Income Taxes. The Company accounts for income taxes in accordance with Financial Accounting Standards ("FAS") No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not, that all or some portion of the benefits related to the deferred tax assets will not be realized. Valuation allowances are based on estimates of taxable income and the
The Company's reserves for losses and LAE are estimates of amounts needed to pay reported and unreported claims and related LAE. If the Company experiences greater than expected severity or frequency of claims, or both, there is a risk that currently established reserves will prove inadequate. The Company's reserves are set based upon a number of assumptions, including that the Company's loss experience does not further deteriorate. If these assumptions prove wrong, reserves will be inadequate. If reserves are inadequate, this could lead to further regulatory action, including the supervision, rehabilitation or liquidation of the Company. As a result of increased loss severity and frequency of claims, the Company has increased reserves in each of the last three fiscal years. If an additional reserve adjustment is required in the future, the Company will likely be insolvent.
The Company May Not be able to Execute its Business Plan to Diversify its Business.
The Company currently reinsures its risks primarily under six reinsurance contracts, five Facultative Contracts and an Aggregate Excess of Loss Contract ("Aggregate Contract"). During January 2002, the Company renewed five institutional policies with Facultative Reinsurance Contracts, which reduced the amount of risk that MIIX retained on each policy. The contracts are on a quota share basis; therefore MIIX shares a portion of the premium and loss on each Facultative Reinsurance Contract. The quota share amount that MIIX retains ranges between 25% and 50%.
Through the nine months ended September 30, 2002, reserve adjustments had been made to maintain the loss and LAE reserve at management's best estimate levels. The reserve adjustments recorded for the three months ending September 30, 2002 followed from an internal study conducted by the Company. Loss and LAE reserves for the quarter ended September 30, 2002 included a net increase to direct and assumed loss and ALAE reserves of $30.7 million and a net decrease to ULAE reserves of $24.1 million. Ceded loss and ALAE reserves were increased by $11.2 million. Adjustments to direct and assumed loss and ALAE reserves included a net increase in Pennsylvania hospital reserves of $23.5 million, a net decrease in Pennsylvania physician reserves of $9.5 million, a net decrease in New Jersey physician reserves of $0.8 million, and a net increase in reserves held on all other business, written primarily in Texas and Ohio, of $17.5 million. The net adjustment primarily reflected adverse severity trends, particularly with respect to Pennsylvania hospital claims, somewhat offset by better than expected activity in the 2002 coverage year. The net adjustment to ULAE reserves primarily reflected the greater level of claims activity associated with claims made business written in recent years. Claims made business generally has a shorter development tail than occurrence policies, so the duration of anticipated future claim handling activity, and claim activity costs per dollar of indemnity payment, diminished.
REALIZED INVESTMENT GAINS AND LOSSES. Net realized investment losses decreased $2.0 million, or 47.4%, due to net realized investment losses of $2.2 million in 2001 compared to net realized investment losses of $4.2 million in 2000. In 2001, $19.7 million of net realized gains were taken primarily from continued repositioning of the portfolio, offset by $21.8 million of losses related to other-than-temporary declines in investment values, including $8.1 million ($5.3 million net of tax) resulting from activity following adoption of EITF 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" effective April 1, 2001. EITF 99-20 established new guidelines for recognition of income and other-than-temporary declines for interests in securitized assets. In 2000, the net losses resulted from the recognition of $1.1 million of other-than-temporary declines in investment values primarily associated with certain high yield securities and net losses of $3.1 million from sales of fixed maturity investments to reposition the investment portfolio in a changing market yield environment.
Equipment $ 391 $ 293 $ 98 $0 Premises 793 767 26 0 Total $1,184 $1,060 $124 $0
Management does not expect that significant unrealized losses will be realized on the fixed maturity portfolio given the credit quality of the portfolio at December 31, 2002 and the Company's policy of matching asset and liability maturities. Asset and liability matching is an important part of the Company's portfolio management process. The Company utilizes financial modeling and scenario analysis to closely monitor the effective modified duration of both assets and liabilities in order to minimize mismatching. The goal of effective asset/liability management is to allow payment of claims and operating expenses from operating funds without disrupting the Company's long-term investment strategy.