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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, 2001
/ / 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 $0.01 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. /X/
The aggregate market value on March 22, 2002 of the voting stock held
by non-affiliates of the registrant was $37,692,191.
As of March 22, 2002, the number of outstanding shares of the
Registrant's Common Stock was 13,479,760.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held May 9, 2002 ("Proxy Statement") are incorporated by
reference in Part III.
THE MIIX GROUP, INCORPORATED
2001 FORM 10-K
TABLE OF CONTENTS
PART I ...........................................................................................2
ITEM 1. BUSINESS...................................................................................2
ITEM 2. PROPERTIES................................................................................25
ITEM 3. LEGAL PROCEEDINGS.........................................................................25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HLDERS........................................26
PART II ..........................................................................................27
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................27
ITEM 6. SELECTED FINANCIAL DATA...................................................................29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................30
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...............................................41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE......................................................................41
PART III ..........................................................................................41
ITEM 10. EXECUTIVE COMPENSATION....................................................................42
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................43
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................43
PART IV ..........................................................................................43
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K...........................43
SIGNATURES ..........................................................................................48
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES...........................................................F-1
1
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
Shareholders, 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: the Company having sufficient liquidity
and working capital; the Company's ability to achieve consistent profitable
growth; the Company's ability to diversify its product lines; the continued
adequacy of the Company's loss and loss adjustment expense reserves; the
Company's avoidance of any material loss on collection of reinsurance
recoverables; increased competitive pressure; the loss of significant customers;
general economic conditions, including changing interest rates; rates of
inflation and the performance of the financial markets; judicial decisions and
rulings; changes in domestic and foreign laws, regulations and taxes; geographic
concentration of the Company's business; effects of acquisitions and
divestitures; further control by insurance department regulators, including the
possibility of rehabilitation or liquidation; and various other factors. 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."
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
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the insurer to guard against insolvency and many other aspects of the day-to-day
operations of the Company. See "Business -- Regulation."
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 2000, the Company has been a leading
provider of medical professional liability insurance in New Jersey and is ranked
seventh among medical professional liability insurers in the United States. The
Company currently insures approximately 17,000 physicians and other medical
professionals who practice alone, in medical groups, clinics or in other health
care organizations. The Company also insures more than 105 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. In 2001, the Company wrote policies in 24 states and the District
of Columbia. In 2001, approximately 51% 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 complementary
insurance products to its insureds and operates other fee-based consulting and
service businesses. See "Business - Risks and Uncertainties."
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 2000, total medical professional liability direct premiums written in the
United States were approximately $6.4 billion, according to data compiled by
A.M. Best, an insurance rating agency, and in New Jersey were approximately
$290.0 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 3.3% in the United States according to data compiled
by A.M. Best and 36.8% in New Jersey according to data compiled by OneSource. In
2001, medical malpractice insurance accounted for approximately 98.7% of the
Company's direct premiums written.
The Company had total revenues and a net loss of $233.3 million and $157.6
million, respectively, in 2001, total revenues and a net loss of $272.5 million
and $36.5 million, respectively, in 2000 and total revenues and net income of
$265.1 million and $20.8 million, respectively, in 1999. As of December 31,
2001, the Company had total assets of $1.9 billion and total equity of $131.5
million.
RISKS AND UNCERTAINTIES
As a result of the net losses reported in 2001, the Risk-Based Capital of two of
the Company's operating subsidiaries, MIIX and Lawrenceville Property and
Casualty Company ("LP&C"), fell below the standards adopted by the National
Association of Insurance Commissioners.
At December 31, 2001, MIIX's Risk-Based Capital ("RBC") was $122.0 million,
which is within the Regulatory Action Level, at approximately 142% of Authorized
Control Level, which required MIIX to prepare and submit a corrective action
plan to the Insurance Commissioner of the New Jersey Department of Banking and
Insurance. The plan must be approved by the New Jersey state Insurance
Commissioner, who may perform an examination of the insurer's financial
position. At December 31, 2001, LP&C's RBC was at the Mandatory Control Level,
at approximately 18% of Authorized Control Level, which authorizes the Virginia
Insurance Commissioner to place LP&C under regulatory control that may result in
rehabilitation or, ultimately, liquidation. See "Regulation - Risk-Based
Capital".
On February 21, 2002, A.M. Best lowered the Company's rating to B- (Fair) with a
negative outlook from A- (Excellent) following the Company's announcement to
strengthen reserves at December 31, 2001. On March 22, 2002, A.M. Best again
lowered the rating of the Company to C+ (Marginal) from B- (Fair). This rating
action
3
reflects A.M. Best's view concerning the Company's weakened capitalization, the
potential negative impact of further adverse loss reserve development, and
concerns about the Company's ability to repay or refinance its debt obligations.
See "A.M. Best Ratings" and "Loss and LAE Reserves."
The Report of Independent Auditors on the Company's 2001 financial statements
contains a going concern explanatory paragraph, which primarily reflects the
potential negative impact of further adverse loss reserve development, current
regulatory limitations, any potential regulatory action by Insurance Departments
having jurisdiction over the Company's Insurance Subsidiaries and the ability of
the Company to repay or refinance its debt obligations. See "Financial
Statements - Report of Independent Auditors."
MIIX has filed a preliminary Corrective Action Plan with the New Jersey
Department of Banking and Insurance, and continues to hold regular discussions
with insurance regulators relative to the specific details included in the plan.
See "Business Strategy - Segregate and Run-Off Certain Lines of Business and
Geographic Focus and Distribution."
In March 2002, the Company communicated to various state insurance departments
where LP&C is an admitted carrier its intention to discontinue writing new
business and planned non-renewal of expiring policies, other than certain "tail"
coverage for which the Company is contractually required to provide or where
required by regulation, and the Company's plan to place LP&C into run-off. LP&C
entered into a consent order with the Virginia Bureau of Insurance on February
22, 2002, in which it agreed not to solicit or issue any new or renewal business
in any jurisdiction, in accordance with applicable laws. LP&C and the Bureau
entered into a second consent order on March 6, 2002, requiring LP&C to obtain
the Bureau's prior written consent before entering into certain material
transactions not in the ordinary course of business, as set forth in the order,
including selling or encumbering assets, lending or disbursing funds, incurring
debt, modifying reinsurance treaties with affiliates, changing directors or
officers of the company, merging the company or paying dividends to
stockholders. In addition, the Company has announced its intention to limit
MIIX's insurance writings to New Jersey and certain mid-Atlantic states and to
no longer write institutional business. In this regard, the Company has closed
its regional offices in Dallas and Indianapolis, as well as announced current
and planned future reductions in personnel and related expenses associated with
these discontinued operations, except for claims staff in these offices as well
as claims staff in the Lawrenceville home office which have been retained to
manage the claims run-off. See "Claims" and "Business Strategy - Geographic
Focus and Distribution."
While the Company envisions a narrower geographic focus going forward, primarily
New Jersey physician business, the specific components of any future business
plan are subject to the approval of the applicable insurance departments. There
can be no assurances that the Company's plan will be approved in its present
form. In the event the Company's proposed plan is not approved, it is unlikely
that the Company will be able to continue operations as an independent entity
unless an alternative plan is developed and approved. It is also uncertain what
actions, if any, the insurance departments will take with respect to the
Company's insurance subsidiaries. Such actions could include supervision,
rehabilitation or liquidation. See "Regulation - Risk-Based Capital."
The Company has outstanding borrowings under a revolving credit facility with
Amboy National Bank of $9.1 million at December 31, 2001, which matures on May
17, 2002. The Company has pledged 100% of the MIIX Insurance Company Stock as
collateral under the credit facility. It is unlikely that the Company will be
able to repay the credit facility balance prior to its May 17, 2002 maturity
date, and will be in default on the credit facility unless it is restructured
prior to that date. The Company is in ongoing discussions with Amboy National
Bank to restructure the terms of the revolving credit facility. However, there
can be no assurance that the Company will have adequate funds to repay or
refinance this loan when due or that Amboy National Bank will agree to
refinancing terms acceptable to the Company.
Actions taken by the New Jersey Department of Banking and Insurance and the A.M.
Best rating of C+ could have a material adverse impact on the Company's ability
both to write new business and to retain renewal business. See "Competition."
In each of the last two years, unexpected loss experience has caused the Company
to make large increases in its loss reserves. If this trend continues, the
Company may have to increase loss reserves further, which could have a material
adverse impact on the Company. See "Loss and LAE Reserves."
4
BUSINESS STRATEGY
The Company believes its revised business plan could allow it to compete
effectively and create long-term growth. The major components of the Company's
strategy are described below.
Focus on Core Markets. The Company's strategy is designed to capitalize on the
strengths that have enabled it to achieve its current market position in New
Jersey, 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
capacity on a per insured basis, (v) its ability to customize product features
and programs to fit the needs of different customers and (vi) its close
relationship with the health care community.
Segregate and Run-Off Certain Lines of Business. An integral part of the
Company's strategy includes its ability to segregate previously written
business, including discontinued institutional and physician business written by
MIIX and LP&C, from the future business written pursuant to the Company's
revised business plan. Under the proposed plan submitted to the New Jersey
Department of Banking and Insurance, the Company contemplates that the
previously written business would be placed into run-off, which the Company
believes would reduce, but not eliminate, the possibility that adverse future
loss experience could further negatively impact its remaining operations.
Geographic Focus and Distribution. The Company plans to offer its products
primarily in New Jersey and other mid-Atlantic states, including Connecticut,
Maryland, Delaware and Pennsylvania. In New Jersey, the Company has
traditionally written insurance primarily on a direct basis. Outside New Jersey,
the Company principally utilized brokers and agents.
Maintain Close Relationship with the Medical Community. Since its founding in
1977, the Company has maintained a close relationship with the health care
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 undertook a major re-underwriting
of its book of business during 2000 with the objective of increasing the
profitability of the business. As a result of this effort, certain accounts were
either non-renewed or re-priced, premium rates were generally increased, and
available discounts were substantially reduced or eliminated. Overall premium
volume was lower in 2000 compared to 1999, in part due to these actions. This
re-underwriting project was completed during 2001.
Enhance Product Offerings. During 2000, the Company introduced a new
plain-language "Essentials" policy for physicians, designed to communicate
coverage intent as clearly as possible. In addition to its core medical
professional liability insurance products, the Company has developed other
products and services for physicians. The Company intends to continue to enhance
the products it offers to its customer base in order to be able to provide them
with a full range of business liability coverages and services.
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 and medical groups on a claims made,
"modified claims made" or occurrence basis.
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
5
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.
In Pennsylvania traditional occurrence coverage was primarily offered to
physicians. In late 2001 the Company made the decision to no longer offer
occurrence coverage to physicians in Pennsylvania because of the long loss
emergence period under this coverage and the volatile litigation climate in
Pennsylvania. Instead we offered each renewing policy on a claims made basis. In
other states, the Company issues policies primarily on a claims made coverage
basis to physicians. 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. The Company currently offers
policy limits up to $5,000,000 per incident and $7,000,000 in the aggregate for
individual physicians.
In addition to its core medical professional liability insurance products, the
Company offers comprehensive liability coverage. Other related products and
services for health care providers are currently under review.
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. In 2001,
the Company began an "off-anniversary" initiative to move New Jersey business
from a common January 1 renewal date to renewal dates more evenly spread
throughout the year. 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 Years Ended December 31,
------------------------------------------------------------------------
2001 2000 1999
--------------------- ---------------------- --------------------
(In thousands)
% of % of % of
$ total $ total $ total
--------- -------- --------- -------- -------- -------
Professional Liability Products
Occurrence/Occurrence-like $123,331 54% $126,323 60% $152,520 62%
Claims Made 105,235 45% 83,427 39% 89,253 37%
Other Products 2,984 1% 2,404 1% 2,653 1%
-------- ---- -------- ---- -------- ------
Direct Premiums Written $231,550 100% $212,154 100% $244,426 100%
======== ==== ======== ===== ======== ======
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 47% of the Company's direct premiums written in New
Jersey. The Company believes that its broker relationships in New Jersey are
important to its ability to grow and sustain its business in that market
segment. 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 2001, 126 independent brokers and agents
actively marketed the Company's products in 24 states and the District of
Columbia and produced approximately 73% of the Company's direct premiums
written. No national broker or regional agency accounted for more than 16% of
the Company's year-end direct premiums
6
written. The Company selects brokers and agents that it believes have
demonstrated profitable 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 may receive 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 profitable business for the Company. See "Business --
Business Strategy -- Geographic Focus and Distribution."
The Company also provides risk management services. 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 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 all underwriting authority at its home office.
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 include
information regarding the medical training, current practice and claims history
of the applicant. Large groups 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.
Risk management surveys are generally 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 insureds 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 nonrenewals, any candidates for cancellation or nonrenewal, and all large
accounts to be quoted. 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.
The Company undertook a major re-underwriting of its book of business during
2000 with the objective of increasing the profitability of the business. This
re-underwriting project was completed during 2001. As a result of this effort,
certain accounts were either non-renewed or re-priced, premium rates were
generally increased, and available discounts were substantially reduced or
eliminated. Overall premium volume was higher in 2001 compared to 2000, in part
due to these actions.
PRICING
The Company establishes, through its underwriting and actuarial staff, 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 has established its pricing for
large groups using actuarially sound techniques to analyze the experience of
these insureds.
CLAIMS
The Company's Claims Department is responsible for claims investigation,
establishment of appropriate case reserves for loss and allocated loss
adjustment
7
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 two staff counsel offices 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.
In March 2002, the Company announced its intention to place all operations of
LP&C into run-off. In addition, the Company announced its intention to limit
MIIX's insurance writings to New Jersey and certain mid-Atlantic states and no
longer write institutional business. As a result, other (discontinued) business
will be written only as required by contractual provisions or regulation.
Regional offices in Dallas, Texas and Indianapolis, Indiana were closed in March
2002 as part of the run-off plan, except for claims staff in these offices as
well as claims staff in the Lawrenceville home office which have been retained
to manage the claims run-off. The Company remains strongly committed to handling
claims in a strong, aggressive and professional manner.
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
20-plus-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.
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
8
have an adverse effect on the Company's results of operations for the period in
which the adjustments are made. Given the Company's current financial condition,
any material increase in its loss reserves could result in its rehabilitation or
liquidation.
There are significant inherent uncertainties in estimating ultimate losses in
the casualty insurance business. 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. This uncertainty is potentially
great in a period of increasing loss severity, such as the present.
The Company offered traditional occurrence professional liability insurance
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. As displayed in the table below, loss and LAE reserves carried for PPP
policies and traditional occurrence professional liability policies constitute
approximately 70% of the gross loss and LAE reserves at December 31, 2001.
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, 1999 $837,724 79.5% $185,497 17.6% $30,376 2.9% $1,053,597
December 31, 2000 850,040 74.4% 282,127 24.7% 10,363 0.9% 1,142,530
December 31, 2001 832,290 69.5% 357,495 29.9% 7,213 0.6% 1,196,998
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
l7.6% of total gross loss and LAE reserves held at December 31, 1999 to 29.9% at
December 31, 2001. This has primarily been the result of the Company's
claims-made policy form writings during 1997 through 2001. The majority of
policies sold in these new states was claims made. In March 2002, the Company
began working with the Virginia Bureau of Insurance to place the insurance
operations of its subsidiary, LP&C, into run-off, subject to regulatory and
contractual requirements. For the immediate future, the Company expects that New
Jersey physician business may constitute a significant majority of its ongoing
writings. New Jersey physician business has primarily been written under the
occurrence-like PPP policy.
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:
9
December 31, 1999 $381,564 36.2% $640,096 60.8% $31,937 3.0% $1,053,597
December 31, 2000 411,939 36.1% 689,431 60.3% 41,160 3.6% 1,142,530
December 31, 2001 429,493 35.9% 719,268 60.1% 48,237 4.0% 1,196,998
The Company has issued occurrence policies since 1977 and occurrence-like PPP
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 more than twenty years ago.
The following table illustrates the amount and percentage of gross loss and LAE
reserves held by the Company at December 31, 2001 categorized by accident year.
Gross Loss and Loss Adjustment Expense Reserves By Accident Year
As of December 31, 2001
(In thousands)
Accident Year Gross Reserves % of Total
- ---------------------------------------------- -------------- ------------
1977-91..................................... 30,826 2.6%
1992........................................ 7,864 0.7%
1993........................................ 10,403 0.9%
1994........................................ 20,774 1.7%
1995........................................ 28,895 2.4%
1996........................................ 57,142 4.8%
1997........................................ 114,381 9.6%
1998........................................ 181,270 15.1%
1999........................................ 252,855 21.1%
2000........................................ 264,759 22.1%
2001........................................ 227,829 19.0%
------------ ------
Total Gross Reserves held by the Company.... $ 1,196,998 100.0%
============ ======
As shown in the above tables, at December 31, 2001: approximately 70% of gross
reserves are occurrence based; over 60% of gross reserves are IBNR reserves; and
approximately 87% of gross reserves relate to the most recent five accident
years, which are the most immature (and therefore the most subject to
variability) 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 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 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.
The Company's evaluations are performed by internal staff. At December 31, 2001,
the internal evaluation was supplemented with a review of major reserve
components performed by an outside actuarial firm. 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.
10
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. The Company's
loss and LAE reserves have been adjusted significantly upward from prior year
recorded amounts in each of the last two years. 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, risk based
capital and other regulatory trigger points or results of operations. See "Risks
and Uncertainties."
Activity in the liability for unpaid losses and loss adjustment expenses gross
of reinsurance is summarized as follows:
Years Ended December 31,
--------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Balance as of January 1, gross of reinsurance
recoverable................................... $1,142,530 $1,053,597 $ 951,659
Incurred related to:
Current year............................... 230,399 276,261 254,570
Prior years................................ 117,881 47,212 16,514
---------- ---------- ----------
Total incurred.................................. 348,280 323,473 271,084
---------- ---------- ----------
Paid related to:
Current year............................... 2,570 4,535 4,622
Prior years................................ 291,242 230,005 164,524
---------- ---------- ----------
Total paid...................................... 293,812 234,540 169,146
---------- ---------- ----------
Balance at end of period, gross of reinsurance
recoverable................................... 1,196,998 1,142,530 1,053,597
Reinsurance recoverable......................... 463,275 432,046 406,409
========== ========== ==========
Balance at end of period, net of reinsurance.... $ 733,723 $ 710,484 $ 647,188
========== ========== ==========
The Company increased prior year gross reserves by $117.9 million, $47.2 million
and $16.5 million during 2001, 2000 and 1999, 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 2001, 2000 and 1999. The
following table presents the estimated ultimate losses and LAE gross of
reinsurance (including changes in such estimates) by accident year:
11
Accident Year Development
(In thousands)
Changes in Estimated
Ultimate Losses and LAE
Estimated Ultimate for the Years Ended
Losses and LAE as of December 31, December 31,
---------------------------------------------------- -------------------------------------
Accident Year 1998 1999 2000 2001 1999 2000 2001
- ------------- ---------- ---------- ---------- ---------- ---------- ------------ ----------
1991 and Prior $1,107,044 $1,093,029 $1,106,260 $1,109,790 $ (14,015) $ 13,231 $ 3,530
1992 112,404 112,488 114,955 114,650 84 2,467 (305)
1993 121,990 118,450 109,686 107,844 (3,540 (8,764) (1,842)
1994 154,063 144,513 143,651 152,787 (9,550) (862) 9,136
1995 165,973 169,024 155,128 156,665 3,051 (13,896) 1,537
1996 174,681 178,048 179,902 186,510 3,367 1,854 6,608
1997 195,469 213,762 205,156 226,797 18,293 (8,606) 21,641
1998 214,413 233,237 242,349 278,821 18,824 9,112 36,472
1999 254,570 307,246 332,052 52,676 24,806
2000 276,261 292,559 16,298
2001 230,399
---------- ---------- ---------- ---------- ---------- ------------ ----------
Total Estimated Ultimate Losses
and LAE $2,246,037 $2,517,121 $2,840,594 $3,188,874 $ 16,514 $ 47,212 $ 117,881
---------- ---------- ---------- ---------- ========== ============ ==========
Less: Total Paid Loss and LAE $1,294,378 $1,463,524 $1,698,064 $1,991,876
---------- ---------- ---------- ----------
Gross Loss and LAE Reserves as
of December 31 $ 951,659 $1,053,597 $1,142,530 $1,196,998
========== ========== ========== ==========
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 15% of estimated accident year ultimate losses at
December 31, 2001, is not unreasonable for the medical malpractice line of
business.
Specific factors noted in management's actuarial analysis that gave rise to the
accident year reserve development in 2001 included the following. Overall
reserves across all accident years were adjusted significantly to reflect
increased loss severity seen during 2001. Claims were adjudicated or settled at
higher values than the Company had previously experienced. This increase in
severity was seen primarily in the Company's Pennsylvania institutions book, and
to a lesser degree in the Company's core New Jersey physician book as well as in
the physician business in many other states, including, most particularly,
Pennsylvania, Texas and Ohio. Development on older accident years up through
1996 primarily reflects this severity trend in Pennsylvania and New Jersey.
Development on accident years 1997 through 2000 was primarily composed of
increases to Pennsylvania physician and institutional reserves as well as
increases to reserves on physician business in states outside of New Jersey and
Pennsylvania. The increases to reserves held on business outside of New Jersey
and Pennsylvania reflected increased severity as well as, to a lesser extent,
greater than previously anticipated loss frequency.
Specific factors noted in management's actuarial analyses that gave rise to the
accident year development in 2000 included the following. Reserves held on
accident years 1990 and prior were increased to reflect a longer development
period on New Jersey physician business than had previously been projected,
principally due to an eroding statute of limitations regarding late assertion of
claims. Reserves held on accident years 1991 through 1996 were adjusted to
reflect the net impact of a lengthened projected development period and
generally higher severities offset by lower than anticipated reported claim
development on New Jersey and Pennsylvania physician business and greater than
anticipated claim frequency and claim severities on Pennsylvania institution
business. Reserves held on accident year 1997 were adjusted to reflect the net
impact of the lengthened development period and lower than anticipated reported
claim development on New Jersey physician business, somewhat offset by higher
than anticipated claim frequency and severities associated with Pennsylvania
physician and institution business and business written in new states during
1997. Reserves held on accident years 1998 and 1999 were adjusted to reflect the
net impact of higher than anticipated claims frequency and severities associated
with, primarily, business written in new states since 1997, for which limited
loss data had previously existed, as well as on Pennsylvania physician and
institution business, and a lengthened development period and lower than
anticipated reported claim development on New Jersey physician business.
Specific factors noted in management's actuarial analyses that gave rise to
accident year development in 1999 included the following. Reserves held on
accident years 1990 and prior were decreased to reflect lower than anticipated
case reserve development during 1999. Reserves on accident years 1991, 1993 and
1994 were reduced to reflect
12
lower than anticipated loss frequency and severities. Reserves held on accident
years 1995 and 1996 were increased to reflect higher loss expectations for the
Pennsylvania physician and institution business. Additional reserves were
recorded for accident year 1997 to reflect higher than anticipated loss
frequency and severities associated with Pennsylvania physician and institution
business and with physician business written in new states in 1997. Reserves
held on accident year 1998 were increased to reflect, primarily, higher than
anticipated claim frequency associated with physician business written in new
states.
On a net of reinsurance basis, the activity in the liability for unpaid losses
and LAE is summarized as follows:
Years Ended December 31,
------------------------------------------
2001 2000 1999
--------- --------- ---------
(In thousands)
Balance as of January 1, net of
reinsurance recoverable.......................... $ 710,484 $ 647,188 $ 625,864
Net reserves acquired in acquisition
of the Underwriter................................ 0 0 8,286
Incurred related to:
Current year.................................. 203,975 227,921 189,000
Prior years................................... 46,793 51,303 (14,014)
---------- ---------- ----------
Total incurred..................................... 250,768 279,224 174,986
---------- ---------- ----------
Paid related to:
Current year.................................. 2,571 4,535 4,589
Prior years................................... 224,958 211,393 157,359
---------- ---------- ----------
Total paid......................................... 227,529 215,928 161,948
---------- ---------- ----------
Balance at end of period, net of
reinsurance recoverable.......................... 733,723 710,484 647,188
Reinsurance recoverable............................ 463,275 432,046 406,409
---------- ---------- ----------
Balance at end of period, gross of reinsurance..... $1,196,998 $1,142,530 $1,053,597
---------- ---------- ----------
Net loss and LAE reserves reported in accordance with statutory accounting
principles were $103.3 million lower than the net loss and LAE reserves
displayed above at January 1, 1999. The difference relates 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, 2000 and 2001 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 1996 to be $100,000 was first reserved in 1991
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1991 through 1995
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.
13
TABLE I. LOSS AND LAE RESERVES DEVELOPMENT - GROSS
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
LOSS AND LAE RESERVES $593,828 $629,064 $667,200 $688,455 $748,660 $795,449 $876,721 $951,659 $1,053,597 $1,142,530
LIABILITY REESTIMATED AS
OF:
One year later 583,133 616,042 623,988 688,455 748,660 795,654 880,543 968,173 1,100,809 1,260,411
Two years later 570,108 572,831 623,986 688,450 744,130 793,170 878,233 962,709 1,202,392
Three years later 532,877 572,831 623,989 689,122 739,106 772,567 863,657 1,039,486
Four years later 532,878 572,871 624,567 674,224 715,136 766,597 903,962
Five years later 540,067 570,424 606,219 647,203 707,312 785,261
Six years later 538,126 570,390 588,748 653,275 719,368
Seven years later 539,298 556,459 595,682 663,794
Eight years later 525,283 572,157 597,065
Nine years later 538,514 575,382
Ten years later 542,044
CUMULATIVE REDUNDANCY
(DEFICIENCY) 51,784 53,682 70,135 24,661 29,292 10,188 (27,241) (87,827) (148,795) (117,881)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later $ 79,239 $ 83,837 $ 83,522 $ 98,053 $116,532 $101,217 $141,954 $164,524 $ 230,005 $ 291,242
Two years later 161,532 165,737 179,714 212,284 214,484 231,755 298,785 370,911 497,982
Three years later 238,998 256,860 284,828 293,323 332,920 373,232 470,693 588,348
Four years later 318,934 348,868 343,563 407,357 452,055 514,813 634,094
Five years later 389,638 395,242 436,921 492,388 553,205 629,774
Six years later 413,413 462,920 486,861 552,039 621,022
Seven years later 459,668 493,034 524,025 594,337
Eight years later 479,717 517,161 548,388
Nine years later 495,748 537,106
Ten years later 511,634
TABLE II. LOSS AND LAE RESERVES DEVELOPMENT - NET
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
LOSS AND LAE
RESERVES-GROSS $593,828 $629,064 $667,200 $688,455 $748,660 $795,449 $876,721 $951,659 $1,053,597 $1,142,530
REINSURANCE RECOVERABLE ON
UNPAID LOSSES 8,265 3,037 62,682 112,917 165,729 221,749 270,731 325,795 406,409 432,046
-------- -------- -------- -------- -------- -------- -------- -------- ---------- ----------
585,563 626,027 604,518 575,538 582,931 573,700 605,990 625,864 647,188 710,484
LIABILITY REESTIMATED AS
OF:
One year later 581,453 600,655 559,518 575,538 582,931 573,700 603,906 611,850 698,491 757,277
Two year later 560,688 555,656 559,518 575,538 582,931 573,321 603,809 649,454 738,008
Three years later 521,671 555,656 559,518 575,538 580,883 588,477 627,292 678,666
Four years later 521,828 555,655 559,518 575,124 579,766 595,479 611,087
Five years later 529,008 555,656 559,133 566,608 587,836 587,991
Six years later 525,111 555,484 548,242 576,831 586,777
Seven year later 524,574 541,142 561,953 580,940
Eight years later 510,517 557,594 564,486
Nine years later 524,772 559,570
Ten years later 527,802
CUMULATIVE REDUNDANCY
(DEFICIENCY) 57,761 66,457 40,032 (5,402) (3,846) (14,291) (5,097) (52,802) (90,820) (46,793)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later $ 79,239 $ 83,212 $ 82,572 $ 97,496 $116,194 $ 84,276 $134,666 $157,359 $ 211,393 $ 224,958
Two years later 161,532 164,469 178,357 211,426 197,370 214,404 284,887 345,305 413,084
Three years later 238,998 255,586 283,370 278,571 315,743 365,517 439,372 496,456
Four years later 318,928 347,493 328,836 392,522 437,779 492,617 536,488
Five years later 389,579 381,408 422,194 478,731 524,447 550,600
Six years later 401,000 449,086 473,702 523,901 549,919
Seven years later 447,255 479,987 508,269 544,626
Eight years later 468,091 503,373 528,303
Nine years later 483,654 523,319
Ten years later 499,539
The aggregate excess reinsurance contracts, in place from 1993 through 1999,
provide coverage above aggregate retentions for losses and ALAE other than
certain losses and ALAE retained by LP&C and losses and ALAE retained by MIIX or
reinsured under other insignificant reinsurance contracts. The aggregate
reinsurance contracts, therefore, have the effect of holding underwriting year
net incurred losses and ALAE for years 1993 through 1999 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 aggregate excess reinsurance
contracts for 2000 and 2001 cover New Jersey and Pennsylvania physician business
only. The adjustments to net reserves in 2001 and 2000 relate to losses and LAE
not covered by the aggregate reinsurance contracts, including, primarily, losses
and ALAE for accident years 2001 and 2000 associated with business other than
New Jersey and Pennsylvania physician business, losses and ALAE for accident
years 1992 and prior, losses and ALAE for accident years since 1997 retained by
LP&C and ULAE.
14
General liability incurred losses have been about 1.0% of medical malpractice
incurred losses over 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. The Company's loss and LAE reserves have been adjusted
significantly upward from prior year recorded amounts in each of the last two
years. 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.
The Company reinsures its risks primarily under two reinsurance contracts, the
Specific Contract and the Aggregate Contract. During 2001, 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 $25 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 available 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 a 10% 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 2001 provided coverages on an aggregate 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 2001, combined
ceded losses under the aggregate excess reinsurance contracts were increased by
a net amount of $61.7 million, resulting in a net additional premium charge of
$45.4 million and net additional funds held charges of $19.8 million. During
2000, combined ceded losses under the aggregate excess reinsurance contracts
were increased by a net amount of $20.9 million, resulting in net additional
premium charges of $18.8 million and a net reduction in funds held charges of
$13.0 million. 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. 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 is 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
15
provisions. Profit sharing is recorded as an offset to funds held charges and to
the funds withheld liability.
Each of the aggregate excess reinsurance contracts also contains a provision
requiring that the funds withheld be placed in trust should the A.M. Best rating
assigned to MIIX Insurance Company or its predecessor, Medical Inter-Insurance
Exchange of New Jersey, fall below B+. On February 21, 2002, A.M. Best lowered
the rating of MIIX Insurance Company to B-. On March 22, 2002, A.M. Best again
lowered the rating of MIIX Insurance Company, to C+. The Company is working with
reinsurers to establish the required trust accounts and move invested assets
into trusts in accordance with contract provisions. Each of the aggregate excess
reinsurance contracts also contains a provision allowing reinsurers to offer
additional reinsurance coverage that MIIX Insurance Company or its predecessor,
Medical Inter-Insurance Exchange of New Jersey is obligated to accept. For
contract years beginning November 1, 1999 and forward, the contracts require
that the funds withheld balance on a particular contract year be below $500,000
before reinsurers may offer the additional coverage. For contract years prior to
November 1, 1999, the contracts provide no funds withheld threshold amount,
although the reinsurance intermediary has confirmed in writing that the
intention of the parties was that the additional coverage would be offered only
if and when the funds withheld balance was in a loss position. No funds withheld
balances are below $500,000 or in a loss position.
The major elements of ceded reinsurance activity are summarized in the following
table:
For the Years Ended December 31,
------------------------------------
2001 2000 1999
-------- -------- --------
(In thousands)
Ceded premiums earned.................... $67,529 $46,463 $47,962
Ceded Losses and LAE..................... 97,509 44,248 96,077
Funds held charges....................... 42,476 7,502 14,338
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, 2001, and collateral
held by the Company in the form of funds withheld and letters of credit as of
December 31, 2001. No other single reinsurer's percentage participation in 2001
exceeded 5% of the total reinsurance recoverable at December 31, 2001.
At December 31, 2001
---------------------------------
Total Amounts Total Amount of
Reinsurer Recoverable Collateral Held
------------- ---------------
(In thousands)
Hannover Reinsurance (Ireland) Ltd........... $236,262 $245,339
Eisen und Stahl Reinsurance (Ireland) Ltd.... 58,023 61,835
Scandinavian Reinsurance Company Ltd......... 37,226 41,084
London Life and Casualty Reinsurance
Corporation............................... 64,502 65,590
Underwriters Reinsurance Company (Barbados).. 91,677 90,170
European Reinsurance......................... 37,484 36,640
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 should such
obligations ultimately exceed the collateral held.
Reinsurance Assumed. The Company assumed reinsurance under various contracts
with assumed written premiums of $0.4 million, $14.0 million and $12.7 million
in 2001, 2000 and 1999, respectively. In 2001, 2000 and 1999, $0.4 million,
$13.9 million and
16
$12.7 million of the assumed written premiums related to an excess of loss
contract providing medical professional liability coverage on an institutional
account. This excess of loss contract was non-renewed at December 31, 2000. As
the result of a claims audit conducted during 2001, the Company has identified
significant items of dispute with the ceding company under this assumed
reinsurance contract. The parties are in the process of selecting an arbitration
panel to address the dispute. Assumed premiums in 2001 represent adjustment
premiums in accordance with terms of the contract.
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 three outside investment managers for fixed maturity securities.
At December 31, 2001 and 2000, 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, 2001 December 31, 2000
-------------------------- --------------------------
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.................................. $ 54,495 $ 55,038 $ 141,781 $ 144,709
Obligations of states and political
subdivisions.............................. 123,079 122,082 158,749 164,928
Foreign securities - U.S. dollar
denominated............................... 35,942 35,553 45,757 44,611
Corporate securities........................ 413,433 404,103 418,737 396,553
Mortgage-backed and other asset-backed
securities................................ 434,550 438,158 419,033 420,383
---------- ---------- ---------- ----------
Total fixed maturity investments............ 1,061,499 1,054,934 1,184,057 1,171,184
Equity investments.......................... 7,081 6,623 6,880 5,837
Short-term.................................. 166,501 166,501 82,291 82,291
---------- ---------- ---------- ----------
Total investments........................ $1,235,081 $1,228,058 $1,273,228 $1,259,312
========== ========== ========== ==========
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 Executive Committee.
The table below contains additional information concerning the investment
ratings of the fixed maturity investments at December 31, 2001:
Percentage of
S&P Rating of Investment (1) Amortized Cost Fair Value Fair Value
- -------------------------------------------- -------------- ---------- -------------
(In thousands)
AAA (including U.S. Government and Agencies)....... $ 500,051 $ 501,571 47.6%
AA................................................. 112,106 110,114 10.4%
A.................................................. 234,752 237,746 22.5%
BBB................................................ 141,157 141,450 13.4%
Other Ratings (below investment grade)............. 73,372 63,982 6.1%
Not Rated.......................................... 61 71 0.0%
---------- ---------- ------
Total........................................... $1,061,499 $1,054,934 100.0%
========== ========== ======
(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,
17
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, 2001
by contractual maturity:
Amortized Fair Percentage of
Maturity of Investment Cost Value Fair Value
- --------------------------------------------------- ---------- ---------- -------------
(In thousands)
Due one year or less............................... $ 34,014 $ 34,557 3.3%
Due after one year through five years.............. 130,290 132,156 12.6%
Due after five years through ten years............. 211,092 205,121 19.4%
Due after ten years................................ 247,527 240,770 22.8%
Mortgage-backed and other asset-backed securities.. 434,550 438,158 41.5%
Preferred stock.................................... 4,026 4,172 0.4%
---------- ---------- -----
Total .......................................... $1,061,499 $1,054,934 100.0%
========== ========== =====
The average effective maturity and the effective duration of the securities in
the fixed maturity portfolio (excluding short-term investments) as of December
31, 2001, was 6.72 years and 4.64 years, respectively.
The mortgage-backed portfolio represents approximately 26.52% of the total fixed
income portfolio and is allocated equally across "standard" and "more complex"
securities, while the asset-backed portfolio represents approximately 15.01% 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
According to A.M. Best, in 2000 there were 325 companies nationally that wrote
medical professional liability insurance. In New Jersey, where approximately 49%
of the Company's premiums were written for the year ended December 31, 2001, as
well as in the surrounding states, the Company's principal competitors include
the Princeton Insurance Companies, ProMutual Group, ProNational Insurance Group,
Medical Protective Company, Clarendon Insurance Group and Pennsylvania Medical
Society Liability Insurance Company. 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. Many of the Company's current and potential competitors have greater
financial resources and stronger A.M. Best ratings than the Company. 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 Company plans to compete by, among other things, maintaining a close
relationship with the health care community, maintaining underwriting discipline
with a strong clinical focus and differentiating itself through superior claims,
risk management and customer services. As a result of recent developments in the
marketplace, including poor financial performance and the exit of several
companies that had meaningful market share in various states, there is an
increasing lack of capacity in the medical malpractice insurance market. The
Company believes this should have the impact of allowing for greater acceptance
of higher rates charged on policies in most of the states where the Company
operates. All markets in which the Company now writes insurance and in which it
expects to continue to compete 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
18
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. In addition to regulation by
Virginia, LP&C is also subject to the Holding Company Act requirements of Texas
because Texas determined in December, 2001, that LP&C met the threshold for
designation as a commercially domiciled insurer. In general, a state's 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. Material changes or additions to this
information must be reported to the domiciliary regulatory agency within fifteen
days after the end of the month in which the change or addition occurred.
Certain transactions between an insurance company and its affiliates, including
sales, loans or investments may not be entered into unless the insurer has
provided written notice to the domiciliary regulatory agency at least thirty
days prior to entering into the transaction, and the regulatory agency has
either approved or has not disapproved the transaction within that 30-day
period. In New Jersey, transactions with affiliates involving (i) loans, sales,
purchases, exchanges, extensions of credit, investments, guarantees, or other
contingent obligations which within any 12 month period aggregate at least 3% of
the insurance company's admitted assets or 25% of its surplus as regards
policyholders, whichever is lesser, (ii) reinsurance agreements or modifications
in which the reinsurance premium or a change in the insurer's liabilities equals
or exceeds 5% of the insurer's surplus as regards policyholders, and (iii) all
management agreements, service contracts and all cost-sharing arrangements are
subject to the 30-day prior notice and non-disapproval requirement. In Virginia,
similar affiliated transactions may not be entered into unless the insurer has
provided prior written notice to the Virginia Bureau of Insurance and the Bureau
has either approved the transaction or has not disapproved the transaction
within sixty days after the insurer provides notice of the transaction to the
Bureau. In New York, (i) sales, purchases, exchanges, loans or extensions of
credit, or investments which within any twelve month period aggregate to more
than 0.5% but less than 5% of the insurance company's admitted assets as of the
end of the company's last fiscal year, (ii) reinsurance treaties or agreements,
(iii) the rendering of services on a regular or systematic basis, and (iv)
certain material transaction may not be entered into unless the insurer has
notified the New York Insurance Department in writing at least thirty days prior
to entering the transaction and the Department has not disapproved of such
transaction within the thirty-day period. See "Business -- Regulation --
Risk-Based Capital."
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 established percentages
by regulation 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 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 and other insurance laws
also effectively restrict the Company from consummating certain reorganizations
or mergers without prior regulatory approval.
19
Regulation of Dividends from Insurance Subsidiaries. The Holding Company Act of
the State of New Jersey limits the ability of MIIX to pay dividends to The MIIX
Group. MIIX may not pay an extraordinary dividend or distribution until 30 days
after providing notice of the declaration of such dividend or distribution to
the New Jersey Insurance Commissioner and the Commissioner has not disapproved
the payment within such 30-day period. An extraordinary dividend or distribution
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 of the dividend is
approved or not disapproved as an extraordinary dividend or distribution. 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. See
"Note 9 of the Notes to Consolidated Financial Statements and Market for
Registrant's Common Equity and Related Stockholders Matters - Dividends."
The other United States domiciled Insurance Subsidiaries are 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. 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.
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.
MIIX's periodic financial examination based on December 31, 2000, began in May,
2001 and is scheduled to be completed during 2002. In addition, the New Jersey
Department of Banking and Insurance is currently performing a review of MIIX's
loss and LAE reserves. The last periodic financial examination of LP&C, based on
December 31, 1999 financial statements, was completed on May 5, 2000, and a
report was issued on October 20, 2000. The issued report included an examination
adjustment to loss and LAE reserves of $29.3 million, the
20
amount derived from the Company's loss reserve study at June 30, 2000, and was
recorded by the Company at June 30, 2000. During 2001, LP&C was subject to a
targeted examination of the loss reserves held at December 31, 2000 and a report
was issued on February 28, 2002. The issued report concluded that the carried
reserves of LP&C fell within a reasonable range as determined by the independent
actuary hired by Virginia to conduct the study. Further, the issued report
referenced the findings of the independent actuary hired by New Jersey to review
the carried reserves of MIIX, who concluded that MIIX's carried reserves fell
within a reasonable range. The Virginia Bureau of Insurance is currently
conducting a review of LP&C's loss and LAE reserves as of December 31, 2001.
Either insurance regulator could require further increases to recorded reserves.
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
procedures 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 the varying levels of RBC, the Company is subject to the following
regulatory attention:
- Company Action Level - below which a company submits a plan for
corrective action.
- Regulatory Action Level - below which a company must file a
corrective action plan that details the insurer's corrective
actions to raise additional statutory capital over the next four
years. The plan must be approved by the state Insurance
Commissioner, who may also perform an examination of the insurer's
financial position.
- Authorized Control Level - below which the Insurance Commissioner
is authorized to take the actions it considers necessary to
protect the best interests of the policyholders and creditors of
an insurer, which may include placing the insurance company under
regulatory control, which, in turn, may result in rehabilitation
or, ultimately, liquidation.
- Mandatory Control Level - below which the Insurance Commissioner
is required to take the actions it considers necessary to protect
the best interests of the policyholders and creditors of an
insurer, which include placing the insurance company under
regulatory control which, in turn, may result in rehabilitation
or, if deemed appropriate, liquidation.
At December 31, 2001, MIIX's Risk-Based Capital was $122.0 million which is
within the Regulatory Action Level, at approximately 142% of Authorized Control
Level, which required MIIX to prepare and submit a corrective action plan to
raise additional statutory capital over the next four years to the Insurance
Commissioner of the New Jersey Department of Banking and Insurance. The plan
must be approved by the New Jersey Insurance Commissioner, who may perform an
examination of the insurer's financial position. Included in MIIX's RBC at
December 31, 2001 is an $18.1 million inter-company note receivable from
Hamilton National Leasing ("HNL"). In March 2002, the Company executed a letter
of intent to sell HNL. The Company expects the note receivable will be repaid
upon the consummation of the sale of HNL, which is anticipated to occur in the
second quarter of 2002. In the event that the sale of HNL does not close as
currently anticipated, the note receivable may be considered non-admitted for
statutory reporting purposes. At December 31, 2001, LP&C's RBC was at the
Mandatory Control Level, at approximately 18% of Authorized Control Level, which
21
authorizes the Virginia Insurance Commissioner to place LP&C under regulatory
control that may result in rehabilitation or, ultimately, liquidation. On March
14 and 15, 2002, the Company made contributions of capital to LP&C totaling
$2,125,000 in order to meet minimum statutory capital requirements in Virginia
of $4 million. LP&C entered into a consent order with the Virginia Bureau of
Insurance on February 22, 2002, in which it agreed not to solicit or issue any
new or renewal business in any jurisdiction, in accordance with applicable laws.
LP&C and the Bureau entered into a second consent order on March 6, 2002,
requiring LP&C to obtain the Bureau's prior written consent before entering into
certain material transactions not in the ordinary course of business, as set
forth in the order, including selling or encumbering assets, lending or
disbursing funds, incurring debt, modifying reinsurance treaties with
affiliates, changing directors or officers of the company, merging the company
or paying dividends to stockholders. MIIX New York did not write any premium
during 2001, 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. At
December 31, 2001, MIIX had two ratios (two-year overall operating ratio and
change in policyholders' surplus) outside the usual range. At December 31, 2000,
MIIX had one ratio (change in policyholders' surplus) outside the usual range.
The ratios outside the usual range reflect the loss reserve strengthening in
2001 and 2000. At December 31, 2001, LP&C had eight ratios (gross premiums to
policyholders' surplus, net premiums written to policyholders' surplus, two-year
overall operating ratio, change in policyholders' surplus, liabilities to liquid
assets, gross agents' balances to policyholders' surplus, one-year reserve
development to policyholders' surplus and two-year reserve development to
policyholders' surplus outside of the usual range. At December 31, 2000, LP&C
had three ratios (two-year overall, change in surplus and two-year reserve
development to policyholders' surplus) outside the usual range. These ratios
outside the usual range reflect the loss reserve strengthening in 2001 and 2000,
the increase in premiums written during the early years of operation, capital
contributions by MIIX and the increased cost of 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 meaningful because it did not write business in 2000 and 2001.
Regulation of Investments. The Insurance Subsidiaries are subject to state laws
and regulations that limit the types of investments each insurance subsidiary
may make, 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 2001.
Rates and Policies Subject to Regulation. Pursuant to the New Jersey Insurance
Code, a domestic insurer must submit policy forms and endorsements to the
Commissioner 30 days prior to the policies becoming effective. If not
disapproved by the Commissioner within 30 days, such policy forms are deemed
approved. Rates and rating plans must be filed with the New Jersey Commissioner
30 days after becoming effective. In Virginia, an insurer must file policy forms
and endorsements with the Bureau of Insurance thirty days prior to the policy
forms and endorsements becoming effective, and generally such policy forms and
endorsements may be used if not disapproved by the Bureau within the thirty-day
period. An insurer must also file rates and rating plans with the Bureau. Rates
and rating plans are not effective unless approved by the Bureau, but rates and
rate plans are generally deemed approved if 60 days has lapsed since filing and
the Bureau has not disapproved the filing. The possibility exists that the
Company may be unable to implement desired rates, policies, endorsements, forms,
or manuals if such items are disapproved 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 other states, policy forms
usually
22
are subject to prior approval by the regulatory agency while rates usually are
"file and use." The New York Insurance Department sets the rates for medical
malpractice coverage on an annual basis.
Medical Malpractice Tort Reform. Revisions to certain of New Jersey's statutes
governing medical malpractice took effect in 1995. These revisions included
raising joint and several liability standards, requiring affidavits of merit,
restricting 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. These changes were intended to bring
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 in informed
consent cases must prove receiving information necessary to form an informed
consent would have been a substantial factor in the patient's decision whether
to undergo certain procedures, that except for cases alleging intentional
misconduct, and that punitive damages assessed against individual defendants be
capped at twice the compensatory damages. Courts in Pennsylvania have in certain
instances pronounced that the Pennsylvania Medical Professional Liability
Catastrophe Loss Fund (the "Cat Fund") be responsible for delay damages.
Pennsylvania enacted new reforms on March 19, 2002, that include requiring a
patient's medical costs exceeding $100,000 to be paid over time rather than in a
lump sum, prohibiting a patient from suing for damages paid by a health insurer,
and granting patients seven years from injury to make a claim or until a child's
20th birthday. The law also places the Cat Fund under the Department of
Insurance and phases out the fund over six years. The Company continues to
analyze the impact of these reforms. 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. Some states in which the Company writes insurance have
established catastrophe fund laws that effectively limit the Company's liability
to a level below the Company's typical policyholder limits of coverage. By way
of example, for policies issued or renewed after January 1, 2001, Pennsylvania's
Catastrophe ("Cat") Fund provides coverage for medical malpractice claims
exceeding $500,000 per occurrence for physicians and hospitals and $1.5 million
and $2.5 million aggregate per year for physicians and hospitals, respectively.
For calendar year 2001 and each year thereafter, the Cat Fund coverage is
limited to $700,000 per claim and $2.1 million in the aggregate.
A.M. BEST RATINGS
On February 21, 2002, A.M. Best lowered the Company's rating to B- (Fair) with a
negative outlook from A- (Excellent) following the Company's announcement to
strengthen reserves at December 31, 2001. On March 22, 2002, A.M. Best again
lowered the rating of the Company to C+ (Marginal) from B- (Fair). This rating
action reflects A.M. Best's views concerning the Company's weakened
capitalization, the potential negative impact of further adverse loss reserve
development, and concerns about the Company's ability to repay or refinance its
debt obligations.
A.M. Best publications indicate that the "C+" rating is assigned to those
companies that in A.M. Best's opinion have the ability to meet their current
obligations to policyholders, but their financial strength is vulnerable to
adverse changes in underwriting and economic conditions. 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
23
and surplus; its capital structure; the experience and competence of its
management; and its market presence.
EMPLOYEES
The Company employed approximately 215 persons at December 31, 2001. During
March, 2002, the Company reduced the number of employees to approximately 180
persons. Additional employee reductions of approximately 50 persons are planned
for the remainder of 2002. None of the Company's employees are covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the individuals who
currently serve executive officers of The MIIX Group. The MIIX Group has five
executive officers, Ms. Costante, Mr. Grab, Mr. Gerson, Mr. Redman and Ms.
Williams.
Information regarding Directors of the Company is incorporated by reference to
the section entitled "Election of Directors" in the Company's definitive proxy
statement to be filed with the SEC in connection with the Annual Meeting of
Shareholders to be held May 9, 2001 (the "Proxy Statement").
Name Position
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