
process consistently applied in setting and adjusting loss and LAE reserves.
Although variability is inherent in such estimates, recorded loss and LAE
reserves represent management's best estimate of the remaining costs of settling
all incurred claims. Changes in the Company's estimate of ultimate claim costs
are recognized in the period in which the Company's estimate of those ultimate
costs is changed. These estimates are reviewed regularly and any adjustments to
prior year reserves are reflected in current year operating results.
The Company offered pure occurrence coverage from 1977 through 1986 and a form
of occurrence coverage, "modified claims made" from 1987 to the present through
its Permanent Protection Plan ("PPP") policy. The PPP policy provides coverage
for claims reported during the policy period as well as, under the extended
reporting endorsement, claims reported after the termination of the policy (for
any reason), and thus is reserved on an occurrence basis. The Company also
offers traditional claims-made and occurrence coverages, which are reserved on a
claims-made or occurrence basis, as appropriate.
Premiums
Premiums are recorded as earned over the period the policies to which they apply
are in force. Premium deposits represent amounts received prior to the effective
date of the new or renewal policy period. The reserve for unearned premiums is
determined on a monthly pro-rata basis. Gross premiums include both direct and
assumed premiums earned.
Reinsurance
Reinsurance premiums, losses, and loss adjustment expenses are accounted for on
a basis consistent with the accounting for the original policies issued and the
terms of the reinsurance contracts. Premium deposits, unearned premiums, and
unpaid losses and loss adjustment expenses are reported gross of reinsurance
amounts.
All reinsurance contracts are accounted for in accordance with the provisions of
SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts", which provides the criteria for determining whether
the contracts should be accounted for utilizing reinsurance accounting or
deposit accounting. Reinsurance contracts that do not satisfy certain
requirements of SFAS No. 113 are accounted for using the deposit method.
Recorded deposits are initially established based on the consideration paid less
any fees which are expensed in accordance with the contract terms. Subsequent
adjustments to the deposit are measured based on the present value of the
expected future cash flows arising from the contract.
Income Taxes
The Company utilizes the liability method of accounting for income taxes. Under
the liability method, deferred income taxes arise as a result of applying
enacted statutory tax rates to the temporary differences between the financial
statement carrying value and the tax basis of assets and liabilities. A
valuation allowance is established for any portion of a deferred tax asset that
management believes will not be realized.
F-9
54
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reclassification
Certain prior year amounts have been reclassified to be comparable to the 1999
presentation.
Cash Flow Reporting
For purposes of reporting cash flows, cash consists of amounts held at banks,
cash in money market accounts and time deposits with original maturities of
three months or less.
Stock-Based Compensation
The Company grants stock options for a fixed number of shares to employees and
board members with an exercise price equal to the fair value of the shares at
the date of grant. The Company accounts for stock option grants in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25) and related interpretations because the Company believes the
alternative fair value accounting provided for under SFAS Statement No. 123,
"Accounting for Stock-Based Compensation," requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the dates of grant, no
compensation expense is recognized.
Earnings Per Share
Basic and diluted earnings per share are calculated in accordance with SFAS No.
128. Earnings per share through August 4, 1999 and for the periods ended
December 31, 1998 and 1997 gives effect to the reorganization and allocation of
approximately 12,025,000 shares of common stock distributed to the Exchange's
members on August 4, 1999.
Segment Information
The Company's operations are classified into one reportable segment: providing
professional liability and related insurance coverages to the healthcare
industry. In connection therewith the Company generally offers three products,
occurrence policies, claims made policies with prepaid tail coverage and claims
made policies in each of its markets. The Company distributes its products both
directly to the insureds and through intermediaries.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 15, 2000. Adoption of this
statement is not expected to have a significant impact on the Company's
financial position or results of operations.
3. LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
F-10
55
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Balance as of January 1, net of reinsurance recoverable of
$325.8 million, $270.7 million, and $221.7 million,
respectively............................................. $ 625,864 $605,990 $573,700
Net reserves acquired in acquisition of the Underwriter.... 8,286 0 0
Incurred related to:
Current year............................................. 189,000 157,952 120,496
Prior years.............................................. (14,014) (2,084) 0
-------- -------- -------
Total incurred............................................. 174,986 155,868 120,496
Paid related to:
Current year............................................. 4,589 1,328 3,930
Prior years.............................................. 157,359 134,666 84,276
-------- -------- --------
Total paid................................................. 161,948 135,994 88,206
-------- -------- --------
Balance as of December 31, net of reinsurance
recoverable.............................................. 647,188 625,864 605,990
Reinsurance recoverable.................................... 406,409 325,795 270,731
--------- -------- --------
Balance, gross of reinsurance.............................. $1,053,597 $951,659 $876,721
========== ======== ========
The Company increased prior year gross reserves in the amounts of $16.5 million,
$3.8 million and $0.2 million during 1999, 1998 and 1997, respectively. At
December 31, 1999, 1998 and 1997, reserves for gross losses and loss adjustment
expenses on incurred but not reported claims amounted to $640.1 million, $623.8
million, and $591.2 million, respectively, of which $444.7 million, $436.3
million and $430.3 million related to prior years.
Loss and loss adjustment expense reserve estimates have been reviewed regularly
and adjusted where judged prudent to do so. Medical malpractice business,
particularly occurrence or occurrence-like coverage, has a very long development
period. Cases may take years to be reported, and, as a rule, take several years
to adjust, settle or litigate. In addition, general long term trends impacting
ultimate reserve values such as changes in liability standards and expanding
views of contract interpretation increase the uncertainty. While certain
individual cases were settled during 1999, 1998 and 1997 at values more or less
than specific case reserve amounts established in prior years, there were no
overall indications that prior established best estimates, including the
significant portion of reserves for incurred but not reported claims, should be
adjusted beyond the amounts recorded.
The Company maintains aggregate excess reinsurance contracts that provide
coverage, above aggregate retentions for most losses and allocated loss
adjustment expenses. The aggregate excess reinsurance contracts, therefore, have
the effect of holding net incurred losses and allocated loss adjustment expenses
on subject business at a constant level as long as losses and allocated loss
adjustment expenses remain within the coverage limits, which occurred for the
years ended December 31, 1999, 1998 and 1997. The adjustments to net reserves in
1999 and 1998 generally resulted from favorable development of older accident
year gross occurrence and modified claims made gross reserves, which are not
covered by aggregate reinsurance contracts, offset by unfavorable development on
recent accident year gross claims made reserves, which are largely covered by
aggregate reinsurance contracts.
4. RELATED PARTY TRANSACTIONS
The Company held a note receivable of $2.6 million and $2.8 million, included in
other assets, at December 31, 1999 and 1998, respectively, from the Medical
Society of New Jersey, collateralized by the building in which the Company
maintains its home office. The note provides for monthly payments of $40,000,
which includes interest at 9.05% until September 1, 2004 and reduced payments
thereafter until June 1, 2009. In addition, the Company made contributions to
the Medical Society of New Jersey in 1999, 1998 and 1997.
Management services agreements between the Company's insurance subsidiaries and
the Underwriter provide, among other things, that the Underwriter is responsible
for
F-11
56
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the administration and management of the Company's insurance operations. In
exchange for the services provided, fees are paid to the Underwriter which equal
the actual direct expenses incurred by the Underwriter in performing the
services. Expenses incurred by the Underwriter and reimbursed by the Company's
insurance subsidiaries through August 4, 1999, the date the Company purchased
the Underwriter, amounted to $18.7 million in 1999, $30.6 million in 1998 and
$22.7 million in 1997.
5. INVESTMENTS
The Company's investment strategy focuses primarily on the purchase of
intermediate-term, investment-grade securities along with a modest allocation to
below investment-grade (i.e., high yield) fixed maturity investments not to
exceed 7.5% of invested assets. At December 31, 1999 and 1998, the average
credit quality of the fixed income portfolio was AA-. The portfolio does not
include any investments in real estate.
The actual or amortized cost and estimated market value of the Company's
available-for-sale securities as of December 31, 1999 and 1998 were as follows:
GROSS UNREALIZED ESTIMATED
AMORTIZED ----------------- MARKET
COST GAINS LOSSES VALUE
---------- ------- ------ ----------
(IN THOUSANDS)
1999
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $ 107,044 $ 98 $ 5,649 $ 101,493
Obligations of states and political
subdivisions.................................. 162,078 102 6,987 155,193
Foreign securities -- U.S. dollar denominated... 35,619 547 2,021 34,145
Corporate securities............................ 350,897 752 19,508 332,141
Mortgage-backed and other asset-backed
securities.................................... 476,293 111 21,570 454,834
---------- ------- ------- ----------
Total fixed maturity investments................ 1,131,931 1,610 55,735 1,077,806
Equity investments.............................. 13,169 259 1,034 12,394
---------- ------- ------- ----------
Total investments..................... $1,145,100 $ 1,869 $56,769 $1,090,200
========== ======= ======= ==========
1998
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.......... $ 119,083 $ 4,451 $ 270 $ 123,264
Obligations of states and political
subdivisions.................................. 176,798 8,420 2 185,216
Foreign securities -- U.S. dollar denominated... 15,694 352 918 15,128
Corporate securities............................ 322,477 6,874 5,021 324,330
Mortgage-backed and other asset-backed
securities.................................... 407,140 4,415 1,754 409,801
---------- ------- ------- ----------
Total fixed maturity investments................ 1,041,192 24,512 7,965 1,057,739
Equity investments.............................. 3,159 -- -- 3,159
---------- ------- ------- ----------
Total investments..................... $1,044,351 $24,512 $ 7,965 $1,060,898
========== ======= ======= ==========
The fair values for fixed maturity investments are based on quoted market
prices, where available. For fixed maturity investments not actively traded,
fair values are estimated using values obtained from independent pricing
services. The fair values for equity securities are based on quoted market
prices and quantitative estimates of management for non-traded securities.
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1999 by contractual maturity are shown below. Actual maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
F-12
57
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ---------
(IN THOUSANDS)
Due in one year or less..................................... $ 21,394 $ 21,374
Due after one year through five years....................... 103,736 100,527
Due after five years through ten years...................... 225,811 214,376
Due after ten years......................................... 304,698 286,695
Mortgage-backed and other asset-backed securities........... 476,292 454,834
---------- ----------
Total............................................. $1,131,931 $1,077,806
========== ==========
Major categories of the Company's net investment income are summarized as
follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Fixed maturity investments............................ $69,845 $59,037 $49,241
Equity investments.................................... 436 878 1,678
Short-term investments................................ 6,472 7,376 4,925
Other................................................. 503 361 775
------- ------- -------
Subtotal.................................... 77,256 67,652 56,619
Investment expenses................................... 1,595 2,545 2,727
------- ------- -------
Net investment income................................. $75,661 $65,107 $53,892
======= ======= =======
Realized gains and losses from sales of investments are summarized as follows:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Fixed maturity investments
Gross realized gains................................ $ 4,950 $13,084 $ 2,803
Gross realized losses............................... (11,358) 1,052 1,158
------- ------- -------
Net realized gains on fixed maturity investments...... (6,408) 12,032 1,645
Equity investments
Gross realized gains................................ 138 38,823 8,719
Gross realized losses............................... (500) 465 68
------- ------- -------
Net realized gains (losses) on equity investments..... (362) 38,358 8,651
------- ------- -------
Net realized losses on equity collar investments...... 0 14,000 0
------- ------- -------
Net realized gains (losses) on investments............ $(6,770) $36,390 $10,296
======= ======= =======
The net realized gains on equity investments for the year ended December 31,
1998 resulted from the Company's decision to liquidate substantially all of its
equity investments during the third quarter of 1998.
The change in the Company's unrealized appreciation (depreciation) on fixed
maturity investments was $(70,672), $(3,377) and $17,856 for the years ended
December 31, 1999, 1998 and 1997, respectively. The corresponding amounts for
equity investments were $(775), $(22,560) and $10,664.
At December 31, 1999 and 1998, investments in fixed maturity investments with a
carrying amount of approximately $10.4 million and $10.1 million, respectively,
were on deposit with state insurance departments to satisfy regulatory
requirements.
F-13
58
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. REINSURANCE
Certain premiums, losses and loss adjustment expenses are ceded to other
insurance companies under various reinsurance agreements in-force during 1999,
1998 and 1997. These reinsurance agreements protect the underwriting and
operating results from unexpected increases in frequency, severity, and
acceleration of the payments of losses and loss adjustment expenses, and contain
the following significant terms:
COVERAGE COVERAGE
CONTRACT TYPE RETENTION LIMIT OTHER
1999 Specific Excess Per loss $10 million $65 million No aggregate deductible
1999 Aggregate Excess Aggregate 75% loss and 75% loss and Aggregate limit
ALAE ratio ALAE ratio
1998 Specific Excess Per loss $2-$3 million $48 million Aggregate deductible
1998 Aggregate Excess Aggregate 75% loss and 75% loss and Aggregate limit
ALAE ratio ALAE ratio
1997 Specific Excess Per loss $2-$3 million $38 million Aggregate deductible
1997 Aggregate Excess Aggregate 75% loss and 75% loss and Aggregate limit
ALAE ratio ALAE ratio
In addition, in 1992, the Company entered into a combined aggregate and specific
excess of loss contract covering losses and ALAE which occurred on or before
December 31, 1992. This contract was accounted for using deposit accounting on a
GAAP basis. On September 30, 1999 the Company commuted this contract at no gain
or loss. At December 31, 1998 the net deposit related to this contract was $0.
The effect of assumed and ceded reinsurance on premiums is summarized in the
following table (dollars in thousands):
1999 1998 1997
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
-------- -------- -------- -------- -------- --------
Direct............... $244,426 $222,898 $230,314 $195,591 $162,430 $150,099
Assumed.............. 12,674 12,909 1,543 3,015 15,478 15,568
Ceded................ (53,682) (47,962) (37,685) (36,105) (44,522) (42,337)
-------- -------- -------- -------- -------- --------
Net premiums......... $203,418 $187,845 $194,172 $162,501 $133,386 $123,330
======== ======== ======== ======== ======== ========
During 1999, 1998 and 1997, approximately $96.1 million, $62.4 million, and
$68.9 million, respectively, of losses and loss adjustment expenses were ceded
to reinsurers.
The Company remains liable in the event that amounts recoverable from reinsurers
are uncollectible. To minimize its exposure to losses from reinsurer
insolvencies, the Company enters into reinsurance arrangements with carriers
rated "A" or better by A.M. Best. At December 31, 1999 and 1998, the Company
held collateral under related reinsurance agreements for all unpaid losses and
loss adjustment expenses ceded in the form of funds withheld of $271.6 million
and $228.1 million and letters of credit of $178.7 million and $143.0 million,
respectively.
In accordance with the provisions of the reinsurance contracts, the funds
withheld are credited with interest at contractual rates ranging from 7.5% to
8.6%, which is recorded as a period expense in the year incurred. There are
currently no restrictions on investments held in support of funds withheld.
7. RETIREMENT PLANS
Costs associated with the Company's retirement plans in 1997 through August 4,
1999 were charged to the Company by the Underwriter as part of its management
fee.
The Company has a contributory 401(k) Retirement Savings Plan which covers
substantially all employees. The Company currently contributes 50% of the first
6% of compensation contributed by participants. Employer contributions for the
years ended December 31, 1999, 1998 and 1997 totaled $344,852, $278,359 and
$258,324, respectively.
F-14
59
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also provides a noncontributory defined benefit pension plan
covering substantially all its employees.
The net periodic pension expense consists of the following components:
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------ ------ ------
(IN THOUSANDS)
Service cost.......................................... $ 789 $ 702 $ 560
Interest cost......................................... 568 508 416
Actual return on plan assets.......................... 675 701 (1,158)
Amortization of:
Transition obligation (asset)...................... (22) (22) (22)
Actuarial loss..................................... (126) (197) 239
------- ------ ------
Net periodic pension expense.......................... $1,884 $1,692 $ 35
====== ====== ======
The following table sets forth the funding status of the plan:
YEAR ENDED DECEMBER 31,
---------------------
1999 1998
-------- --------
(IN THOUSANDS)
Change in Benefit Obligation
Net benefit obligation at beginning of year........... $ 9,427 $ 6,737
Service cost.......................................... 789 702
Interest cost......................................... 568 508
Actuarial loss........................................ (2,872) 1,540
Gross benefits paid................................... (89) (60)
------- -------
Net benefit obligation at end of year................. $ 7,823 $ 9,427
------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year........ $ 9,858 $ 8,718
Actual return on plan assets.......................... 675 700
Employer contributions................................ 363 500
Gross benefits paid................................... (89) (60)
------- -------
Fair value of plan assets at end of year.............. $10,807 $ 9,858
------- -------
Funded status (underfunded)........................... $ 2,984 $ 431
Unrecognized actuarial (gain) loss.................... (3,963) (1,434)
Unrecognized net transition obligation (asset)........ (90) (112)
------- -------
Prepaid (accrued) pension expense..................... $(1,069) $(1,115)
======= ========
Amounts recognized in the statement of
financial position consists of
Accrued benefit liability.......................... $(1,069) $(1,115)
-------- -------
Prepaid (accrued) pension expense...................... $(1,069) $(1,115)
======== =======
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
------ ------ ------
Weighted-average assumptions
Discount rate........................................ 8.00% 6.50% 7.25%
Expected return on plan assets....................... 9.00% 9.00% 8.00%
Rate of compensation increase........................ 4.00% 5.00% 5.00%
F-15
60
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COMMITMENTS, CONTINGENCIES AND OFF BALANCE SHEET RISK
In 1997, the Company implemented an "equity collar" (collar) around the
Company's equity securities of $81.6 million. An "equity collar" is an option
position created with the simultaneous purchase and sale of an equal number of
put and call options which serves as a hedge transaction, the purpose of which
is to reduce equity market volatility and to protect surplus from significant
declines in the market value of the Company's equity securities. This resulting
option position establishes both a ceiling and a floor with respect to the
financial performance of the underlying asset, upon which the "equity collar" is
established, for a specified time period. The collar transaction was executed on
July 8, 1997 and expired on January 2, 1998. The collar was constructed using
European-style S&P 500 options and as of December 31, 1997, the collar had no
unrealized gain or loss. A "European-style" option is an option contract that
may be exercised only upon expiration of the contract. To minimize loss exposure
due to credit risk, the Company utilizes intermediaries with a Standard and
Poor's rating of "AA" or better.
In 1998, another equity collar was implemented with a notional value of $85
million around the equity portfolio. Again, the purpose of the collar was to
reduce equity market volatility and to stabilize unassigned surplus. The collar
was constructed using European-style S&P 500 options. The collar transaction was
executed on January 13, 1998 and expired on July 13, 1998, and resulted in a net
realized loss to the Company of $14 million. This loss offset gains on the
related hedged equity securities liquidated in the third quarter of 1998.
Since the expiration of the equity collar mentioned above, the Company has not
held any other derivative investments.
The Company has employment contracts with certain officers which commit the
Company to various salary and fringe benefit obligations as specified in the
individual agreements.
The Company leases office space and office equipment. Rent expense for 1999,
1998 and 1997 was $2,162,120, $1,799,749 and $1,415,473, respectively, including
rent paid to the Medical Society of New Jersey of $772,173 in 1999, 1998 and
1997. Minimum future rental obligations for leases currently in effect are as
follows:
2000 $ 2,050,753
2001 1,642,276
2002 1,272,078
2003 1,042,340
2004 873,755
Thereafter 772,173
-----------
$ 7,653,375
===========
The Company currently purchases annuities without recourse on a competitive
basis to fund settlements of indemnity losses. The nature and terms of the
annuities vary according to settlements. The current value of annuities
purchased in prior years from other insurance companies, but with recourse to
the Company, and reflected as an other asset and an other liability in the
consolidated balance sheets, totaled $19.9 million and $19.3 million as of
December 31, 1999 and 1998, respectively. The Company becomes liable only in the
event that an insurance company cannot meet its obligations under existing
agreements and state guarantee funds are not available. To minimize its exposure
to such losses, the Company only utilizes insurance companies with an A.M.
Best rating of "A+" or better.
Legal proceedings beyond the ordinary course of business at December 31, 1999
included an appeal filed by three individual insureds of the order issued by the
Commissioner of the New Jersey Department of Banking and Insurance approving the
Company's Plan of Reorganization. On February 14, 2000, the Appellate Division
of the Superior Court of New Jersey affirmed the Commissioner's order approving
the Plan of Reorganization, rejecting all of appellants' contentions. Appellants
are now seeking review of the Appellate Court's decision by the New Jersey
Supreme Court. A second court action challenging certain aspects of the Plan of
Reorganization and seeking damages and injunctive relief that was filed by five
individual insureds in January 1999 was dismissed by the trial court in August
1999
F-16
61
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and is now on appeal. The Company intends to continue vigorously defending
against these actions.
9. STATUTORY ACCOUNTING PRACTICES
MIIX, domiciled in New Jersey, LP&C, domiciled in Virginia, MIIX New York,
domiciled in New York, and Lawrenceville Re. Ltd., domiciled in Bermuda, prepare
statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the New Jersey Department of Banking and Insurance,
the Virginia Department of Insurance, the New York State Insurance Department
and the Bermuda Register of Companies, respectively. "Prescribed" statutory
accounting practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (the "NAIC"). "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices may
differ from state to state, may differ from company to company within a state,
and may change in the future. The NAIC adopted codified statutory accounting
principles "Codification," which is effective for the reporting periods
beginning after January 1, 2001. Codification constitutes the only source of
prescribed statutory accounting practices in the United States. Management
believes that the impact of codification will not be material to the statutory
basis financial statements of MIIX, LP&C and MIIX New York. Combined
policyholders' surplus and net income, as reported to the domiciliary insurance
departments in accordance with its prescribed or permitted statutory accounting
practices for these companies, are summarized as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Statutory net income for the year.................. $ 8,812 $ 29,631 $ 30,302
Statutory surplus at year-end...................... $268,445 $253,166 $242,395
The maximum amount of dividends that domestic insurance companies in New Jersey
can pay without prior approval of the New Jersey insurance commissioner is
subject to restrictions. No dividends were paid or declared in 1999, 1998 or
1997. In 1999, MIIX could have paid dividends to The MIIX Group, Incorporated,
of approximately $25.3 million without the prior approval of the New Jersey
Insurance Commissioner. The other insurance subsidiaries are subject to similar
provisions and restrictions. No significant amounts are currently available for
payment of dividends by insurance subsidiaries other than MIIX without prior
approval of the applicable state insurance department or Bermuda Registrar of
Companies.
10. RESTRUCTURING CHARGE
The Company undertook a restructuring during the second quarter of 1999 and on
June 23 announced the reduction of regional and home office staff and the
closing of regional offices in Boston and Atlanta to centralize their functions
at the Company's home office. The Company recognized a pre-tax charge in the
second quarter of 1999 related to this restructuring of $2.4 million.
11. INCOME TAXES
For federal income tax purposes, the Company files a consolidated return with
its subsidiaries.
The components of the income tax provision in the accompanying statements of
income are summarized as follows:
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Current income tax expense............................ $16,690 $19,111 $ 3,423
Deferred income tax benefit........................... (10,073) (7,957) (1,417)
------- ------- -------
Total income tax expense.............................. $ 6,617 $11,154 $ 2,006
======= ======= =======
F-17
62
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income tax computed at the federal statutory tax rate to
total income tax expense is as follows:
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Federal income tax at 35%............................. $ 9,581 $14,309 $10,896
Increase (decrease) in taxes resulting from:
Tax-exempt interest................................. (2,431) (2,810) (3,583)
Provision for (reversal of) tax contingencies and
other tax matters................................ 0 0 (4,217)
Other............................................... (533) (345) (1,090)
------- ------- -------
Total income taxes.......................... $ 6,617 $11,154 $ 2,006
======= ======= =======
Significant components of the Company's deferred tax assets and liabilities are
summarized as follows:
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
Deferred tax assets:
Discounting of loss reserves.............................. $47,747 $37,181
Unearned premium reserve.................................. 5,539 3,893
Unrealized losses on investments.......................... 19,395 0
Other..................................................... 2,953 1,362
------- -------
Total deferred tax assets......................... $75,634 $42,436
------- -------
Less Valuation allowance................................. 3,612 0
------- -------
Deferred tax asset after valuation allowance..... $72,022 $42,436
Deferred tax liabilities:
Unrealized gains on investments........................... $ 0 $ 5,791
Other..................................................... 2,289 1,914
------- -------
Total deferred tax liabilities.................... $ 2,289 $ 7,705
------- -------
Net deferred tax assets........................... $69,733 $34,731
======= =======
Based on the anticipated realizability of the deferred tax asset relating to
unrealized losses on the available-for-sale securities, the Company established
a $3.6 million valuation allowance at December 31, 1999. Net deferred tax assets
and income tax expense in future years can be significantly affected by changes
in enacted tax rates or by unexpected adverse events that would impact
management's conclusions as to the ultimate realizability of deferred tax
assets.
At December 31, 1999 and 1998, the Company had income taxes payable included in
other liabilities of $12.8 million and $4.5 million, respectively.
The amount of income taxes paid in 1999, 1998 and 1997 was $8.9 million, $17.4
million and $6.0 million, respectively.
As a result of developments during 1996 related to Internal Revenue Service
examinations, the Company established a provision for tax contingencies of $5.2
million. During 1997, the Company reached favorable resolutions and was able to
release $4.2 million of that amount. The federal income tax returns of the
Company have been examined by the Internal Revenue Service through the years
1994. Management believes the Company has adequately provided for any remaining
tax contingencies.
F-18
63
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. IMPAIRMENT OF CAPITALIZED SYSTEM DEVELOPMENT COSTS
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" requires recognition of impairment losses
for long-lived assets whenever events or changes in circumstances result in the
carrying amount of an asset to exceed the sum of the expected future cash flow
associated with the asset. During 1998, management replaced its policy
administration system, and accordingly, recognized a $12.7 million pre-tax
charge which represented the net book value of capitalized system development
costs associated with the old computer system at the time of disposal.
13. DEFERRED POLICY ACQUISITION COSTS
The following represents the components of deferred policy acquisition costs and
the amounts that were charged to expense for the year ended December 31, 1999,
1998, and 1997.
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Balance at beginning of period....................... $ 2,810 $ 100 $ 451
Cost deferred during the period...................... 13,565 14,648 4,379
Amortization expense................................. (13,210) (11,938) (4,730)
-------- ------- -------
Balance at end of period............................. $ 3,165 $ 2,810 $ 100
======== ======= =======
14. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the years ended
December 31, 1999, 1998 and 1997 were as follows:
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Net income.................................................. $ 20,758 $29,728 $29,124
Other comprehensive income:
Unrealized holding appreciation (depreciation) arising
during period (net of tax of $(23,944), $3,659, and
$13,586, respectively).................................. (54,273) 6,795 25,230
Reclassification adjustment for (gains) losses realized
in net income (net of tax of $2,370, $(12,736) and
$(3,604), respectively)................................ 4,400 (23,654) (6,692)
------- ------- -------
Net unrealized appreciation (depreciation) arising during
the period at December 31, (net of tax of $(21,574),
($9,078), and $9,982, respectively)..................... $(49,873) $(16,859) $18,538
-------- ------- -------
Comprehensive income........................................ $(29,115) $ 12,869 $47,662
======== ======= =======
15. STOCK BASED COMPENSATION
The Company accounts for its stock-based compensation in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations. The Company's policy regarding stock options is to issue
options with an exercise price equal to the market price on the date of grant.
Under APB 25 no compensation expense is recognized given the Company's policy.
Certain executive officers, board members and employees have been granted a
total of 609,000 options to purchase shares of The MIIX Group common stock with
exercise prices ranging from $11.90625 to $16.0625, of which 152,250 options
were immediately exercisable, and 157,500 options were subsequently cancelled.
During 1999, no options were exercised. Pursuant to stock purchase and loan
agreements, The MIIX Group loaned certain officers of the Company approximately
$4,640,000, which the officers used to purchase unregistered shares of The MIIX
Group common stock at the Offering Price. On September 15, 1999, 45,515
restricted shares of The MIIX Group common stock, having a per share market
value of $16.0625, were granted to certain officers and board members, of which
12,597 shares were immediately vested, and 20,078 shares were subsequently
forfeited.
F-19
64
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's pro forma information using the Black-Scholes valuation model
follows:
1999
-------
Estimated weighted average of the fair value of options granted $3.77
Pro forma net income (in thousands) $19,821
Pro forma earnings per share - Basic $1.47
- Diluted $1.46
For pro forma disclosure purposes, the fair value of stock options was estimated
at each date of grant using a Black-Scholes option pricing model using the
following assumptions: Risk-free interest rates ranging from 5.8% to 6.4%;
dividend yields ranging from 1.48% to 1.68%; volatility factors of the expected
market price of the Company's common stock ranging from 33.3% to 38.2%; and a
three-years weighted average expected life of the options.
In management's opinion, existing stock option valuation models do not provide
an entirely reliable measure of the fair value of non-transferable employee
stock options with vesting restrictions.
16. EARNINGS PER SHARE
Basic and diluted earnings per share are calculated in accordance with SFAS
Statement No. 128, "Earnings per Share." Earnings per share for the year ended
December 31, 1999 is computed using the weighted-average number of common shares
outstanding during this period of 13,497,110. Earnings per share for the period
ended December 31, 1998 gives effect to the reorganization and the allocation of
approximately 12,025,000 shares of common stock distributed to the Exchange's
members on August 4, 1999.
The following table sets forth the computation of basic and diluted earnings per
share:
YEARS ENDED DECEMBER 31,
--------------------------------
1999 1998 1997
-------- ------- -------
(IN THOUSANDS)
Numerator:
Net income............................................... $20,758 $29,728 $29,124
Numerator for:
Basic earnings per share of common stock.................. 20,758 29,728 29,124
Diluted earnings per share of common stock................ 20,758 29,728 29,124
Denominator:
Denominator for basic earnings per share of
common stock - weighted-average shares outstanding........ 13,497 12,025 12,025
-------- ------- -------
Effect of dilutive securities:
Stock options........................................... 37 0 0
-------- ------- -------
Denominator for diluted earnings per share of
common stock adjusted - weighted-average shares
outstanding............................................. 13,534 12,025 12,025
Basic earnings per share of common stock.................... $ 1.54 $ 2.47 $ 2.42
======== ======= =======
Diluted earnings per share of common stock.................. $ 1.53 $ 2.47 $ 2.42
======== ======= =======
F-20
65
THE MIIX GROUP, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly results of operations for 1999
and 1998:
1999
-----------------------------------------
1ST 2ND 3RD 4TH
-------- ------- ------- -------
(IN THOUSANDS)
Total written premiums............................. $141,619 $ 12,617 $ 69,503 $33,361
Net premiums earned................................ 45,581 45,906 58,798 37,560
Net investment income.............................. 17,387 18,348 19,479 20,447
Realized investment losses......................... (504) (2,928) (1,668) (1,670)
Losses and loss adjustment expenses................ 43,043 43,176 54,318 34,449
Restructuring charge............................... 0 2,409 0 0
Net income......................................... $ 4,606 $ 2,894 $ 6,442 $ 6,816
Basic earnings per share........................... $ 0.38 $ 0.24 $ 0.44 $ 0.44
======== ======= ======= =======
Diluted earnings per share of common stock......... $ 0.38 $ 0.24 $ 0.44 $ 0.44
======== ======= ======= =======
Dividend per share of common stock................. $ 0 $ 0 $ 0.05 $ 0.05
======== ======= ======= =======
1998
-----------------------------------------
1ST 2ND 3RD 4TH
-------- ------- ------- -------
(IN THOUSANDS)
Total written premiums............................. $146,680 $18,045 $42,393 $24,739
Net premiums earned................................ 35,817 38,563 40,286 47,835
Net investment income.............................. 14,803 16,051 16,769 17,484
Realized investment gains.......................... 1,441 2,805 29,317 2,827
Losses and loss adjustment expenses................ 36,050 36,902 40,098 42,818
Impairment of capitalized system development
costs............................................ 0 12,656 0 0
Net income (loss).................................. $ 3,461 $(1,530) $21,497 $ 6,300
Basic earnings (loss) per share) .................. $ 0.29 $ (0.13) $ 1.79 $ 0.52
======== ======= ======= =======
Diluted earnings (loss) per share of common stock.. $ 0.29 $ (0.13) $ 1.79 $ 0.52
======== ======= ======= =======
F-21
66
SCHEDULE I
SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
(IN THOUSANDS)
AMORTIZED AMOUNT ON
COST FAIR VALUE BALANCE SHEET
---------- ---------- -------------
Fixed maturities:
Bonds:
United States government and government agencies
and authorities.................................. $ 107,044 $ 101,493 $ 101,493
States, municipalities and political subdivisions... 162,078 155,193 155,193
Public utilities.................................... 35,246 33,723 33,723
Foreign securities--U.S. dollar denominated......... 35,619 34,145 34,145
All other corporate bonds........................... 791,944 753,252 753,252
---------- ---------- ----------
Total fixed maturities........................... $1,131,931 $1,077,806 $1,077,806
---------- ---------- ----------
Equity securities:
Common stock:
Banks, trust and insurance companies............. 13,169 12,394 12,394
---------- ---------- ----------
Total equity securities.......................... $ 13,169 $ 12,394 $ 12,394
---------- ---------- ----------
Short-term investments................................ $ 92,743 $ 92,743 $ 92,743
---------- ---------- ----------
Total investments..................................... $1,237,843 $1,182,943 $1,182,943
========== ========== ==========
F-22
67
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
The MIIX Group, Incorporated
Condensed Balance Sheets
(in thousands, except share amounts)
DECEMBER 31,
------------------
1999 1998
------- -------
Assets:
Investments
Equity investments at fair value
(cost: 1999 -- $5,819; 1998 -- $0)...................... $ 4,869 $ 0
Short-term investments.................................... 11,850 0
Investment in subsidiaries................................ 303,167 10,238
-------- --------
Total Investments................................. $319,886 $ 10,238
Other assets.............................................. 609 0
------- --------
Total Assets...................................... $320,495 $ 10,238
======== ========
Liabilities:
Due to affiliates......................................... $ 362 $ 0
Other liabilities......................................... 1,429 0
-------- --------
Total Liabilities................................. $ 1,791 $ 0
-------- --------
Stockholders' Equity:
Preferred stock
($.01 par value, 50,000,000 shares authorized,
no shares issued and outstanding)...................... $ 0 $ 0
Common stock
($.01 par per share, 100,000,000 shares authorized,
16,469,939 shares issued, 15,258,567 outstanding)...... 165 0
Additional paid in capital................................ 52,942 10,000
Retained earnings......................................... 328,897 0
Treasury stock, at cost (1999 -- 1,236,809 shares)........ (19,249) 0
Stock purchase loans and unearned stock compensation...... (4,934) 0
Accumulated other comprehensive income.................... (39,117) 238
-------- --------
Total Stockholder's Equity........................ $318,704 $ 10,238
-------- --------
Total Liabilities and Stockholder's Equity........ $320,495 $ 10,238
======== ========
F-23
68
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
The MIIX Group, Incorporated
Condensed Statements of Operations
DECEMBER 31,
--------------------
1999 1998
-------- --------
(IN THOUSANDS)
Net investment income............................. $ 711 $ 0
Realized investment gains (losses) ............... 138 0
Other expenses.................................... (852) 0
-------- --------
Earnings before federal income taxes and equity
in income of subsidiaries....................... (3) 0
Federal income taxes.............................. (11) 0
-------- --------
Earnings before equity in income of subsidiaries.. 8 0
Equity in income of subsidiaries.................. 20,750 191
-------- --------
Net income................................ $ 20,758 $ 191
======== ========
F-24
69
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT - (CONTINUED)
The MIIX Group, Incorporated
Condensed Statements of Cash Flows
DECEMBER 31,
------------------
1999 1998
------- -------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................................. $ 20,758 $ 191
Adjustments to reconcile net income to net cash provided by operating
activities:
Realized investment (gains) losses......................................... (138) 0
Change in payable to subsidiaries.......................................... 362 0
Net change in other assets and liabilities................................. 857 0
Equity in undistributed income of subsidiaries............................. (20,750) (191)
-------- -------
Net cash provided by operating activities.................................. 1,089 0
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from fixed maturity investment sales.............................. 2,915 0
Proceeds from equity sales................................................. 1,553 0
Cost of investments acquired............................................. (10,148) 0
Purchase of subsidiary..................................................... (100) 0
Change in short-term investments, net...................................... (11,850) 0
-------- ------
Net cash provided by investing activities.................................. (17,630) 0
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from initial public offering, net of
offering and reorganization costs....................................... 37,350 0
Purchase of treasury stock................................................. (19,249) 0
Cash dividends to stockholders............................................. (1,560) 0
Capital contribution from the Exchange..................................... 0 10,000
Capital contribution to MIIX Insurance..................................... 0 (10,000)
-------- -------
Net cash provided by (used in) financing activities........................ 16,541 0
Net change in cash......................................................... 0 0
Cash at beginning of period................................................ 0 0
Cash at end of period...................................................... 0 0
======== ========
$ 0 $ 0
======== ========
F-25
70
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT (continued)
The MIIX Group, Incorporated
Notes to Condensed Financial Statements
December 31, 1999
1. REORGANIZATION
On August 4, 1999 the Exchange consummated its Plan of Reorganization whereby
the Exchange reorganized from a reciprocal insurer to a stock insurance company
(MIIX) and became a wholly owned subsidiary of The MIIX Group.
The MIIX Group has no historic operation and was organized in October 1997 as
part of the Exchange's plan to reorganize its corporate structure. The Plan of
Reorganization included several key components, including: formation of the MIIX
Group to be the ultimate parent for the reorganized Company; the transfer of
assets and liabilities held by the Exchange to MIIX, formed for that purpose;
acquisition of the Underwriter; distribution of shares of The MIIX Group common
stock and/or cash to current and former members of the Exchange ("distributees")
as defined in the Plan of Reorganization; and dissolution of the Exchange.
2. BASIS OF PRESENTATION
In The MIIX Group's financial statements, investment in subsidiaries is stated
at cost plus equity in undistributed earnings of subsidiaries since date of
acquisition. The MIIX Group, Incorporated's financial statements should be read
in conjunction with the consolidated financial statements.
F-26