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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
---------- --