The Company leases 49,000 square feet of space from the Medical Society of New Jersey in Lawrenceville, New Jersey, where its home office and Mid-Atlantic Region office are located. The Company also leases 28,000 square feet of space in a second Lawrenceville office building, where its claim department and a subsidiary are based. The Company's regional office facilities are located in rented office space in Indianapolis (5,000 square feet) and Dallas (5,000 square feet). The Company believes that its office space is adequate for its present needs and that it will be able to secure additional office space in the future if necessary.
The following table sets forth selected consolidated financial and operating data for the Company. The income statement data set forth below for each of the five years in the period ended December 31, 2000 and the balance sheet data as of December 31, 2000, 1999, 1998, 1997 and 1996 are derived from the consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors. All selected financial data are presented in accordance with GAAP, except for the item entitled "statutory surplus," which is presented in accordance with Statutory Accounting Principles ("SAP"). The statutory surplus amounts are derived
(1) Basic loss per share of common stock for the year ended December 31, 2000 is computed using the weighted average number of common shares outstanding during the year of 14,100,043. Diluted loss per share of common stock for the year ended December 31, 2000 is computed using the weighted average number of common shares outstanding during the year of 14,116,770.
The following discussion should be read in conjunction with the consolidated financial statements and the related notes thereto appearing elsewhere in this Annual Report. The consolidated financial statements for 2000 include the accounts and operations of The MIIX Group, Incorporated ("The MIIX Group") and its wholly-
On August 4, 1999, the reorganization of the Exchange was consummated. The reorganization was conducted according to a Plan of Reorganization adopted by the Board of Governors of the Exchange on October 15, 1997 and approved by members of the Exchange at a special meeting held on March 17, 1999 and by the Commissioner of the New Jersey Department of Banking and Insurance ("the Commissioner"). The Plan of Reorganization included several key components, including: formation of The MIIX Group to be the ultimate parent company for the Company; the transfer of assets and liabilities held by the Exchange to an affiliated stock insurance company, MIIX Insurance Company, formed for that purpose; acquisition of the Underwriter; distribution of shares of The MIIX Group common stock and/or cash to current and former members of the Exchange ("Distributees") as defined in the Plan of Reorganization; and dissolution of the Exchange. In connection with the reorganization, 11,854,033 shares of The MIIX Group common stock were issued to Distributees and 814,815 shares were issued to the Medical Society of New Jersey, plus $100,000 in cash, in exchange for all common stock of the Underwriter.
The MIIX Group sold three million shares of its common stock in an underwritten public offering ("the Offering") that closed on August 4, 1999. On August 11, 1999 an additional 450,000 shares were sold to underwriters of the Offering pursuant to an over-allotment option in the Offering underwriting agreement. The net proceeds of the Offering of approximately $37.3 million consisted of gross proceeds of $46.5 million less reorganization and offering costs of $9.2 million and have been used for general corporate purposes, including payment of dividends and the repurchase of shares under a stock buyback program. During August 1999, the Company approved a stock repurchase program authorizing the purchase of up to one million shares of common stock in the open market. During November 1999, the program was amended, authorizing the purchase of up to an additional two million shares. Through December 31, 2000, 3,000,000 shares had been repurchased at a total cost of $39.3 million and 25,933 shares have been issued from treasury at a value of $0.4 million.
The availability of medical malpractice insurance, or the industry's underwriting capacity, is determined principally by the industry's level of capitalization, historical underwriting results, returns on investments and perceived premium rate adequacy.
Management periodically reviews the Company's guidelines for premiums, surcharges, discounts, cancellations and non-renewals and other related matters. As part of this review, rates and rating classifications for its physicians, medical groups
The determination of loss and loss adjustment expense ("LAE") reserves involves the projection of ultimate losses through an actuarial analysis of the claims history of the Company and other professional liability insurers, subject to adjustments deemed appropriate by the Company due to changing circumstances. Management relies primarily on such historical experience in determining reserve levels on the assumption that historical loss experience provides a good indication of future loss experience despite the uncertainties in loss trends and the delays in reporting and settling claims. As additional information becomes available, the estimates reflected in earlier loss reserves have been and may continue to be revised. The Company increased prior year gross reserves by $47.2 million and $16.5 million in 2000 and 1999, respectively.
Reserves for incurred but not reported claims ("IBNR reserves") have consistently represented the majority of total loss and LAE reserves held by the Company. At December 31, 2000 and 1999, gross IBNR reserves composed 60.3% and 60.8%, respectively, of total gross loss and LAE reserves. The decrease in the proportion of IBNR in 2000 is primarily the result of additional claims made basis reserves, which develop more quickly from IBNR reserves into reported case reserves than the Company's occurrence basis loss and LAE reserves. Gross loss and LAE reserves on claims made medical malpractice policies amounted to $282.1 million, or 24.7% of total gross loss and LAE reserves at December 31, 2000, compared to gross loss and LAE reserves on claims made policies of $185.5 million, or 17.6% of total gross loss and LAE reserves at December 31, 1999.
The Aggregate Contract in 2000 provided several coverages on an aggregate excess of loss, specific excess of loss and quota share basis. The primary coverage afforded under the Aggregate Contract attaches above a Company retention measured as a 75% loss and allocated loss adjustment expense ratio ("loss and ALAE ratio"). Reinsurers provide coverage for an additional 75% loss and ALAE ratio, with an aggregate annual limit of $200 million. The Company has maintained aggregate excess of loss coverage generally similar to that described since 1993.
to 12.5% of premiums, whereas the Company does not incur commissions on products it sells directly. To the extent that brokered business represents an increased percentage of the Company's business in the future, expense ratios may increase.
NET PREMIUMS EARNED. Net premiums earned were $184.1 million in 2000 compared to $187.8 million in 1999, a decrease of approximately $3.7 million or 2.0%. This net decrease is composed of decreased direct and ceded premiums earned offset somewhat by an increase in assumed premiums earned. Direct premiums earned decreased $6.3 million, or 2.8%, to $216.6 million in 2000 from $222.9 million in 1999 and resulted from reduced direct premiums written in 2000 compared to 1999. Ceded premiums earned declined by $1.5 million, or 3.1%, to $46.5 million in 2000 from $48.0 million in 1999 primarily due to reduced ceded losses under aggregate reinsurance contracts during 2000 as compared to 1999. Assumed premiums earned increased $1.0 million, or 7.9%, to $13.9 million in 2000 from $12.9 million in 1999 and primarily represented activity associated with one large assumed excess of loss reinsurance contract on an institutional account first written in 1999.
NET INVESTMENT INCOME. Net investment income increased $9.5 million, or 12.6%, to $85.2 million in 2000 from $75.7 million in 1999. Average invested assets increased to approximately $1.27 billion in 2000 from $1.24 billion in 1999. The average pre-tax yield on the investment portfolio increased to 6.69% in 2000 from 6.22% in 1999 primarily as the result of ongoing changes in asset allocation due to a changing market yield environment.
REALIZED INVESTMENT GAINS AND LOSSES. Net realized investment losses decreased approximately $2.6 million, or 38.6%, to $4.2 million in 2000 compared to net realized investment losses of $6.8 million in 1999. In 2000, the net losses resulted from the recognition of $1.1 million of other than temporary declines in investments 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. In 1999, the net losses were primarily due to sales of fixed maturity investments to reposition the investment portfolio in an increasing market yield environment.
FUNDS HELD CHARGES. Funds held charges decreased $6.8 million, or 47.7%, to $7.5 million in 2000 from $14.3 million in 1999. Funds held charges relate to the Company's ceded aggregate reinsurance contracts, for which balances due to reinsurers are withheld as collateral for losses and loss adjustment expenses ceded under the contracts. The net decrease in funds held charges resulted from an increase of $6.4 million resulting from growth in the funds held under reinsurance treaties during 2000 compared to 1999 offset by a decrease of $13.2 million in funds held charges associated with adjustments to loss reserves, ceded losses and ceded premiums during 2000.
RESTRUCTURING CHARGE The Company undertook a restructuring during the second quarter of 1999 and on June 23, 1999 announced the reduction of regional and home office staff and the closing of the regional offices in Boston and Atlanta to centralize their functions at the Company's home office. The Company recognized a pre-tax charge of $2.4 million related to this restructuring. All actions contemplated by the charge were taken in June 1999 and no adjustments to the restructuring charge reserve were recorded during the balance of 1999.
The MIIX Group is a holding company whose assets primarily consist of all of the capital stock of its subsidiaries. Its principal sources of funds are dividends and other permissible payments from its subsidiaries and the issuance of debt and equity securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to surplus and net income without the consent of the applicable state regulatory authority, principally the New Jersey Department of Banking and Insurance. MIIX Insurance Company, The MIIX Group's principal insurance subsidiary, may pay dividends to The MIIX Group in any year, without regulatory approval, to the extent such dividends do not exceed the greater of statutory net income (excluding realized capital gains) of the preceding calendar year or 10% of statutory surplus at the end of the preceding year. Applicable regulations further require that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs. New Jersey permits the payment of dividends only out of statutory earned (unassigned) surplus unless the payment out of other funds is approved by the Commissioner. In 2001, MIIX may pay dividends to The MIIX Group of approximately $22.5 million without the prior approval of the New Jersey Insurance Commissioner. The MIIX Group expects that these current limitations imposed on MIIX Insurance Company should not affect its ability to declare and pay dividends sufficient to support The MIIX Group's initial dividend policy and other obligations. The other insurance subsidiaries are subject to similar provisions and restrictions. No significant amounts are currently available for payment of dividends by insurance subsidiaries other than MIIX Insurance Company without prior approval of the applicable state insurance department or Bermuda Registrar of Companies.
On May 24, 2000, the Company obtained a $20.0 million revolving credit facility with Amboy National Bank to meet certain non-operating cash needs as they may arise. The credit facility terminates April 7, 2002 and bears a fixed interest rate of 8.0% per annum. The Company has pledged 100% of The MIIX Insurance Company stock as collateral under the credit facility. As of December 31, 2000 the Company had borrowed approximately $7.5 million against the credit facility, which is included in notes payable and other borrowings on the consolidated balance sheet. During the period ended December 31, 2000 the Company incurred interest expense on the loan of approximately $247,222. At December 31, 2000, the Company had fixed maturity investments in Amboy National Bank of approximately $7.5 million earning a fixed interest rate of 6% per annum. The Company's CEO is a brother of the Senior Vice President and CFO of Amboy National Bank. The Company believes that the terms of
the credit facility described above are as fair to the Company as could have been obtained from an unaffiliated third party.
The Company invests its positive cash flow from operating activities primarily in fixed maturity securities. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration-sensitive, taxable bond and tax-preferred municipal bond portfolio, while maintaining an adequate level of liquidity. The Company currently plans to continue this strategy.
Cash dividends paid to shareholders were $0.20 per share in 2000. The Company expects to pay dividends in the future. However, payment of dividends is subject to approval by the Board of Directors, earnings and the financial condition of the Company.
Based on historical trends, market conditions and its business plans, the Company believes that its sources of funds will be sufficient to meet its liquidity needs over the next 18 months and beyond. However, because economic, market and regulatory conditions may change, there can be no assurance that the Company's funds will be sufficient to meet these liquidity needs.
During August 1999, the Company approved a stock repurchase program authorizing the purchase of up to 1,000,000 shares of its common stock in the open market. During November 1999, the program was amended, authorizing the purchase of up to an additional 2,000,000 shares. Through December 31, 2000, 3,000,000 shares had been repurchased at a total cost of $39.3 million and 25,933 shares have been issued from treasury at a value of $0.4 million.
At December 31, 2000, the Company had net after-tax unrealized losses on its fixed maturity investment portfolio of $8.6 million, which included a deferred tax valuation allowance of $0.6 million. The net after-tax unrealized losses of $8.6 million on the fixed maturity portfolio represented 2.9% of total shareholders' equity gross of net after-tax unrealized losses on investments. The net unrealized losses were the result of the rise in market interest rates during 1999 offset, in part, by unrealized gains during 2000. The unrealized losses at December 31, 2000 do not significantly impact the Company's ability to meet all regulatory capital requirements.
The Company also holds a portfolio of equity investments. At December 31, 2000, the cost and fair value of equity investments was $6.9 million and $5.8 million respectively. At December 31, 1999, the cost and fair value of equity investments was $13.2 million and $12.4 million, respectively. A 10% decline in value of the equity investments at December 31, 2000 would result in after-tax accumulated unrealized losses on equity investments of $0.6 million, or 0.2% of total shareholders' equity gross of net after-tax unrealized losses on investments.
The Company considers the effects of inflation in pricing insurance coverages provided and in reserving for losses and LAE. There may be long periods between the sale of insurance coverage and the reporting of losses, particularly with respect to coverage provided by the Company on occurrence-basis policies. Further, there are typically significant periods of time between reporting and settlement of losses. The actual effects of inflation on the Company's operating results cannot be accurately known until losses are reported and ultimately settled. Management believes that the Company's pricing and loss and LAE reserving processes adequately incorporate the effects of inflation.
The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedule on page are filed as part of this report.