The MIIX Group, Incorporated ("The MIIX Group") was organized as a Delaware
corporation in October 1997 and, until September 28, 2004 (see "Subsequent
Events" below), was the parent company of a group of medical malpractice
insurance and insurance-related subsidiaries. Upon its formation, The MIIX Group
succeeded to the business of its predecessor. Until about 1991, the Company's
business was based primarily in New Jersey and written through its largest
insurance subsidiary, MIIX Insurance Company ("MIIX"). During 1991-2000, the
Company expanded to 24 other states, writing through both MIIX and Lawrenceville
Property and Casualty Company ("LP&C"). The MIIX Group began operating as a
publicly traded company on July 30, 1999.
As a result of net losses reported in 2000 and 2001, the insurance subsidiaries
ceased writing new or renewal business in all states by September 1, 2002,
consistent with the withdrawal requirements of individual states. By December
31, 2003, all insurance policies written by MIIX had expired.
Since ceasing to write new insurance policies in 2002, the Company's business
has consisted principally of managing the runoff of existing claims, the
Company's investment portfolio, and the operations of a New Jersey insurance
company, MIIX Advantage Insurance Company of New Jersey, which was renamed
"MDAdvantage Insurance Company of New Jersey"("MDAdvantage").
For purposes of this Annual Report on Form 10-K, the "Company" refers at all
times 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. "MIIX" refers to MIIX Insurance Company. "MIIX Advantage" and
"MDAdvantage" both refer to MIIX Advantage Insurance Company of New Jersey,
renamed in August 2004 to MDAdvantage Insurance Company of New Jersey.
MDAdvantage is not owned by the Company, rather it has a contractual arrangement
for its management with New Jersey State Medical Underwriters, Inc. (the
"Underwriter"), a subsidiary of The MIIX Group. See Part I, Item 13 of this Form
10-K.
SUBSEQUENT EVENTS. In furtherance of the ongoing monitoring of the runoff of
MIIX's insurance operations, the New Jersey Department of Banking and Insurance
("New Jersey Department") appointed an Administrative Supervisor in April 2004.
MIIX continued to operate in voluntary solvent runoff until September 28, 2004
when it was placed in rehabilitation by the New Jersey Department. See
"Regulation - Order of Rehabilitation" on page 17 of this Form 10-K.
MIIX's excess reinsurance contracts currently in place contain a provision
allowing reinsurers to offer additional reinsurance coverage that MIIX is
obligated to accept. In September and October 2004, the reinsurers initiated
requests for
2
additional premiums in accordance with contract terms. MIIX is without
sufficient surplus to purchase the requested coverage. See "Reinsurance -
Reinsurance Ceded."
During the summer of 2004, the Company retained financial advisors to assist in
exploring all of its alternatives. In connection with that exploration, the
financial advisors have contacted more than 50 prospective purchasers of assets
of MIIX or investors in MIIX. As a consequence of that effort, the Company has
received one indication of interest from MDAdvantage to acquire certain assets
of the Underwriter and one additional possible offer. The Company is proceeding
to negotiate with MDAdvantage the documentation relating to a possible sale of
the Underwriter's assets, subject to the receipt of all necessary approvals and
"higher or better offers" prior to closing. The Company is also continuing to
seek other buyers for its assets. Lawrenceville Re, Ltd. ("Lawrenceville Re") is
the sole remaining operating asset of the Company, and it has minimal activity.
The Company anticipates that its current cash position will not allow it to
continue to operate and that it will be required to wind up its business.
Significant aspects of the description of the Company's business contained in
this report are historical in nature and are not necessarily reflective of the
Company's current activities.
OVERVIEW
HISTORY OF BUSINESS
Medical professional liability insurance, also known as medical malpractice
insurance, insures the physician, other medical professionals or health care
institutions against liabilities arising from the rendering, or failure to
render, medical professional services. Under the typical medical professional
liability policy, the insurer also is obligated to defend the insured against
alleged claims.
The Company had total revenues and a net loss of $15.4 million and $314.7
million, respectively, in 2003, total revenues and a net loss of $165.0 million
and $116.0 million, respectively, in 2002 and total revenues and a net loss of
$233.3 million and $157.6 million, respectively, in 2001. As of December 31,
2003, the Company had total assets of $1.3 billion and a deficiency in total
stockholders' equity of $(278.5) million.
RESERVE ADJUSTMENTS
In 2001 and 2002, prior year gross loss and Loss Adjustment Expense ("LAE")
reserves were adjusted by $117.9 million and $161.2 million, respectively, to
reflect adverse development on several lines of business including New Jersey
and other states' physicians, Pennsylvania hospitals and hospital excess. The
adjustments were related to increases in severity and frequency. These trends
continued in 2003 and were complicated by acceleration in the claims process
attributable to tort and judicial reform in Pennsylvania and New Jersey and the
impact of MIIX and LP&C entering voluntary solvent runoff in 2002. Loss and LAE
reserves for 2003 were established by the Company as a result of an internal
actuarial review, an external opining actuarial review and an external actuarial
review performed in conjunction with the filing of MIIX's Annual Audited
Statutory Financial Statements ("Audited Report"). As a result of these reviews,
prior year gross loss and LAE reserves were increased by $353.0 million. The
increase was attributable to adverse development and increased severity in the
New Jersey and Pennsylvania physician and hospital excess lines of business.
As of December 31, 2003, MIIX's Total Adjusted Capital, as filed in its Audited
Report, was a deficit of $(305.6) million, which is below the Mandatory Control
Level. MIIX continued to operate in voluntary solvent runoff until September 28,
2004 when the State of New Jersey entered an Order of Rehabilitation of MIIX.
See "Regulation - Order of Rehabilitation." Additionally, MIIX completed the
merger of LP&C into MIIX on December 31, 2003.
As a result of the losses occurring in 2001 and 2002, the Company's various
insurance subsidiaries were required by the New Jersey Department and other
applicable state regulatory bodies to cease writing insurance by September 1,
2002. As a result, the Company's business activities since that date have been
limited to managing claims, managing its investment portfolio and, through its
underwriting subsidiary, providing claims management and underwriting and
related services to MIIX and MDAdvantage. By December 31, 2003, all insurance
policies written by the Company had expired.
3
OTHER RECENT DEVELOPMENTS: 2003-2004
Primarily as a result of the dramatic increases in reserves over the past three
years, the Company has experienced a number of adverse developments. The
following are among the most significant.
During 2003, MIIX entered into an Order with the New Jersey Department that set
forth the framework for the regulatory monitoring of MIIX and established
certain operating limitations on MIIX. On September 28, 2004, the Superior Court
of New Jersey entered an Order placing MIIX into rehabilitation. See "Regulation
- Order of Rehabilitation" on page 17 of this Form 10-K.
The trading of The MIIX Group's common stock was suspended at the opening of
business on April 28, 2003 by the New York Stock Exchange ("NYSE") because The
MIIX Group was "below criteria" as its total capitalization was less than $50
million over a 30-day trading period and stockholders' equity was less than $50
million. The MIIX Group's common stock now trades on the Over-The-Counter
("OTC") Bulletin Board under the ticker symbol "MIIX." See "Risks and
Uncertainties."
During 2002, the Company engaged financial advisors to assist it in obtaining
offers for the Company's assets. No viable offers to make a significant
investment in the Company or to purchase all of the Company were received. In
2004, the Company engaged additional financial advisors to assist it in
exploring all available alternatives, and the Company continues to be interested
in entertaining any and all offers by any interested parties for its assets
and/or for investment in the Company. In connection with that exploration, the
financial advisors have contacted more than 50 prospective purchasers of assets
of the Company or investors in the Company. As a consequence of that effort, the
Company has received one indication of interest from MDAdvantage to acquire
certain assets of the Underwriter and one additional possible offer. The Company
is proceeding to negotiate with MDAdvantage the documentation relating to a
possible sale of the Underwriter's assets, subject to the receipt of all
necessary approvals and "higher or better offers" prior to closing. The Company
is also continuing to seek other buyers for its assets.
CLAIMS
Although entry of the Order of Rehabilitation for MIIX on September 28, 2004,
gave the New Jersey Department authority over claims, the Company's Claims
Department was responsible for claims investigation, establishment of
appropriate case reserves for loss and Allocated Loss Adjustment Expense
("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 at December 31, 2003. 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 has historically been provided almost exclusively by private
law firms with lawyers whose primary focus is defending malpractice cases.
LOSS AND LAE RESERVES
As discussed above, the Company has recorded substantial increases in its loss
and LAE Reserves in each of the past three years. In consequence, the Company
ceased writing medical malpractice insurance in New Jersey as of September 1,
2002, and in all other states in accordance with their respective specific
requirements. In September 2004, MIIX was determined by the New Jersey
Department to be in hazardous financial condition, and on September 28, 2004, an
Order of Rehabilitation was entered with respect to MIIX. The discussion that
follows summarizes the methodology employed by the Company in establishing loss
and LAE reserves and some of the adverse developments experienced by the Company
over the past few years.
Loss reserves recorded by the Company include estimates of amounts to be paid
for losses and for LAE. LAE consists of two types of costs, 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, including
4
mainly salaries and overhead associated with the Company's Claims 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 quarterly actuarial analyses. 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 Claims
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.
There are significant 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-like coverage that make up a substantial portion of
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 with respect to an occurrence-like policy as opposed to a claims-made
policy. In 2004, the Company is still experiencing development on claims
associated with coverage written in the 1970's. With the longer claim reporting
and development period, reserves are more likely to be affected 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.
These uncertainties inherent in estimating losses have been exacerbated by
several factors in the past several years. The Company's entry into runoff in
2002 resulted in a continuous decline of policies in force during 2003, with no
policies remaining in force as of December 31, 2003. This caused a significant
and continuing decrease in new claim reports as well as an overall significant
decrease in total pending claims. The decreased pending claims, and especially
the decreased new claim reports, which consumed disproportionately longer set-up
time, have allowed a greatly increased time for each claim handler to work on
existing claims. This has resulted in an acceleration in the setting up of case
reserves, departing significantly from the historic patterns the Company has
relied upon to estimate future development and IBNR.
Simultaneously, significant changes in the litigation environment in New Jersey,
which represents approximately 50% of the Company's reserves, resulted in faster
processing of claims and a corresponding acceleration in case reserving. The
court system in New Jersey instituted its "Best Practices" initiative in
September 2000 which was intended to speed cases through the courts. This
initiative has substantially speeded up trials in New Jersey and thus has
affected the entire claims management process. In June 2003, the courts issued a
public report stating that the court system in New Jersey had reached its lowest
level of backlogged cases since 1980.
As a result of these various uncertainties, estimates reflected in earlier loss
reserves may be revised, as has been the case in each of the past three years.
METHODOLOGIES. The Company sets and adjusts financial statement loss and LAE
reserves beginning 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 establishing the IBNR component of
the financial statement reserves.
The determination of loss and LAE reserves involves the projection of ultimate
loss and ALAE through various actuarial techniques, including:
o Incurred Development Method
o Berquist-Sherman Method
o Bornhuetter-Ferguson Method
o Frequency-Severity Method
o ALAE-to-Indemnity Ratio Method
o Audit Method
5
ULAE reserves are projected through a Paid-to-Paid Ratio Method.
A brief description of each of these methods follows:
o Incurred Development Method: Historical patterns of loss and
ALAE emergence are observed and selections of period-to-period
development factors are made to estimate the relative
development within a Coverage Year from one maturity point to
the next. These selected factors are applied to the latest
reported incurred loss and ALAE amounts for each Coverage Year.
This method is used mainly for relatively mature Coverage Years.
o Berquist-Sherman Method: Changing conditions in the claim
management process can cause significant distortions in reserve
projections. The Berquist-Sherman Method adjusts the historical
data to the conditions inherent in the most recent data. This
allows selections of period-to-period development factors which
take into account the changes in conditions.
o Bornhuetter-Ferguson Method: This method relies on the
assumption that the remaining unreported loss and ALAE amounts
are a function of the total expected amounts rather than a
function of the latest reported incurred loss and ALAE amounts.
Expected future development amounts are added to current
reported incurred loss and ALAE amounts for each Coverage Year.
The expected future development amounts for each Coverage Year
are derived by multiplying an a-priori expected ultimate loss
and ALAE amount by the estimated percentage of ultimate loss and
ALAE unreported, to date. This percentage is based on the
factors selected within the Incurred Development Method. The
a-priori expected ultimate loss and ALAE amount is derived via
either of two approaches: (1) it is assumed to match the prior
quarter's selected ultimate loss and ALAE amount; or (2) it is
based upon a more mature Coverage Year's selected ultimate loss
and ALAE amount as a ratio to earned premium, the current
Coverage Year's earned premium and estimated effects of rate and
mix-of-business differences between the more mature and current
Coverage Years. This method is used mainly for relatively
immature Coverage Years.
o Frequency-Severity Method: Ultimate reported claim counts and
ultimate average loss and ALAE per claim are projected
separately, and then multiplied together. Ultimate claim counts
are derived in a manner similar to the Incurred Development
Method; however, the implied ultimate claim counts are analyzed
as ratios to exposure level to achieve implied frequencies.
Final frequencies are selected judgmentally and multiplied by
the exposure measure to obtain final ultimate reported claim
counts. Ultimate average loss and ALAE per claim are derived
through curve-fitting techniques in which the a-priori
parameters are the estimated ultimate reported claim counts and
ultimate loss and ALAE amounts achieved via another method.
Selected curve fits are extrapolated to more recent Coverage
Years for which credible severity information may not yet exist.
This method is used mainly for relatively immature Coverage
Years.
o ALAE-to-Indemnity Ratio Method: This method is only used to
estimate ultimate ALAE amounts when loss and ALAE are projected
independently. Both ALAE and indemnity amounts must have been
projected to ultimate using other methodologies. Then ratios of
(ultimate ALAE)-to-(ultimate indemnity) are calculated for each
Coverage Year, and appropriate ratios are judgmentally selected
for each year. More mature Coverage Years serve as a basis for
the selections in immature years. Then, the selected ratios are
multiplied by the ultimate indemnity amounts. This method is
used mainly for relatively immature Coverage Years.
o Audit Method: Claims personnel review individual claims and
estimate their ultimate loss and ALAE amounts based on their
specific characteristics. This method is mainly used for
segments of the business with low frequency and high severity
exposures.
o Paid-to-Paid Ratio Method: Historical ratios of (paid
ULAE)-to-(paid indemnity and ALAE) are calculated and serve as a
basis for the judgmental selection of a corresponding ratio to
be expected in the future. This ratio is applied to the
estimated indemnity and ALAE reserves.
6
RESERVES BY POLICY TYPE AND YEAR. The Company also reserves by policy type and
by year. In addition to claims-made insurance coverage, the Company offered
traditional occurrence professional liability insurance coverage from 1977
through 1986 and offered a form of occurrence-like coverage, "modified
claims-made," from 1987 to August 31, 2002. The Company's modified claims-made
policy was the Permanent Protection Policy ("PPP"). Under the PPP, coverage was
provided for claims reported to the Company during the policy period arising
from incidents since inception of the policy. The PPP included "tail coverage"
for claims reported after expiration of the policy for occurrences during the
policy period, and thus was 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 constituted approximately 67% of the
gross loss and LAE reserves at December 31, 2003.
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, 2001 $832,290 69.5% $357,495 29.9% $7,213 0.6% $1,196,998
December 31, 2002 750,175 65.1% 395,774 34.4% 5,686 0.5% 1,151,635
December 31, 2003 812,527 66.7% 401,564 32.9% 4,866 0.4% 1,218,957
As displayed in the above table, the proportion of the gross loss and LAE
reserves held on claims-made medical professional liability policies has grown
from 29.9% of total gross loss and LAE reserves held at December 31, 2001 to
32.9% at December 31, 2003. This has primarily been the result of the Company's
claims-made policy form writings during 1997 through 2002. New Jersey Physician
business was primarily written under the occurrence-like PPP policy. The
majority of policies sold in other states were claims-made.
Since a significant portion of the Company's reserves are recorded on an
occurrence basis, and given the long time that typically elapses between the
coverage incident and the resolution of the claim, IBNR reserves have
consistently represented a majority of the gross reserves recorded by the
Company. The following table summarizes the components of gross loss and LAE
reserves, including ULAE reserves, and indicates that IBNR reserves constitute a
majority of gross reserves on a consistent basis:
Components of Gross Loss and Loss Adjustment Expense Reserves
(In thousands)
Loss and Loss and Total
ALAE Case % of ALAE IBNR % of ULAE % of Gross
Reserves Total Reserves Total Reserves Total Reserves
--------- ------ --------- ------ -------- ----- ----------
Gross Reserves Held as of:
December 31, 2001 $429,493 35.9% $719,268 60.1% $48,237 4.0% $1,196,998
December 31, 2002 436,873 37.9% 696,287 60.5% 18,475 1.6% 1,151,635
December 31, 2003 463,686 38.0% 737,070 60.5% 18,201 1.5% 1,218,957
The Company 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 adjust open claims that are associated with coverage
written in the 1970's.
7
The following table illustrates the amount and percentage of gross loss and LAE
reserves held by the Company at December 31, 2003 categorized by year.
Gross Loss and Loss Adjustment Expense Reserves By Coverage Year
As of December 31, 2003
(In thousands)
Coverage Year Gross Reserves % of Total
---------------------------------------------- -------------- ------------
1977-93..................................... $ 54,046 4.4%
1994........................................ 22,686 1.9%
1995........................................ 24,410 2.0%
1996........................................ 48,590 4.0%
1997........................................ 65,042 5.3%
1998........................................ 127,485 10.5%
1999........................................ 173,043 14.2%
2000........................................ 219,946 18.0%
2001........................................ 264,136 21.7%
2002........................................ 186,341 15.3%
2003........................................ 33,232 2.7%
------------ ------
Total Gross Reserves held by the Company.... $ 1,218,957 100.0%
============ ======
As shown in the above tables, at December 31, 2003, approximately 67% of gross
reserves are occurrence based; over 60% of gross reserves are IBNR reserves, and
approximately 72% of gross reserves relate to the most recent five coverage
years, which are the most immature (and, therefore, most subject to variability)
in terms of loss development.
Activity in the liability for unpaid losses and LAE gross of reinsurance is
summarized as follows:
Years Ended December 31,
--------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Balance at January 1, gross of reinsurance
recoverable................................... $1,151,635 $1,196,998 $1,142,530
Incurred related to:
Current year............................... 33,582 150,612 230,399
Prior years................................ 352,983 161,207 117,881
---------- ---------- ----------
Total incurred.................................. 386,565 311,819 348,280
---------- ---------- ----------
Paid related to:
Current year............................... 350 2,648 2,570
Prior years................................ 318,893 354,534 291,242
---------- ---------- ----------
Total paid...................................... 319,243 357,182 293,812
---------- ---------- ----------
Balance at December 31, gross of reinsurance
recoverable................................... 1,218,957 1,151,635 1,196,998
Reinsurance recoverable......................... 425,785 457,005 463,275
---------- ---------- ----------
Balance at December 31, net of reinsurance...... $ 793,172 $ 694,630 $ 733,723
========== ========== ==========
The Company increased prior year gross reserves by $353.0 million, $161.2
million and $117.9 million during 2003, 2002 and 2001, 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 coverage
year ultimate losses and LAE. Accordingly, reserves established for losses and
LAE on individual coverage years may experience greater volatility than
aggregate reserves reported in the Company's financial statements. Individual
coverage year reserves cover a smaller amount of
8
business over a shorter period of time than do the aggregate reserves, which are
an accumulation of reserves pertaining to all coverage years. Estimated ultimate
losses and LAE associated with individual coverage years were adjusted in 2003,
2002 and 2001. The following table presents the estimated ultimate losses and
LAE gross of reinsurance (including changes in such estimates) by coverage year:
Coverage 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,
---------------------------------------------------- --------------------------------------
Coverage Year 2000 2001 2002 2003 2001 2002 2003
------------- ---------- ---------- ---------- ---------- --------- --------- ---------
1993 and Prior $1,330,901 $1,332,284 $1,336,850 $1,360,565 $ 1,383 $ 4,566 $23,715
1994 143,651 152,787 159,170 168,681 9,136 6,383 9,511
1995 155,128 156,665 163,978 170,515 1,537 7,313 6,537
1996 179,902 186,510 217,126 238,018 6,608 30,616 20,893
1997 205,156 226,797 235,972 255,709 21,641 9,175 19,737
1998 242,349 278,821 303,113 339,270 36,472 24,292 36,156
1999 307,246 332,052 358,724 414,796 24,806 26,672 56,071
2000 276,261 292,559 321,075 374,179 16,298 28,516 53,104
2001 230,399 254,073 330,614 23,674 76,541
2002 150,612 201,329 50,717
2003 33,582 33,582
---------- ---------- ---------- ---------- --------- --------- --------
Total Estimated Ultimate Losses
and LAE 2,840,594 3,188,874 3,500,693 3,887,258 $ 117,881 $ 161,207 $386,565
========= ========= ========
Less: Total Paid Loss and LAE 1,698,064 1,991,876 2,349,058 2,668,301
---------- ---------- ---------- ----------
Gross Loss and LAE Reserves at
December 31 $1,142,530 $1,196,998 $1,151,635 $1,218,957
========== ========== ========== ==========
2001, 2002, 2003 ADJUSTMENTS. In 2001 and 2002, prior year gross loss and LAE
reserves were adjusted by $117.9 million and $161.2 million, respectively, to
reflect adverse development on several lines of business including New Jersey
and other states' physicians, Pennsylvania hospitals and hospital excess. The
adjustments were related to increases in severity and frequency.
Specific factors noted in management's actuarial analysis giving rise to the
coverage year reserve development in 2001 included the following: overall
reserves across all coverage years were significantly adjusted 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 in prior coverage years
through 1996 primarily reflects this severity trend in Pennsylvania and New
Jersey. Development on coverage 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 in management's actuarial analysis giving rise to the coverage
year development in 2002 were increased loss severity, re-underwriting
initiatives undertaken by the Company since 1999 and the acceleration of claim
reporting, settlement and payments experienced by the Company during 2002.
The continued increase in severity of claims was particularly noted in the
physician book in Texas, Ohio and New Jersey, and in the hospital book in
Pennsylvania and all other markets in 2002. The majority of the adverse
development in all markets was observed in coverage years prior to 2000. A
significant acceleration of claim reporting was observed in the first half of
2002 in Pennsylvania attributable to a rush to file suits ahead of pending tort
reform legislation in this state. The Pennsylvania book also showed indications
of acceleration of the claim settlement process, which the Company believes is
attributable to its runoff status, lifting of stays that had delayed many cases
and general efforts by the Pennsylvania court system to clear the backlog of
cases. The New Jersey physician book showed significant acceleration in the
claim settlement process in the latter half of the year with claim settlement
rates in some of the older coverage years (1998 and prior) at 100% or more above
expected levels. The
9
Company believes the acceleration in New Jersey is attributable to its runoff
status, as well as the continued effects of the "Best Practices" initiative
mandated by the New Jersey Supreme Court in September 2000.
These trends continued in 2003 and were complicated by acceleration in the
claims process attributable to tort and judicial reform in Pennsylvania and New
Jersey and the impact on the internal claim process of the Company entering
voluntary solvent runoff in 2002. After extensive analyses, the Company's prior
year gross loss and LAE reserves were adjusted by $353.0 million for 2003. The
increase was primarily attributable to adverse development and increased
severity in New Jersey and Pennsylvania physician lines of business and the
hospital excess lines in all jurisdictions.
The 2003 adjustments were established as a result of an extensive process, which
included an internal actuarial review of data valued at September 30, 2003,
December 31, 2003, March 31, 2004, and June 30, 2004, an external opining
actuarial review of data valued at September 30, 2003, December 31, 2003 and
June 30, 2004 and an external actuarial review performed in conjunction with
filing MIIX's Audited Report.
The reason for the extensive actuarial analyses on multiple quarters of data was
to determine how much of the development in the loss experience of the Company
from quarter to quarter was attributable to acceleration in the claim handling
process and environment as opposed to adverse development in terms of increased
severity.
Management and 2 external actuarial analyses concur that there is acceleration
in the development of the Company's data. Determining, however, what portion is
acceleration versus adversity is extremely difficult. Management sought out
multiple actuarial reviews over four successive quarters of development data to
evaluate the volatile data. The extreme uncertainty in the data and analyses has
been the result of several factors.
The Company's entry into runoff in 2002 resulted in a continuous decline of
policies in force during 2003, with no policies remaining in force as of
December 31, 2003. This caused a significant and continuing decrease in new
claim reports as well as an overall significant decrease in total pending
claims. The decreased pending claims and especially the reduced new claim
reports, which consumed a disproportionately longer time to initially set up,
have allowed greatly increased time for each claim handler to work on existing
claims. This has resulted in an acceleration in the setting up of case reserves,
departing significantly from the historic patterns the Company has relied upon
to estimate future development and IBNR.
Simultaneously, significant changes in the litigation environment in New Jersey,
which represents approximately 50% of the Company's reserves, resulted in the
faster processing of claims and a corresponding acceleration in case reserving.
The court system in New Jersey instituted its "Best Practices" initiative in
September 2000, which was intended to speed cases through the courts. This
initiative has substantially speeded up trials in New Jersey and, thus, has
affected the entire claims management process. In June 2003, the courts issued a
public report stating that the court system in New Jersey had reached its lowest
level of backlogged cases since 1980.
10
On a net of reinsurance basis, the activity in the liability for unpaid losses
and LAE is summarized as follows:
Years Ended December 31,
-------------------------------------------
2003 2002 2001
--------- --------- ---------
(In thousands)
Balance at January 1, net of
reinsurance recoverable.......................... $ 694,630 $ 733,723 $ 710,484
Incurred related to:
Current year.................................. 33,582 146,619 203,975
Prior years................................... 237,357 49,868 46,793
---------- ---------- ----------
Total incurred..................................... 270,939 196,487 250,768
---------- ---------- ----------
Paid related to:
Current year.................................. 350 2,648 2,571
Prior years................................... 172,047 232,932 224,958
---------- ---------- ----------
Total paid......................................... 172,397 235,580 227,529
---------- ---------- ----------
Balance at December 31, net of
reinsurance recoverable.......................... 793,172 694,630 733,723
Reinsurance recoverable............................ 425,785 457,005 463,275
---------- ---------- ----------
Balance at December 31, gross of reinsurance....... $1,218,957 $1,151,635 $1,196,998
---------- ---------- ----------
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 1998 to be $100,000 was first reserved in 1993
at $150,000, the $50,000 redundancy (original estimate minus actual loss) would
be included in the cumulative redundancy in each of the years 1993 through 1997
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.
11
TABLE I. LOSS AND LAE RESERVES DEVELOPMENT - GROSS
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
LOSS AND LAE RESERVES $667,200 $688,455 $748,660 $795,449 $876,721 $ 951,659 $1,053,597 $1,142,530 $1,196,998 $1,151,635
LIABILITY REESTIMATED AS
OF:
One year later 623,988 688,455 748,660 795,654 880,543 968,173 1,100,809 1,260,411 1,358,205 1,504,617
Two years later 623,986 688,450 744,130 793,170 878,233 962,709 1,202,392 1,397,944 1,660,471
Three years later 623,989 689,122 739,106 772,567 863,657 1,039,486 1,311,410 1,623,669
Four years later 624,567 674,224 715,136 766,597 903,962 1,121,831 1,484,030
Five years later 606,219 647,203 707,312 785,261 962,015 1,238,380
Six years later 588,748 653,275 719,368 834,139 1,042,407
Seven years later 595,682 663,794 737,630 894,795
Eight years later 597,065 674,743 777,393
Nine years later 601,631 707,969
Ten years later 625,346
CUMULATIVE REDUNDANCY
(DEFICIENCY) 41,854 (19,514) (28,733) (99,346) (165,686) (286,721) (430,433) (481,139) (463,473) (352,983)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later $ 83,522 $ 98,053 $116,532 $101,217 $141,954 $ 164,524 $ 230,005 $ 291,242 $ 354,535 $ 318,893
Two years later 179,714 212,284 214,484 231,755 298,785 370,911 497,982 620,952 661,087
Three years later 284,828 293,323 332,920 373,232 470,693 588,348 755,339 888,421
Four years later 343,563 407,357 452,055 514,813 634,094 771,226 968,729
Five years later 436,921 492,388 553,205 629,774 757,853 896,538
Six years later 486,861 552,039 621,022 707,116 828,050
Seven years later 524,025 594,337 655,511 745,480
Eight years later 548,388 618,134 676,667
Nine years later 562,629 631,646
Ten years later 571,715
TABLE II. LOSS AND LAE RESERVES DEVELOPMENT - NET
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
LOSS AND LAE
RESERVES-GROSS $667,200 $688,455 $748,660 $795,449 $876,721 $951,659 $1,053,597 $1,142,530 $1,196,998 $1,151,635
REINSURANCE RECOVERABLE
ON UNPAID LOSSES 62,682 112,917 165,729 221,749 270,731 325,795 406,409 432,046 463,275 457,005
-------- -------- -------- -------- -------- -------- -------- ---------- ---------- ----------
604,518 575,538 582,931 573,700 605,990 625,864 647,188 710,484 733,723 694,630
LIABILITY REESTIMATED AS
OF:
One year later 559,518 575,538 582,931 573,700 603,906 611,850 698,491 757,277 783,590 931,987
Two year later 559,518 575,538 582,931 573,321 603,809 649,454 738,008 765,508 988,667
Three years later 559,518 575,538 580,883 588,477 627,292 678,666 674,266 888,819
Four years later 559,518 575,124 579,766 595,479 611,087 622,337 756,560
Five years later 559,133 566,608 587,836 587,991 596,751 699,426
Six years later 548,242 576,831 586,777 583,738 634,088
Seven year later 561,953 580,940 587,266 619,876
Eight years later 564,486 582,625 621,539
Nine years later 568,076 615,361
Ten years later 591,551
CUMULATIVE REDUNDANCY
(DEFICIENCY) 12,967 (39,823) (38,608) (46,176) (28,098) (73,562) (109,372) (178,335) (254,944) (237,357)
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
CUMULATIVE AMOUNT OF
LIABILITY PAID THROUGH:
One year later $ 82,572 $ 97,496 $116,194 $ 84,276 $134,666 $157,359 $ 211,393 $ 224,958 $232,932 $172,048
Two years later 178,357 211,426 197,370 214,404 284,887 345,305 413,084 433,064 392,640
Three years later 283,370 278,571 315,743 365,517 439,372 496,456 548,839 553,688
Four years later 328,836 392,522 437,779 492,617 536,488 557,648 615,383
Five years later 422,194 478,731 524,447 550,600 542,294 582,701
Six years later 473,702 523,901 549,919 531,001 560,675
Seven years later 508,269 544,626 533,102 548,031
Eight years later 528,303 528,347 548,006
Nine years later 530,409 541,619
Ten years later 539,255
The aggregate excess reinsurance contracts, in place from 1995 through 1999,
provide coverage above aggregate retentions for losses and ALAE other than
certain 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 1995
through 1999 at a constant level provided such losses and ALAE ceded under the
aggregate excess reinsurance contracts remain within the coverage limits
available in each underwriting year. Ceded losses and ALAE have remained within
coverage limits in each year since 1995 with the exception of 1998 and 1999.
Loss and LAE reserves have exceeded contract limits in 1998 and 1999 by $6.3
million and $4.5 million, respectively. The aggregate excess reinsurance
contracts for 2000 and 2001 cover New Jersey and Pennsylvania physician business
12
only. The aggregate excess reinsurance contract for 2002 covers New Jersey
physician business only. The aggregate contracts operate on a funds held basis
and provide for premium adjustments based on loss experience. See "Business -
Reinsurance" and "Management's Discussion and Analysis of Financial Condition
and Results of Operation - Risks and Uncertainties."
REINSURANCE
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 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 did not purchase reinsurance
in 2003 because it was no longer writing insurance policies.
In prior years, the Company reinsured its risks primarily under two reinsurance
contracts, the Specific Contract and the Aggregate Contract. 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. The table below
presents a summary of activity for the aggregate excess reinsurance contracts
for each of the last three years.
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 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 fall below B+. Under the contracts, and as a result of the
downgrade of MIIX's A.M. Best rating to below B+ during the first quarter of
2002, reinsurers requested that assets supporting the funds withheld account be
placed in trust. MIIX established the required trust accounts 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 is obligated to accept. In September and October 2004, the
reinsurers initiated requests for additional premiums from MIIX in accordance
with provisions of the contracts. Reinsurers are prohibited from canceling
current reinsurance agreements or making additional premium charges to MIIX
under the September 28, 2004 Order of Rehabilitation.
The major elements of all ceded reinsurance activity are summarized in the
following table:
For the Years Ended December 31,
------------------------------------
2003 2002 2001
-------- -------- --------
(In thousands)
Ceded premiums earned.................... $ 50,707 $ 59,325 $67,529
Ceded losses and LAE..................... 115,626 115,332 97,509
Funds held charges....................... 42,996 54,209 42,476
13
MIIX seeks to control credit risk from reinsurance 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, 2003, and collateral
held by the Company in the form of funds withheld and letters of credit as of
December 31, 2003. No other single reinsurer's percentage participation in 2003
exceeded 5% of the total reinsurance recoverable at December 31, 2003.
At December 31, 2003
---------------------------------
Total Amounts Total Amount of
Reinsurer Recoverable Collateral Held
-------------------------------------------- ------------- ---------------
(In thousands)
Hannover Reinsurance (Ireland) Ltd.......... $214,226 $207,754
Eisen und Stahl Reinsurance (Ireland) Ltd... 53,556 51,814
London Life and Casualty Reinsurance
Corporation.............................. 37,970 41,559
Underwriters Reinsurance Company (Barbados). 74,565 79,326
Swiss Reinsurance/European Reinsurance...... 68,351 59,410
The Company analyzes the credit quality of its reinsurers and relies on its
brokers and intermediaries to assist in such analysis. To date, the Company has
not experienced any material difficulties in collecting reinsurance
recoverables.
REINSURANCE ASSUMED. The Company did not assume reinsurance in 2003 or 2002,
consistent with its decision to discontinue writing insurance. On July 1, 2002,
an excess of loss contract providing medical professional liability coverage on
an institutional account was commuted. The commutation of this treaty had no
impact on the Company's financial condition or results of operations.
REINSURANCE COMMUTED. In June 2004, MIIX commuted its 1995 aggregate excess
reinsurance treaty. The commutation agreement provided for the release of
applicable funds held balances and trust fund assets. The reduction to earnings
as a result of the commutation was $3.3 million in 2004.
INVESTMENT PORTFOLIO
When MIIX was placed by court order into rehabilitation on September 28, 2004,
the New Jersey Department assumed full control of MIIX's investment portfolio.
The Company's investment policy, prior to that time, placed primary emphasis on
holding investment grade, fixed maturity securities, maximizing after-tax yields
while minimizing credit risks and preserving liquidity. In doing so, the Company
used independent fixed income portfolio managers and an investment consultant
operating under the guidance of investment policies established at the direction
of the Company's Board of Directors (the "Board").
Under the Order of Rehabilitation, which was entered on September 28, 2004, the
New Jersey Department has assumed control of the investment portfolio. As a
result, the Company presently exercises no control over its investments, the
liquidation of those investments, or investment policy. The discussion set forth
below and elsewhere in this 10-K is as of December 31, 2003, and does not
describe the management of MIIX's investment portfolio as at present, as the New
Jersey Department's approach to the management of that portfolio is not known to
the Company.
14
The following table sets forth the composition of the investment portfolio of
the Company at the dates indicated. All of the fixed maturity investments were
held as available-for-sale.
December 31, 2003 December 31, 2002
-------------------------- --------------------------
Cost or Cost or
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
(In thousands)
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies.................................. $ 99,778 $ 100,011 $ 108,725 $ 112,499
Obligations of states and political
subdivisions.............................. 7,795 7,695 0 0
Foreign securities - U.S. dollar
denominated............................... 0 0 6,946 7,351
Corporate securities........................ 218,666 229,268 280,152 285,183
Mortgage-backed and other asset-backed
securities................................ 354,558 358,761 375,591 383,547
---------- ---------- ---------- ----------
Total fixed maturity investments............ 680,797 695,735 771,414 788,580
Equity investments.......................... 2,781 3,226 4,804 5,187
Short-term.................................. 56,470 56,468 262,537 262,537
---------- ---------- ---------- ----------
Total investments........................ $ 740,048 $ 755,429 $1,038,755 $1,056,304
========== ========== ========== ==========
The investment portfolio of fixed maturity investments consisted primarily of
intermediate-term, investment-grade securities with an allocation to below
investment-grade (i.e. high yield) fixed maturity investments not to exceed 7.5%
of invested assets as per the Company's investment policy prior to 2003. In
2003, as a result of the runoff of MIIX, the Company elected to
opportunistically eliminate its exposure to below investment-grade securities as
market conditions permit.
At December 31, 2003, the average credit quality of the fixed income portfolio
was AA. The table below contains additional information concerning the
investment ratings of the longer term fixed maturity investments at December 31,
2003:
Amortized Fair Percentage of
S&P Rating of Investment (1) Cost Value Fair Value
--------------------------------------------------- ----------- ------- -------------
(In thousands)
AAA (including U.S. Government and Agencies)....... $441,001 $445,533 64.0%
AA................................................. 82,110 84,355 12.1%
A.................................................. 124,476 129,234 18.6%
BBB................................................ 3,513 3,665 0.5%
Other Ratings (below investment grade)............. 29,697 32,948 4.8%
-------- -------- ------
Total........................................... $680,797 $695,735 100.0%
======== ======== ======
(1) The ratings set forth above are based on the ratings, if any, assigned
by Standard & Poor's Rating Services ("S&P"). If S&P's ratings were
unavailable, the equivalent ratings supplied by another nationally
recognized ratings agency were used.
The following table sets forth certain information concerning the maturities of
fixed maturity investments, excluding equity and short-term fixed maturity
securities, in the investment portfolio as of December 31, 2003, by contractual
maturity:
Amortized Fair Percentage of
Maturity of Investment Cost Value Fair Value
--------------------------------------------------- ---------- ---------- -------------
(In thousands)
Due one year or less............................... $ 15,071 $ 15,400 2.2%
Due after one year through five years.............. 183,973 187,039 26.9%
Due after five years through ten years............. 102,697 109,292 15.7%
Due after ten years................................ 24,498 25,243 3.6%
Mortgage-backed and other asset-backed securities.. 354,558 358,761 51.6%
-------- -------- ------
Totals.......................................... $680,797 $695,735 100.0%
======== ======== ======
15
The effective duration of the securities in the longer term fixed maturity
portfolio (excluding short-term investments) as of December 31, 2003, was 3.2
years.
Mortgage-backed securities represent approximately 24.2% of the total fixed
income portfolio and are allocated equally across "standard" and "more complex"
securities, while the asset-backed portfolio represents approximately 27.4% of
the total fixed income portfolio. Asset-backed securities may involve certain
risks not presented by other securities. These risks may be enhanced during
periods of economic downturn such as what was experienced in the past year.
Risks include default, lack of liquidity, price volatility and sensitivity to
interest rates.
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 that are
backed by the same underlying collateral mortgages.
CUSTOMERS
The Company's only significant customer activity is providing third party
management services to MDAdvantage.
REGULATION
The Company's insurance subsidiaries are subject to supervisory regulation by
their respective states of incorporation, commonly called the state of domicile.
MIIX is domiciled in New Jersey, MIIX Insurance Company of New York ("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, had the most significant impact on the
operations of the combined company.
HOLDING COMPANY REGULATION. As part of a holding company system, MIIX and MIIX
New York are subject to the Insurance Holding Company Systems Acts (the "Holding
Company Act") of their domiciliary states. 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. 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.
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. The last completed periodic financial examination of
MIIX as of December 31, 2000, was completed on October 30, 2003, and a report
was issued on December 23, 2003. The New York Insurance Department ("New York
Department") conducted an examination of MIIX New York as of December 31, 2001.
The examination report was filed by the New York Department on January 7, 2004.
Currently, the Company has no financial examination in progress. 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 ("NAIC"). The NAIC's methodology for assessing the adequacy of
statutory surplus of property and casualty insurers includes an 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 an insurance company's RBC.
16
At December 31, 2003, MIIX's RBC was below the Mandatory Control Level and
continues at this level.
During 2003, MIIX entered into an Order with the New Jersey Department that set
forth the framework for the regulatory monitoring of MIIX and established
certain operating limitations on MIIX. The limitations, among other things,
required the approval of the New Jersey Department prior to payment of dividends
by the Company's insurance subsidiary, and for lending arrangements, investments
and inter-company arrangements outside of the normal course of business, and
required MIIX to periodically provide information relating to its operations and
finances to the New Jersey Department. In April 2004, the New Jersey Department
appointed an Administrative Supervisor as part of its ongoing efforts to monitor
MIIX's runoff operations.
ORDER OF REHABILITATION. On September 28, 2004, the Superior Court of New Jersey
entered an Order placing MIIX and its wholly owned subsidiaries, MIIX New York
and Lawrenceville Holdings, Inc., into rehabilitation and naming the
Commissioner of the New Jersey Department as Rehabilitator with immediate and
exclusive control over the business and property of MIIX. The Order provides
that The MIIX Group and the Underwriter will continue to provide administrative
services to MIIX pursuant to the current Management Services Agreement until
terminated by the New Jersey Department after appropriate notice. The Order does
not stay payment of claims for any litigation currently pending against MIIX or
its insureds and does not bar claimants from filing new actions against MIIX
insureds. The Order, however, prohibits persons from filing any new action or
new claim directly against MIIX without permission of the Court. The Order also
requires notice to and consent of the Rehabilitator for the assignment of any
contract to which MIIX is a party. Reinsurers are prohibited from canceling
current reinsurance agreements or making additional premium charges to MIIX
under the September 28, 2004 Order of Rehabilitation.
EMPLOYEES
When the Company initially entered runoff in 2002, it employed 237 persons. At
December 31, 2003, the Company employed 94 persons. During 2003, as a result of
its reduced insurance operations, the Company reduced the number of employees by
24 persons. None of the Company's employees are covered by a collective
bargaining agreement. The Company believes that its relations with its employees
are good.
AVAILABLE INFORMATION
The Company files annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read
and copy any materials that the Company files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including those that filed electronically with the SEC. The public can
obtain any documents that the Company files with the SEC at http://www.sec.gov.
The Company also makes available free of charge through its Internet website
(http://www.MIIX.com) its Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13, or 15(d) or 16(a) of the Exchange Act as soon
as reasonably practicable after the Company electronically files such material
with, or furnishes it to, the SEC.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information concerning the individuals who serve
as executive officers of The MIIX Group. At December 31, 2003, The MIIX Group
had seven executive officers, Ms. Costante, Mr. Davis, Mr. Grab, Ms. Mason, Mr.
Roynan, Mr. Sugerman and Ms. Williams.
17
Name Position
---- --------
Patricia A. Costante Chairman and Chief Executive Officer
William Davis Senior Vice President, Claims
Edward M. Grab Senior Vice President, Chief Actuary
Verice M. Mason Senior Vice President and General Counsel
James Roynan Senior Vice President, Information Systems
Allen G. Sugerman Chief Financial Officer and Treasurer
Catherine E. Williams Senior Vice President, Business Development and
Corporate Secretary
PATRICIA A. COSTANTE (47), Chairman and Chief Executive Officer. Patricia A.
Costante has been Chairman since 2002 and Chief Executive Officer of the Company
since 2001. Before being named Chief Executive Officer, Ms. Costante was the
Company's Chief Operating Officer from September 2001 to November 2001. Prior to
serving as Chief Operating Officer, she was Senior Vice President responsible
for the sale and delivery of all products and services to the New Jersey
physician market from March 2000 to September 2001. Prior to being named Senior
Vice President, Ms. Costante was Executive Vice President and Chief Operating
Officer of MIIX Healthcare Group, Inc., a subsidiary of the Underwriter from
April 1998 to March 2000 and from July 1996 to April 1998 served as Assistant
Vice President. Ms. Costante is Vice Chairman of the Board of Trustees, Catholic
Charities, Diocese of Trenton.
WILLIAM G. DAVIS, JR. (56), Senior Vice President, Claims Operations. Mr. Davis
has been Senior Vice President, Claims since March 2002. He is responsible for
Claims Operations. Prior to serving as Senior Vice President, Mr. Davis served
as Vice President, Claims Operations from September 1995 to February 2000 and
Assistant Vice President, Claims from June 1992 to September 1995. Mr. Davis was
terminated from the Company effective January 26, 2004.
EDWARD M. GRAB (48), Senior Vice President, Chief Actuary. Mr. Grab has served
as Senior Vice President since March 2000. He is responsible for actuarial
services and staff underwriting functions which includes underwriting policy and
risk management services. Prior to serving as Senior Vice President, Mr. Grab
served as Vice President, Chief Actuary from October 1999 to March 2000. Before
joining the Company, he was Vice President and Actuary for Zurich Financial
Services from March 1996 to June 1999 where he directed the actuarial department
in support of four strategic business units with a combined book of $1 billion.
VERICE M. MASON (52), Senior Vice President and General Counsel. Ms. Mason has
served as Senior Vice President and General Counsel since June 2002. She is
responsible for all legal and regulatory matters involving the Company. Prior to
serving as Senior Vice President and General Counsel, Ms. Mason served as Senior
Vice President, Legal and Regulatory Affairs from February 2002 to June 2002.
Prior to being named Senior Vice President, Legal and Regulatory Affairs, Ms.
Mason served as Vice President, Legal and Regulatory Affairs from June 1999 to
February 2002 and Assistant Vice President, Associate General Counsel from June
1995 to June 1999. Ms. Mason resigned from the Company effective October 29,
2004.
JAMES P. ROYNAN (43), Senior Vice President, Information Systems. Mr. Roynan has
served as Senior Vice President since December 2002. He is responsible for
strategy and implementation for all process improvement, information technology,
systems and integration, network administration, software development and
technical support activity. Prior to serving as Senior Vice President Mr. Roynan
served as Vice President, Information Systems from December 2001 to December
2002. Prior to joining the Company Mr. Roynan served as Executive Vice President
and CIO of Xyan, Inc. from September 2000 to May 2001. From February 2000 to
August 2000 Mr. Roynan served as Executive Vice President and COO of WePlayIt,
Inc. From January 1992 to January 2000 Mr. Roynan served as Vice President,
Technology Solutions of Reed Technologies and Information Services. Mr. Roynan
was terminated from the Company effective January 26, 2004.
18
ALLEN G. SUGERMAN (53), Chief Financial Officer and Treasurer. Mr. Sugerman has
served as Chief Financial Officer since July 2002. Mr. Sugerman has been a
principal of Altila Corporation, a health care management consulting firm, since
1990. He has more than 25 years of diversified financial and operational
experience.
CATHERINE E. WILLIAMS (43), Senior Vice President, Business Development and
Corporate Secretary. Ms. Williams has served as Senior Vice President since
December 2001. She is responsible for business development, corporate
governance, shareholder relations, human resources and facilities management.
Prior to serving as Senior Vice President, Ms. Williams served as Vice
President, Corporate Secretary from August 1999 to December 2001 and as
Assistant Corporate Secretary from May 1997 to August 1999.
The following sets forth information regarding Directors of the Company as of
December 31, 2003.
PATRICIA A. COSTANTE (47), Director since 2001. Patricia A. Costante has been
Chairman since 2002 and Chief Executive Officer of the Company since 2001.
Before being named Chief Executive Officer, Ms. Costante was the Company's Chief
Operating Officer from September 2001 to November 2001. Prior to serving as
Chief Operating Officer, she was Senior Vice President responsible for the sale
and delivery of all products and services to the New Jersey physician market
from March 2000 to September 2001. Prior to being named Senior Vice President,
Ms. Costante was Executive Vice President and Chief Operating Officer of MIIX
Healthcare Group, Inc., a subsidiary of the Underwriter, now a subsidiary of the
Company, from April 1998 to March 2000 and from July 1996 to April 1998, served
as Assistant Vice President. Ms. Costante is Vice-Chairman, Board of Trustees,
Catholic Charities, Diocese of Trenton.
ANGELO S. AGRO, M.D. (55), Director since 1997. Dr. Agro has been a member of
the Board of Directors of the Underwriter since 1990. He is a physician
certified by the American Board of Otolaryngology and practices in Andalusia,
Alabama with Andalusia Greater Regional Otolaryngology. He is a member of the
American Academy of Otolaryngology, the American Medical Association and the
American College of Surgeons.
SCOTT L. BARBEE (31), Director since 2003. Mr. Barbee has been Managing Director
of Berno, Gambal & Barbee, Inc. since 1997. He is also lead manager of the Aegis
Value Fund. Prior to his appointment as a Managing Director, Mr. Barbee was a
broker with Berno & Gambal Capital Management from December 1996 until June
1997. Mr. Barbee is a Chartered Financial Analyst. Mr. Barbee resigned from the
Board on October 13, 2004.
HARRY M. CARNES, M.D. (72), Director since 1997. Dr. Carnes has served as a
member of the Board of Directors of the Underwriter since 1989. He is a board
certified physician practicing in Audubon, New Jersey. Dr. Carnes is a member of
the American Academy of Family Practice, the American Medical Association, the
Camden County Medical Society, the Medical Society of New Jersey and the New
Jersey Medical Political Action Committee.
DOMINICK D'AGOSTA (63), Director since 2003. Mr. D'Agosta has served in the
Office of the Chairman of Fleet Bank of New Jersey since 2001. Prior to this
position, he served in the Office of the President of Summit Bank from 1996 to
2001. Mr. D'Agosta has 44 years of experience in the banking industry and has
worked in various senior management positions, which included positions in
marketing, operations and branch administration. He serves as Vice Chair of the
Hudson County Chamber of Commerce, Chairman of the Meadowlands Chamber of
Commerce and the Urban League of Hudson County, Director of Commerce and
Industry Association, National Conference for Community & Justice, Arthritis
Foundation of New Jersey and Bon Secours of Canterbury Partnership for Care. Mr.
D'Agosta is Chair of the New Jersey City University Foundation and Director of
Yes Youth Consultation Service.
PAUL J. HIRSCH, M.D. (67), Vice Chairman of the Board of Directors since 1997.
Dr. Hirsch has served as Vice Chairman of the Board of Directors of the
Underwriter, now a subsidiary of the Company since 1990. He is a board certified
physician practicing in Bridgewater, New Jersey, with BioSport Orthopedics and
Sports Medicine. Dr. Hirsch is President and Medical Director of InterMedix, an
orthopedic specialty care network. He is a member of the American Academy of
Orthopedic Surgeons, the American Orthopedic Association, the American College
19
of Surgeons, the American Medical Association, and the Medical Society of New
Jersey. He currently serves on the Board of Trustees for Raritan Valley
Community College. Dr. Hirsch is a clinical professor of orthopedic surgery at
Seton Hall School of Graduate Medical Education and Editor in Chief of NEW
JERSEY MEDICINE.
A. RICHARD MISKOFF, D.O. (62), Director since 1997. Dr. Miskoff served as a
member of the Board of Governors of Medical Inter-Insurance Exchange of New
Jersey, the predecessor of MIIX Insurance Company, from 1994 to 1999. He is a
board certified physician practicing in Edison, New Jersey. Dr. Miskoff is a
member of the American Osteopathic Association, the American Society of Clinical
Oncologists, the American Society of Hematology, and the New Jersey Association
of Osteopathic Physicians. He is past president of the Middlesex County Medical
Society of Osteopathic Physicians. Dr. Miskoff is Director of the Cancer Program
at JFK Medical Center, Edison, New Jersey.
CARL RESTIVO, JR., M.D. (58), Director since 1997. Dr. Restivo has been a member
of the Board of Directors of the Underwriter since 1997. He is a board certified
physician practicing in Jersey City, New Jersey. Dr. Restivo is a member of the
Arthritis Foundation and the New Jersey Chapter of the American Medical
Association. Dr. Restivo resigned from the Board effective May 1, 2004.
MARTIN L. SORGER, M.D. (70), Director since 1997. Dr. Sorger served as a member
of the Board of Governors of Medical Inter-Insurance Exchange of New Jersey from
1979 to 1999. He is a board certified orthopedic physician practicing in Glen
Ridge, New Jersey, and a member of the Montclair Orthopedic Group. Dr. Sorger is
a member of the American Academy of Orthopedic Surgeons, the American Medical
Association, the American College of Surgeons and a former member of its Board
of Councilors. He is a member of the executive committee and past president of
the New Jersey Orthopedic Society. Dr. Sorger is Vice President of InterMedix,
an orthopedic specialty care network.
BESSIE M. SULLIVAN, M.D. (63), Director since 1997. Dr. Sullivan was a member of
the Board of Governors of Medical Inter-Insurance Exchange of New Jersey from
1992 to 1999. She is a board certified physician practicing in Edison, New
Jersey with Arthritis, Allergy & Immunology Center. Dr. Sullivan is a member of
the American Medical Association and the American Rheumatism Association, a
trustee and Secretary of the Medical Society of New Jersey and a member of the
Executive Committee of the Union County Medical Society.
Because the Company's securities are not traded on a national securities
exchange or quoted on a national quotation system, the Company is not required
to maintain an audit committee under the federal securities laws. Under state
law, the Company must maintain an audit committee, although no audit committee
financial expert is required. The Company has sought to engage an audit
committee expert but has been unsuccessful in its efforts.
ITEM 2. PROPERTIES
The Underwriter leases approximately 25,000 square feet of space from Gordon
Lawrenceville Realty Associates, LLC ("Gordon") in Lawrenceville, New Jersey,
the location of its home office operations. The Underwriter entered into the
lease agreement with Gordon as of November 25, 2003, with an effective date of
April 27, 2004. The lease agreement was amended on June 22, 2004, and October 1,
2004. The term of the lease is for five years with an option to renew for an
additional five years.
ITEM 3. LEGAL PROCEEDINGS
GLASSER V. THE MIIX GROUP, INC. ET AL. On February 5, 2003, a shareholder of the
Company instituted a putative class action in the United States District Court
for the District of New Jersey against the Company, present and former directors
and officers of the Company, the Medical Society of New Jersey ("MSNJ") and
Fox-Pitt Kelton, Inc. ("FPK"), which acted as financial advisor to the Company.
The complaint alleges that the Company and its directors and officers engaged in
securities fraud, breaches of fiduciary duty and violations of New Jersey
antitrust laws in connection with the MIIX Advantage contracts and alleged
misrepresentations and omissions of material fact in various SEC filings by the
Company. On May 13, 2003, another shareholder of the Company instituted a
separate putative class action in the United States District Court for the
District of New Jersey
20
(WASSERSTRUM V. THE MIIX GROUP, INC., ET AL.) against the Company and certain of
its officers alleging securities fraud. The law firms representing plaintiffs in
the two actions agreed to consolidate the plaintiffs' claim against the Company.
On August 12, 2003, a Consolidated Amended Complaint (the "Complaint") was filed
by the plaintiffs against the Company, present and former directors and officers
of the Company and MSNJ alleging securities fraud based on alleged
misrepresentations and omissions of material fact in various SEC filings by the
Company concerning the Company's financial condition, its statement of reserves,
the pricing of its policies, the MIIX Advantage contracts and other matters. The
Complaint seeks certification of a plaintiff class of the Company's shareholders
from July 30, 1999 to September 12, 2002 and unspecified damages, pre- and
post-judgment interest, attorneys' fees and costs. On October 21, 2003, the
Company filed a motion to dismiss the Complaint, which is currently pending. On
December 11, 2003, the Court ordered that the case be submitted to mediation and
stayed all proceedings pending mediation. The parties are engaging in mediation
discussions.
FOX-PITT KELTON V. THE MIIX GROUP, INC. On February 10, 2003, FPK, which had
been engaged as financial advisor to the Company, instituted suit against the
Company in the Supreme Court of New York to recover fees allegedly due from the
Company as a result of the investment banking services it rendered in connection
with the Company's efforts to dispose of assets or obtain capital and the
agreements entered into between the Company and MIIX Advantage. FPK filed a
motion for summary judgment in its favor, which was denied by the Court. On
April 28, 2004, the suit was dismissed with prejudice.
WEISFELD V. THE MIIX GROUP, INC., ET AL. On November 20, 2002, a former
executive of MSNJ filed suit in the Superior Court of New Jersey against MSNJ
and certain of its officers, including MSNJ officers who were also MIIX Group
board members, alleging wrongful discharge and defamation. On March 19, 2003,
plaintiff filed pleadings amending the Complaint to include The MIIX Group as a
defendant, alleging that The MIIX Group tortiously interfered with his
employment relationship and that its alleged influence over MSNJ was a causative
factor in his discharge. Motions to dismiss plaintiff's Amended Complaint were
filed by all defendants. By order dated August 19, 2003, the Court granted the
defendants' motions to dismiss and the entire Complaint was dismissed with
prejudice. On October 2, 2003, plaintiffs filed a notice of appeal of the
dismissal of the Complaint with the Superior Court of New Jersey, Appellate
Division. Oral argument in the Appellate Division was held on October 25, 2004.
The parties are awaiting the Court's decision.
Given the Company's current financial condition, any negative outcome of the
litigation requiring the payment of damages could have a material adverse effect
on the Company. The Company may also be a party to litigation from time to time
in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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