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
The following table sets forth selected consolidated financial and operating data for the Company. The income statement data set forth below for each of the five years in the period ended December 31, 1999 and the balance sheet data as of December 31, 1999, 1998, 1997 and 1996 are derived from the consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors. The balance sheet data as of December 31, 1995 is derived from unaudited consolidated financial statements of the Company which management believes incorporate all of the adjustments necessary for the fair presentation of the financial condition as of such date. All selected financial data are presented in accordance with GAAP, except for the item entitled "statutory surplus," which is presented in accordance with Statutory Accounting Principles ("SAP"). The statutory surplus amounts are derived from the audited statutory financial statements of the Company and, in the opinion of management, fairly reflect the specified data for the periods presented. The information set forth below should be read in conjunction with, and is qualified by reference to, the Company's financial statements and related notes thereto included elsewhere herein.
(1) Basic earnings per share of common stock for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding during the year of 13,497,110. Diluted earnings per share of common stock for the year ended December 31, 1999 is computed using the weighted average number of common shares outstanding during the year of 13,534,052. Basic and diluted earnings per share for the years ended December 31, 1998 and prior gives effect to the issuance of approximately 12,025,000 shares of Common Stock to Distributees in the Company's reorganization consummated on August 4, 1999.
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 Company offered traditional occurrence coverage from 1977 through 1986 and has offered a form of occurrence-like coverage, "modified claims made," from 1987 to the present. Occurrence and modified claims made coverages have constituted the majority of the Company's business throughout its history. In recent years, however, the Company has increased its claims made business. Development of losses and LAE is longer and slower for occurrence business than claims made business.
Management believes the extent and, particularly, the frequency of reserve adjustments may increase in the future in response to the Company's expansion into new states and the increasing proportion of claims made insurance coverage being provided in those new markets. There are significant uncertainties in estimating losses and LAE in the casualty insurance business and these uncertainties are increased in periods when a company is expanding into new markets with new distribution channels. In addition, the shorter reporting period for claims made policies should allow the Company to more quickly determine ultimate losses on this business. Gross loss and LAE reserves on claims made policies amounted to $185.5 million, or 17.6% of total gross loss and LAE reserves at December 31, 1999, compared to gross loss and LAE reserves on claims made policies of $104.8 million, or 11.0% of total gross loss and LAE reserves at December 31, 1998.
Reserves for incurred but not reported claims ("IBNR reserves") have consistently represented the majority of total loss and LAE reserves held by the Company. At December 31, 1999 and 1998, gross IBNR reserves composed 60.8% and 65.6%, respectively, of total gross loss and LAE reserves. The decrease in the proportion of IBNR in 1999 is primarily the result of additional claims made basis reserves, which develop more quickly from IBNR reserves into reported case reserves than the Company's occurrence basis loss and LAE reserves.
The Aggregate Contract in 1999 provided several coverages on an aggregate excess of loss, specific excess of loss, and quota share basis. The primary coverage afforded under the Aggregate Contract attaches above a Company retention measured as a 75% loss and allocated loss adjustment expense ratio ("loss and ALAE ratio"). Reinsurers provide coverage for an additional 75% loss and ALAE ratio, with an aggregate annual limit of $200 million. The Company has maintained aggregate excess of loss coverage generally similar to that described since 1993.
Statements in this Annual Report that are not strictly historical constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. In addition to specific uncertainties and other factors mentioned elsewhere in this report, these uncertainties and other factors include, but are not limited to: (i) the Company having sufficient liquidity and
REALIZED INVESTMENT GAINS AND LOSSES Net realized investment losses were $6.8 million in 1999 compared to net realized investment gains of $36.4 million in 1998. In 1999, the net losses were primarily due to sales of fixed-maturity investments to reposition the investment portfolio in an increasing market yield portfolio. In 1998 the net gains were primarily composed of $38.4 million on the disposition of the Company's equity portfolio, partially offset by a $14.0 million loss realized on the expiration of an equity collar position on July 13, 1998. The remaining net realized gains in 1998 of $12.0 million resulted from sale of fixed-maturity investments in a generally falling market yield environment.
OTHER EXPENSES Other expenses amounted to $3.3 million in 1999 and primarily consisted of the costs associated with the leasing, brokerage and other businesses acquired by the Company in the acquisition of the Underwriter on August 4, 1999.
NET INVESTMENT INCOME Net investment income increased $11.2 million, or 20.8%, to $65.1 million in 1998 from $53.9 million in 1997. Average invested assets during 1998 increased to approximately $1.1 billion during 1998 from $1.0 billion in 1997. The average pre-tax yield on the investment portfolio increased to 5.88% in 1998 from 5.61% in 1997 primarily as the result of changes in asset allocation with an increased concentration in higher pre-tax yielding securities and a corresponding decrease in government and tax-exempt security holdings.
LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) Losses and LAE increased $35.4 million, or 29.4%, to $155.9 million in 1998 from $120.5 million in 1997. Losses and LAE were net of ceded losses and LAE of $62.4 million in 1998 and $68.9 million in 1997. The ratio of net losses and LAE to net premiums earned decreased to 95.9% in 1998 from 97.7% in 1997. This decrease is principally attributable to an increasing portion of the Company's business being written on a claims made basis which is expected to result in a lower ultimate loss and LAE ratio. Changes in loss and LAE reserves held on prior accident years also impacted the ratio of net losses and LAE to net premiums earned in 1998. During 1998, gross loss and LAE reserves were increased by $3.8 million, ceded loss and LAE reserves were increased by $5.9 million, and ceded earned premiums were increased as the result of the additional ceded losses and LAE by $3.3 million. No adjustments to loss and LAE reserves held on prior accident years were made during 1997.
UNDERWRITING EXPENSES Underwriting expenses increased $16.6 million, or 65.5%, to $42.1 million in 1998 from $25.4 million in 1997. The increase in expenses was attributable to the costs of acquiring new business, primarily through a broker distribution network, and to increased infrastructure costs necessary to service the increased volume of business activity. The ratio of underwriting expenses to net premiums earned increased to 25.9% in 1998 from 20.6% in 1997.
The MIIX Group is a holding company whose assets primarily consist of all of the capital stock of its subsidiaries. Its principal sources of funds are dividends and other permissible payments from its subsidiaries and the issuance of debt and equity securities. The insurance company subsidiaries are restricted by state regulation in the amount of dividends they can pay in relation to surplus and net income without the consent of the applicable state regulatory authority, principally the New Jersey Department of Banking and Insurance. MIIX Insurance Company, The MIIX Group's principal insurance subsidiary, may pay dividends to The MIIX Group in any year, without regulatory approval, to the extent such dividends do not exceed the greater of statutory net income (excluding realized capital gains) of the preceding calendar year or 10% of statutory surplus at the end of the preceding year. The MIIX Group expects that these current limitations imposed on MIIX Insurance Company should not affect its ability to declare and pay dividends sufficient to support The MIIX Group's initial dividend policy. Applicable regulations further require that an insurer's statutory surplus following a dividend or other distribution be reasonable in relation to its outstanding liabilities and adequate to meet its financial needs. New Jersey permits the
The primary sources of the Company's liquidity are insurance and assumed reinsurance premiums collected, net investment income, proceeds from the maturity or sale of invested assets, recoveries from reinsurance and revenues from non-insurance operations. Funds are used to pay losses and LAE, operating expenses, reinsurance premiums and taxes. The Company's net cash flow from operating activities was $107.4 million in 1999 compared to $92.7 million in 1998 and $64.6 million in 1997. The rise in positive cash flow during this period resulted from increases in collected premiums in excess of increases in paid losses and LAE and in paid underwriting expenses. Because of the inherent unpredictability related to the timing of the payment of claims, it is not unusual for cash flow from operations for a medical malpractice insurance company to vary, perhaps substantially, from year to year.
Cash dividends paid to stockholders were $0.10 per share in 1999. The Company expects to pay dividends in the future. However, payment of dividends is subject to approval by the Board of Directors, earnings and the financial condition of the Company.
The Company began evaluating this issue in 1996 in connection with an overall evaluation of the Company's systems and during 1997 assigned a project manager to study the Company's information systems and computers to determine whether they would appropriately handle post-1999 date codes. The identification of compliance issues included the Company's internal systems and processes, as well as exposure from service providers, brokers and other external business partners. Software applications, hardware and information technology ("I/T") infrastructure and non I/T systems such as the Company's telephone, security and heating and ventilating
Management completed the development of alternative Year 2000 contingency plans during 1999. Such plans would most likely involve the assignment of internal and external resources to process business manually during the period of any non-compliance. The plans remain available should Year 2000 difficulties develop at some point in the future.
Interest rate risk is considered by management to be the most significant market risk element currently facing the Company. Interest rate risk is the price sensitivity of a fixed maturity security to changes in interest rates. The Company views these potential changes in price within the overall context of assets and liability management. To reduce the Company's interest rate risk, duration targets are set for the fixed income portfolio after consideration of the duration of associated liabilities, primarily losses and LAE reserves, and other factors.
The tables below provide, as of December 31, 1999 and 1998, information about the Company's fixed maturity investments, which are sensitive to changes in interest rates, showing principal amounts and the average yield applicable thereto by expected maturity date and type of investment. The expected maturities displayed have been compiled based upon the earlier of the investment call date or the maturity date or, for mortgage-backed securities, expected payment patterns based on statistical analysis and management's judgment. Actual cash flows could differ, perhaps significantly, from the expected amounts.
Management does not expect that significant unrealized losses will be realized on the fixed maturity portfolio given the credit quality of the portfolio at December 31, 1999, the Company's positive operating cash flows, and the Company's policy of matching asset and liability maturities. Asset and liability matching is an important part of the Company's portfolio management process. The Company utilizes financial modeling and scenario analysis to closely monitor the effective modified duration of both assets and liabilities in order to minimize any mismatching. The goal of effective asset/liability management is to allow payment of claims and operating expenses from operating funds without disrupting the Company's long-term investment strategy.
Short term investments are composed of highly rated money market instruments.
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